How much continuously outstanding debt under a multiyear master loan agreement entered Louisiana's corporation franchise-tax base?

Plain-English summary

A master loan used for continuous financing over more than one year created long-term borrowed capital even though individual advances were repaid within a year.

The amount included in the franchise-tax base was the lowest loan balance outstanding at any point during the year—the amount the borrower owed throughout the entire year.

Substance over individual advances

The agreement lasted more than one year, allowed repeated borrowing and repayment up to a limit, and always had some balance outstanding. The Department treated the overall substance as continuous long-term operational financing rather than a collection of isolated short-term loans.

The ruling explained that allowing repeated repayments to control would let a corporation avoid tax on capital continuously employed in its business merely by changing the transaction's form.

Floor-plan financing exception

The ruling excluded qualifying inventory financing for motor vehicle, manufactured-home, recreational-vehicle, boat, motorcycle, motor-home, and farm-implement dealerships.

That exception required financing secured by specifically identified units and repayment of an equivalent amount as each unit was sold.

Common questions

Q: Did repaying particular draws within one year keep all debt out of borrowed capital?

A: No. The continuously outstanding portion remained long-term financing.

Q: What amount entered the base?

A: The minimum balance outstanding at any point during the year.

Q: Did the ruling include every floor-plan loan?

A: No. The statutory exception had specified inventory, identification, security, and unit-sale repayment conditions.

Q: Did this ruling replace an earlier version?

A: It revised Revenue Ruling 01-018 to reflect the 2002 statutory floor-plan amendment.

Citations and references

• La. R.S. 47:603 — borrowed-capital definition
• La. R.S. 47:603(5) — specified floor-plan financing exclusion
• 2002 La. Acts 38 — amendment reflected in this ruling
• State v. Banana Selling Co., 170 So. 30 (La. 1936)
• Collector of Revenue v. Maison Blanche Corp., 126 So. 2d 704 (La. App. 1961)
• Weiss v. Stearn, 265 U.S. 242 (1924)
• Diedrich v. Commissioner, 457 U.S. 191 (1982)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 02-015

Original ruling text

Revenue Ruling
No. 02-015
August 27, 2002
Corporation Franchise Tax
Inclusion of Certain Indebtedness in the Franchise Tax Base

Purpose:
The purpose of this revenue ruling is to inform those taxpayers that are subject to the corporation franchise tax that indebtedness that exists under a master loan agreement for more than a year is considered long-term debt and therefore is included in the borrowed capital component of the borrower’s franchise tax base, unless the indebtedness is specifically excluded from the definition of borrowed capital. Discussion: The facts presented are as follows. Borrower is a business organization that is subject to the Louisiana corporation franchise tax. Borrower and lender have entered into a master loan agreement. The term of the master loan agreement is more than one year. During the term of the agreement the borrower has the right to borrow and repay funds, but at no time can outstanding borrowings exceed a set amount. Interest charges vary under the terms of the master loan agreement. The agreement requires the borrower to grant certain securities, maintain certain conditions, and make certain repayments. A portion of the loaned amount is borrowed and repaid within a year, however, additional funds are borrowed under the agreement between the time the first amount was borrowed and repaid. During the borrower’s taxable year there is always some outstanding indebtedness. Although under the master loan agreement there are a series of payments and repayments that can appear to be short-term transactions between the parties, the master loan agreement is, in substance, used by the borrower to satisfy a need for continuous long-term financing of its operations. The Louisiana corporation franchise tax was originally created with the enactment of the Louisiana Franchise Tax Act, 1932 La. Acts 8. The franchise tax is imposed on taxable capital employed in a domestic or foreign corporation’s business activities in this state. There are three components of taxable capital: issued and outstanding capital stock; surplus and undivided profits; and borrowed capital. Borrowed capital, which is the subject of this revenue ruling, is defined in LSA R.S. 47:603 as “all indebtedness of the corporation, maturing more than one year from the date incurred, or which is not paid within one year from the date incurred regardless of maturity date.” At the time of its enactment, the inclusion of borrowed capital in the franchise tax base was a fairly new concept. Shortly after the adoption of the tax, the Louisiana Supreme Court acknowledged that the Legislature included borrowed capital in the tax base in order to prevent corporations from reducing their base by issuing small dollar amounts of capital stock and borrowing large sums to finance their operations. The court recognized that if this were allowed, corporations would only be taxed on the amount of capital stock, despite the fact that the borrowed amounts significantly contributed to the profitability of the corporation. See State v. Banana Selling Co., 170 So. 30 (La.1936).

Revenue Ruling No. 02-015
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A fundamental principal in the application of tax laws is the elevation of the substance of a transaction over its form. Weiss v. Stearn, 265 U.S. 242 (1924), Diedrich v. C. I. R., 457 U.S. 191 (1982). This principal has been applied to Louisiana’s corporation franchise tax. State v. Banana Selling Co., 170 So. 30 (La.1936), Collector of Revenue v. Maison Blanche Corp., 126 So.2d 704, (La.Ct.App.1961). In Collector of Revenue v. Maison Blanche Corp., 126 So.2d 704, 708 (La.App. 1961), the Fourth Circuit Court of Appeal stated that the Collector had the right to seek the substance of the transaction rather than its mere form, the former being controlling in the matter of establishing tax liability. The measure of taxation for the franchise tax is the capital employed by the corporation, which includes indebtedness that is not paid within a year. Despite the fact that certain portions of the debt under the master loan agreement are paid within a year, the purpose of the transaction as a whole is to provide long-term financing to the borrower. Therefore, this debt must be included in the franchise tax base or a corporation could avoid inclusion of capital employed by the corporation by structuring transactions in such a way that they appear to be short-term debt. To find otherwise would allow the form of the transaction, rather than its substance, to control the tax consequences. Subsequent to the issuance of the original version of this revenue ruling (RR 01-018), the Louisiana Legislature enacted LSA R.S. 47:603(5), which specifically excludes the following “floor plan” type financing arrangements that would otherwise meet the statutory definition of borrowed capital: (5) Financing of the inventory of a motor vehicle, manufactured home, recreational vehicle, boat, motorcycle, motor home, or farm implement dealership when the financing is secured by specific motor vehicles, manufactured homes, recreational vehicles, boats, motorcycles, motor homes, or farm implements, each of which is identified by a manufacturer or vehicle identification number, and an amount equivalent to the funds lent on each motor vehicle, manufactured home, recreational vehicle, boat, motorcycle, motor home, or farm implement is required to be repaid as each such unit is sold. Conclusion: Indebtedness that exists under a master loan agreement for more than a year is long-term debt and must be included in the borrowed capital component of the borrower’s franchise tax base, with the exception of any such indebtedness that is specifically excluded under R.S. 47:603(5). The amount to be included in the base is the minimum loan balance outstanding at any point during the year. This is the amount by which the borrower has been indebted to the lender for the entire year. Example: The following example is provided to illustrate the application of this revenue ruling. It is not the only situation to which this revenue ruling applies. The master loan agreement is between a lender and a corporation. Under the terms of the master loan agreement, the borrower is entitled to borrow funds up to a set dollar amount. The borrower agrees that a specified maximum debt to equity ratio will not be exceeded and that in the event the borrower defaults on any of its loans, all amounts outstanding under the master loan agreement are immediately due and payable. The lender may require a security interest in anything purchased with

Revenue Ruling No. 02-015
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the funds or may require some other type of security device such as a mortgage. During the course of the corporation’s taxable year, the corporation regularly borrows and repays variable amounts depending on its cash needs. While the total loan balance may fluctuate during the year, it is never paid down to zero. Because the lender has provided capital to the corporation for more than one year, the indebtedness must be included in the corporation’s franchise taxable base. The amount to be included in the base is the amount outstanding under the master loan agreement for more than a year, which is the minimum loan balance outstanding at any point during the year. Cynthia Bridges Secretary By:

____
Leonore F. Heavey
Attorney
Policy Services Division

History: December 28, 2001 (new document Revenue Ruling 01-018); August 27, 2002 (Revenue Ruling 02-015 issued to reflect amendment to La. Rev. Stat. Ann. § 47:603 by 2002 La. Acts 38).

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is issued under Section 61:III.101(C) of the Louisiana Administrative Code to apply principles of law to a specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a statement of the department's position and is binding on the department until superseded or modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.