Louisiana Addresses “Other Apportionable Income” Included in the Sales Factor

Thoughtware Alert Published: Jan 29, 2021
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Large capital gains resulting from the sales of businesses have been facing increasing scrutiny from both taxing agencies and taxpayers. On December 30, 2020, the Louisiana First Circuit Court of Appeal affirmed a judgment from the Louisiana Board of Tax Appeals granting Davis-Lynch Holding Co., Inc.’s (Davis-Lynch) Petition for Redetermination of Corporate Income Tax Assessment and vacating the Louisiana Department of Revenue’s (Department) assessment against Davis-Lynch. The primary issue in the case involved a discrepancy between Louisiana Revised Statute 47:287.95(F) and Louisiana Department of Revenue Regulation Title 61, Section 1134(D) regarding the apportionment formula. 

Davis-Lynch was a Texas corporation whose only business activity in Louisiana included holding an interest in Davis-Lynch, LLC, a Texas LLC, authorized to do business in Louisiana. Davis-Lynch, LLC manufactured and sold float and cementing equipment to offshore drilling companies and maintained a warehouse in Louisiana. 

In July 2011, Davis-Lynch sold its interest in Davis-Lynch, LLC. The proceeds of the sale resulted in a gain to Davis-Lynch. Davis-Lynch conceded that the gain is apportionable income under La. R.S. 47:287.29(C). On its 2011 Louisiana State Income Tax Return, Davis-Lynch calculated its apportionment percentage using the three-factor formula under La. R.S. 47:287.95(F)(1)(a)-(c). Davis-Lynch included the gain from its sale of Davis-Lynch, LLC in the denominator of the sales ratio as “other apportionable income.” 

The relevant part of La. R.S. 47:287.95(F)(1)(c) provides: 

  • The ratio of net sales made in the regular course of business and other gross apportionable income attributable to this state to the total net sales made in the regular course of business and other gross apportionable income of the taxpayer.

During an audit of the 2011 return, the Department increased the apportionment percentage, alleging Davis-Lynch erroneously included income generated from activity not in the taxpayer’s regular course of business in the ratio. The Department subsequently adjusted the ratio to exclude the gain. The Department relied on Louisiana Administrative Code, Title 61, §1134(D) to justify the adjustment. This section provides: 

  • … For the formula provided by R.S. 47:287.95(F), the revenue ratio consists of the ratio of net sales made in the regular course of business and other gross apportionable income attributable to this state to the total net sales made in the regular course of business and other gross apportionable income of the taxpayer. Sales not made in the regular course of business are not included in the formula provided by R.S. 47:287.95(F).

On appeal, the Louisiana First Circuit Court of Appeal analyzed whether the Department’s regulation exceeded the scope of the relevant statute and whether Davis-Lynch appropriately included the gain from a sale not made in the regular course of business in “other apportionable income.” The Department argued the regulation permitted the exclusion of revenue not made in the regular course of the taxpayer’s business, while Davis-Lynch contended the Department’s regulation was contrary to La. R.S. 47:287.95(F)(1)(c), and the Legislature did not intend to exclude sales not made in the regular course of business from other gross apportionable income.

The court recognized the Department’s broad authority to enact regulations but cautioned that the Department’s regulations cannot exceed the scope of the applicable statute imposed by the Louisiana Legislature. To determine if the Department’s regulation was contrary to the relevant statute, the court looked to the prior treatment of gains. In 1993 La. Acts No. 690 (Act 690), the Legislature specified “gross apportionable income shall not include income from profits or losses from sales or exchanges of property … not made in the regular course of business …” Act 690 was declared unconstitutional, and the Legislature did not include similar language in any subsequent amendments.  

The court ultimately held Louisiana Administrative Code, Title 61, §1134(D) is contrary to the clear meaning of La. R.S. 47:287.95(F), and La. R.S. 47:287.95(F) does not exclude income from sales not made in the regular course of business from gross apportionable income. Therefore, Davis-Lynch correctly included the gain in the sales factor.

For additional guidance on La. R.S. 47:287.95(F), contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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