McNamara v. Tube-Alloy Corp.

• Decision Date: 27 June 1991
• Docket Number: TUBE-ALLOY,No. 90,90
• Parties: Shirley McNAMARA, Secretary for the Department of Revenue and Taxation, State of Louisiana v.CORPORATION. CA 1637.
• Court: Court of Appeal of Louisiana — District of US

Page 930

583 So.2d 930

Shirley McNAMARA, Secretary for the Department of Revenue and Taxation, State of Louisiana v. TUBE-ALLOY CORPORATION.

No. 90 CA 1637.

Court of Appeal of Louisiana First Circuit.

June 27, 1991.

Rehearing Denied Sept. 4, 1991.

Robert R. Rainer, Baton Rouge, for plaintiff and appellant, Shirley McNamara, Secretary for Dept. of Revenue & Taxation.

George F. Riess, New Orleans, for defendant and appellee, Tube-Alloy Corp.

Before SAVOIE, CRAIN, and FOIL, JJ.

CRAIN, Judge.

Tube-Alloy Corporation (Tube-Alloy) is a domestic corporation which manufactures and sells down-hole tubular products used in the petroleum industry. Its subsidiary, Tube-Alloy Corporation International (International), incorporated under the laws of the State of Texas, purchases products manufactured by Tube-Alloy and sells them on the international market. Tube-Alloy also sells to unrelated purchasers products manufactured for and used in the domestic market. For the fiscal years ending March 31, 1981, 1982 and 1983, the Department of Revenue and Taxation of the State of Louisiana (Department) allocated 100% of International's income to Tube-Alloy pursuant to La.R.S. 47:95 and assessed Tube-Alloy for the alleged deficiency. Tube-Alloy protested the assessment.

After trial on the merits, judgment was rendered in favor of Tube-Alloy. From this judgment the Department appeals alleging as error: (1) the trial court's failure to hold that an allocation by the Department pursuant to La.R.S. 47:95 is presumed correct and that the Taxpayer has the burden of proving otherwise; (2) the trial court's determination that Tube-Alloy dealt at arm's length with International; and (3) the trial court's failure to apply the ruling of Bunge Corp. v. Secretary of the Department of Revenue and Taxation, 419 So.2d 1288 (La.App. 5th Cir.), writ denied, 423 So.2d 1181 (La.1982).

ASSIGNMENTS OF ERROR NUMBERS 2 and 3

The Department contends that Tube-Alloy failed to carry its burden of proving that it dealt at arm's length with International.

Congress enacted 26 U.S.C. Secs. 991-997 in order to encourage and promote the foreign exportation of manufactured goods by United States corporations by giving favorable tax treatment to the qualifying "Domestic International Sales Corporations" (DISC). Bunge Corp. v. Secretary of Department of Revenue and Taxation, 419 So.2d at 1294. The DISC law was in effect during the fiscal years at issue and International elected DISC status during that period.

Louisiana does not have a similar DISC statute nor does it recognize the federal DISC tax deferral. It need not give similar favorable tax treatment to a corporation which has availed itself of the federal DISC statute. Under some circumstances La. 47:95 may be used to allocate incomes of the DISC to the parent corporation. See Bunge Corp. v. Secretary of Department of Revenue and Taxation, 419 So.2d at 1289.

La.R.S. 47:95(A) provides:

If in any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the State of Louisiana, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the collector is authorized to distribute, apportion or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses.

Article 95.1(C) of the Department's regulations provides:

Transactions between one controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid, or escape taxes.... The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income, in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer.

Thus, arm's length dealing between the parties is the relevant standard for the application of La.R.S. 47:95. Much of the Departments's case at trial relied on the fact that International was a DISC during the fiscal years at issue and that it was not a viable corporation because International did not have its own employees and its own office. During the auditing process, the Department did not investigate the pricing of the goods sold by...