Bridges v. Autozone Properties, Inc.

• Citation: 900 So.2d 784
• Decision Date: 24 March 2005
• Docket Number: No. 2004-C-0814.,2004-C-0814.
• Parties: Cynthia BRIDGES, Secretary, Department of Revenue, State of Louisiana v. AUTOZONE PROPERTIES, INC.
• Court: Louisiana Supreme Court

900 So.2d 784

Cynthia BRIDGES, Secretary, Department of Revenue, State of Louisiana v. AUTOZONE PROPERTIES, INC.

No. 2004-C-0814.

Supreme Court of Louisiana.

March 24, 2005.

Opinion Concurring in Denial of Rehearing May 13, 2005.

Weiler & Rees, LLC, Theodore David Vicknair, John Jurgen Weiler, New Orleans, Counsel for Applicant.

Oreck, Bradley, Crighton, Adams & Chase, LLC, Frederick William Bradley, Nicole Crighton, Boulder, CO, Counsel for Respondent.

JOHNSON, Justice.

Autozone, Inc. is a Nevada corporation engaged in the nationwide retail sale of automobile parts. In 1995, the corporation became a holding company which provided management services to its several subsidiaries. All retail stores, including the 68 stores in Louisiana, are now owned by Autozone Development Corporation, a corporate real estate investment trust (REIT).

As a REIT, Autozone Development distributed most of its income to its beneficial owners. The majority of shares were owned by Autozone Properties, Inc., a Nevada corporation organized for the sole purpose of holding shares in Autozone Development.

Following a tax audit, the Louisiana Department of Revenue filed this action against Autozone Properties to recover income taxes on rental income received from the REIT, and franchise taxes on Autozone Properties' taxable capital in Louisiana. The state takes the position that under La. R.S. 47:287.93 the corporate owner of a REIT is required to file a tax return and to report the Louisiana income that passes through it.

The Department argues that rent from Louisiana real estate is income derived from Louisiana sources, and trust beneficiaries, including beneficiaries of the REIT are required to file tax returns reflecting their Louisiana source income. Autozone Properties argues that it is not doing business in the state of Louisiana, and is therefore not subject to personal jurisdiction in Louisiana courts, as it does not meet the definition of "minimum contacts" with this state.

For the reasons that follow, we conclude that Louisiana has personal jurisdiction over a nonresident shareholder when Louisiana has provided benefits, opportunities, and protections which helped to create the income.

FACTS and PROCEDURAL HISTORY

Prior to 1995, Autozone, Inc. operated and paid corporate income taxes as one entity. After corporate restructuring, Autozone, Inc., became a holding company that provided management services to its subsidiary businesses. Three of those subsidiary entities are relevant to our discussion: (1) Autozone Stores, Inc. (hereinafter Stores), (2) Autozone Development Corp., (hereinafter Development), and (3) Autozone Properties, Inc. (hereinafter Properties). Stores and Development are registered with the Louisiana Secretary of State as non-domiciliary business corporations that are domiciled in Nevada and have their principal offices in Tennessee. Both Stores and Development filed Louisiana income tax returns. Conversely, Properties also domiciled in Nevada, with its principal place of business in the Bahamas, is not registered in Louisiana and filed no Louisiana income tax return.

Stores engages in the retail sale of automobile parts. Development—the real estate investment trust—owns the real property where Stores operates. Development operates as a conduit or pass-thru entity for Properties. Properties holds 100% of the common stock and roughly 90% of the preferred stock in Development.

Stores pays rent to Development in the amount of 8% of the Stores' gross sales for the use of Development's real property, in operating its retail sale business. For the taxable years 1996 through 1998, Stores paid Development approximately $20 million in rent for its Louisiana operations. On its Louisiana income tax returns, Stores took deductions for the rents it paid to Development.

Properties received the rental income, sourced in Louisiana, from Development in the form of dividends. Thus, the rental income that was created from real property located in Louisiana escaped Louisiana taxation. Development's function as a conduit or pass-thru entity is essential for Properties' untaxed receipt of the Louisiana-sourced rental income, in the form of dividends.

During the tax period at issue, Development distributed 100% of its earnings to Properties. On its Louisiana tax return, Development reported no income because it took a dividends-paid deduction for the rental income it passed through to its shareholders, Properties.

The Louisiana Department of Revenue and Taxation (the Department) has not contested Development's right to take the dividends-paid deduction on its Louisiana income tax return. However, the Department has disputed Properties' right to receive the passed through rental income, in the form of dividends, without filing a Louisiana tax return or paying any Louisiana income taxes.

The state filed suit against Properties pursuant to La. R.S. 47:1561(3), which provides authority to collect taxes by ordinary suit, and La. R.S. 13:3201, the Louisiana long-arm statute. In its petition to collect taxes, the state asserts that Properties received income from a REIT located and operating in Louisiana but failed to file a Louisiana tax return. As a result, the state performed a corporation income tax and corporation franchise tax audit of Properties for the taxable years 1996 through 1998 and determined, pursuant to La. R.S. 47:287.92-287.93 and La. Admin. Code title 61 § I.XXXX-XXXXX, that Properties owed back taxes. Therefore, the state imposed a corporation income tax on Properties for the taxable years ending in August 1996 and August 1997 pursuant to La. R.S. 47:287.2 et seq., and a corporation franchise tax against Properties for the taxable years ending in August 1997 and August 1998 pursuant to La. R.S. 47:601 et seq. The state sought to collect the following alleged tax liabilities:

(1) corporation income taxes of $778,789.00 plus interest of $519,710.40 plus a delinquent penalty of $194,697.25 plus interest and penalties until paid;

(2) corporation franchise taxes in the amount of $214,098.00 plus interest of $141,704.55 plus a delinquent penalty for $53,524.50 plus interest and penalties until paid.

According to the state's petition, Properties was given sufficient notice of the tax assessment. The state then brought suit against Properties to recover $1,902,523.70 in taxes. In response to the suit, Properties filed an exception of lack of personal jurisdiction which argued that Louisiana was without jurisdiction to tax Properties because Properties lacked a "substantial nexus" or "significant contacts" with the state. Specifically, Properties made the following four arguments: (1) a nonresident shareholder of a corporation doing business in Louisiana does not thereby subject itself to the jurisdiction of a Louisiana court, (2) the situs of Properties shares in Development follows the commercial domicile of Properties, (3) jurisdiction over Properties cannot be established in light of the restrictions imposed by the Due Process Clause of the 14th Amendment, and (4) jurisdiction over Properties cannot be established in light of the restrictions imposed by the United States commerce clause. U.S. Const. Art. 1, § 8, cl. 3.

The trial court sustained Properties' exception of lack of personal jurisdiction but also noted that the reorganized structure amounted to a "scheme" initiated by Autozone in an effort to maximize their profits and reduce taxes.

In its analysis, the court relied on the seminal case International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945) for the legal concept of "minimum contacts." In International Shoe, supra, the United States supreme court held the following:

due process requires only that in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend `traditional notions of fair play and substantial justice.' Id. at 316, 66 S.Ct. 154.

Without reaching a conclusion on this issue of whether Properties had enough "minimum contacts" with Louisiana to justify Louisiana's imposition of taxes, the trial court ruled that the real question was whether Louisiana ought to subject Properties to its jurisdiction based on an "entity isolation theory" that the parties had cited in brief.

The trial court discussed Brunswick Corp. v. Suzuki Motor Co., Ltd., 575 F.Supp. 1412 (E.D.Wis.1983) and Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660 (1960) and concluded the "entity isolation theory" was inapplicable. Brunswick, supra, involved a manufactured product that made its way into the stream of commerce. Scripto, supra, involved a product that was sold by agents. Both cases involved products. Conversely, the court ruled that in the present case there was no product at issue. Thus, the court reasoned that the entity isolation theory was inapplicable here because no product was involved.

The trial court then moved on to consider the ultimate question which was whether or not persons who receive distributions from REITs should pay taxes to the state where the REIT is located or whether taxes should be paid to the state where the recipient is domiciled. The court concluded that Properties lacked the requisite "minimum contacts" to bring it under Louisiana's taxing authority and sustained Properties' exception of lack of personal jurisdiction.

Court of Appeal

On appeal, the First Circuit concluded that the dividends received by Properties from its ownership of Development shares did not acquire a business situs in Louisiana and affirmed the trial court's ruling sustaining Properties' declinatory exception of lack of personal jurisdiction. Bridges v. Autozone Properties, Inc., XXXX-XXXX (La.App. 1st Cir.01/05/2004), 873 So.2d 25, rehearing denied (02/27/2004).

The court of appeal distinguished the...