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:

                                                                        *   *   *

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.

The Louisiana Supreme Court recently denied the writ application of Crosstex LIG, LLC relating to its 2005 ad valorem property tax disputes with Rapides and Ouachita parishes. Crosstex had appealed the values because Ouachita adjusted for obsolescence but did not use the service factor formula set forth in the Louisiana Tax Commission (“LTC”) Rules and Regulations, and Rapides denied obsolescence as a matter of “standard operating procedure.”

In its decision, the LTC held that when using the cost approach to value pipeline properties, the decision to adjust for obsolescence rests with the “sound discretion” of the assessor, but once the assessor makes the decision, he must use the service factor formula to calculate. By denying the writ, the Supreme Court allows the LTC to circumvent the constitutional and statutory requirements of ad valorem property taxation based upon fair market value, statewide uniformity, and the proper application of the cost approach. 

In Susan Orillion v. Crawford, 2005-0559 (La. App. 1 Cir. 9/1/06), 2006 WL 2521450, Orillion disputed the imposition of Louisiana individual income taxes on prejudgment interest received in connection with an automobile accident in 1988. The state paid its half of the damage award judgment in connection with the accident, with accrued judicial interest. Relying on tax laws current at the time, the Orillions paid no state or federal income taxes on their damage awards.

As described by the court, “The issue of whether prejudgment interest was taxable under 26 U.S.C.A. §104(a)(2) came to the forefront in federal court beginning with an unpublished case arising out of Michigan, entitled Kovacs vs. C.I.R., 25 F.3d 1048 (6th Cir. 1994), cert. denied, 513 U.S. 963, 115 S.Ct. 424, 130 L.Ed.2d 338 (1994). It was quickly and subsequently followed by a series of cases that held that prejudgment interest was not excluded from taxation under 26 U.S.C.A. §104(a)(2).” Thus, beginning in 1994 the treatment of prejudgment interest for federal tax purposes became clear. Orillion, however, contended that La. R.S. 47:46 precluded the imposition of the Louisiana individual income tax on prejudgment interest. In pertinent part, La. R.S. 47:46 provides, “gross income does not include: * * * (2) the amounts of any damages received (whether by suit or agreement) on account of personal injuries or sickness * * *.”

The Department argued that La. R.S. 47:46 had been superseded by the provisions of La. R.S. 47:290 et seq. Consistent with this position, the Department has historically argued that except for modifications contained in La. R.S. 47:290, et seq. the Louisiana individual income tax liability is derived directly from the federal income tax liability. 

In the Orillion case, the court determined that La. R.S. 47:290, et seq. superseded the pre-existing provisions of the individual income tax law only to the extent that the provisions of the pre-existing individual income tax law were expressly inconsistent with the provisions of La. R.S. 47:290, et seq. Rather, the court found that La. R.S. 47:293(6)(a)(iii) (allowing for adjustments for income exempt from taxation under Louisiana law or which Louisiana is prohibiting from taxing by the Constitution or laws of the United States) appears to reaffirm exemptions from taxation under other provisions of Louisiana law, which necessarily includes La. R.S. 47:46.

The court then concluded, “under Louisiana law, prejudgment interest is part of personal injury damages and is specifically excluded from gross income.”

The Louisiana Third Circuit Court of Appeal caused quite a stir in the Louisiana business community in December, 2005 when it rendered its decision in Doland v. ACM, 921 So.2d 196 (La.App. 3 Cir. 12/30/05). In Doland, the Court was called upon to resolve a heated dispute over the termination of a lease of video poker machines. The video poker machines were being leased by ACM [FN1] for use in the Pat’s of Cameron Restaurant. Upon the expiration of the original three year term, written notice had been given of the restaurant’s desire to retain possession of the machines on a day-to-day basis, and to continue as such until the restaurant was able to obtain different machines, either through direct purchase or through another lessor. The restaurant had the machines disabled by the Louisiana State Police after ACM refused to remove the machines after removal was requested by the restaurant. Because of ACM’s refusal to remove them, the video poker machines remained disabled but on the premises of the restaurant, preventing the installation of new video poker machines, for roughly three months. During this time, the restaurant experienced a decrease in revenue not only from the lack revenue generated from the video poker machines themselves, but also from a decline in restaurant sales due to a lack of patronage. 

We similarly find that the lease agreement that is presently before us was entered into individually by Pat Doland. He signed the lease in his personal name, without any designation that he was acting on behalf of any other entity. In addition, we find it relevant that “Pat’s Restaurant of Cameron, Inc.” is a Chapter S corporation. The owners of such qualifying entities are taxed as sole proprietors or partnerships and are personally liable for the losses and debts of such a corporation; the Chapter S corporation is not taxed. See 26 U.S.C.A. §§ 1363, 1366. Under Louisiana law, this corporation, therefore, is not a separate and distinct entity from the individual, Doland, and as a result, there exists no legal distinction between the individual and the business. See Robinson v. Heard, 01-1697 (La. 2/26/02), 809 So.2d 943. Doland at 201. (Emphasis added).

Although the above-quoted language is dictum, it was enough to send a wave of panic surging through the S corporations, limited liability companies and registered limited liability partnerships across the state. S corporations, limited liability companies and registered limited liability partnerships can enjoy the benefits of both limited liability and pass through taxation [FN 3], making them appealing options for certain business ventures [FN 4]. Unless remedied, this language alone could have been enough to allow the courts to begin to erode away the protection from liability enjoyed by these entities, leaving only C corporations, subject to double taxation, shielded from liability. Entities that thought they would be able to enjoy both pass through taxation and limited liability were possibly facing a foreseeable change in the protection they enjoy.            

The Court more recently granted a rehearing for the limited purpose of deleting the above-quoted dictum. The Court then went on to clarify that S corporations are offered a “shield of protection against individual liability” even though, because of pass through taxation, there is “no legal distinction for income tax purposes between an individual and a Chapter S corporation”.

There can be no guarantee that any business entity is free from the piercing of the corporate veil and the resulting collapse of the business entity. There is also nothing to stop a court in another matter from readdressing the issue. What is encouraging is that, at least for now, the Court realized the severity of the impact its dictum could have on the business community and made a directed effort to remedy the situation. 

[FN 1] The original lease was between the restaurant and Allied Gaming Management, Inc. (“Allied”), which sold its assets (including this lease) to ACM as part of Allied’s Chapter 11 bankruptcy reorganization plan prior to the expiration of the original three year term.

[FN 2] Not only was Doland able to recover for lost revenue stemming from the lack of video poker gaming, but also from the lost restaurant sales. The Court also awarded Doland interest, general damages and attorney’s fees.

[FN 3] Pass through taxation allows entities such as partnerships, sole proprietorships, S corporations, limited liability companies electing to be treated as partnerships to avoid taxation at the entity level. This results in only one level of taxation: at the individual shareholder, partner, or member level. To the contrary, C corporations and limited liability companies electing to be treated as a corporation are taxed first at the entity level and then again at the shareholder or member level.

[FN 4] There are certain restrictions on the formation of these types of entities. 

            The Gulf Opportunity Zone Act of 2005 (“GO Zone”) created a number of business incentives to help Louisiana and the other areas impacted by Hurricane Katrina. One of the key elements of the GO Zone legislation is the 50 percent bonus depreciation provision. This provision has been getting a great deal of coverage in the media and among the various investment circles. However, until guidance is issued by the IRS, there are some areas of uncertainty in this legislation. 

The Louisiana Supreme Court has ruled that interstate airplanes and other interstate transportation equipment will be subject to Louisiana state and local use taxes if a taxable moment outside of use in interstate commerce is found. The Court overruled cases which had previously found that transportation equipment used in interstate commerce would not be subject to use tax unless the equipment was used for intrastate transportation.
In Word of Life Christian Center vs. Mark West, Administrator, Ascension Parish Sales and Use Tax Authority, 04-1484 (La. 4/17/2006), _____ So.2d______, the Louisiana Supreme Court reviewed the taxability of airplanes purchased by the Word of Life Christian Center.

Mark West, the Ascension Parish Tax Collector, demanded that Word of Life pay sales/use tax to Ascension Parish on both planes. The district court in Ascension Parish determined that the planes could not be taxed in Ascension Parish. The Louisiana First Circuit Court of Appeal followed its prior decisions in The Shaw Group, Inc. v. John H. Kennedy, Secretary, Dept. of Revenue, State of Louisiana, (La.App. 1 Cir. 2000), 767 So.2d 937 and Tigator Inc.v. West Baton Rouge Police Jury, 94-1771, 94-1772 (La. App. Cir. 5/5/95), 657 So.2d 221, writ denied, 95-2126 (La.11/17/95), 663 So.2d 712 and found that any contact with Ascension Parish was in connection with interstate commerce activities and Ascension Parish could not collect a use tax on those activities.

In Tigator, the Louisiana First Circuit Court of Appeal had determined that La. R.S. 47:305(E) precluded the imposition of a use tax on trailers engaged in interstate commerce unless the trailers dropped out of interstate commerce and were used for intrastate transportation. The Tigator court refused to find that the garaging and maintenance of the trailers in East Baton Rouge Parish was a taxable use of the trailers. In Shaw, the Louisiana First Circuit Court of Appeal found that an airplane purchased out of state and hangared in Louisiana for interstate trips was not subject to the Louisiana use tax because the ultimate use of the property was in interstate commerce which was non-taxable under La. R.S. 47:305(E).
In Word of Life, the Louisiana Supreme Court overruled Tigator and Shaw.

The Court determined that the concept of ultimate use was not supported by the Louisiana sales tax law and that any use not in interstate commerce, such as storage, cleaning, and repairing in Louisiana would be sufficient for the imposition of the state and local use taxes. The court did recognize that activities in interstate commerce could not be taxed under La. R.S. 47:305(E), but found taxable moments in between interstate activities.
Thus, under Word of Life, a commercial airplane that stops at the Baton Rouge airport to discharge and receive passengers would probably not be subject to use tax even if the plane is repaired and serviced in connection with its interstate flights. However, airplanes and other instrumentalities of interstate commerce would probably be subject to state and local use tax if the property is stored in Louisiana and is otherwise maintained in Louisiana between interstate trips.

Taxpayers should check for other exclusions or exemptions that may be applicable to their equipment before paying use taxes on interstate commerce equipment, such as La.R.S. 47:305.50(exemption for trucks and buses used more than 80% in interstate commerce and for certain rail rolling stock), La. R.S. 47:305.1(B)(exemption for materials and supplies for interstate commerce vessels), La. R.S. 47:301(10)(m)(sales/use tax exclusion for certain aircraft). The application of these exemptions may not be clear. Taxpayers should check with their tax advisors before paying use tax on interstate commerce equipment because the interplay between available exclusions and exemptions and commerce clause considerations may require a broader reading of the provisions. For example, the exclusion for aircraft manufactured in Louisiana found in La. R.S. 47:301(10)(m) may have to be construed to include aircraft manufactured outside Louisiana in order to prevent a violation of the Commerce Clause of the United States Constitution.

Download the full outline here.

For more information, contact a member of the Kean Miller Business and Corporate team, or send an email to client_services@keanmiller.com.

Louisiana allows the same annual exclusion as the federal gift tax so Louisiana's annual exclusion will increase as well. However, Louisiana has a lifetime exemption of only $30,000, not $1,000,000.

For more information, please contact Kevin C. Curry.

The Senate Revenue and Fiscal Affairs Committee has reported to the full Senate HB 148 (Rep. Arnold), which appears to be a compromise between the assessors and local government on the revaluation of property due to damage or destruction because of the hurricanes.

HB 148 (Rep. Arnold) must now be voted on by the full Senate and the House must vote to accept the Senate amendments or to send the bill to a conference committee.

HB 148 as amended would preserve the revaluation provisions dealing with flooded property (immovable and corporeal movable (i.e. real estate and tangible personal property) in current law, La. R.S. 47:1978. That is, flooded property must be revalued. Property destroyed, uninhabitable, or non-operational due to other hurricane related causes will be revalued as follows: If the local taxing jurisdictions vote to use pro-ration, the tax bill will be prorated for 2005 based on the number of days the property was "habitable". This pro-ration provision cannot be used by Jefferson, Orleans, Plaquemines, and St. Bernard. If the local taxing jurisdictions do not vote to use pro-ration and in Jefferson, Orleans, Plaquemines, and St. Bernard the property will be revalued in its damaged state for the entire year.

Procedure

If the assessment rolls have not yet been certified to the Board of Review, the general assessment rolls must be updated to reflect the damaged value of the property and the normal procedures for contesting the correctness of assessments will apply (appeal to local board of review, appeal from the board of review to the Tax Commission, appeal from the Tax Commission to district court). If the assessment rolls have been certified to the board of review, the assessor must prepare a supplemental assessment roll reflecting the damaged value of the property and the normal procedures for contesting the correctness of assessments will apply. If the assessment rolls have been certified to the Tax Commission, the Assessor may either use a supplemental roll or may issue change orders. If a supplemental roll is used, the normal procedures for contesting the correctness of assessments will apply. If the assessor uses change orders to update the value of damaged property and the taxpayer does not agree with a change order, the taxpayer has ten days from the mailing of the notice of the change order to file an appeal with the Tax Commission and request a hearing. Decisions of the Tax Commission are final unless the decision is appealed to district court with ten days from the mailing of notice of the decision of the Tax Commission.

Non-flood Damage

Under HB 148, as amended, immovable and corporeal movable (i.e. real and tangible personal) property that has been damaged by the hurricanes (other than flood damage) could be revalued under the following provisions:

Pro-ration

If the local taxing jurisdictions in a parish (except Jefferson, Orleans, Plaquemines, and St. Bernard) properly follow the procedures in the bill and vote to use pro-ration, taxpayers who notify the Tax Collector that they want a reduction in their tax bill because of such damage will be able to have their tax bill revised as follows: The tax liability resulting from the full assessment of the property (valued as of January 1) will be prorated based on the number of months that the property was "habitable" divided by twelve.

Revaluation

If the taxing jurisdictions do not vote to use pro-ration (including Jefferson, Orleans, Plaquemines, and St. Bernard), then the assessed value of property will be revised based upon the fair market value of the property taking into consideration the damage and depreciation in value caused by the disaster or emergency and the procedures described above for flooded property will be used.

Millages

HB 148, as amended, provides that the revaluations do not result in automatic millage rollups under the provisions of La. Const. art 7, sect. 23. Automatic millage rollups will still occur to cover bonded debt.

Filing of Assessment Rolls

The time for filing tax rolls for 2005 taxes (2006 taxes for Orleans Parish) would be extended until March 31, 2006.

Payment of Taxes

The time for the payment of taxes would be extended for 2005 taxes (2006 taxes for Orleans Parish) to forty-five days after certification and approval of the tax rolls by the Tax Commission or December 31, 2005, whichever is later. [Under this provision, the taxes in the areas of the state that do not require revaluations will be due on December 31 as required by current law. In those parishes were revaluations could be done before November 15, the normal due date of December 31 would apply. In those parishes were revaluations can not be done before November 15 (St. Bernard, Plaquemines, Jefferson, Orleans, and many of the other coastal parishes) the taxes will be due after December 31 based on when the rolls are certified, but in all cases before May 15, 2006].

Application of the Provision of HB 148, as amended.

None of the provisions of HB 148, as amended, will apply in any parish for which the assessments rolls for 2005 were certified, or partially or conditionally certified, by the Tax Commission prior to the effective date of the bill (i.e. as of the date the Governor signs the bill).

HB 148 is substantially through the legislative process and will likely by the instrument that survives, subject to further amendment by the full Senate and conference committee, if the House sends the bill to conference.

SB 103 (Sen. Quinn) and SB 104 (Sen. Schedler) are awaiting Senate Floor action. It is unlikely that theses bill will be moved through the process.

For a recent article on HB 148 as amended click the link below:

http://www.wwltv.com/local/stories/WWL111605hurricane.67f86185.html

Three different bills dealing with revaluations because of hurricane damage are working their way through the Legislature.

Existing law, La. R.S. 47:1978 requires the revaluation of flooded property in the year of the flood even if the assessment rolls have been certified.

HB 148 (Rep. Arnold)

Revaluations

Creates a new La. R.S. 47:1978.1 that complements La. R.S. 47:1978. It expands on La. R.S. 47:1978 by requiring revaluation not only in the case of floods, but also in the case of property damaged or destroyed during a declared disaster or emergency.

Millages

Provides that the revaluations do not result in automatic millage rollups under the provisions of La. Const. art 7, sect. 23. Automatic millage rollups will still occur to cover bonded debt.

Filing of Assessment Rolls

The time for filing tax rolls for 2005 taxes (2006 taxes for Orleans Parish) would be extended until March 31, 2006.

Payment of Taxes

The time for the payment of taxes would be extended for 2005 taxes (2006 taxes for Orleans Parish) to forty-five days after certification and approval of the tax rolls by the Tax Commission or December 31, 2005, whichever is later. [Under this provision, the taxes in the areas of the state that do not require revaluations will be due on December 31 as required by current law. In those parishes were revaluations could be done before November 15, the normal due date of December 31 would apply. In those parishes were revaluations can not be done before November 15 (St. Bernard, Plaquemines, Jefferson, Orleans, and many of the other coastal parishes) the taxes will be due after December 31 based on when the rolls are certified, but in all cases before May 15, 2006].

HB 148 will be considered by the Senate Revenue and Fiscal Affairs Committee tomorrow.

SB 103 (Sen. Quinn)

Creates a La. R.S. 47:1978.1 that allows for the revaluation of property damaged in a declared disaster or emergency. How the revaluation is done is decided by the individual taxing jurisdictions (In Orleans the decision would be made on a parish wide basis by the City Council). Each individual taxing jurisdiction (parishes, school boards, levee districts, drainage districts, etc.) could either: (1) instruct the assessors to do a full revaluation based on the fair market value after the disaster or emergency under provisions similar to HB 148, or (2) provide for the proration of the tax bill based upon the number of months during the tax year that the property was "habitable". The bill does preclude millage rollups and does have provisions for the postponement of taxes similar to HB 148.

SB 103 is awaiting Senate Floor action.

SB 104 (Sen. Schedler)

This bill appears to be identical to SB 103 by Sen. Quinn.

SB 104 is awaiting Senate Floor action.