On January 8, 2020, the Court of Appeal of Louisiana partly affirmed and partly reversed a district court’s rejection of the Louisiana Department of Revenue’s franchise tax audit changes for a taxpayer that owned and operated, through subsidiaries and an affiliate, casinos and horse-racing facilities. Following an audit, the Department made numerous adjustments to the taxpayers’ franchise tax capital base. After paying the tax and interest, the entities sought a refund for the taxes paid under protest. The district court granted summary judgment to the taxpayer on multiple issues, which the Department then appealed to the appellate court.

First, the court held that the district court erred by determining that there was not a genuine issue of material fact regarding whether fees for management services should be apportioned to Louisiana. Because the parent utilized and paid employees in Louisiana, even though the management agreements stated that the employees were performing services for the subsidiary, there was a question as to whether the employees were employed by the parent or the subsidiary while rendering services in Louisiana.

Second, the court upheld the district court’s determination that the taxpayer’s adjustments to its surplus and undivided profits were proper because the adjustments were made pursuant to the equity method of accounting reflecting the fair value of the investments.

Third, the court held that the district court erred in finding that the Department improperly characterized the parent’s funds furnished by its affiliates as borrowed capital included for purposes of computing franchise tax. The taxpayers could not avoid the funds’ characterization as borrowed capital because they could not present any evidence of restrictions on the parent’s use of the funds in its concentrator account, of which it had exclusive control. The taxpayers also could not show that the funds fell within an exception because there was no evidence that the moneys were actually segregated by the taxpayer (e.g., a separate bank account, rather than a mere account entry).

Fourth, the court held that the district court erred by determining that there was not a genuine issue of material fact regarding whether the parent could include losses suffered by its wholly-owned partnership for purposes of the franchise tax business ratio. The court concluded that the taxpayers failed to present evidence to sufficiently establish that the partnership’s losses were “revenues from a partnership” that could be included in the parent’s business ratio. Boyd Louisiana Racing, Inc. v. Bridges, Dkt. Nos. 2018 CA 1309 et seq. (La. Ct. App. Jan. 8, 2020).