United States: UTELCOM Analysis Endorsed In Louisiana Franchise Tax Nexus Dispute

In Bridges v. Polychim USA, Inc,1 the Louisiana First Circuit Court of Appeal overturned a trial court's summary judgment ruling that an out-of-state corporation was subject to the Louisiana franchise tax, and remanded the case back to the trial court for further consideration. The corporation's primary connection to Louisiana was an indirect ownership interest in a general partnership doing business in Louisiana. The decision endorses the analysis undertaken by the same court in UTELCOM, Inc. v Bridges.2

Background

The corporation, Polychim, which was organized in Georgia, neither conducted activity on its own in Louisiana nor was registered to do business in the state. Polychim owned 100 percent of the stock in a Georgia corporation, CMB, Inc., and 96.76 percent of the interest in a Georgia limited liability company, Cami Polymers. CMB, Inc. and Cami Polymers collectively owned 100 percent of the interest in a Pennsylvania joint venture, Pinnacle Polymers, which owned property and was doing business in Louisiana. CMB, Inc. and Cami Polymers served as the general partners of Pinnacle Polymers.

Polychim filed its Louisiana corporation income/franchise tax returns and reported and paid its share of Cami Polymers' flow-through net income for purposes of the income tax. However, Polychim did not report and pay the franchise tax. Upon audit of the 2005 through 2007 franchise tax calendar years, the Louisiana Department of Revenue claimed that Polychim had Louisiana franchise tax nexus due to its indirect ownership interest in Pinnacle Polymers and assessed tax due. The Department contended that Polychim had conducted business in a corporate form and exercised its charter in Louisiana. Polychim argued that it had not engaged in these activities in Louisiana, and also claimed that the proposed assessment of franchise tax violated the U.S. and Louisiana Constitutions on a number of grounds.

A Louisiana district court granted summary judgment to the Department.3 Polychim appealed the summary judgment, and also appealed its own cross-motion summary judgment claim that had been simultaneously denied.

Discussion and Analysis

The Court of Appeal began its analysis with the franchise tax nexus statute, which subjects to tax a corporation that is doing business or exercises its charter in Louisiana, or owns or uses property in Louisiana in a corporate capacity.4 After describing the relevant principles that apply in tax cases that involve summary judgment determinations, including the fact that Louisiana tax statutes must be interpreted in favor of the taxpayer when ambiguity exits, the Court focused on Polychim's argument that the decision in UTELCOM controlled the disposition of this case. In UTELCOM, the assessed businesses were non-resident corporations whose only contacts with Louisiana were through passive limited partnership interests in pass-through entities not subject to the Louisiana franchise tax. Key to the Polychim court's assessment of the UTELCOM case was the UTELCOM court's finding that the general partner in the pass-through entities had the authority to bind the Louisiana partnership, but had no authority to act as the agent for the limited partners. As a result, the Department's argument that the actions of the general partner should be attributable to all of the companies within the corporate structure (including the non-resident corporations) was defeated.

In this case, the Department similarly asserted that Polychim was subject to the franchise tax based on the actions of other members of the corporate group. Specifically, the Department claimed that Polychim controlled and conducted business in Louisiana by its control of Pinnacle Polymers through common members of the board. The Court disagreed, noting that even though certain members in the management boards of Polychim and Pinnacle Polymers were the same, the two entities were separate legal entities. The Court also noted that the Department's argument essentially skipped over the roles of CMB and Cami Polymers, the mid-tier entities that served as general partners of Pinnacle Polymers. Ultimately, the Court concluded that the Department's use of the "single business entity" doctrine to subject Polychim to the franchise tax based on the actions of other entities was improper.

The second element of the Department's appeal was to claim that Polychim had franchise tax nexus because of a Louisiana commercial domicile. For Louisiana franchise tax purposes, commercial domicile is defined as: "the state where management decisions are implemented, which is presumed to be the state where the taxpayer conducts its principal business and thereby benefits from public facilities provided by that state. The location of board of director's meetings is not presumed to create a commercial domicile in that location."5

The Department relied on the statute, as well as relevant case law to claim that Polychim's commercial domicile was located in Louisiana.6 The Department argued that Polychim's listed address in Atlanta, Georgia as its principal place of business was actually the address of Polychim's attorneys, and that Polychim had no actual office in Atlanta. Further, although Polychim had no offices, facilities or business conducted in Louisiana, Polychim's Louisiana income tax returns were prepared with Pinnacle Polymers' Louisiana address, Polychim had requested Hurricane Katrina extensions for certain Louisiana tax returns, and the tax returns were prepared by a New Orleans, Louisiana accounting firm. Polychim argued that none of its officers or directors resided in Louisiana during the audit period, monetary decisions were made in Belgium, and Polychim's corporate records were kept in Connecticut. Following a consideration of the entire record, the Court ruled that "genuine issues of material fact remain which precludes the granting of summary judgment in favor of either party" and remanded the case to the district court for, at a minimum, determination of Polychim's commercial domicile.

Commentary

Although this decision merely weighed in on whether summary judgment could be achieved by either side, several developments should be noted. In addition to reinforcing the judicial principle requiring that Louisiana tax statutes must be interpreted in favor of the taxpayer when ambiguity exists, the support and endorsement of UTELCOM is telling. Given the similarities of the Polychim corporate structure to the fact pattern in UTELCOM, this may not be surprising. However, the Court's rejection of the Department's arguments that it initially presented in UTELCOM reflects the Court's insistence that the "single business entity" and "unity of purpose" doctrines will not be followed in circumstances when an out-of-state corporation has a passive ownership interest in a Louisiana business. One can also expect the Department's continued nonacquiescence with UTELCOM.

Given the conflicting evidence on the issue of commercial domicile, it was virtually impossible for the Court to grant summary judgment to either side. Determining commercial domicile is a facts and circumstances test that must be determined upon a weighing of the relevant factors and cannot be established by the presence or absence of a single factor or by presumption. The Court reflected that the many factors that determine commercial domicile were neither apparent nor yet addressed. Details clearly matter, as the listing of a Louisiana address on Polychim's Louisiana tax return did the taxpayer no favors and possibly provided the Department with the ammunition needed to challenge Polychim on the commercial domicile issue.

Footnotes

1 Louisiana Court of Appeal, First Circuit, No. 2014 CA 0307, April 24, 2015 (not designated for publication).

2 77 So.3d 39 (La. Ct. App. 2011).

3 19th Judicial District Court, East Baton Rouge Parish, No. 581,759, Jan. 2, 2014.

4 LA. REV. STAT. ANN. § 47:601(A)(1)-(3).

5 LA. REV. STAT. ANN. § 47:606(A)(1)(e)(v)(bb).

6 Specifically, the Department relied on Kevin Associates, L.L.C. (Successor in Interest Through Merger to Yendis Properties, Inc.) v. Crawford, 865 So. 2d 34 (La. 2004), in which an out-of-state holding company was determined to have Louisiana income and franchise tax nexus because the management of the corporation was undertaken in and directed from Louisiana.

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