How did Louisiana apply the corporate franchise-tax rule that reclassified 50% of excess related-party debt when the corporation's capital account was negative?

Plain-English summary

When related-party debt exceeded capital stock, surplus, and undivided profits, Louisiana moved 50% of the excess into the capital account—but never enough to make related-party debt negative.

The ruling addressed the difficult case where the corporation's capital stock, surplus, and undivided profits already showed a negative balance.

The basic rule

La. R.S. 47:605.1 compared qualifying debt owed to related parties with capital stock, surplus, and undivided profits determined under La. R.S. 47:604 and 47:605.

If related-party debt was larger, 50% of the difference was reclassified from debt into the capital account. The ruling said trade debt less than 180 days old and deposit liabilities to related parties were not included, and receivables did not reduce debt.

The ruling's examples

Both balances positive

With $100,000 of related-party debt and $50,000 of capital, the excess was $50,000. Half—$25,000—moved to capital, leaving $75,000 in debt and $75,000 in capital.

Debt positive and capital negative

With $75,000 of debt and negative $25,000 of capital, the difference was $100,000. A $50,000 transfer left $25,000 in debt and positive $25,000 in capital.

The normal 50% amount exceeded available debt

With $25,000 of debt and negative $75,000 of capital, half the $100,000 difference would ordinarily be $50,000. The ruling capped the transfer at $25,000 so debt ended at zero, not negative. Capital ended at negative $50,000.

Common questions

Q: Was the transfer always exactly half the difference?

A: Only if that amount did not reduce related-party debt below zero.

Q: Could a negative capital balance increase the computed excess?

A: Yes. The ruling's second and third examples calculated the difference against negative capital.

Q: Who counted as a related party?

A: A member of a controlled group under 26 U.S.C. § 1563 or a person that would be a member under similar rules.

Q: Did every payable count as debt?

A: No. The ruling excluded trade debt less than 180 days old and deposit liabilities to related parties.

Citations and references

• La. R.S. 47:604 and 47:605 — capital stock, surplus, and undivided profits
• La. R.S. 47:605.1 — 50% excess related-party debt rule
• 26 U.S.C. § 1563 — controlled-group definition
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-010

Original ruling text

Revenue Ruling No. 06-010
June 30, 2006
Corporate Franchise Tax
R.S. 47:605.1's Fifty Percent Excess Rule and its Implementation Purpose The purpose of this Revenue Ruling is to provide guidance to Revenue employees and taxpayers in determining the proper way to include fifty percent of a corporation's debt to related parties in the capital stock and surplus and undivided profits of that same corporation. Background/Analysis Revised Statute 47:605.1 states that if a corporation's total debt to related parties exceeds the capital stock, surplus and undivided profits of the corporation as determined under R.S. 47:604 and 605, then 50% of the amount of the excess shall be included in the capital stock, surplus and undivided profits of the corporation. The term debt can not include trade debt that is less than 180 days old, deposit liabilities to related parties or be reduced by receivables. "Related parties" mean any member of a controlled group of corporations as defined in 26 U.S.C. § 1563 or any other person that would be a member of a controlled group if rules similar to those of 26 U.S.C.
§ 1563 were applied to that person. The difficulty in implementing this fifty percent excess rule arises in some situations when the corporation's capital stock and surplus and undivided profits account carries a negative number. Ruling When both the corporation's debt to related parties and its capital stock, surplus and undivided profits are positive numbers, half of the excess debt to related parties will be included in the capital stock, surplus and undivided profits of that corporation. Example 1: A Corporation's debt to related parties equals $100,000 and its capital stock, surplus and undivided profits equals $50,000. The difference in the debt to related parties and the corporation's capital stock, surplus and undivided profits is $50,000. Fifty percent of the difference or $25,000 will be transferred from related party debt to A Corporation's capital stock, surplus and undivided profits. After the transfer of half the related debt, the account balances will be $75,000 in related party debt and $75,000 in capital stock, surplus and undivided profits. When the corporation's debt to related parties is a positive number and its capital stock, surplus and undivided profits is a negative number, half of the debt to related parties in excess of the capital stock, surplus and undivided profits will be included in the capital stock, surplus and undivided profits of the corporation to the extent that the corporation's debt does not fall below zero. Example 2: B Corporation's debt to related parties equals $75,000 and its capital stock, surplus and undivided profits equals ($25,000). The difference in B Corporation's related party debt and its capital stock, surplus and undivided profits is $100,000. Fifty percent of the difference or $50,000 will be transferred from B Corporation's related party debt to its capital

Revenue Ruling No. 06-010
Page 2
June 30, 2006
stock, surplus and undivided profits. After the transfer of half of the related debt, the account balances with be $25,000 in related party debt and $25,000 in capital stock, surplus and undivided profits. Example 3: C Corporation's debt to related parties equals $25,000 and its capital stock, surplus and undivided profits equals ($75,000). The difference in C Corporation's related party debt and its capital stock, surplus and undivided profits is $100,000. Normally, fifty percent of the difference or $50,000 would be transferred from C Corporation's related party debt to its capital stock, surplus and undivided profits. In this case, transferring the entire $50,000 would make the related party debt a negative number. Instead, only $25,000 will be transferred from related party debt to C Corporation's capital stock, surplus and undivided profits leaving balances of $0 in related party debt and ($50,000) in capital stock, surplus and undivided profits.

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.