Louisiana: Gain from LLC sale included in sales factor denominator

Recently, the Louisiana First Circuit Court of Appeal addressed whether gain from the sale of an LLC doing business in Louisiana, which all parties agreed was apportionable income, was excluded from the sales factor of the LLC’s corporate owner for the tax year at issue. In filing its original returns, the taxpayer did not include the gain in the Louisiana sales factor numerator but included it in the sales factor denominator. On audit, the Department of Revenue excluded the gain from the factor entirely, which resulted in additional corporate income tax being owed to the state. After the taxpayer protested the assessment and the Board of Tax Appeals ruled in its favor, the Department of Revenue appealed.

Under the Louisiana statute governing the computation of the sales factor, the numerator includes sales made in the regular course of business and other gross apportionable income attributable to Louisiana. The denominator includes total net sales made in the regular course of business and the taxpayer’s other gross apportionable income. A regulation provides that sales not in the regular course of business are excluded from the factor. The taxpayer argued that the regulation exceeded the scope of the statute, was not a reasonable interpretation of the law, and was therefore unenforceable. The court ultimately agreed with the taxpayer— based largely on statutory construction and legislative intent. Specifically, although the current version of the statute did not address sales not made in the regular course of business, a prior version of the law had excluded certain types of income not derived from the taxpayer’s regular course of business from the sales factor. After that law was declared unconstitutional, the legislature did not attempt to reintroduce similar language. Further, a 2002 law change added profits or losses from sales or exchanges of property, including certain intangibles, to the list of allocable income. However, a few years later that law change was repealed. In the court’s view, this rendered such items apportionable by default. The court concluded that the language in the regulation excluding income associated with sales not made in the regular course of business was contrary to the clear wording of the statute and the Board did not err when it ruled in the taxpayer’s favor. Please contact Christie Rao at 504-569-8807 at with questions on Davis-Lynch Holding Company, Inc. v. Robinson.