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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.