Were long-term lease obligations tied to industrial revenue bonds borrowed capital subject to Louisiana corporation franchise tax?

Plain-English summary

Long-term lease obligations associated with industrial revenue bonds were not borrowed capital in the lessee's Louisiana corporation franchise-tax base. The related future right to use the leased property also was not an asset in the property factor.

The Department relied on Louisiana's Industrial Inducement Statute and two Louisiana appellate decisions distinguishing genuine leases from debt or disguised credit sales.

The financing structure

La. R.S. 39:991 et seq. supplied a special industrial financing arrangement intended to make Louisiana locations more economically attractive. Under the described structure, a municipality or other authorized local government issued bonds and leased the financed property to the industrial business.

The ruling said following that arrangement did not create franchise-tax liability for the lessee-industry merely from the lease obligation.

Franchise-tax treatment of borrowed capital

At the time, La. R.S. 47:601 imposed corporation franchise tax on taxable capital. Section 47:602 included issued capital stock, surplus, undivided profits, and the borrowed capital then covered by Section 47:603.

Section 47:603 defined borrowed capital by reference to indebtedness maturing, or remaining unpaid, more than one year after it was incurred. The key question was whether future rent under a long-term lease was already indebtedness.

The two court decisions

In Traigle v. Gulf Coast Aluminum Corporation, parish industrial revenue bonds financed property leased to Gulf Coast Aluminum. The court excluded the lifetime lease payments from the company's franchise-tax base because the company did not own the property and taxing the bond arrangement would undermine the industrial-inducement provisions.

In System Fuels, Inc. v. Kennedy, the court addressed long-term leases of fuel-storage facilities and vessels. It held that a true lease, rather than a disguised credit sale, did not create an unconditional payment obligation: each party's duty remained tied to the other's performance. Periodic rent did not become debt until it came due.

The Department's ruling

Following those statutes and cases, the Department concluded that long-term lease obligations associated with industrial revenue bonds were not borrowed capital. They were therefore excluded from Louisiana corporation franchise tax.

The corresponding long-term lease right was also excluded as an asset when computing the property factor. Future use depended on the lessee paying rent and the lessor continuing to make the property available. The ruling reasoned that the future right did not yet exist any more than the future debt did.

What this means for you

Industrial lessees

Under this ruling, a genuine lease in the statutory industrial-revenue-bond structure did not turn all future rent into borrowed capital.

Corporate tax departments

The treatment was symmetrical: exclude the contingent future obligation from borrowed capital and the contingent future use right from the property-factor assets.

Businesses using lease-like financing

Substance matters. The cases and disclaimer distinguish a true lease from a disguised credit sale, which may produce a different result.

Common questions

Q: Were all future lease payments treated as current debt?

A: No. Under a genuine bilateral lease, periodic rent became debt only when due.

Q: Did the lease obligation enter borrowed capital?

A: No.

Q: Was the future lease right included as a property-factor asset?

A: No.

Q: Did ownership matter?

A: Yes. One cited case emphasized that the industrial lessee did not own the financed property.

Citations and references

• La. R.S. 47:601 — corporation franchise tax described in the ruling
• La. R.S. 47:602 — taxable capital definition
• La. R.S. 47:603 — borrowed capital definition
• La. R.S. 39:991 et seq. — Industrial Inducement Statute
• Traigle v. Gulf Coast Aluminum Corporation, 442 So. 2d 1190 (La. App. 1st Cir. 1982)
• System Fuels, Inc. v. Kennedy, 858 So. 2d 585 (La. App. 5th Cir. 2003)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 07-010

Original ruling text

Revenue Ruling No. 07-010
December 11, 2007
Corporation Franchise Tax
Taxability of Industrial Revenue Bonds
Purpose
The purpose of this Revenue Ruling is to provide guidance to Revenue employees and taxpayers in determining whether or not long-term lease obligations associated with industrial revenue bonds are subject to Louisiana corporation franchise tax under La. R.S. 47:601. Background and Facts Louisiana Revised Statutes 47:601, enacted in 1958, imposes a tax on every domestic corporation and every foreign corporation exercising its charter or qualified to do business or actually doing business in Louisiana or owning or using any part or all of its capital, plant, or any other property in the state. The tax is equal to one dollar and fifty cents for each one thousand dollars, or major fraction thereof on the first three hundred thousand dollars of taxable capital. The rate is then increased to three dollars for each one thousand dollars over three hundred thousand dollars of taxable capital. Taxable capital is defined in La. R.S. 47:602 as the amount of a corporation’s issued and outstanding capital stock, surplus and undivided profits and that portion of borrowed capital provided for in R.S. La. 47:603 until borrowed capital is no longer included in taxable capital. Additionally, La. R.S. 39:991 et seq., contains Louisiana’s Industrial Inducement Statute which was enacted to make industrial location in Louisiana more economically desirable. Specifically, La. R.S. 39:991, et seq. provides a special financing arrangement which, if followed, does not result in franchise tax liability to the lessee-industry which leases property from a municipality or other authorized local government issuing bonds. In two separate cases, Louisiana courts have ruled that industrial revenue bonds are not subject to Louisiana franchise tax. In Traigle v. Gulf Coast Aluminum Corporation, et al., 442 So.2d 1190, (La. App. 1st Cir., 1982), industrial revenue bonds were issued by the parish and the property constructed with the bond proceeds was leased to Gulf Coast Aluminum Corp. In this case the court held that the lease payments over the life of the lease were not included in the franchise tax base of Gulf Coast Aluminum Corp. The court based its decision on two premises: 1) Gulf Coast Aluminum was not the owner of the property in question and 2) the industrial inducement provisions would be greatly diminished if the bond sales were subject to franchise tax. The second case that dealt with whether or not a company should include industrial revenue bonds in their corporation franchise tax base was System Fuels, Inc. v. Kennedy, 858 So.2d 585, ( La. App. 5th Cir., 2003). In this case, System Fuels Inc. had five long-term lease agreements during the 1970’s. Three of these long-term leases were leases of immovable property, specifically, leases for fuel oil storage facilities. The remaining two leases were bareboat charter agreements for the lease of water vessels to transport fuel or oil and were thus leases of movable property. The Department of Revenue contended that System Fuels’ obligations to pay rent pursuant to these leases constituted borrowed capital and should have been included in the company’s franchise tax base. The 5th Circuit held that a true or genuine lease, as opposed to a disguised credit sale, are not unconditional obligations to pay because a lease is a bilateral contract so that the obligation of each party is correlative to the obligation of the other. Finally

Revenue Ruling 07-010
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December 11, 2007
the court discussed how R.S. La. 47:603 defines borrowed capital as indebtedness maturing more than one year from the date the indebtedness is incurred or which is not paid within one year from the date incurred regardless of the maturity date. The court further stated that when periodic rental payments exist under a lease agreement, no debt is incurred until the payment becomes due. Due to this analysis, the court ruled that the industrial revenue bonds were not subject to Louisiana corporation franchise tax. Ruling After careful consideration of the statutes and cases mentioned above, it is the position of the Louisiana Department of Revenue that long-term lease obligations associated with industrial revenue bonds are not “borrowed capital” and as such are not subject to Louisiana franchise tax. In addition, the corresponding long-term lease obligation will not be considered an asset when computing the property factor since, following the reasoning of the courts in the abovementioned cases, future use of the asset is a right contingent upon payment of the lease and the other party making the leased property available. The right does not exist any more than the debt exists and therefore should not be reflected as an asset on the balance sheet.

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.