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No Louisiana Nexus Over Out-of-State Corporate Partners

The Louisiana Supreme Court declined to review the Court of Appeal’s holding that an out-of-state corporation’s passive ownership of an interest in a limited partnership is not a sufficient basis, by itself, to subject the foreign limited partner to L

June 1, 2012

The Louisiana Supreme Court declined to review the Court of Appeal’s holding that an out-of-state corporation’s passive ownership of an interest in a limited partnership is not a sufficient basis, by itself, to subject the foreign limited partner to Louisiana franchise tax. UTELCOM, Inc. v. Bridges, No. 2010-0654, 77 So.3d 39 (La. App. 1st Cir. Sept. 12, 2011), reh’g denied (Nov. 1, 2011), writ denied, No. 2011-C-2632 (La. Mar. 2, 2012). The court’s decision to not accept the case should prompt the Department of Revenue to reverse course on its current position.

In UTELCOM, the Department issued franchise tax assessments against two out-of-state corporations whose only connection with Louisiana was their ownership interests in a limited partnership engaged in the long-distance telecommunications business in Louisiana. The primary basis for the Department’s position was a regulation that provided that owning property in Louisiana through a partnership is sufficient to create franchise tax nexus. The trial court upheld the assessments based on the Department’s regulation.

The Court of Appeal reversed, holding that the regulation is invalid because it attempts to impermissibly expand the franchise tax statute on foreign corporations “owning or using any part” of their capital in the state. The court reasoned that once the capital was contributed by the foreign corporate partners to the limited partnership, the capital was no longer “owned or used” by the foreign corporate partners.

While the writ application was pending, the Department continued to assert that its position was correct and pursued audit adjustments on that basis. Now that the case is final, the Department should revise its current audit position that foreign limited partners are subject to the franchise tax.

Corporate taxpayers whose only connection with Louisiana is through an ownership interest in a pass-through entity should evaluate whether refunds may be available as a result of this case. While the facts of the case involved a limited partnership, its holding should apply equally to an LLC, which is treated as a limited partnership for Louisiana franchise tax purposes. Taxpayers should be prepared to pursue their refund claims, if denied by the Department, to the Board of Tax Appeals or Louisiana District Court. Under La. R.S. § 47:1621(F), the Department has historically denied refund claims resulting from “a mistake of law arising from the misinterpretation by the [Department] of the provisions of any law.”

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