Kean Miller Industrial Strength Law

By Chris Dicharry and Jason Brown

The Louisiana Corporation Franchise Tax (“CFT”) has historically been imposed only on corporations. Thus, LLCs and partnerships have not been subject to the CFT. In the Special Session that ended last March, the Louisiana Legislature expanded the companies subject to the CFT to include non-corporate entities that elect to be taxed as corporations for federal income tax purposes. See, La. Acts 2016 (1st Ex. Sess.), No. 12 (“Act 12”).  The new law provides a safe harbor for LLC’s “qualified and eligible to make an election to be taxed” as an S-Corporation. Yet, while Act 12’s plain language does not appear to require that an LLC actually make the S-Corporation election to qualify for the safe harbor, the Louisiana Department of Revenue (“LDR”) has informed Kean Miller that LDR policy may require that an LLC actually make the election to avoid the CFT.

The expanded CFT law also legislatively overrules the taxpayer-favorable UTELCOM case. UTELCOM, Inc. v. Bridges, 2010-0654 (La. App. 1 Cir. 9/12/11), 77 So.3d 39. Under UTELCOM, a corporation was found not to be doing business in the state of Louisiana so as to be subject to the CFT, when its only activity in Louisiana was as a limited partner in a partnership doing business in Louisiana. The court found that the law did not extend to corporations that were not directly (and only passively, through ownership) engaged in business in Louisiana. The new law expands the activities that will subject an entity to the CFT by including the following as one of the taxable incidents in Louisiana:

“The owning or using any part or all of its capital, plant, or other property in this state whether owned directly or indirectly by or through a partnership, joint venture, or any other business organization of which the domestic or foreign corporation is a related party as defined in R.S. 47:605.1.”

Thus, owning an interest in an entity with operations in Louisiana may subject the owner to the CFT. Unfortunately, the CFT may end up being tiered under these circumstances. The entity operating directly in Louisiana may be subject to the CFT depending on how it is taxed for federal income tax purposes and its ability to elect S-Corporation treatment; and the interest owner may also be subject to CFT based on its investment in the entity with Louisiana operations.

For example: If Alligator Energy Corporation has no operations in Louisiana, but holds a 60% ownership interest in Alligator Pipeline, LLC, a Louisiana LLC that operates exclusively in Louisiana, Alligator Pipeline, LLC will be subject to the CFT if it is taxed as a corporation for federal tax purposes and is not eligible to be taxed as an S-Corporation. Alligator Energy Corporation will also pay CFT based on its investment in Alligator Pipeline, LLC. In essence, the activities of Alligator Pipeline, LLC will be taxed twice – once at the operating entity level and once at the parent level.

Act 12 does add a new holding company deduction; however, the deduction is only available if the parent has at least 80% of the voting and nonvoting power of all classes of stock, membership, partnership, or other ownership interests in the “subsidiary.”

Act 12 is applicable to tax periods beginning on or after January 1, 2017; however, this effective date could be misleading. Historically, a corporation subject to the CFT paid an initial CFT of $10 for its first year of operation. Under Act 12, an existing entity that becomes subject to the CFT because it is taxed as a corporation for federal income tax purposes (and cannot use the S-Corporation safe harbor) will be subject to full CFT liability based upon its books and records for the prior year.