How did Louisiana treat capitalized lease assets in the corporation franchise-tax and income-tax property factors?

Plain-English summary

Louisiana treated a capitalized lease differently for corporation franchise tax and corporation income tax.

For franchise tax, a true or genuine lease remained a rental. The lessee did not include the leased property as an asset in the property factor.

For income tax, Louisiana followed federal ownership. If federal tax law treated the lessee as owner, the asset was included in Louisiana's property factor when used to produce apportionable income. If federal law did not treat the lessee as owner, the asset was excluded.

Franchise-tax treatment

The ruling applied Statement of Acquiescence No. 04-001 only to franchise tax. A capitalized lease that was genuinely a rental was not property of the lessee for the allocation-ratio property factor.

Income-tax treatment

Federal tax ownership depended on the substance of the lease. A financing arrangement for an ultimate purchase could cause the lessee to be treated as owner, take depreciation and interest deductions, and forgo a rent deduction. Under an operating lease, ownership remained with the lessor and the lessee deducted rent.

Louisiana followed that federal result for the income-tax property factor.

Interest-expense attribution

When the lessee was treated as owner, the ruling also required the asset to be considered in attributing indirect interest expense between allocable and apportionable income.

Common questions

Q: Did a true lease enter the franchise-tax property factor?

A: No.

Q: What controlled the income-tax property factor?

A: Whether federal income-tax law treated the taxpayer as owner.

Q: Was federal ownership alone enough for inclusion?

A: The asset also had to be used to produce apportionable income.

Q: Did ownership treatment affect anything besides the property factor?

A: Yes. It also affected indirect-interest-expense attribution.

Citations and references

• Louisiana Statement of Acquiescence No. 04-001 — franchise-tax treatment identified in the ruling
• IRS Revenue Ruling 55-540 and Revenue Procedure 75-21 — federal lease-ownership guidance discussed
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 05-003

Original ruling text

RPage 1 of 1Revenue Revenue RevenueRRRRevenue Information Bulletin No 01-xxxx Transactions by Roustabouts, “Work as Directed" Service ProvidersrrEVENUErRRR

Revenue Ruling
No. 05- 003
June 28, 2005
Corporation Income and Franchise Taxes
Capitalized Lease Assets in the Property Factors
Purpose: The purpose of this Revenue Ruling is to address the different treatment of capitalized lease assets for corporation income and franchise tax property factor purposes. Analysis/Discussion: In Statement of Acquiescence No. 04-001, the Department found that when a capitalized lease is a “true” or “genuine” lease, capitalized lease assets would not be included in the property factor for franchise tax purposes. This leads to the question of inclusion of capitalized lease assets in computing the property factor for corporation income tax purposes. Louisiana’s corporation income tax piggybacks the federal corporation income tax scheme. The question of what is an item of income or expense or what is an asset is determined beginning with the federal income, expenses or assets. In the federal tax scheme it is necessary to determine who has ownership, and therefore, who is entitled to the depreciation deduction in leasing arrangements. The IRS has published guidance through a number of rulings. The primary rulings are Rev. Rule 55-540 and Rev. Procedure 7521. Basically, where the lease arrangement poses as a financing tool for an ultimate purchase, federal law will regard the transaction as a purchase financed through the lease agreement. The lessee is treated as the owner of the asset and will be entitled to depreciation deductions on the property and interest expense on the loan. In this type of lease arrangement, the lessee will not take a deduction for rental payments. In the case of an operating lease (lease represents an agreement to pay rent for the use of property for a specified period of time), the lessee is not treated as the owner of the asset and will deduct the periodic payments under the lease. Ownership of the property remains with the lessor, who would be entitled to the asset depreciation and any interest expense incurred from financing. Conclusion: The Department’s Statement of Acquiescence No. 04-001 is applicable for franchise tax purposes only. A capitalized lease asset is treated as a true rental for corporation franchise tax purposes. The leased property is not considered an asset and is not included as property for purposes of the property factor of the allocation ratio. For corporation income tax purposes, in accordance with the federal treatment, a capitalized lease asset that is considered owned by the taxpayer for federal income tax purposes is an asset for Louisiana income tax purposes. It is included in the property factor of the apportionment ratio if it is used to produce apportionable income. A capitalized lease asset that is not treated as owned by the taxpayer for federal income tax purposes is not included in the Louisiana corporation income tax property factor. Whenever a capitalized lease asset is considered owned for federal income tax purposes it is considered owned for Louisiana income tax purposes. In addition to property factor considerations, when the capitalized lease asset is considered owned it must also be considered in any attribution of indirect interest expense to allocable and apportionable income. Cynthia Bridges Secretary

A Revenue Ruling is issued under the authority of LAC 61III.101 (C ). A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is a written statement issued 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.