In Leisure Recreation & Entertainment, Inc. v. First Guaranty Bank, the Louisiana Supreme Court found the voluntary pay doctrine to be in direct conflict with the Civil Code.   In this action, the borrower was to make payments with interest accruing at 6.5% for years one through five of the loan, 7.5% in years six through ten, and then at Citibank prime rate.  Although the rate declined in years eleven through thirty, the borrower continued to pay interest at 7.5%, which exceeded the prime rate during the applicable period.   In response to borrower’s claim, the bank asserted that borrower was estopped from recovering the payments or arguing that the payments were improperly made pursuant to the voluntary payment doctrine.  In a 1902 decision, the Louisiana Supreme Court addressed the voluntary pay doctrine calling it “an established rule of law that if a party with full knowledge of facts, voluntarily pays a demand unjustly made on him and attempted to be enforced by legal proceedings, he cannot recover the money back”.

However, this time the Louisiana Supreme Court concluded that Civil Code article 2299 says nothing about the voluntary pay doctrine.  This article states “a person who has received a payment or a thing not owed to him is bound to restore it to the person from whom he received it.”  The Court found the express and plain language of article 2299 rejects the application of this doctrine and it reversed the Court of Appeal ruling insofar as it held plaintiff is precluded from recovering payments voluntarily made, whether made knowingly or by mistake.  It stated that the knowledge exception applied in the voluntary pay doctrine is contrary to the express mandate of Civil Code article 2299, which the legislature adopted.  Simply put, the article states that a person receiving payment of a thing not owed must return it.  The Court stated, “There is no place in Louisiana law for a common law estoppel doctrine that addresses a subject already encompassed with positive law of the Civil Code.”

4872-5866-6014 v1

On Monday, October 24, the United States Department of Justice (the “DOJ”) confirmed that it did not appeal the Court of Appeals for the Fifth Circuit’s decision in Trafigura Trading LLC v. United States, No. 21-20127, 29 F.4th 286 (5th Cir. 2022). The Fifth Circuit invalidated the federal tax on domestic crude oil exported from the United States as unconstitutional. The DOJ also provided a letter to House Speaker Nancy Pelosi explaining its decision and reaffirming its commitment to defending the oil export tax in other circuits. The Fifth Circuit’s finding that the oil export tax is unconstitutional and the DOJ’s decision not to appeal create both a refund opportunity and considerable uncertainty for taxpayers. In Trafigura Trading, the Fifth Circuit found that the oil export tax violated the Export Clause under Article I, section 9, Clause 5 of the United States Constitution, which bans taxes or duties on articles exported from any state. Any taxpayer that previously paid the tax should consider filing refund claims on a timely basis before the statute of limitations on refunds prevents recovery of these amounts.

Tax on Exported Crude Oil Held Unconstitutional

The tax on exported crude oil is imposed by Internal Revenue Code (“IRC”) Section 4611(b) as one of the “Environmental Taxes” under Subtitle D (Miscellaneous Excise Taxes). The tax was originally imposed in 1980 but exports of crude oil were heavily restricted by the Bureau of Industry and Security until 2016.[1] The tax applies to domestic crude oil that is exported from the United States, at a rate of nine cents per barrel (after 2016). The tax is due quarterly, and the return must be filed on the last day of the first calendar month following the quarter for which it is made.[2] Proceeds from the tax go into the Oil Spill Liability Fund (“the Fund”).

Trafigura Trading, the taxpayer, sought a refund of over four million dollars in taxes paid between tax years 2014 and 2017 under IRC Section 4611(b). Trafigura’s argued that the tax was unconstitutional under the Export Clause. The Internal Revenue Service’s (the “IRS”) audit division denied the refund request, and the IRS appeals division denied Trafigura’s protest of the refund claim denial because it “does not consider arguments based on constitutional grounds.”

When Trafigura challenged the denial, the government argued that the levy was not a prohibited tax on exports but a “user fee,” citing United States v. U.S. Shoe, 523 U.S. 360 (1998), and Pace v. Burgess, 92 U.S. 372 (1875) in support of that proposition. The United States District Court for the Southern District of Texas disagreed and granted Trafigura Trading’s motion for summary judgment.

In considering the government’s appeal, the Fifth Circuit looked to the historical context of the Export Clause and noted that delegates to the constitutional convention from the southern states (the nation’s then primary exporters) considered the Export Clause so important that there would have been no Constitution without it. The Appeals Court therefore determined that the ban on export taxes was meant to be unqualified and absolute. Hence, the government’s only defense was to show that the “tax” was, despite its name, a “user fee.”

In order to qualify as a “user fee,” however, the charge contained in IRC Section 4611(b) would have to satisfy a two-part test articulated by the United States Supreme Court in U.S. Shoe and Pace. First, the charge must not be based on the quantity or value of the exported oil – if it was, it was more likely a tax. Second, the charge must “fairly match” or “correlate reliability” with the Fund’s services to exporters.

As to the first part of the test, the government admitted that the charge was based on the volume of oil exported. The tax failed the second part of the test because, as noted by the Appeals Court, the Fund is mainly used to provide reimbursement for oil spill cleanup costs above a statutory cap, to cover costs incurred by federal, state, and Indian tribe trustees for natural resource damage assessment and restoration, and to support research and development on oil pollution. The Appeals Court held that these were not services provided to exporters in return for the charge as a “value-for-value transaction” but were instead “a mishmash of anti-pollution measures for the general benefit of society.” Even if exporters benefitted indirectly from these measures, the same could be said for any tax. For those reasons, the Court held that the charge under IRC Section 4611(b) was a tax and not a “user fee.” As a result, the Appeals Court affirmed the decision of the District Court, and ruled that the tax under IRC Section 4611(b) violated the Export Clause and could not be enforced by the government.

Refund Implications for Taxpayers

Of immediate concern to taxpayers is that the statute of limitations for filing a refund claim expires the later of three years from the date the return was filed or two years from the date the tax was paid.[3] As a result, taxpayers are running out of time to file potential refund claims for recovery of taxes paid in prior years under IRC Section 4611(b). For those who missed the opportunity when the decision came out in March, there is still a limited window in which to file claims by October 31 for taxes paid during the third quarter of 2019. Until the issue is ultimately resolved, taxpayers should consider continuing to file refund claims for open periods.

The DOJ’s decision not to appeal the Fifth Circuit’s decision, highlights one of the longstanding issues with our system of judicial review of tax matters – that authoritative rules to resolve a tax controversy may not be determined for a protracted period of time.[4] In this case, the DOJ’s decision not to appeal causes considerable uncertainty for taxpayers because, absent a legislative fix, taxpayer’s with materially similar facts may have different tax consequences based solely on whether their challenge to the tax would be subject to the jurisdiction of the Fifth Circuit. This uncertainty will persist until the statute is amended in a manner that renders it constitutional or the United States Supreme Court definitively rules on the issue.

In addition to considering whether to file refund claims related to past tax periods, a taxpayer subject to the tax should also retain necessary documentation necessary and consider filing refund claims on a timely basis with respect to these payments in order to preserve the right to recover these amounts from IRS. Taxpayers outside of the Fifth Circuit should also consider filing timely refund claims to protect their right to recover these amounts as the issue is unresolved and may ultimately be decided in favor of taxpayers. Finally, taxpayers should monitor any proposed amendments to IRC 4611.

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Willie Kolarik at (225) 382-3441, or Divya Jeswant at (504) 293-5766.

[1] https://www.bis.doc.gov/index.php/documents/pdfs/1462-crude-oil-final-rule-5-12-1016/file

[2] Treas. Reg. 40.6071(a)-1(a).

[3] IRC Section 6511.

[4] Edwin N. Griswold, The Need for a Court of Tax Appeals, 57 Harv.L.Rev. 1153 (1944) (available at: https://repository.uchastings.edu/cgi/viewcontent.cgi?article=1020&context=tax).

Earlier this year, Governor John Bel Edwards signed into law House Bill No. 515, amending La. R.S. 12:1333 and enacting the new La. R.S. 12:1333.1 of the Louisiana Limited Liability Company Law (the “LLC Law”), which became effective on August 1, 2022. This legislation represents meaningful changes to the nature of membership interests in Louisiana single-member limited liability companies and the rights related to those interests upon the death of a member.

Under Louisiana law, upon the death or declaration of incompetency of a member of a limited liability company, the deceased member’s membership interest in the company automatically terminates.[1] Thereafter, the appropriate representative of the deceased or incompetent member is treated as an assignee of the member’s interest and is entitled only to receive distributions from the company, to share in profits and losses, and to receive allocations of the company’s items of income, gain loss, deductions and credit (“Financial Rights”).[2] Unless and until an assignee is admitted as a member of the company, the assignee is not entitled to exercise any management rights or powers of a member, such as voting rights and inspection of company records (“Management Rights”).

The designation of a person who assumes the membership interests of a deceased or incompetent member as an assignee is particularly significant in the context of single-member limited liability companies. Prior to the enactment of Section 1333.1, upon the death or incompetence of the sole member, the company’s membership would be reduced to zero. Unlike a partnership entity, which automatically terminates upon the reduction of its membership to one person,[3] the LLC Law is silent as to the effects of a limited liability company’s membership being reduced to zero.[4] Thus, prior to the enactment of Section 1333.1, when the sole member in a single-member LLC died or was declared incompetent, and his or her membership interests transferred to the designated assignee, it was unclear who, if anybody, had the authority to manage the company, or even whether the existence of the company would continue.

The newly enacted Section 1333.1 offers some clarity on this issue by providing an exception to the general rule that the representative of a deceased single member is to be treated as an assignee:

  1. Notwithstanding any provision of law to the contrary, the death of the member of a single-member limited liability company shall not result in the termination of the interest of the deceased single member in that limited liability company or in the termination of that limited liability company, but instead the interest of the member in the single-member limited liability company shall be fully heritable.[5]

Upon the death of the single member, the deceased member’s succession representative “may exercise all of the deceased member’s rights for the purpose of settling or administering the member’s estate, including all financial and management rights related to the single-member limited liability company held by the deceased member at the time of his death.”[6] Once the membership interest is properly transferred, as part of the succession, “the heir or legatee shall have full rights of membership in the limited liability company, including all financial and management rights.”[7]

These changes could result in significant consequences for single-member limited liability company owners that do not adequately plan for the transfer of membership interests upon their death. Unless otherwise provided in the company’s articles of organization or a written operating agreement, the membership interests of a deceased single member are fully heritable and would be transferred to the deceased member’s heirs and legatees, who would then enjoy full rights as a member or members of the company. Now, the owner of a successful single-member LLC will be able to leave his or her membership interest to their non-member children, who can carry on the business following his or her death. Alternatively, consider the sole member that dies intestate whose estranged son inherits full membership rights and is free to manage the company as he chooses. Business owners and practitioners should be cognizant of the effects of these changes and should prepare accordingly in drafting articles of organization and operating agreements of Louisiana single-member limited liability companies.

 

[1] LSA-R.S. 12:1333(A).

[2] LSA-R.S. 12:1330(A).

[3] LSA-C.C. Art. 2826.

[4] The LLC Law defines a “limited liability company” as “an unincorporated association having one or more members” (LSA-R.S. 12:1301(10) (emphasis added), there is no statute providing for express automatic termination of an LLC with no members.

[5] LSA-C.C. 12:1333.1(A).

[6] LSA-R.S. 12:1333.1(B).

[7] LSA-R.S. 12:1333.1(C).

For traditional manufacturers, the Inflation Reduction Act of 2022 (IRA) offers a mixed bag of carrots and sticks to support its green energy goals.

Signed by President Biden on Aug. 16, 2022, the bill includes numerous tax credits and other incentives promoting clean energy investment. One of the IRA’s stated purposes is to incentivize and revitalize domestic manufacturing, and many of its tax credits and incentives are focused on clean energy manufacturing.

The IRA directs some specific tax outcomes, like tax credits for manufacturing green components. Other outcomes may be consequential or indirect, like increased local tax revenues due to higher wages or an expanded property tax base.

First, the Carrots

One of the most significant benefits of the IRA is the expansion of the Advanced Energy Project Tax Credit. This provision credits up to 30 percent of the investment in property used in a “qualifying advanced energy project” that is certified by the Department of Energy, and that is placed in service within two years from certification.

The IRA expands the definition of a qualifying advanced energy project to include initiatives at manufacturing facilities that reduce their greenhouse gas emissions by at least 20 percent. Manufacturers can apply the tax credit to low-carbon industrial heat; carbon capture, transport, utilization and storage systems; and equipment for recycling, waste reduction and energy efficiency. This tax credit is funded at $10 billion for eligible projects.

Similarly, the IRA creates a new, $5.8 billion Advanced Industrial Facilities Deployment Program under the Department of Energy’s Office of Clean Energy Demonstrations to invest in projects aimed at reducing greenhouse gas emissions from energy-intensive industries. Such fields include chemical, paper and pulp, iron, steel and glass manufacturing.

Importantly, companies may use this funding to retrofit or upgrade existing facilities, and the program’s funds may be issued as grants, rebates or loans to eligible manufacturers. Funding selection will give priority to projects with the greatest greenhouse gas emissions reductions and greatest benefit to the largest number of people.

The IRA grants $3 billion to the Environmental Protection Agency to award rebates and grants to port authorities, other local governing bodies and private entities to acquire green equipment and develop climate action plans. The heavy-duty vehicles and equipment used to load and unload cargo often make ports into air quality hot spots. The IRA sets aside $750 million for ports located in non-attainment areas, meaning those with severe air pollution.

The IRA also provides $2 billion to the Department of Energy for Domestic Manufacturing Conversion Grants. Selected applicants can use the grants to retool or retrofit existing automotive facilities for domestic manufacturing of green vehicles such as hybrid, electric, and hydrogen-fueled automobiles.

Finally, the IRA increases the Carbon Capture and Sequestration Tax Credit amount for industrial facilities and decreases the minimum plant size threshold for eligibility. The tax credit, described in Section 45Q of the Internal Revenue Code, incentivizes investment in systems that trap and store carbon emissions, such as in underground geological formations.

Now for the Sticks 

One of the most significant drawbacks in the IRA is the enactment of a corporate minimum book tax. The minimum tax would be 15 percent of book income, which is the amount of income shown on the applicable corporation’s financial statements. Book income is reduced by any corporate alternative minimum foreign tax credit and can be adjusted for certain depreciation.

As a condition for being subject to the corporate minimum book tax for a tax year, the applicable corporation must have average book income in excess of $1 billion over three years prior to the tax year. A lower threshold of $100 million applies for a foreign patented multinational group.

The tax applies to a corporation that must be aggregated with other trades or businesses that are component members of a commonly controlled group, whether or not incorporated. Only the corporate partner’s distribution share of the partnership’s financial statement income is included. The aggregation standard includes, but is broader than, that required for filing consolidated returns. Also, a predecessor corporation is required to be aggregated.

It is important to note that the final version of the IRA retains a provision allowing for 100 percent bonus depreciation, which allows companies to fully and immediately deduct the cost of capital purchases from their book incomes.

Without the bonus depreciation, capital-intensive companies like manufacturers would report higher incomes and therefore likely incur higher taxes. Unfortunately, this bonus depreciation provision will be phased out between 2023 and 2026.

Another stick imposed by the IRA is an excise tax on the repurchase of shares by a corporation. Public companies with excess cash frequently use these stock buybacks to reduce the number of shares outstanding in order to increase earnings per share, which in turn affects the stock price. The excise tax is imposed at the rate of 1 percent of the amount of the buyback.

Finally, the IRA establishes a maximum annual methane waste emission rate for facilities and imposes escalating penalties for exceeding the limit.

Local Tax Implication

Manufacturers must also consider an unforeseen consequence of all this green investment: the potential for increased local property taxes.

Fortunately, most states already provide some economic development incentives for new or expanding manufacturing facilities, either in the form of property tax exemptions or income tax credits. Most states also provide a specific property tax exemption for pollution control equipment.

Manufacturing site selection is extremely competitive, and corporate tax rates, state and local incentives — as well as tax exemptions — are always among the Top 10 site selection factors identified by manufacturers. No doubt the states with these sorts of incentives will fare better in recruiting new green manufacturers and encouraging traditional manufacturers to implement greener technologies.

The IRA’s clean energy goals are clear, and it does an admirable job of incentivizing and encouraging green manufacturing. But for traditional manufacturers, it remains to be seen whether the IRA’s carrots — or sticks — will have the greater impact.

This article was originally published by REBusinessOnline.

On March 11, 2020, during the height of the COVID-19 global pandemic, Governor John Bel Edwards declared a public health emergency for the State of Louisiana pursuant to the Louisiana Health Emergency Powers Act, La. R.S. 29:760 et seq. This is not the first time the Governor has declared a public health emergency for the State of Louisiana, as Louisiana is familiar with hurricanes and other natural disasters.

The Louisiana Health Emergency Powers Act provides, in relevant part, that, “[d]uring a state of public health emergency, any health care providers shall not be civilly liable for causing the death of, or injury to, any person or damage to any property except in the event of gross negligence […].”[1] Accordingly, the Louisiana Health Emergency Powers Act applies in favor of any healthcare provider, regarding any personal injury or property damage claim, that arises during a public health emergency.

The Louisiana Second Circuit Court of Appeals further elaborated on the specifics of the Louisiana Health Emergency Powers Act, as it pertains to healthcare providers and the COVID-19 global pandemic. In Lathon v. Leslie Lakes Retirement Center, 54,479 (La.App. 2 Cir. 9/21/22), the plaintiff brought a premises liability action against the owner of nursing home, alleging that the plaintiff slipped and fell when she stepped in liquid that was spilled by the owner’s employee. The Second Circuit held that the provision of the Louisiana Health Emergency Powers Act[2], which governs healthcare provider immunity, applied to the owner, and thus the owner was not liable for the plaintiff’s alleged injuries in the absence of evidence of gross negligence.

Lathon’s significance is that this is the first premises liability case that involved a healthcare provider’s facility during a public health emergency, and the healthcare provider’s facility was entitled to the protections of the Louisiana Health Emergency Powers Act. Furthermore, not only does Lathon create a defense for premises liability cases arising out of the COVID-19 pandemic, but it also creates a defense for premises liability cases that arise out of future public health emergencies in the State of Louisiana.

[1] La. R.S. 29:771(B)(2)(c).

[2] La. R.S. 29:771(B)(2)(c).

On September 2, 2022, the U.S. Customs and Border Protection of the Department of Homeland Security (“CBP”) issued a CBP ruling, HQ H32233, determining that most offshore Wind Energy installation projects, including the laying of transmission cables, generally requires the use of Jones Act (Coastwise) compliant vessels. Jones Act qualified and compliant vessels are those vessels that are, among other things, (a) wholly owned by a U.S. Citizen; and (b) have been issued a Certificate of Documentation with a valid coastwise endorsement.

Importantly, any offshore installation projects must ensure that plans incorporate and adhere to the Jones Act. Failure to comply with these demanding laws may result in severe penalties, fines, and even forfeiture of assets/vessels.

In this case, CBP was specifically asked to consider five (5) questions concerning the following topics:

(1) whether jet action emulsification for cable laying constitutes dredging;

(2) laying cable with a non-coastwise qualified vessel violated the Jones Act;

(3) whether excess cable returned to a U.S. port by a non-coastwise qualified vessel violated the Jones Act;

(4) whether the transportation and/or placement of concrete mats on a non-coastwise qualified vessel violates the Jones Act; and

(5) whether the transportation of the marine and project crew violates the Passenger Vessel Services Act.

First Issue: Dredging

Generally, dredging operations on the Outer Continental Shelf (“OCS”) require the use of Jones Act qualified vessels. However, CBP has consistently held that the use by cable-laying vessels of cable-burial devices employing a jetting action resulting in the emulsification of the seabed surrounding the cable does not constitute an engagement in dredging. Furthermore, CBP has also determined that the use of “a share or plow and cutting disc” that creates a ‘very narrow’ slice of the seabed under which the cable is buried is not an engagement in dredging. Thus, based upon these specific facts presented, the use of a water-jet cable-burial device does not violate the Jones Act if used by a non-coastwise qualified vessel on the OCS.

Second Issue: Cable Laying Vessel

In 2021, the Outer Continental Shelf Lands Act of 1953 (“OCSLA”) was specifically amended to include “installations and other devices… attached to the seabed which may be erected thereon for the purpose of exploring for, developing, or producing resources, including non-mineral energy resources…” Thus, OCSLA, as amended, extends U.S. jurisdiction to the OSC seabed for the purpose of producing wind energy. See, The William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. § 9503 (2021). Therefore, coastwise laws apply to such wind energy installation projects on the OCS.

Generally, a Jones Act qualified vessel is required to transport merchandise between two “U.S. points.” However, since 2001, for cable laying operations, the CBP has consistently determined that cable placement operations do not constitute coastwise trade under the Jones Act. Previous determinations have permitted non-coastwise qualified (e.g., foreign flagged vessels) to pay-out cable within U.S. territorial waters and on to the OCS.

Additionally, the process of connecting a previously laid cable with a new reel of cable (on board the vessel) by picking up the cable on the seafloor and connecting it to the new extension does not violate the Jones Act if the operation is completed by non-coastwise qualified vessel. Such is an important determination that could accelerate transmission capabilities on the OCS.

Third Issue: Returning Excess Cable to U.S. Port Post-Operation

The Jones Act declares that only coastwise qualified vessels may transport merchandise or passengers between two U.S. points. Historically, CBP has liberally construed the term “merchandise” to include even “valueless” items. Here, CBP was asked whether the Jones Act would be violated if a non-coastwise qualified vessel transported excess cable (not paid out) to a U.S. port (the end of the unused reel of cable) following the conclusion of the project.

While CBP did not provide a precise answer, the general parameters were set: there is no violation of the Jones Act if the non-coastwise qualified vessel returns excess cable to the exact coastwise point at which it was loaded onto the vessel if such was ladened at a U.S. port. In fact, the “same point” requires the loading/unloading to take place in the same berth within the same harbor; otherwise, a violation of the Jones Act may occur given that “points within a harbor” are considered two U.S. points for purposes of transporting merchandise like this transmission cable.

Fourth Issue: Transporting Concrete Mats or Bags of Rock to Protect Cables

As previously discussed, merchandise has a broad definition, which includes even valueless items. The term merchandise includes concrete mats and bags of rock. Such items are not excluded from this broad definition even with the “vessel equipment” exception given that mats and rock are not “necessary and appropriate for the navigation of, operation or maintenance of the vessel.” In fact, in April 2022, CBP determined that cable-protection material transported and discharged by a cable installation vessel did not constitute “vessel equipment” because such items are not utilized to aid the cable installation itself, and are thus “dissimilar from things used as tools for installation operations.” Such materials are intended to perform functions separate from that of the vessel’s operations. Therefore, the mats and rock are “merchandise” and must be transported between two U.S. points (U.S. Port and the point discharged on to the OCS) by Jones Act qualified vessels. Here, the electrical transmission cable locations are coastwise points; and if the port of lading is also a U.S. port, then transporting the merchandise (rock and mats) between the U.S. port and the seabed must be conducted by a Jones Act qualified vessel.

Fifth Issue: Transporting Marine and Project Crew Violates the Passenger Vessel Services Act

Generally, a non-coastwise qualified vessel cannot transport “passengers” between two U.S. points either directly or indirectly via a foreign port. The marine crew is responsible for the navigation and operation of the vessel. Project crew members are those on board to oversee the cable installation, which include executive company representatives.

CBP determined that to the extent that the individuals will be engaged in any shipboard activities while traveling on the non-coastwise qualified vessels between two or more coastwise points that would be “directly and substantially” related to the operation, navigation, or business of the vessel itself, as would be the case under the facts herein submitted, such individuals would not be considered “passengers.” CBP determined project members are ‘directly and substantially’ related the operation and “business of the vessel,” which was to lay submarine electrical transmission cables on the OCS. Therefore, for the purposes of this factual scenario, the “project” members on board the vessel would not be considered “passengers” for purposes of the Passenger Vessel Services Act.

Conclusion:

Overall, CBP appears to appreciate the complexity of constructing offshore wind installations on the OCS. Such includes the need to bury transmission cables and to transport company personnel on board vessels while such operations are underway.

While this ruling is in no way binding as precedent (as with any CBP ruling), such does offer guidance as to how CBP may approach and address future scenarios. However, should you have any specific questions or concerns, it is paramount to consult with counsel before undertaking offshore activities that may violate the Jones Act; violations may result in hefty fines, penalties, and forfeiture of vessels and assets.

In trip and fall litigation, the validity of a plaintiff’s claim often turns on whether the condition allegedly causing the fall is a so-called “open and obvious” risk of harm. That is, a risk of harm that is so obvious and discoverable that a reasonable person would have avoided the hazard, and ultimately, the injury.[1]

Knowing what Louisiana courts traditionally deem “open and obvious” can inform a property owner on the likelihood of liability if an injury arises from a fall on their property. Practically, this can prepare property owners for what to watch out for and may lead to quicker resolution of pending litigation should it occur.

“Unreasonably Dangerous” Conditions

If a risk of harm is open and obvious to all who may encounter it, the likelihood that it will cause harm is decreased, and it will not be considered unreasonably dangerous under Louisiana law.[2] This is critical because a defendant does not generally have a duty to protect against an open and obvious hazard.[3] If a plaintiff cannot prove that the defendant owed a duty to protect against the risk of harm, the plaintiff’s claim will necessarily fail.

A Recent Case

Earlier this year, the Louisiana Fifth Circuit Court of Appeal affirmed the trial court’s determination that risk of harm presented by the concrete base of a 20-foot light pole 18 inches wide and 4 inches high was not open and obvious and thus, was unreasonably dangerous.[4]

The trial court’s determination hinged on the fact that, because the base was covered with black mold and dirt and often partially obstructed by shadows, it blended in with the sidewalk and was not open and obvious.[5] In shooting down the property owner’s open and obvious argument, the court emphasized that the mold and dirt on the base combined with shadows from a nearby ramp and the light pole rendered the base virtually indistinguishable from the walkway.[6] Therefore, despite the considerable size of the base of the light pole, the court determined that the base was not open and obvious.[7]

So, what could the property owner have done differently? In its decision the court did offer some guidance that may be instructive to concerned property owners.

The court indicated that its decision was partially based on the light pole base not being marked as a trip hazard when other trip hazards in the walkway were marked as such.[8] Further, the court indicated that, had the base been painted a color that distinguished it from the walkway, it may have been more obvious to those traversing the area.[9]

Visible Markings Help Prevent Injuries

The suggestion to use visible markings is in line with other Louisiana jurisprudence on the issue instructing that visibly marked warning signs and an unobstructed view of the risk of harm cut against a plaintiff’s showing of an unreasonably dangerous condition.[10]

For instance, in another case, the Louisiana Second Circuit Court of Appeal determined that a product display that a plaintiff tripped over did not pose an unreasonably dangerous condition due to its open and obvious nature because the corners of the display were visibly marked with warning signs and the path alongside the display was not obstructed.[11]

Similarly, the Louisiana First Circuit Court of Appeal held that any risk of harm created by a curb was open and obvious because the curb created no optical illusion, nothing prevented the plaintiff from seeing the curb, and the edge of the curb was painted yellow making it readily apparent to all who may encounter it.[12] In that case, the plaintiff, who tripped over the curb outside of a hotel, could not recover because of the failure to show that the curb was an unreasonably dangerous condition.

In summary, the open and obviousness of an alleged risk of harm is an important factor that courts consider when determining whether the risk of harm constitutes an unreasonably dangerous condition.

If a court determines that a risk of harm is open and obvious to all who may encounter it, the plaintiff will likely be unable to carry the burden of proving that there was an unreasonably dangerous condition and the claim will fail.

[1] Pitre v. Louisiana Tech Univ., 95-1466 (La. 5/10/96), 673 So. 2d 585, 589.

[2] See Broussard v. State ex rel. Off. of State Bldgs., 2012-1238 (La. 4/5/13), 113 So. 3d 175, 184.

[3] Id.

[4] Tromatore v. Jefferson Par. Hosp. Serv. Dist., 21-551 (La. App. 5th Cir. 5/26/22), 341 So.3d 1269.

[5] Id. at 1276.

[6] Id. at 1278.

[7] Id.

[8] Id.

[9] Id.

[10] See, e.g., Upton v. Rouse’s Enter., LLC, 15-484 (La. App. 5th Cir. 2/24/16), 186 So. 3d 1195, writ denied, 2016-0580 (La. 5/13/16), 191 So. 3d 1057; Jones v. Mkt. Basket Stores, Inc., 2021-354 (La. App. 3d Cir. 3/30/22), reh’g denied (Apr. 27, 2022).

[11] Primrose v. Wal-Mart Stores, Inc., 48,370 (La. App. 2 Cir. 10/2/13), 127 So. 3d 13.

[12] Primeaux v. Best W. Plus Houma Inn, 2018-0841 (La. App. 1st Cir. 2/28/19), 274 So. 3d 20, 33.

Louisiana Department of Revenue income tax auditors are increasingly proposing large assessments by misapplying a formula in a Department regulation (La. Admin. Code 61:I.1130(B); the “Regulation”). The Regulation is based on a statute designed to prevent deductions related to allocable and nontaxable income and contains a formula that purports to determine a percentage of a taxpayer’s assets that produce income not taxable by the state. Under this blanket approach, which doesn’t take into account whether the assets plugged into the formula are held to produce allocable or apportionable income (or whether they produce income at all), audit assessments result from a proportionate denial of expenses otherwise deductible by the taxpayer. In particular, in these audits, the Department incorrectly denies a taxpayer’s interest expense deductions by attributing, for example, the interest expense on acquisition loans or other expenses designed to produce apportionable income, to nontaxable income or to allocable income not taxable by the state. This approach ultimately distorts the taxpayer’s Louisiana taxable income. By incorrectly over-attributing a taxpayer’s interest expense to its allocable and non-taxable income through routine application of the inapplicable Regulation the Department is forcing taxpayers with multi-state operations into expensive and time-consuming audits.

Under Louisiana law, the state can tax its share of a taxpayer’s apportionable income as well as any income allocable to the state.[1] Louisiana cannot tax income that is allocated elsewhere or tax-exempt income, including interest and dividend income which were previously allocable income but are now no longer subject to tax after 2005 changes to Louisiana corporation income tax law.[2] As will be explained, the Department’s revisions to the Regulation to address the 2005 revisions to the taxation of interest and dividend income created many of the issues that now arise regularly on audit and are frequently the subject of litigation.

Before a taxpayer can determine its net allocable and net apportionable income (which ultimately compose the taxpayer’s Louisiana net income) it must determine its allowable deductions.[3] But “in computing Louisiana net income or Louisiana taxable income no deduction shall in any case be allowed in respect of any amount otherwise allowable as a deduction which is attributable to income which, for any reason whatsoever, will not bear the tax imposed by [Louisiana corporation income tax law].”[4] Louisiana’s law is analogous to Internal Revenue Code sec. 265 but, with respect to interest income, the Department, in its regulations, adopts the approach in the federal regulations under IRC sec. 861. IRC sec. 265 adopts the direct tracing approach for purposes of determining the amount of a taxpayer’s interest expense from indebtedness related to tax-exempt interest income, for which no deduction is allowed, and, only when direct tracing is not possible, turns to a formulary approach.[5] The Department’s regulatory mechanism, however, for attributing deductible income expense to allocable income is similar to the asset-based apportionment method in the IRC sec. 861 regulations. Under Louisiana law, before a taxpayer can determine the amount of its deductions to be netted with its gross allocable and gross apportionable income, the taxpayer must attribute a portion of its otherwise deductible expenses to its nontaxable income because no deduction for those expenses is permitted.

The Department, however, skips the direct tracing method entirely. Specifically, the Department’s Regulation adopts a broad asset-based apportionment method to apportion a taxpayer’s interest expense deductions to allocable and apportionable income, regardless of why the expense was actually incurred. In contrast, under IRC sec. 265, the use of an asset-based apportionment method to allocate interest expense to tax-exempt income is only permitted if the proceeds of indebtedness are not directly traceable to the holding of an instrument that produces tax-exempt income.[6]

The Department’s regulatory approach is based on the premise that money is fungible and as a result, unless an exception applies, a taxpayer’s deductible interest expense must be apportioned to all activities and property of the taxpayer regardless of the purpose of the borrowing.[7] For that reason, the Regulation provides that the interest expense attributable to total assets producing or held for the production of allocable income “shall be determined by multiplying the total amount of interest expense by a ratio, the numerator of which is the average value of assets that produce or that are held for the production of allocable income, and the denominator of which is the average value of all assets of the taxpayer.”[8] This approach has the unfortunate effect of over-stating Louisiana taxable income.

In addition to being inconsistent with the way the comparable federal legislation IRC sec. 265 is administered, the Regulation is not consistent with Louisiana law. The Louisiana statutory definitions of net apportionable and net allocable income mandate use of the direct tracing method, as recognized by the Louisiana Board of Tax Appeals in Ampacet Corporation. In Ampacet, the Board held that the statutory definitions for determining net apportionable and net allocable income, which rely on direct tracing similar to Code Section 265, must be applied before the Department’s Interest Expense Attribution Regulation can be considered. Other states with comparable state statutes patterned after IRC sec. 265 have also relied on direct tracing because it is appropriate under the rationale of these laws. See e.g., Appeal of Zenith National Insurance Corp. and Apple, Inc. v. Franchise Tax Bd. Nevertheless, the Department has continued to assert that the formulary approach in the Regulation applies to the exclusion of direct tracing methods even where the result is nonsensical. This is the crux of the problem and the approach, unfortunately, has resulted in a significant increase in litigation.

The Regulation states that the Department is decoupling from IRC sec. 265 and the statutory definitions of net allocable and apportionable income as necessary for the “convenience of computation” – but that is not for a compelling policy reason.[9] Certainly, the Department has no authority to discard the direct tracing method absent an amendment by the legislature that forbids the use of such a method for purposes of determining a taxpayer’s deductible interest expense.

Asset-based apportionment apportions an expense to classes of gross income by multiplying the expense by a ratio, the numerator of which is the value of assets that generate the relevant class of income of income and the denominator of which is the value of the taxpayer’s total assets.[10] As mentioned above, under the Department’s reasoning, interest on borrowed money is never susceptible of direct attribution to any specific income and must always be allocated with this formula. On audit, the Department routinely improperly includes assets that do not or cannot produce allocable income in the ratio’s numerator. Such assets include items like goodwill, technology (e.g., patents and proprietary technology), capitalized costs related to long-term customer contracts, licenses, advertising expenses, and covenants not to compete many of which generally do not produce allocable income except for example, where technology is licensed to third parties and produces royalty income. For example, taxpayer cannot sell a competitor the right to benefit from its advertising campaign or license its goodwill to another party.

Most of these assets exists solely because U.S. Generally Accepted Accounting Principles require a taxpayer to capitalize and amortize these expenses over time, as opposed to expensing these costs in the year they are incurred. Moreover, taxpayers incur these types of costs solely for the purpose of producing and selling goods or services, the sales of which generate apportionable income. These assets don’t belong in the numerator of the Louisiana interest expense attribution ratio. From a practical standpoint, inflating the numerator of the attribution ratio in this manner could, for example, result in the Department taking the nonsensical position that, in effect, a taxpayer incurs a large proportion of its debt to earn a miniscule amount of nontaxable and allocable income producing absurd and inequitable results.

Similarly, the Department, in light of the fact that dividend income is not taxable, will include investments in subsidiaries in the numerator of its regulatory expense attribution ratio. Investments are typically held for the purpose of ultimately producing net gains in the value of the investments, i.e., apportionable income. The Department has resisted determining whether investments such as these actually produce dividend income at all regardless of whether they actually do produce nontaxable or allocable income during the audit periods. Nevertheless, because dividend income is nontaxable, the portion of the interest expense to be disallowed must be determined based on the direct tracing approach required by the statutory definitions of net apportionable and net allocable income to determine whether the investments produce apportionable income for example, by selling products to customers.

In general, when a regulation imposes conditions not contained in the statute the regulation purports to interpret, resulting in audit assessments which are unsupported by substance or the rationale for the law at issue, the taxpayer should consider challenging the proposed adjustment. It is important to challenge, on a timely basis, an assessment based on rote application of the Regulation. One size does not fit all situations like this.

[1] La. R.S. 47:287.92(A) and La. R.S. 47:287.701(C) and (D).

[2] See prior law at La. R.S. 47:287.93(2005); La. R.S. 47:287.93(2005) and revised law at 2005 La. Sess. Law Serv. Act 401 (H.B. 679). See also La. R.S. 47:287.93 and La. R.S. 47:287.738(F). Note that from July 1, 2015 through June 30, 2018, 28% of dividend income was classified as apportionable income. (See La. R.S. 287.738(F); 2015 La. Sess. Law Serv. Act 123 (H.B. 624) Sec. 1 (effective July 1, 2015) and Sec. 3 (effective July 1, 2018)).

[3] La. R.S. 47:287.63.

[4] La. R.S. 47:287.81.

[5] I.R.C. Sec. 265(a)(2) and Revenue Procedure (“Rev. Proc”) 72-18 (1972-1 C.B. 740). Code Section 163(a) permits a taxpayer to deduct interest paid or accrued on indebtedness unless an exception applies. Section 265 contains an exception to the general rule in Section 163 and disallows a deduction for interest expense on indebtedness incurred or continued to purchase or carry obligations that produce tax-exempt interest income. For purposes of Code Section 265, Rev. Proc. 72-18 adopts the direct tracing method to determine whether the proceeds of indebtedness are directly related to a specific instrument that produces tax-exempt income. The revenue procedure provides an asset-based apportionment formula for use when direct tracing is not possible.

[6] Rev. Proc. 72-18 Sec. 7.02.

[7] La. Admin. Code 61:I.1130(B)(1)(a).

[8] La. Admin. Code 61:I.1130(B)(1)(d)(iii).

[9] La. Admin. Code 61:I.1130(B)(1)(d)(iv)(a).

[10] Treas. Reg. 1.861-9(g) and 1.861-9T(g). Code Section 861 and the related regulations contain complex and detailed rules for the asset-based apportionment of a taxpayer’s deductible interest expense to its foreign source income. The Department’s Interest Expense Attribution Regulation relies on a less sophisticated asset-based apportionment mechanism than Code Section 861.

In a decision holding that surety bonds are not executory contracts, the Fifth Circuit signaled that courts may in the future utilize the functional approach to determine if multiparty contracts are executory in nature. The case, filed in the United States Bankruptcy Court for the Middle District of Louisiana as In re Falcon V, L.L.C., concerned a $10.5 million surety agreement between the Debtor, Falcon V, L.L.C., and Argonaut Insurance Company (“Argonaut”).

The Debtor and its affiliates were involved in oil and gas exploration and development and the Debtor entered into an agreement for Argonaut to post four irrevocable performance bonds, which guaranteed the Debtor’s obligations to third parties related to plugging and abandonment and restoration of wells. If the Debtor failed to perform its obligations, Argonaut was obligated to pay the third-party obligee the amount of the obligation or to perform the obligation, up to the amount of the performance bond.

The bonds provided that regardless of whether the Debtor paid the premiums owed, Argonaut’s obligations continued and would not be discharged by the Debtor’s failure to pay such premiums. The Debtor agreed to make premium payments to Argonaut and to indemnify it for any payments made under the bonds. After filing its Chapter 11 case, the Debtor sought and received permission from the Bankruptcy Court to continue meeting its obligations to Argonaut under the bond program (referred to as the “Surety Bond Program”).

Argonaut filed a proof of claim in the bankruptcy case that included a statement that the Surety Bond Program could not be assumed and assigned because it was a “financial accommodation,” but reserved all rights in the event the Surety Bond Program was deemed an executory contract. The Debtor’s Plan, as approved, provided that all executory contracts not specifically rejected were assumed. The Surety Bond Program was not included on the list of rejected executory contracts.

After the Debtor was discharged, Argonaut requested that the Debtor provide an additional $7.3 million in collateral to secure the performance bonds. The Debtor refused. The Debtor argued that Argonaut’s claim had been discharged through the bankruptcy process. Argonaut claimed that the Surety Bond Program was an executory contract that was assumed, or alternatively, the Surety Bond Program “rode through” the bankruptcy case.

The Bankruptcy Court (Dodd, J.) determined that the Surety Bond Program was not an executory contract assumed by the approved Plan because Argonaut owed no continuing performance to the Debtor. Even if it was an executory contract, the Bankruptcy Court ruled that it was a non-assumable financial accommodation. The District Court (Jackson, J.) affirmed the Bankruptcy Court’s ruling. Argonaut subsequently appealed to the Fifth Circuit, arguing that the Surety Bond Program was assumed as an executory contract, or alternatively that it rode through the bankruptcy case.

In determining whether the Surety Bond Program was an executory contract, the Fifth Circuit first looked to the Countryman Test, which looks at whether each side to a contract has at least one material unperformed obligations as of the date the bankruptcy petition is filed and if a party’s failure to perform a material obligation would excuse compliance by the counterparty. The Bankruptcy Court and District Court both found there were not material obligations remaining on both sides on the petition date; the Debtor owed obligations to Argonaut, but Argonaut owed no obligations to the Debtor.

Argonaut pointed out that it still owed obligations to the third-party obligees under the Surety Bond Program, and argued that this multiparty contractual relationship justified a departure from the Countryman Test. The Fifth Circuit rejected this proposed approach, stating that it “seems designed simply to elevate the rights of sureties above those of other creditors.”

However, the Fifth Circuit agreed that the Countryman Test should be applied flexibly to account for obligations owed to all parties in multiparty agreements. Nonetheless, the Court found that even if the obligations owed by Argonaut to the third-party obligees would meet the material obligations portion of the Countryman Test, it failed the second requirement, as the performance bonds were irrevocable and the Debtor’s failure to perform its obligations would not excuse Argonaut from its obligations under the agreements.

In an important footnote, the Court noted that in future cases courts may be called upon to modify the Countryman Test and apply and adopt a more “functional approach” for multiparty contracts. The functional approach looks at the benefits that assuming or rejecting a contract would produce for the bankruptcy estate to determine if the contract at issue is executory in nature. This opens the door for a more flexible approach in determining whether multiparty contracts are executory and will have implications beyond the realm of surety contracts.

The 19th Judicial District Court in Baton Rouge, Louisiana issued a decision on September 14, 2022, vacating a proposed industrial facility’s permit issued by the Louisiana Department of Environmental Quality (“LDEQ”) and finding that LDEQ violated the federal Clean Air Act and its duty under the Public Trust Doctrine.[1] Although the decision concerns permitting for a specific facility in St. James Parish, FG LA’s planned ethylene and propylene complex, the decision has far-reaching effects for air permitting in Louisiana under the Prevention of Significant Deterioration (“PSD”) program. In the nearly 40-page decision, the Court holds on several issues including disapproval of the use of Significant Impact Levels (“SIL”) in the PSD analysis, requirements for Environmental Justice reviews and implementation of the U.S. Environmental Protection Agency’s EJSCREEN tool,[2] review of air modeling conclusions, and analysis under Louisiana’s so called “IT Factors.”[3] The opinion also states that the LDEQ failed to perform a cumulative impact analysis for potential air toxics emissions from the planned facility such as ethylene oxide and benzene.[4]

The Court notes that environmental justice issues are “at the heart of” this case. Environmental justice issues have been elevated by the Biden administration’s efforts to highlight and advance policies to address and support underserved communities. In January of 2021 President Biden signed Executive Orders (“E.O.”) 13985 and 14008, which concern environmental justice issues. In connection with these E.O.s, EPA published a guidance document entitled “EPA Legal Tools to Advance Environmental Justice” in May of 2022. The document includes lengthy discussions on cumulative impacts of air toxics and analyzes the current EPA regulatory frameworks and statutory authority to implement cumulative impacts analysis as it relates to overburdened communities. Still, programs at both the federal and state level designed to control and mitigate toxic air pollutants often address cumulative impacts only indirectly and leave open practical questions about applying a cumulative impact analysis to review of a stationary source air permit or permit modification.[5]

For instance, EPA regulates over 150 hazardous air pollutants and provides control technology standards (National Emission Standards for Hazardous Air Pollutants, “NESHAP”) for individual industries. But other than vague “other impact analysis” requirements in the PSD program (which the Court did not reference here), there is no regulatory framework or specific guidance for considering the cumulative impact of emissions of multiple hazardous or toxic pollutants. The difficulty grows exponentially upon consideration of the cumulative impacts from multiple commercial and industrial facilities. Although some states (like Louisiana) have regulated beyond EPA’s list of hazardous air pollutants through the development of state-only toxic air pollutant ambient standards, these also generally consider a single pollutant’s environmental and health effects rather than aggregate impacts.[6]

As acknowledged by the EPA, there are significant research gaps and deficient data areas that need to be addressed to inform a proper cumulative impact assessment.[7] Even more so, a cumulative risk assessment will require more refined biological and chemical data and methods that are not currently developed.

The Court here did not address these issues with performing a cumulative impacts analysis and rejected LDEQ’s more qualitative analysis of potential air toxics emissions at the proposed facility. The Court found instead that:

…LDEQ cannot determine [the community’s] full risk for cancer from exposure to toxic air pollutants if the agency does not consider FG LA’s ethylene oxide and benzene emissions in combination with such emissions from other facilities that the agency itself says drives EPA’s cancer risk data for the area [referencing the EPA EJSCREEN].

Thus, the Court held that LDEQ’s conclusion about air toxics was arbitrary and capricious and not supported by a preponderance of the evidence in the record. And because LDEQ relied on this conclusion in its Public Trust Doctrine analysis, the agency failed to meet that duty as well.

There remains time to appeal this decision to the Louisiana First Circuit. But the opinion signals at least a shift towards cumulative impact analysis requirements in air permitting in Louisiana, considering that the 19th Judicial District is venue for all LDEQ permit challenges. Environmental justice issues, and especially air toxics issues, are becoming a battle ground for air permitting application challenges. In the meantime, stakeholders and permittees should consider performing at least a qualitative analysis of the effects of air toxics from the project and surrounding areas for the record.

[1] The Public Trust Doctrine is established under the Louisiana Constitution. It requires that the natural resources of the state and the quality of the environment must be protected and conserved consistent with the health, safety, and welfare of the people. See La. Const. art. IX §1.

[2] The EPA’s EJSCREEN tool has emerged as a standard for the environmental justice analysis in air permitting and otherwise. But the EJSCREEN does not analyze or produce cumulative impact information. Rather, the EJSCREEN produces a series of indices that combine demographic indicators with one single environmental factor.

[3] In Save Ourselves, Inc. v. La. Env’t Control Comm’n, 452 So. 2d 1152 (La. 1984), the Louisiana Supreme Court interpreted the Public Trust Doctrine to require LDEQ to address certain factors before issuing a permit. These are referred to as the “IT Factors” after the name of the permittee in the case.

[4] The case is Rise St. James, et. al. v. Louisiana Department of Environmental Quality, Docket No. 694,029, 19th Judicial District Court Parish of East Baton Rouge (Sept. 14, 2022).

[5] See Rucinski, Addressing Cumulative Impacts of Air Toxics in Air Permitting, Air & Waste Management Association’s 115th Annual Conference & Exhibition, held June 27-30, 2022 in San Francisco, CA (providing a full discussion of current EPA regulatory frameworks for addressing cumulative impacts and discussion of state and federal guidance on practicalities of implementing such reviews in air permitting).

[6] See e.g., Louisiana Administrative Code – LAC 33:III.Chapter 51, Tables 51.1 – 51.3; see also California Air Resources Board (CARB), Airborne Toxic Control Measures. In 1989 Louisiana enacted Louisiana Revised Statute 30:2060 which called for (among other mandates) the establishment of a toxic air pollutant (“TAP”) emissions control program, the development of a baseline for TAP emissions, and a 50% reduction of statewide TAP from that base line level within 20 years. The LDEQ promulgated regulations that, in addition to incorporating MACT standards, establishes reporting requirements for all major sources of TAPs and sets ambient air standards for each TAP. Louisiana’s list of TAPs includes all of the federal HAPs and adds others that are of particular concern in Louisiana, including ammonia and hydrogen sulfide.

[7] See Cumulative Impacts, Recommendations for ORD Research, EPA, January 2022 (available at: https://www.epa.gov/system/files/documents/2022-01/ord-cumulative-impacts-white-paper_externalreviewdraft-_508-tagged_0.pdf) (last accessed 05/13/2022).