Louisiana protects corporate directors and officers from liability to shareholders or others when they make decisions in good faith and reasonably believe that their decisions are in the best interest of the organization. This principal, called the “business judgment rule,” gives officers and directors the freedom to take risks and to make decisions without wondering if shareholders or others will attempt to sue them, personally, if a particular decision ultimately results in a loss to the company. The business judgment rule itself is not news; it has been discussed in American case law since at least the 1940s, and is now codified in the statutory law of some states, including Louisiana. The blog-worthy news about the business judgment rule is a December 13, 2011 court decision from a federal court in California in FDIC v. Perry noting that the statutory version of the rule enacted by California’s legislature protects only corporate directors, not officers. You can see the opinion here, and an interesting commentary on the opinion by Kevin LaCroix here.

Unlike California’s law, the Louisiana statute that codifies the business judgment rule, La. R.S. 12:91, provides business-judgment-rule protections to directors and officers of corporations, partnerships, and limited liability companies formed in Louisiana. Louisiana provides strong protection to directors and officers who act in good faith and exercise reasonable diligence in making decisions. Louisiana is already attracting digital-media and other high-tech and entertainment-related business from California with the possibility of attractive tax credits, free workforce training, and other incentives. The fact that Louisiana’s corporate law is more management-friendly than California’s is one more factor for businesses to consider when thinking about expanding or relocating to Louisiana.
 

The Gulf Opportunity Zone Act of 2005 (the “Act”) added several new sections to the Internal Revenue Code that provide certain tax benefits for affected hurricane disaster areas. Section 1400N(a) authorized the issuance of Qualified Private Activity Bonds (“Qualified Bonds”) to finance the construction and rehabilitation of residential and nonresidential property located in the Gulf Opportunity Zone (“GO Zone”). The Act gave private business owners and corporations the opportunity to borrow capital at favorable tax-exempt rates to acquire, construct, reconstruct or renovate qualified property in the GO Zone. The deadline for the issuance of GO Zone Bonds was extended through the end of 2011. However, the Act did not address the current refunding of Qualified Bonds after the applicable issuance deadline had passed.  

In a refunding, an issuer sells bonds and uses the proceeds to redeem outstanding debt that typically has higher interest rates. In a current refunding, the issuer uses the refunding bond proceeds to redeem the outstanding debt within 90 days. On December 23, 2011, the Internal Revenue Service released an advance copy of Notice 2012-3, which provides guidance on current refunding of outstanding prior issues of Qualified Bonds, including GO Zone Bonds and Hurricane Ike Bonds.

A current refunding of Qualified Bonds that meets the conditions of Notice 2012-3 may be issued after the applicable deadline and still be treated as Qualified Bonds. The conditions include that the original Qualified Bonds must have been issued before the deadline for the issuance of such bonds. The issue price of the current refunding issue must be no greater than the outstanding stated principal amount of the refunded bonds. And, the current refunding issue must meet all applicable requirements for the issuance of tax-exempt private activity bonds, including that the average bond maturity must be no longer than 120 percent of the average reasonably expected economic life of the facilities financed or refinanced.

Additionally, as long as the original Qualified Bonds satisfied the designation requirement, no further designation or official state or local governmental action is required for a current refunding of such bonds.

Notice 2012-3 will appear in Internal Revenue Bulletin 2012-3, dated January 17, 2012.

Act Number 323 of the 2011 Regular Session of the Louisiana Legislature modified the rules on small successions in Louisiana. In addition to some other changes, the law allows the use of the small succession procedure, which generally involves filing an affidavit rather than opening judicial proceedings, to transfer title to immovable property in Louisiana if the property has a value of $75,000.00 or less as of the date of death. Further, this new rule applies to successions of individuals who died either before or after the effective date of the legislation. Under this new rule, if a decedent was domiciled outside of Louisiana at the time of death and had a testament that has been probated by a court order of another state, then title to the immovable property in Louisiana, including mineral interests, can be transferred through the small succession procedure if the property has a gross value of $75,000.00 as of the date of death.

The new legislation may need some modification as it appears to only apply to ancillary probate proceedings that are testate and not intestate while it applies to Louisiana residents who die intestate. Given the fact that immovable property in Louisiana would be governed by Louisiana’s rules of intestacy, a non-Louisiana resident who dies intestate should be able to benefit from the same procedure. In any event, the new legislation is a step in the right direction to assist with ancillary probate proceedings in Louisiana, particularly when the property in Louisiana of nominal value. Often, the costs of an ancillary probate can be greater than the property involved.
 

The Louisiana Supreme Court has refused to review the decision of the First Circuit Court of Appeal in ConAgra Foods, Inc. vs. Bridges, 2010-0907 (La. App. 1st Cir. 10/29/10), 48 So.3d 1249. In ConAgra Foods, the First Circuit determined that ConAgra Foods, Inc. would receive the benefits of Louisiana net operating loss carryovers held by subsidiaries, which had been sold in Internal Revenue Code (“IRC”) §338(h)(10) transactions . Under federal tax law, the parties to a stock sale can elect IRC §338(h)(10) treatment such that the stock sale is treated as an asset sale for income tax purposes and the tax attributes of the subsidiaries that are sold are acquired by the selling parent corporation. The steps that occur under an IRC §338(h)(10) transaction are as follows:

In 1986, the Louisiana Legislature amended the Louisiana corporation income tax law so as to rely on the federal corporation income tax law, except for modification from federal tax law clearly provided for in Louisiana law. See La. R.S. 47:287.2 et seq.

In the ConAgra Foods case, the Department of Revenue did not dispute the federal tax treatment but contended that for Louisiana corporation income tax purposes, the net operating loss carryovers did not transfer to ConAgra Foods, the parent entity.

The court rejected the Department of Revenue’s argument that the provisions of La. R.S. 47:287.86(I) precluded ConAgra Foods from being the corporation that acquired the net operating losses. The court held:

A close scrutiny of the two statutes [La. R.S. 47:287.86(I)(1) and IRC §381] reveals that the language utilized in La. R.S. 47:287.86(I)(1) is nearly identical to that employed under federal law. And the express provisions of La. R.S. 47:287.86(I)(1) indicate that the determination of “the acquiring corporation [that] shall succeed to and take into account, as of the close of the day of distribution or transfer, the aggregate net operating loss carryovers of the distributors or transferor corporation,” is “subject to federal law and the limitations provided thereunder.”

Because the Department has conceded that under federal law ConAgra as the parent selling corporation of the subsidiaries is entitled to succeed to and take into account the remaining tax attributes [including the net operating loss carryovers] after the deemed sale of the assets to Pilgrim’s Pride and UAP [the purchasing entity] in the deemed liquidation of the subsidiaries back into the parent, and mindful of the nearly identical provisions of both Louisiana and the federal statutes, clearly ConAgra is the “acquiring corporation” of the NOLs for Louisiana state income tax purposes as well.
ConAgra Foods, 483 So.3d at 1252.

The ConAgra Foods case will provide good authority for taxpayers who have relied on the incorporation of federal income tax law into the Louisiana corporation income tax system. Absent clear Louisiana statutes modifying the federal corporation income tax treatment for Louisiana corporation income tax purposes, taxpayers should be able to rely on the federal corporation income tax treatment.
 

As companies expand their operation into foreign states, it is essential to determine the potential tax liability for conducting business in those jurisdictions.  Although states differ as to their treatment of out-of-state taxpayers, all states are bound by the U.S. Constitution and federal law and jurisprudence, which require a nexus between a taxpayer and a foreign state before a tax may be imposed. 

Read the entire article. 

On September 30, 2010, the Internal Revenue Service issued guidance providing relief to homeowners who have suffered property losses due to the effects of certain imported drywall installed in homes between 2001 and 2009.  In particular, the IRS issued Revenue Procedure 2010-36 which enables affected taxpayers to treat damages from corrosive drywall as a casualty loss and provides a ”safe harbor” formula for determining the amount of the loss.

Revenue Procedure 2010-36 provides the following relief:

• Individuals who pay to repair damage to their personal residences or household appliances resulting from corrosive drywall may treat the amount paid as a casualty loss in the year of payment.
• Taxpayers who have already filed their income tax return for the year of payment generally have three years to file an amended return and claim the deduction. The amount of a loss that may be claimed depends on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation or otherwise.
• In cases where a taxpayer does not have a pending claim for reimbursement, the taxpayer may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances resulting from corrosive drywall.
• If a taxpayer does have a pending claim (or intends to pursue reimbursement), a taxpayer may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.

A taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained may not claim a loss. A taxpayer who has a pending claim for reimbursement (or intends to pursue reimbursement) may have income or an additional deduction in subsequent taxable years depending on the actual amount of reimbursement received.

For purposes of this revenue procedure, the term “corrosive drywall” means drywall that is identified as problem drywall under the two step identification method published by the CPSC and the Department of Housing and Urban Development in their interim guidance dated January 28, 2010.

Further details and limitations can be found in Revenue Procedure 2010-36 on www.irs.gov. The Revenue Procedure can be found here.
 

On January 22, 2010, President Obama signed a law which allows taxpayers to claim a charitable deduction in the 2009 tax year for cash donations made through March 1, 2010 for the relief of victims in areas affected by the January 12, 2010 earthquake in Haiti. The IRS notice on this new law indicates that cash contributions eligible for the deduction against last years taxes include contributions made by text message, check, credit card or debit card. The law gives the taxpayer the option of deducting the cash contribution on his or her 2009 return or his or her 2010 return, but not both. The law does not change any of the other rules applicable to charitable donations such as the percentage limitations, the requirement that the charity be a qualified charity or the fact that the taxpayer must itemize in order to benefit from the deduction.

Each taxpayer should look at his or her own individual situation to determine whether or not the deduction should be claimed against 2009 income or 2010 income. Generally, the sooner the deduction the better but the taxpayer should consider his or her income in each year, tax rate in each year, and applicability of the itemized deduction phase out which is eliminated in 2010.

Further information regarding the deduction for Haiti earthquake relief donations and the identification of possible qualified charities can be found on the IRS website.
 

During the past few years, the Louisiana Legislature has adopted many “green” initiatives as part of climate and energy policies. The state has placed a strong emphasis on increasing both renewable energy generation and energy efficiency. The following is a list of some of these important initiatives:

• The Louisiana Renewable Energy Development Act allows Grid Tied Net Metering systems throughout the state, which allows electric utility customers, who wish to install a net metering facility, to reduce their monthly electricity bill by using electricity that is generated from solar, wind, hydroelectric, geothermal, or biomass resources. See La. R.S. 51:3061-51:3063 (2003).
   

• The Louisiana Biofuel Standard requires all gasoline to contain two percent ethanol and that two percent of all diesel must be biodiesel. The standard is set to go into effect six months after the time when the state has either (i) 50 million gallons of ethanol in annual production or (ii) 10 million gallons of biodiesel. See La. R.S. 3:4674, 3:4674.1, and 3:3712 (2006).

• Wind and Solar Energy Tax Exemptions provides an individual income tax credit of up to for the installation of a wind or solar energy systems on residential property, which may be carried forward for 10 tax years. According to “Green Scene” magazine, this is one of the most progressive pieces of legislation in the country. The credit shall be equal to 50% of the first $25,000 dollars of the cost of each wind energy system or solar energy system, including installation costs. It applies to a wind or solar system that is purchased and installed on or after January 1, 2008. The credit may be used in addition to any federal tax credits earned for the same system. See LAC La. R.S. 47:6030. (2007). In addition, equipment used for solar power is exempt from property taxation. See La. R.S. 47:1706.

• The Louisiana Geologic Sequestration of Carbon Dioxide Act establishes a comprehensive regulatory program for the control of injection, storage, and use of carbon dioxide under the auspices of the Office of Conservation within the Department of Natural Resources (DNR). The act further establishes liability limits for operators with transfer of liability for storage operations to the Geologic Storage Trust Fund (run by the state) after a specified time. Finally, the act provides authority for expropriation of pipeline servitudes, storage facilities and other associated facilities necessary for carbon sequestration operations upon a determination of public convenience and necessity. See La. R.S. 30:1101-30:1111 and La. R.S. 19:2 (2009).

• Advanced Biofuel Industry Development Initiative, has been described as one of the most comprehensive and far-reaching biofuels development programs in the nation. Called the “field to pump” strategy, it creates pilot programs and incentives. It creates two pilot programs – one for Advanced Biofuel Variable Blending Pumps which will involve blending of fuels with advanced biofuel percentages between 10 and 85 % until January 1, 2012. During the pilot, the Louisiana Department of Agriculture and Forestry (LDAF) will monitor the equipment used to dispense the ethanol blends to ascertain that the equipment is suitable and capable of producing accurate measurement. The second pilot calls for trial use of hydrous ethanol blends of E10, E20, E30 and E85 in motor vehicles specifically selected for test purposes until January 1, 2012. During this period the LDAF will monitor the performance of the motor vehicles. An income tax credit of ten cents per gallon of advanced biofuel is available to qualified small advanced biofuel manufacturing facilities. The credit applies only to the first ten million gallons of advanced biofuel produced in a tax year and expires on December 31, 2012. The act requires state agencies to purchase/lease only vehicles capable of using alternative fuels. Finally it provides a pricing discount for members of any governmental body, state educational institution, or instrumentality of the state on the price of E20, E30 or E85 advanced biofuel at a price equal to 15% less per gallon than the price of unleaded gasoline for use in any motor vehicle.

• Alternative Fuel Vehicle Incentives provide an incentive to persons or corporations to invest in qualified clean-burning motor vehicle fuel property by allowing credits against income tax liability, which equal fifty percent of the cost of the qualified clean-burning motor vehicle fuel property. See La. R.S. 47:6035 (2009).

• The Green Jobs Tax Credit provides a corporate or income tax credit for qualified capital infrastructure projects in Louisiana that are directly related to industries including but not limited to the energy efficient and advanced drive train vehicle industry and the biofuels industry. The tax credit is worth up to $1 million per state-certified green project, calculated on the base investment costs of the project, for up to a total of $5 million per year. See La. R.S. 47:6037 (2009).

• Sustainable Energy Financing Districts, authorizes “creation of sustainable energy financing districts by local governmental subdivisions and provides for issuance of bonds and property assessment programs for solar and energy efficiency projects.” This will allow local governments and subdivisions to incur debt for the purposes of providing these “energy financing districts” with necessary funds to cover the cost of energy efficiency improvements or renewable energy improvements. These loans are made directly by the district to the home or property owner, and can be paid back over a twenty year period. Property owners can even make arrangements to pay back loans through its payment of annual property taxes. See La. R.S. 33:130.790 – 793 (2009).

In addition to these legislative efforts, Governor Bobby Jindal issued a green Executive Order in 2008 which, among other things, required the Division of Administration to set energy efficiency goals for state facilities, office buildings; required each department of the executive branch to adopt a program to reduce solid waste and adopt recycling programs; directed the Division of Administration to review its purchasing practices to ensure 100% compliance with existing state requirements related to energy conservation, to adopt best energy purchasing practices and to develop or increase standards for such products as appliances, light bulbs, smart chargers, and computers using Energy Star as a minimum standard. See Executive Order BJ-2008-8.

In 2007, the Louisiana Public Service Commission developed a “Geaux Green” program whereby customers of regulated utilities can choose to purchase green power in blocks from their local utilities. Such power is generated from renewable fuels (Louisiana agricultural by-products such as rice hulls and bagasse) and is priced somewhat higher than power from traditional fuels. The cost is $2.25 per month per 100 kilowatt-hours (kWh) of electricity. A typical household uses from 1000 to 1500 kWh per month. A customer can choose to purchase only 100 kWh or any multiple of 100. Thus far, Entergy has been the only utility to offer the program; however, SWEPCO and CLECO are working with potential renewable fuels suppliers and may join.

The Louisiana Department of Natural Resources (LDNR) manages two long-standing programs that have been successful at promoting real energy efficiency measures. The first of these, the Home Energy Rebate Option or “HERO” is a LDNR program that provides cash rebate payments to Louisiana residents who have made energy efficiency improvements of 30% or more - currently applicable only to existing homes. Since its inception in 1999, the HERO program has awarded more than 17,000 grants valued at over $24 million. LDNR estimates a savings of 1529 kilo tons of CO2, over 2,000 tons of NOx reduction and over 3,000 tons of SO2 reduction. The latter program, the Home Energy Loan Program (HELP) provides home owners the ability to obtain 5-year loans to improve the energy efficiency of their existing homes. LDNR subsidizes one half of the financing for the energy efficient improvements, up to $6,000, at a low interest rate to participating lenders.

On July 7, 2009, Louisiana Governor Bobby Jindal signed Act 442 (SB 9) into law, preserving Louisiana’s long-standing law excluding purchases, rentals and repairs of component parts of immovable property from state and local sales/use tax. Under a law enacted in 2008, purchases of several items previously considered non-taxable component parts of buildings and other immovables (e.g., installed commercial refrigerators and other commercial and industrial fixtures) could have been subjected to state and local sales/use tax. Many taxpayer representatives questioned the constitutionality of the 2008 Act and legislators agreed that it was not their intention to increase sales/use taxes during the 2008 Legislative Session. Act 442 became effective when it was signed by the governor and applies retroactively to all transactions occurring after the July 1, 2008 effective date of the 2008 Act.

In 2008, the Legislature rewrote the law for all purposes, including real estate transactions and lien law. The 2008 Act created a great deal of uncertainty as to whether purchases of many items generally viewed as component parts of an immovable were taxable as tangible personal property. The new law explicitly states that purchases of the type discussed here are not. 

Act 442, described in the legislation as “remedial, curative…procedural…and [to] be applied retroactively,” specifically states that the 2005 and 2006 laws (Acts 301 and 594) are controlling for sales/use tax purposes for determining which items qualify as component parts. The Act 442 changes discussed above originated as House Bill 882 by Representative Hunter Greene (HB 882), and was added by amendment to SB 9. Act 442 expressly provides that, “for purposes of sales and use taxes…the term ‘tangible personal property’ shall not include any property that would have been considered immovable property prior to” the 2008 law. 

Even with the enactment of Act 442, there will continue to be disputes over what property qualifies as component parts. In the coming months, Kean Miller will be working with the Secretary of the Department of Revenue and others to better define “component parts” for sales and use tax purposes. 

A copy of Act 442 may be found here.  

If you have any questions regarding the effect that Act 442 may have on your business, please to do not hesitate to contact us.
 

Owners of exempt property may be hurt by a recent Louisiana law change. Historically, the owners of tax exempt property did not have to confirm that the exemption was being respected by the Assessor by checking the tax rolls during the public inspection period. The owner of exempt property could challenge a tax bill by waiting to receive his tax bill, paying the bill under protest, and then filing a lawsuit in district court. This procedure used to be in La. R.S. 47:2110. As the result of a major rewrite of the Louisiana law on tax sales, La. R.S. 47:2110 was renumbered La. R.S. 47:2134.

This is the first of a three-part series related to Louisiana law and regulations pertaining to the accounting profession. This part focuses on the historical licensing and regulation of the profession by the State of Louisiana.

The Louisiana statutes and regulations governing accountants have become much more sophisticated and comprehensive through the years. In the early 1900s the State’s emphasis was on the qualifications and admission to the practice of public accounting. This continues to be a focus of the state¹s efforts; however, like other learned professions, the Louisiana legislature has adopted additional provisions recognizing the inevitable fact of life that: "Professions once seemingly inviolate from litigation are no longer sacrosanct. The age old axiom that physicians bury their mistakes, while attorneys and accountants file theirs away, has little relevance in modern day America.”

The purpose of this article is to provide an analysis of Louisiana statutes, regulations and jurisprudence regarding the accounting profession, as accountants, like others who practice skilled professions, are now full members of the “Krewe of Defendants” in the Louisiana litigation parade. The article does not include an analysis of other state or federal jurisdictions, regulatory bodies or professional standards and requirements.
 

In 1908, the Louisiana legislature passed the first law regulating the practice of public accounting. The legislation established a State Board of Accounting, fixed fees and prohibited the unauthorized use of any letters, abbreviations or words to indicate that an unauthorized person was a certified public accountant. The Board was authorized to revoke the certificate of any person for “unprofessional conduct...or for other Cause...” upon notice and an administrative hearing. Additionally, the law provided that it would be a misdemeanor to fraudulently use the abbreviation “CPA.”

In 1923, the Louisiana Supreme Court upheld the constitutionality of the 1908 act in a case involving a defendant who had been charged with unlawfully holding himself out as having received a certificate from the state board of accountants to practice as an “expert accountant” and having improperly used the designation “CPA.” The Court recognized the practice of public accounting as a profession of skill and science and the importance of having placed proper safeguards to maintain its dignity. In so holding, the Court reasoned that while neither morals, health, nor safety of anyone is jeopardized by the practice of this profession, the power of the state is not confined to professions involving such consequences. It may also act whenever the general welfare requires to protect the public in the skilled trades and professions against ignorance, incompetence and fraud.

The 1908 law was revised in 1924 in order to place the practice on a higher plane of professional dignity and to impose more rigid qualifications on those desiring to be called a certified public accountant. While continuing the State Board of Accountants, the act included a much more comprehensive definition of a “Certified Public Accountant” and their employees and enhanced enforcement provisions.

The 1924 state accounting regulatory provisions came under scrutiny again in 1930 in a case involving a non-Louisiana licensed Texas CPA, who attempted to collect a fee for Louisiana work. The court rejected the claim by the accountant for fees under a contract as being an agreement in violation of statute; however, the court also rejected a claim by the client for the return of money paid for an “erroneous and worthless audit” holding that there was “no culpable malpractice” because the court recognized the profession’s appreciation in the difference in the scope of work, skill and independent verification involved in a “balance sheet audit” and a “detailed audit.” However, the validity of the State’s interest in regulating the accounting profession was recognized.

The various statutory provisions in the 1924 Act were carried forth in the 1950 Louisiana Revised Statutes. There were substantive amendments and re-enactments of the legislation in 1979, 1997 and 1999. The legislation is designated as Louisiana Revised Statutes 37:71, et seq, and known as the “Louisiana Accountancy Act”. One of the results of the 1997 legislation, was assigning the responsibility to the State Board of Certified Public Accountants of Louisiana for the licensing, regulatory and enforcement functions and the enactment of a “Review Panel” procedure for claims against certified public accountants or firms, which is administered by the Society of Louisiana Certified Public Accountants. While the scope of who is within the ambit of the accountancy statutes and accompanying regulations have been considered by Louisiana courts from time to time, it is clear that the purpose of the statutes is to protect the public from expressions of opinion by persons unqualified in the highly technical profession of accounting. This is a legitimate state objective, as the United States Supreme Court has long recognized. States have the power to regulate professionals in such a way as will protect the general public from, “(T)he consequences of ignorance and incapacity as well as deception and fraud.”

Historically, the IRS has said that a disregarded entity could (and maybe should) use the owner's taxpayer identification number for income and other tax purposes. For employment tax reporting, the IRS issued Notice 99-6, 1999-1 CB 321 , which said that employment taxes for employees of a disregarded entity could be reported by a disregarded entity in one of two ways:

(1) Calculation, reporting, and payment of all employment tax obligations with respect to employees of a disregarded entity by its owner (as though the employees of the disregarded entity are employed directly by the owner) and under the owner's name and taxpayer identification number; or

(2) Separate calculation, reporting, and payment of all employment tax obligations by each state law entity with respect to its employees under its own name and taxpayer identification number.

The regulations provide the following example:

(i) LLCA is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for Federal tax purposes. However, LLCA is treated as an entity separate from its owner for purposes of subtitle C of the Internal Revenue Code. LLCA has employees and pays wages as defined in sections 3121(a), 3306(b), and 3401(a).

(ii) LLCA is subject to the provisions of subtitle C of the Internal Revenue Code and related provisions under 26 CFR subchapter C, Employment Taxes and Collection of Income Tax at Source, parts 31 through 39. Accordingly, LLCA is required to perform such acts as are required of an employer under those provisions of the Internal Revenue Code and regulations thereunder that apply. All provisions of law (including penalties) and the regulations prescribed in pursuance of law applicable to employers in respect of such acts are applicable to LLCA. Thus, for example, LLCA is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. See sections 3402 and 3403 (relating to income tax withholding); 3102(b) and 3111 (relating to FICA taxes), and 3301 (relating to FUTA taxes). In addition, LLCA must file under its name and EIN the applicable Forms in the 94X series, for example, Form 941, “Employer's Quarterly Employment Tax Return,” Form 940, “Employer's Annual Federal Unemployment Tax Return;” file with the Social Security Administration and furnish to LLCA's employees statements on Forms W-2, “Wage and Tax Statement;” and make timely employment tax deposits. See §§31.6011(a)-1, 31.6011(a)-3, 31.6051-1, 31.6051-2, and 31.6302-1 of this chapter.

(iii) A is self-employed for purposes of subtitle A, chapter 2, Tax on Self-Employment Income, of the Internal Revenue Code. Thus, A is subject to tax under section 1401 on A's net earnings from self-employment with respect to LLCA's activities. A is not an employee of LLCA for purposes of subtitle C of the Internal Revenue Code. Because LLCA is treated as a sole proprietorship of A for income tax purposes, A is entitled to deduct trade or business expenses paid or incurred with respect to activities carried on through LLCA, including the employer's share of employment taxes imposed under sections 3111 and 3301, on A's Form 1040, Schedule C, “Profit or Loss for Business (Sole Proprietorship).”

These regulations do not change the fact that a disregarded entity will continue to be disregarded for other Federal tax purposes.
 

Local governments in Louisiana are authorized to impose annual ad valorem property taxes on immovable and corporeal movable property. La. Const. of 1974 art. 6, §§ 26, 27 & 30. Property owners are required to file annual renditions prior to April 1 of each year. La. R.S. 47:2324. Locally elected assessors annually determine the fair market value and assessed value of property based upon the status and condition of taxable property on January 1 of each tax year and are responsible for listing the assessments on the official assessment lists. La. R.S. 47:1952. The assessment lists are open for public inspection during a fifteen day period determined by the assessor. Generally, the fifteen day period must fall between August 15 and September 15 of each year. La. R.S. 47:1992(G). During the fifteen day period, taxpayers may confirm their assessments and discuss changes to the assessments with the assessor. La. R.S. 47:1992(A)(2). Within three days after the end of the public inspection period, the assessors must certify the assessments lists to the local boards of review, which consist of the parish governing authorities. Appeals to the boards of review must be filed with the boards of review no later than seven days prior to the board of review hearings. La. R.S. 47:1992(C). That is, the taxpayer must confirm the dates of the board of review hearings by checking for publication of the appeal dates in the official journal of the parish and making sure that any appeal is filed with the board of review no later than seven days prior to the board of review hearing. The board of review is authorized to increase or decrease the assessment in accordance with the fair market or use valuation determined by the board. La. R.S. 47:1992(C).

Appeals from the board of review are filed with the Louisiana Tax Commission within ten days of the receipt of the board of review’s written decision, pursuant to the procedures provided for in La. R.S. 47:1989.

La. Const. of 1974 art. 7, § 18 (E) mandates that correctness of assessments be first reviewed by the board of review, then by the Louisiana Tax Commission and then by the courts. The correctness of assessments refers to the assessor’s determination of fair market value and to the assessor’s compliance with the uniformity provisions of the Louisiana Constitution. La. Const. 1974 art. 7, §18. Failure to properly file and pursue a protest with the board of review will invalidate the taxpayer’s effort to appeal the value placed on taxable property by the assessor .
 

Property taxes in Louisiana are based on the fair market value of taxable property. The assessors make the fair market value determination based upon the status and condition of property as of January 1 of each tax year. Certain types of immovable property are generally revalued every four years; however if market conditions suggest changes in fair market value, adjustments can be made during the four year cycle. Most equipment and personal property is valued annually. La. R.S. 47:1978 and La. R.S. 47:1978.1 provide relief provisions for property owners that sustain damage after January 1 due to flooding or a natural disaster.

On May 22, 2007 the Department of Revenue issued a long-awaited Revenue Ruling detailing its position regarding the case of Word of Life Christian Center v. West, 936 So.2d 1226, 2004-1484 (La. Sup. Ct. 4/17/06). In Word of Life, the Supreme Court determined that two airplanes which were purchased out of state for use in interstate commerce were nevertheless subject to Louisiana use tax as they had become part of the mass of property of the state. The impact of this decision, however, is not limited to airplanes. Many companies purchase various items outside the territorial limits of Louisiana and thereafter import them into the state for use interstate commerce operations.

The Word of Life decision may ultimately impact these companies as some storage and maintenance, which were previously considered to further interstate operations, may now be enough to subject the items to use tax. Some industries are already attempting to mitigate the impact of Word of Life in the current legislative session.

In International Paper, Inc. vs. Cynthia Bridges, 42, 023 (La. App. 2^nd Cir. 4/4/07), 2007 WL 983965 (not designated for publication), the Louisiana Court of Appeal, Second Circuit, reinterpreted the “further processing” provision of the Louisiana sales tax law. Under the further processing provision, tangible personal property purchased for further processing into tangible personal property for sale at retail is not subject to Louisiana sales/use tax. La. R.S. 47:301(10)(c)(i)(aa). Historically, Louisiana law had applied a three part test to the identification of a nontaxable further processing material: (1) The further processing material must be a benefit to the end product; (2) The further processing material must be a recognizable and identifiable component of the end product, and (3) A purpose for purchasing the further processing material must have been for processing into the end product. 

In the International Paper case, International Paper contended that three bleaching chemicals-sodium chlorate, oxygen, and hydrogen peroxide-were nontaxable further processing materials.

Contrary to the Ormet decision, in the International Paper case, the Court of Appeal, Second Circuit identifies a four part test for the identification of furthering processing materials: (1) The material itself must be processed into tangible personal property for sale at retail; (2) The material must become a recognizable, integral part of the end product; (3) The presence of the material as a component of the end product must be of benefit to the end product, and (4) The primary purpose for the purchase of the material must be to process it into the end product. 

Based upon this test, the court determined that the bleaching chemicals did not meet the further processing standard even though they did provide oxygen atoms as an identifiable beneficial ingredient of the end product paper. The International Paper court relies on Traigle vs. PPG Industries, Inc., 332 So.2d 777 (La. 1976) and Vulcan Foundry, Inc. vs. McNamara, 414 So.2d 1193 (La. 1982) for the “primary purpose” test. In PPG Industries, Inc., the court determined that while constituents of the graphite blades used to make chlorine were present in the end product that the presence was in the nature of a waste material and was not beneficial to the final product. In Vulcan Foundry, Inc., the Louisiana Supreme Court determined that carbon coke used to heat the copula used in the manufacture of iron manhole covers and which contributed some small amount of beneficial carbon to the end products was not a further processing material. The Louisiana Supreme Court found that the coke had been purchased for the purpose of heating scrap iron and that the small amount of carbon in the finished product was incidental. 

The International Paper court disagrees with the Ormet decision. In addition to a primary purpose test, apparently, the International Paper court would require the actual further processing material itself (not constituents of the further processing material) to be found in the end product. In this regard, the Court of Appeal, Second Circuit says:

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However, we concluded that the oxygen from the chemicals is not the same thing as the original chemicals generated, and we are not persuaded that because we know the source of the oxygen molecules, the requirement that the original raw material be recognizable and an integral part of the finished product is met. Clearly the oxygen atoms are an integral part of the lignin as a result of the process; however, the oxygen in the lignin is neither sodium chlorate, hydrogen peroxide nor elemental oxygen, but simply atoms of oxygen now bonded to lignin. 

The Court of Appeal, Second Circuit has declined to rehear the case but attorneys for International Paper have advised that a writ application will be filed with the Louisiana Supreme Court

It is not uncommon for 501(c)(3) non-profit organizations, large and small, to have money making opportunities during their existence. For instance, a larger non-profit organization may have a talented IT department that creates software to benefit the organization, but which can later be marketed to other organizations. In addition, a non-profit organization may receive a bequest of income producing property. Since 501(c)(3) non-profit organizations must be created and operated exclusively for charitable purposes, and not to generate profits, should these organizations ignore these opportunities and miss out on the income that could benefit their just causes, or can they take action? The short answer is that action can be taken but with caution.

The Internal Revenue Code does provide that an organization may still meet this test if the operation of the trade or business is in furtherance of the organization's exempt purpose and if the organization is not organized for the primary purpose of carrying on an unrelated trade or business. However, the Internal Revenue Code also imposes a tax on the "unrelated business taxable income" of organizations otherwise exempt from federal tax under Section 501. Since "unrelated business taxable income" does not include dividends, the most common approach is for non-profit organizations to form for a profit subsidiary to pursue the business opportunity that is unrelated to the organizations charitable or educational purpose.

Of course, this does not mean that the income producing opportunity is not taxable. Since dividends are made out of the after-tax earnings of for-profit companies, the Internal Revenue Service allows distributions (or dividends) to be made to 501(c)(3) organizations while preserving their exempt status. That is, the for-profit entity pays taxes just like any other for-profit organization, and then the for-profit entity makes distributions to its parent, the non-profit organization. Another benefit to this approach is that the non-profit parent organizations can benefit from certain protections afforded by the limited liability laws of the various states by organizing separate legal entities to engage in the opportunity.

While forming a for-profit subsidiary is the most common approach, it is important to note that simply forming a subsidiary to run a for-profit operation will not by itself protect the tax-exempt status of a non-profit organization. The Federal Regulations provide that whether a non-profit organization can maintain its tax-exempt status will be decided on a case-by-case basis.

Many companies in Louisiana may be aware of the beneficial tax exclusion authorized in La. R.S. 47:301 and LAC 61:I.4302 for pollution reduction projects. What they may not be aware of, however, is the broader scope of Louisiana’s program than most other states. Unlike other states, Louisiana’s exclusion applies to both pollution control devices and pollution control systems. Thus, the Louisiana legislature intended to apply the program to more than simply “end of the pipe” control technology. This more expansive scope may make certain projects in Louisiana more attractive for multi-state companies competing for the same project dollars. 

Solely for purposes of the state sales and use tax, the term “sale at retail” shall not include the sale of a pollution control device or system. Pollution control device or system shall mean any tangible personal property approved by the Department of Revenue and the Department of Environmental Quality and sold or leased and used or intended for the purpose of eliminating, preventing, treating, or reducing the volume or toxicity or potential hazards of industrial pollution of air, water, groundwater, noise, solid waste, or hazardous waste in the state of Louisiana. … (emphasis added).

The implementing regulations for the tax exclusion are set forth in LAC 61:I.4302 and “describes the conditions under which certain sale and lease transactions involving personal tangible property used for pollution control purposes may be excluded from the definition of ‘sale at retail’ for purposes of the 3 percent tax levied by this Chapter and the Louisiana Tourism Promotion District.” LAC 61:I.4302.C and D set forth the following conditions that must be satisfied to qualify for the tax relief provided from the definition of “sale at retail”:

1.     the “pollution control device or system” must be approved by both the Department of Revenue and LDEQ to be excluded from the definition of “sale at retail” for states sales and use tax purposes (LAC 61.I.4302.C.1);

2.     the applicant must demonstrate: (A) a net decrease in the volume or toxicity or potential hazards of pollution as a result of the installation of the device or system, or(B)that installation is necessary to comply with federal or state environmental laws or regulations (LAC 61.I.4302.C.2); 

3.     the equipment must be intended for use in an “industrial application” (LAC 61.I.4302.C.3);

4.     the exclusion does not apply to modifications to processes carried out primarily for reasons other than the reduction of “pollution” (LAC 61.I.4302.D.1); and

5.     the exclusion does not apply to installation or replacement of existing process units carried out primarily for reasons other than the reduction of pollution (LAC 61.I.4302.D.2).

“Pollution control device or system” is defined in LAC 33:61.I.4302.B to mean “any one or more pieces of tangible personal property which is intended and installed for the purpose of eliminating, preventing, treating, or reducing the volume or toxicity or potential hazards of industrial pollution of air, water, groundwater, noise, solid waste, or hazardous waste in the state of Louisiana and which has been approved by the Department of Environmental Quality and the Department of Revenue and Taxation for the tax relief granted by this act.” Pollution is also broadly defined in LAC 61:I.4302.B to mean “the environment of the state by any means that would tend to degrade the chemical, physical, biological, or radiological integrity of such environment. …”

If the above five criteria are satisfied, regulated facilities may be able to exclude the cost of the equipment and possibly the materials of construction necessary for the project from Louisiana sales tax. Again, the Louisiana program should be broadly interpreted and could be used for a number of different projects. Many MACT standards, for instance, allow flexibility in how reductions in emissions are achieved. In addition, although pollution reduction must be a significant or primary reason for a project, it does not have to be the exclusive reason for the project. Thus, as long as a net decrease in the volume of pollution will result from the project and the reduction is a critical element, it may be eligible for the exclusion. Finally, the exclusions may be applied for either before the project or afterwards through a rebate.   

On February 16, 2007, the IRS issued a formal ruling approving a sale of a life insurance policy to a grantor trust. This ruling is a rare formal ruling by the IRS in the grantor trust area. Grantor trusts, or intentionally defective grantor trusts, are used often in a variety of estate planning situations. Grantor trusts are typically used in estate planning situations where the parties want the income of the trust to be taxed to the grantor of the trust (the person who set up the trust) or where they want the grantor to be deemed to be the owner of the trust property for income tax purposes.

However, a sale of a life insurance policy can trigger adverse income tax consequences under the so called "transfer for value rule" which makes the death benefit taxable for income tax purposes. An exception to this rule exists for sales to the insured. Revenue Ruling 2007-13 approves the sale of a life insurance policy from one trust to another trust and indicates that the transfer for value rule does not apply when the purchasing trust is a grantor trust. The Revenue Ruling concludes that the sale to the grantor trust is treated as a sale to the grantor/insured and therefore the exception to the transfer for value rule applies.

There has been some concern that the IRS might begin rethinking its policy on grantor trusts, but this ruling would appear to indicate that the IRS is not doing so. Furthermore, this ruling will be helpful for any grantor trusts transfers involving life insurance policies. 

Beginning with the 2006 ad valorem tax year, Louisiana's Assessors have been required to send notice when the taxable assessment of property for a tax year increases by 15% or more from the prior year.  Written notice must be mailed by the Assessor to the address that receives the tax bill no later than the first day of the public exposure period.  La. R.S. 47:1987(B).  The public exposure period is a fifteen day period which must occur between August 15 and September 15 of each year. La. R.S. 47:1992(F).  Valuation and uniformity appeals to the local Boards of Review must be filed shortly after the public exposure period. The new written notice requirement provides a useful tool that will make it easier for taxpayers to manage compliance in Louisiana and reliance on the notice provides the taxpayer with a defense against a claim for additional taxes, interest and penalties.