Before Louisiana's 2002 QSub legislation took effect, how did an S-corporation parent and qualified Subchapter S subsidiary report Louisiana income and franchise tax?

Plain-English summary

Under the pre-2003 law addressed, the S-corporation parent and QSub remained separate Louisiana income- and franchise-tax entities, filed separate returns, and attached a consolidated statement computing their combined Louisiana income.

Revenue normally attributed all consolidated Louisiana income to the S-corporation parent and zero to the QSub, while eliminating intercompany interest, dividends, and other items.

Official supersession note

The PDF states that 2002 La. Acts 17 later enacted specific QSub provisions for taxable periods beginning after December 31, 2002. The method below is therefore historical.

Why a consolidated statement was required

The Louisiana S-corporation rules then treated the parent as though it filed federally as a C corporation. That approach omitted the federally disregarded QSub's income from the parent while leaving the QSub with no separate federal income items, so applying the provisions mechanically would fail to reflect Louisiana income.

The Secretary used La. R.S. 47:287.480 to require a consolidated statement combining income, deductions, credits, assets, sales, revenue, wages, property, and other attributes.

Separate returns and income attribution

The QSub was not disregarded for Louisiana filing purposes and filed its own income and franchise returns. The parent also filed separately. The consolidated statement accompanied both returns.

Revenue normally assigned the consolidated Louisiana income to the S-corporation parent and zero to the QSub, unless the taxpayers presented compelling reasons for a different attribution. The statement itself combined the operations; it did not legally merge the two corporations.

Common questions

Q: Was the QSub disregarded for Louisiana filing under this ruling?

A: No.

Q: Did the parent and QSub file one consolidated return?

A: No. They filed separate returns with a consolidated statement.

Q: Does this method apply after 2002?

A: The official note says specific QSub statutes applied to periods beginning after December 31, 2002.

Citations and references

• La. R.S. 47:287.732 — then-current S-corporation treatment
• La. R.S. 47:287.480 — Secretary's consolidated-statement and allocation authority
• 2002 La. Acts 17 — later QSub provisions identified in the official note
• IRC §§ 351, 368(a)(1)(F), and 1361(b)(3) — federal reorganization and QSub provisions in the request
• LAC 61:III.101.C — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 01-009

Original ruling text

STATE OF LOUISIANA

DEPARTMENT OF REVENUE
POLICY SERVICES DIVISION
M. J. "MIKE" FOSTER, JR.

CYNTHIA BRIDGES

Governor

Secretary

Historical Note: Subsequent to the issuance of this private letter ruling, 2002 La.
Acts 17 enacted La. Rev. Stat. Ann. § 47:287.732(C) and La. Rev. Stat. Ann. §
47:287.732.1, which address the taxation of the income of qualified Subchapter S
subsidiary corporations. For taxable periods beginning after December 31, 2002,
these statutory provisions will apply.
Private Letter Ruling 01-009
Redacted Version
Taxation of a Qualified Subchapter S Subsidiary Corporation
Corporation Income Tax
March 8, 2002

A Private Letter Ruling was requested to address the income tax treatment of a
Qualified Subchapter S Subsidiary (QSub) created as a result of a reorganization.
Following the reorganization Individual A will be the sole owner of Corporation
P, an S corporation. Corporation P will be the parent of Corporation Q, which
will be a QSub. Under the proposed reorganization, this Private Letter Ruling
addresses the following questions:
a. “Following the effective date of [Corporation Q's] election to be a QSub, will
[Corporation Q] be treated, for Louisiana income tax purposes, as: (1) a
“corporation” pursuant to La. R.S. 47:287.11; or (2) a “disregarded entity” and
not an entity separate and apart from [Corporation P], the owner of all the
[Corporation Q] stock?

b. Following the effective date of [Corporation Q's] election to be a QSub, if
[Corporation Q] is treated as a corporation and not as a disregarded entity, will
all of [Corporation Q’s] items of income, deduction and credit be allocated away
from [Corporation Q] and to [Corporation P] and will all of [Corporation Q’s]
assets and operations be combined with and reported as the assets and operations
of [Corporation P], for Louisiana income tax purposes?

Post Office Box 201 Baton Rouge 70821-0201
Telephone 225-219-7318 225-219-2114 (TDD)
An Equal Opportunity Employer

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Date
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c. Following the effective date of [Corporation Q's] election to be a QSub, will
[Corporation Q] be considered and treated as a corporation having no items of
income and deduction (and thus no taxable income) and credit and no assets and
operations, for Louisiana income tax purposes?
d. Following the effective date of [Corporation Q’s] election to be a QSub, will
[Corporation P] be considered and treated as an S corporation having items of
income, deduction and credit consisting of its own items combined with those of
[Corporation Q] but eliminating all intercompany items between [Corporation
Q] and [Corporation P], including intercompany interest and dividends?”
The relevant statements of fact provided were as follows:
a. Current Facts as of the date of the request:
(1) “[Corporation Q] is a Louisiana corporation that has elected S corporation
status for federal income taxation purposes pursuant to Section 1361(a) of the
Internal Revenue Code.
(2) [Individual A], a Louisiana resident, is the sole shareholder and owner of
100% of the outstanding stock of [Corporation Q].”
b. It is proposed that:
(1) “[Individual A] will form and be the sole owner of a new entity
(‘[Corporation P]’), which will be treated as a corporation and make an S
corporation election for federal income tax purposes.
(2) [Individual A] will make a capital contribution of 100% of his [Corporation
Q] stock to [Corporation P] in a transaction that should qualify as a tax free
exchange under Section 351 of the Internal Revenue Code and/or as a
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code.
(3) [Corporation P] and [Corporation Q] will make an election to treat
[Corporation Q] as a QSub for federal income tax purposes pursuant to
Section 1361(b)(3) of the Internal Revenue Code.”

c. Following completion of all steps of the Proposed Reorganization:
(1) “[Individual A] will be the sole 100% owner of [Corporation P];

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(2) [Corporation P] will be the owner of 100% of [Corporation Q].”
The situation that will be addressed by this ruling is that which will exist after
the reorganization and elections outlined in the statements of fact have
occurred. At that point, Individual A will be the sole owner of Corporation P
(an S corporation) and Corporation P will be the sole owner of Corporation Q
(a QSub).
The analysis of this situation begins with the provisions of La. Rev. Stat. Ann.
§47:287.732 (West 2001). Under this section, treatment of an S corporation is
different than the treatment for federal income tax purposes. It requires the S
corporation to apply the Louisiana income tax as if it had been required to file
an income tax return with the Internal Revenue Service as a C corporation for
the current and all prior years. In that statutorily deemed environment,
Corporation P would include only its own income and expenses on its return.
It would not include the income of Corporation Q. At the same time,
Corporation Q, as a disregarded entity for federal income tax purposes, would
not be an S corporation for federal income tax purposes. Corporation Q would
be a corporation for Louisiana income tax purposes, using its federal items of
income and expense as the starting point for computing its Louisiana taxable
income. Corporation Q would have no items of federal income or expense
because for federal income tax purposes it is a disregarded entity. The result,
absent action by the Secretary, would be that Corporation P would pay
Louisiana income tax on its own income, computed without inclusion of
Corporation Q income, and Corporation Q would not pay Louisiana tax on any
income it may have. It is readily apparent Louisiana income would not be
clearly reflected.
Louisiana Revised Statute Annotated §47:287.480 contemplates instances in
which the operation of other provisions of law alone would not clearly reflect
Louisiana income. This section grants the authority to the Secretary to require
adjustments and methods of reporting that will clearly reflect income. Under
the facts presented, the Secretary will require Corporation P and Corporation Q
to compute Louisiana taxable income on a consolidated statement, including
the income, deductions, credits, assets, sales, revenues and other attributes of
both corporations. The Louisiana taxable income so computed must be spread
to the separate returns of the two corporations. Unique to the QSub fact
pattern, the Department would attribute all the income to Corporation P in
keeping with the federal income tax treatment. It is likely the taxpayers will
find it advantageous to attribute all the income to Corporation P because

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Corporation P is eligible for the S corporation exclusion provided by La. Rev.
Stat. Ann. §47:287.732(B) (West 2001).
Addressing your specific questions:
a. Following the effective date of Corporation Q’s election to be a
QSub, Corporation Q will be treated as an entity subject to
Louisiana income and franchise tax. However, the taxable
income will be the amount spread to Corporation Q from the
consolidated statement. This amount will be zero unless the
taxpayer presents compelling reasons to the Department why
Louisiana taxable income should be attributed partly to
Corporation Q.
b. Following the effective date of Corporation Q’s election to be a
QSub, Corporation Q will not be treated as a “disregarded
entity.” It will be treated as an entity separate and apart from
Corporation P and must file its own separate income and
franchise tax returns. However, it will be consolidated with
Corporation P for consolidated statement purposes as part of
the computation of its separate income tax. The consolidated
statement consolidates the items of income, deduction and
credit as well as the assets and operations of both corporations,
but does not attribute them to either. The apportionment factors
used on the consolidated statement reflect the consolidated
apportionment factor items, such as revenue, wages, and
property. The consolidated statement is a device to determine
the Louisiana income of both corporations, then the Louisiana
income so computed is attributed to the separate corporations.
As previously noted, the Department would normally attribute
all the income computed on the consolidated statement to
Corporation P, in keeping with the federal income tax treatment
of QSub’s. The consolidated statement would be an attachment
to the Louisiana income tax returns of both corporations.
c. As noted above, the use of a consolidated statement does not
attribute the operations of one corporation to another
corporation; rather it makes the attribution irrelevant in this
situation. In other situations, not involving a QSub and its
parent, each corporation would have its own apportionment

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factor items, and those items would often be used in
determining how much of the Louisiana income computed on
the consolidated statement is attributed to each corporation.
Under the fact pattern at hand, the consolidated statement
determines the Louisiana income of both corporations. The fact
that the distribution of that income is between an S corporation
parent and its QSub causes the Department to attribute all
Louisiana income to the S corporation and none to the QSub.
d. Following the effective date of Corporation Q’s election to be a
QSub, Corporation P will be considered and treated as an S
corporation for purposes of La. Rev. Stat. Ann. §47:287.732(B)
(West 2001). As noted above, there is no specific attribution to
it of the items of Corporation Q, other than the income of
Corporation Q effectively being attributed to Corporation P. In
the consolidated statement all intercompany items are
eliminated, including intercompany interest and dividends.

This private letter ruling is limited to, and based upon, the facts presented.
Cynthia Bridges
Secretary
By:

Michael D. Pearson
Senior Policy Consultant
Policy Services Division

A Private Letter Ruling (PLR) is issued under the authority of LAC 61:III.101( C ). A PLR
provides guidance to a specific taxpayer at the taxpayer’s request. It is a written statement issued
to apply principles of law to a specific set of facts or a particular tax situation and is limited to
the matters specifically addressed. A PLR does not have the force and effect of law and may not
be used or cited as precedent. A PLR is binding on the Department only as to the taxpayer
making the request and only if the facts provided with the request were truthful and complete and
the transaction was carried out as proposed. The Department’s position concerning the particular
tax situation addressed remains in effect for the requesting taxpayer until a subsequent
declaratory ruling, rule, court case, or statute supersedes it.