Would Louisiana respect a multistate professional partnership's agreement that sourced income into state buckets and first allocated each bucket to equity partners working in that state?

Plain-English summary

Louisiana respected the partnership agreement's state-by-state income buckets because their principal purpose was to attribute income to where equity partners worked and generated revenue, not to avoid tax.

Nonresident partners reported Louisiana-source partnership income assigned under the agreement. Louisiana resident partners remained taxable on all of their distributive income, regardless of which state bucket supplied it.

Partnership-level sourcing

The partnership first allocated and apportioned income inside and outside Louisiana under La. R.S. 47:241 and following provisions. As a service partnership, it used the two-factor payroll-and-revenue formula in La. R.S. 47:245(D).

It then separated income into state buckets based on where the income was actually generated.

Partner-level distribution

Equity partners first received their percentage shares from the bucket for their domicile and work state. If that bucket was too small to satisfy those shares, remaining amounts came proportionally from undistributed income in other state buckets.

The Articles expressly provided this method. The Department found the method's purpose was accurate geographic attribution rather than Louisiana tax avoidance or evasion, so La. R.S. 47:204 allowed the agreement to control distributive shares.

Resident and nonresident treatment

Nonresident equity partners owed Louisiana tax on their shares of Louisiana-source income. Louisiana residents owed Louisiana tax on all income, including shares sourced to another state.

On the actual facts, the other office states had no individual income tax, so Louisiana residents could not claim a credit for taxes paid to those states. The Department said it would still honor the agreement if a future office state imposed income tax and the resulting La. R.S. 47:33 credit reduced Louisiana collections.

Common questions

Q: Did the agreement override Louisiana's partnership-level apportionment?

A: No. Louisiana income was first determined under the state apportionment rules.

Q: Why did Revenue accept the special partner allocations?

A: The agreement stated them and their principal purpose was geographic attribution, not tax avoidance.

Q: Were Louisiana resident partners taxed only on the Louisiana bucket?

A: No. Residents were taxed on all distributive income.

Citations and references

• La. R.S. 47:201-204 — partnership return, partner taxation, distributive shares, and agreement rule
• La. R.S. 47:241-245 — allocation and apportionment, including the service-business formula
• La. R.S. 47:201.1 — composite nonresident return and payment provisions discussed in the source
• La. R.S. 47:33 — credit for income tax paid to another state
• LAC 61:I.1401 — composite-return provisions discussed in the source
• LAC 61:III.101 — Private Letter Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA PLR 08-009

Original ruling text

Private Letter Ruling
Redacted Version
No. 08-009
Individual Income Tax
Allocation of Partnership Income Between States
July 25, 2008
This is in reply to your request for a private letter ruling concerning whether or not the
Louisiana Department of Revenue will accept the distribution of income as set out in
Section XX of the Amended and Restated Articles of Partnership effective January 1,
2007.
FACTUAL SCENARIO
You provided these facts:
Partnership A is a Louisiana limited liability partnership with offices in Louisiana and
several states that do not have a state income tax. As of January 1, 2008, Partnership A
had (a number) partners and approximately (a number) employees. The partners and
employees are assigned to one or more of Partnership A’s offices in the above-referenced
states. Partners who work in one of Partnership A’s Louisiana offices are domiciled in and
residents of Louisiana. Partners who work in one of Partnership A’s non-Louisiana offices
are domiciled in and residents of states other than Louisiana.
There are two classes of partners at Partnership A – Equity Partners and Income Partners.1
For federal and state income tax purposes, the Income Partners are treated as employees
and the Equity Partners are treated as full partners and not employees. For purposes of this
Ruling Request, we will address only Equity Partners.
Equity Partners who are assigned to one or more of the Partnership’s non-Louisiana offices
generally provide all of their services in those states. They do not regularly practice in
Louisiana. They may occasionally travel to Louisiana for meetings with clients in
Louisiana or to attend Partnership-related functions in Louisiana, but they generally do not
work out of any office in or generate any revenues from services performed in Louisiana.
Thus, for example, an Equity Partner who works in one of Partnership A’s offices in State
X performs substantially all of his or her professional services and generates substantially
all of his or her revenues in State X.

1

All capitalized terms herein have the meaning set forth in the Articles.

617 North Third Street
P. O. Box 44098
Baton Rouge, Louisiana 70804-4098
225-219-2780  225-219-2759 Fax
TDD# 225-219-2114  www.revenue.louisiana.gov

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July 25, 2008

All aspects of Partnership governance, including provisions regarding distributions to
partners, are set forth in Partnership A’s Articles of Partnership. Partnership A is governed
by a Board of Directors (the “Board”). The Articles gives the Board the authority to
determine the amount of Equity Partners Net Income (“EPNI”). EPNI is defined in the
Articles to mean “the net income of the Partnership … available for distribution to the
Active Equity Partners, as determined from time to time by the Board ….”
Distributions of EPNI to Equity Partners are made in accordance with the provisions of the
Articles. Essentially, each Equity Partner’s distributive share of EPNI for a particular year
is that Equity Partner’s Net Income Share, which is determined by multiplying each
Partner’s Percentage Interest by the EPNI for the entire year, as finally determined the
Board. In other words, each Equity Partner’s distributive share of EPNI is the Equity
Partner’s Percentage Interest in the Partnership.
In order to properly attribute Partnership income to Equity Partners based on where the
Equity Partners are domiciled, perform professional services and produce revenues for the
Partnership, the Articles were amended effective January 1, 2007, to add the following new
Section XX to the Articles:
Income Sourced To Active Equity Partners In Each State.
(a)
All items of income, gain, loss or deduction shall be allocated among
Active Equity Partners in proportion to their Percentage Interests.
(b)
Equity Partners’ Net Income shall be sourced to each state (including State
X) in accordance with applicable law.
(c)
The portion of Equity Partners’ Net Income sourced to a particular state
(“Domicile State Component”) shall be allocated first to the Active Equity Partners who
are domiciled in that state (“Domicile State Partners”).
(d)
If a Domicile State Component exceeds the aggregate Net Income Shares of
its Domicile State Partners, the excess shall be reallocated to Active Equity Partners
domiciled in other states, up to but no more than their aggregate Net Income Shares, in
proportion to the shortfalls in those other states.
(e)
Domicile State Partners shall share in proportion to their Percentage
Interests the portion of Equity Partners’ Net Income allocated to them from their Domicile
State Component and from other states.
(f)
This Section shall be effective, to the greatest extent permitted under
applicable law, as of January 1, 2007, or as soon thereafter as possible.

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July 25, 2008

(g)
The Board of Directors shall have the authority to interpret and implement
this Section consistent with applicable law.
For 2007 and thereafter, the Partnership will determine each Equity Partner’s distributive
share of EPNI in accordance with the provisions of the Articles, as amended. In essence,
distributions of EPNI will be made as follows:

1. The Partnership will allocate and apportion income within and without
   Louisiana based on the provisions of La. R.S. 47:241 et seq.2 The vast majority
   of the Partnership’s income is and will continue to be apportionable income as
   defined in La. R.S. 47:242(2). The Partnership will apportion its apportionable
   income within and without Louisiana based on the two-factor formula set forth
   in La. R.S. 47:245(D).
2. After allocating and apportioning its income within and without Louisiana as
   described above, the Partnership will further attribute its income among the
   various states in which the Partnership operates based on the where the income
   actually was generated. Thus, in essence, the Partnership will create multiple
   “buckets” of income, one each for Louisiana and the other states where
   Partnership A has offices.3 The amounts that go into each bucket will be
   determined based on where the income was actually generated.4 Thus, for
   example, income generated by Louisiana partners will be attributed to the
   Louisiana “bucket.” The same will apply for the remaining states. After this
   step, the Partnership essentially will have multiple “buckets” of EPNI, one for
   each state in which the Partnership operates.
3. Pursuant to the Articles, Active Equity Partners domiciled in each state will
   first be distributed their Percentage Interests of EPNI from the EPNI “bucket”
   of their state. 5
   If the Domicile State Partners’ distributive shares of
   Partnership EPNI is greater than the EPNI of their state’s “bucket,” i.e., the
   Domicile State Component, then such Domicile State Partners will be
   distributed EPNI from each of the other state “buckets” to the extent there is
   otherwise undistributed EPNI in a state “bucket.”6 For example, assume that
   the Partnership generates $1,000,000 of EPNI in 2007 from its non Louisiana
   State X bucket, it has Domicile State Partners who work in the State X offices,
   and each of the State X-based Domicile State Partners is entitled to a
   distribution of $400,000 of Partnership EPNI. Based on this example, each of
   the State X-based Domicile State Partner’s distributable share of EPNI would
   come entirely from the State X “bucket,” i.e., the State X Domicile State
   Component, and those State X-based Domicile State Partners would have only
   2

See the Articles.
The portion of EPNI sourced to a particular state is referred to in the Articles as the “Domicile State
Component.” In this letter, a Domicile State Component is referred to as a “bucket.”
4
See the Articles.
5
Active Equity Partners who are domiciled in a particular state are referred to in the Articles as “Domicile
State Partners.”
6
See Section XX (c) and (d).
3

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July 25, 2008

State X-source EPNI. None of the State X-based Domicile State Partner’s
distributable share of EPNI would be from any of the other state buckets.
Conversely, if the Partnership generates only $600,000 of EPNI in 2007 from
its State X offices, each of the two State X-based Domicile State Partners
would be distributed $300,000 of State X-sourced EPNI and the other $100,000
of distributable EPNI to each of the State X-based Domicile State Partners
would come proportionately from the other state “buckets” to the extent there is
any undistributed EPNI in the other states’ buckets.
Again, the purpose for the sourcing of income as described above and as specifically
addressed is to attribute the Partnership’s income to the geographic “buckets” that are
associated with the Partnership’s offices in Louisiana and various other states based on
where the Partnership’s income is actually generated. This type of attribution or sourcing
of income more clearly reflects how the Partnership operates and generates its revenues.
TAXPAYER’S DISCUSSION/ANALYSIS
Louisiana Taxation of Individual Partners
A Louisiana resident individual must report and pay Louisiana individual income tax on all
of his or her income from whatever source derived. La. R.S. 47:290(B). A nonresident
individual must report and pay Louisiana individual income tax only on his or her income
earned within or derived from sources in Louisiana. Id.
A partnership is not subject to Louisiana income tax. La. R.S. 47:201. A partnership that
has any partner that is not an individual or any nonresident individual partner, however, is
required to file a partnership return of income. Id. Persons carrying on business as
partners are liable for Louisiana income tax only in their separate or individual capacities.
As discussed below, however, certain partnerships are required to file composite returns
for nonresident partners. La. R.S. 47:201.1.
A partnership that is required to file a return of income (i.e., any partnership that has either
a corporation or nonresident individual as a partner) is required to allocate and apportion
its income within and without Louisiana at the partnership-level as if it were a corporation.
La. R.S. 47:243(A) (6). Each partner then must report and pay Louisiana individual
income tax on his or her distributive share of the Louisiana source net income of the
partnership, which is treated as Louisiana allocable income on such partner’s return. Id.
For a service-based partnership, income generally is apportioned within and without
Louisiana using a two-factor formula – payroll and revenues. La. R.S. 47:245(D). The
payroll factor is the ratio of the amount paid by the taxpayer for salaries, wages, and other
compensation for personal services rendered in Louisiana, to the total amount paid by the
taxpayer for salaries, wages, and other compensation for personal services in connection
with the production of the net apportionable income. La. R.S. 47:245(D) (1). The revenue

Proposed PLR No. 08-009
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July 25, 2008

factor is the ratio of the gross apportionable income of the taxpayer from Louisiana sources
to the total gross apportionable income of the taxpayer.
Louisiana Composite Partnership Return for Nonresident Partners
Any partnership7 that engages in activities in Louisiana is required to file a composite
partnership return8 and make a composite payment9 of individual income tax on behalf of
its nonresident partners unless, among other things, all nonresident partners have a valid,
written agreement on file with the Department pursuant to which the nonresident partner
agrees to file a Louisiana individual income tax return and pay Louisiana individual
income tax on all income derived from or attributable to sources in Louisiana.10 The
composite return must include all nonresident partners who do not have a valid filing
agreement on file with the Department and may include resident partners. La. R.S.
47:201.1(A) (1); LAC 61.I.1401(C).
A partnership that is required to file a composite return is required to make composite
payments on behalf of all of its nonresident partners who do not execute and deliver a
filing agreement to the partnership. La. R.S. 47:201.1(A) (1); LAC 61.I.1401(C) (1). Each
partner’s share of the composite payment is the maximum tax rate for individuals
(currently 6%) multiplied by the partner’s share11 of partnership income that was derived
from or attributable to sources in Louisiana, as reflected on the partnership’s return for the
taxable period. La. R.S. 47:201.1(D) (1); LAC 61.I.1401 (D) (3). This computation is
required whether or not the partnership income is distributed. Id. The composite payment
required to be made by the partnership is the sum of each partner’s share of the composite
payment for all partners included in the composite return. LAC 61:I.1401 (D) (4).
Any composite payment made by a partnership is considered to be a payment by the
nonresident partner on account of the Louisiana individual income tax imposed on the
nonresident partner for the taxable period. La. R.S. 47:201.1(D) (3); LAC 61.I.1401 (D)
(5). To the extent that a composite payment made by a partnership on behalf of a
nonresident partner exceeds the Louisiana individual income tax liability of the
nonresident partner, that nonresident partner is entitled to a refund or credit for the
overpayment. La. R.S.

7

The term “partnership” includes a registered limited liability partnership, such as the Partnership. La. R.S.
47:201.1(A) (2) (a).
8

A “composite return” means “a return filed by an entity treated as a partnership on behalf of all of its
nonresident partners or members which reports and remits the Louisiana income tax of the nonresident
partner or member.”
9

A “composite payment” is “a payment filed with a composite return which remits the Louisiana income tax
of a partnership’s nonresident partner or member.” Thus, a composite payment is a payment of the
individual, nonresident partner’s Louisiana individual income tax liability and is not a payment of any tax
due by the partnership.
10

The Partnership currently obtains such agreements from each non-Louisiana partner and, therefore, does
not file a Louisiana composite partnership return.
11

This term is not defined in La. R.S. 47:201.1.

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July 25, 2008

47:201.1(D) (3). A partnership that makes a composite payment of income tax on behalf
of a nonresident partner is entitled to recover the amount paid by the partnership, plus
interest or penalty, from the nonresident partner on whose behalf the payment was made.
La. R.S. 47:201.1(D) (2).
Partner’s Share of Partnership Income
For purposes of determining a partner’s Louisiana individual income tax, the partner must
take into account his or her distributive share, whether or not distributed, of the
partnership’s, inter alia, taxable income or loss and other items of income, gain, loss,
deduction or credit. La. R.S. 47:202(A). A partner’s distributive share of income, gain,
loss, deduction or credit generally is determined by the partnership agreement. La. R.S.
47:204(A). An exception to the general rule is set forth in La. R.S. 47:204(B), which
provides as follows:
B. Distributive share determined by income or loss ratio. A
partner’s distributive share of any item of income, gain, loss, or deduction
shall be determined in accordance with his distributive share of taxable
income or loss of the partnership, as described in R.S. 47:202 A(4), for the
taxable year, if:
(1) the partnership agreement does not provide as to the partner’s
distributive share of such item, or
(2) the principal purpose of any provision in the partnership
agreement with respect to the partner’s distributive share of such item is the
avoidance or evasion of any tax imposed by this Chapter.
There are no Louisiana regulations or other administrative interpretations with respect to
the provisions of La. R.S. 47:204(B).
Thus, under Louisiana law, the provisions of the Articles will determine an Equity
Partners’ distributive shares of EPNI unless one of the two exceptions in La. R.S. 47:202A
(4) applies. The first exception clearly does not apply because of the Articles, as amended
effective January 1, 2007. These sourcing provisions are discussed above and clearly must
be taken into account for purposes of determining a particular Equity Partner’s share of
Louisiana-source EPNI.
The second exception does not apply because the principal purpose of the provisions in the
Articles is to provide a mechanism for Partnership A to attribute and distribute EPNI to all
Equity Partners based on the geographical region in which the Equity Partners generate
EPNI. The purpose of the provisions of the Articles is to neither avoid nor evade
Louisiana individual income tax. Equity Partners domiciled in the other states will
continue to file Louisiana individual income tax returns and pay Louisiana individual

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July 25, 2008

income tax on their distributive shares of Louisiana source income, if any, from the
Partnership.
Non-Louisiana source EPNI will be properly distributed to the non-Louisiana Equity
Partners because their efforts generated the EPNI in the state of their domicile. Louisiana
Equity Partners will file Louisiana individual income tax returns and pay Louisiana
individual income tax on their distributive shares of EPNI regardless whether the EPNI is
sourced to Louisiana or to other states.
TAXPAYER’S CONCLUSION
Based on the foregoing, we respectfully request that the Department rule that the
provisions for distributing EPNI set forth in the Articles will be respected for Louisiana
individual income tax purposes and all Equity Partners domiciled outside Louisiana should
report his or her Louisiana-source EPNI from the Partnership in accordance with the
provisions of the Articles.
RULING REQUESTED
The provisions for distributing EPNI set forth in the Articles, including Section XX, will
be respected for Louisiana individual income tax purposes and all Equity Partners
domiciled outside Louisiana should report his or her Louisiana-source EPNI from the
Partnership in accordance with the provisions of the Articles.
RULING
The taxpayer properly states Louisiana tax law as it relates to the taxation of income from a
partnership. The taxpayer also correctly sets out the two-factor apportionment formula
used for partnerships as set out in La. R.S. 47:245(D). Finally, the taxpayer accurately
states that the provisions of La. R.S. 47:204 allow a partnership to determine each partner’s
share of distributive income according to its partnership agreement. The only way the
Department will not honor this distribution is if the principal purpose of the allocation is
the avoidance or evasion of any tax.
In this case, Partnership A’s Articles set out its distribution of partnership income. The
Department of Revenue agrees that the principal purpose of the distribution provisions is
not to avoid or evade tax, but the purpose is to attribute and distribute EPNI based on the
geographical region in which the equity partner worked to generate the EPNI in question.
Based on this analysis, the provisions for distributing EPNI as set forth in the Articles will
be respected by the Department of Revenue for Louisiana individual income tax purposes
and all Equity Partners domiciled outside of Louisiana should report his or her Louisianasource EPNI from the Partnership in accordance with the Articles, including the provisions
of Section XX.
Under the facts as presented, Louisiana will still collect tax on 100 percent of the Louisiana
apportioned EPNI because all of the other states in which Partnership A has an office do
not have an individual income tax; therefore, no Equity Partners domiciled in Louisiana
will be eligible to claim the income tax credit for taxes paid to another state. But even in

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July 25, 2008

the case that Partnership A had an office in a state with an individual income tax that did
not recognize the distributions of EPNI under the Articles, which might allow Louisiana
Equity Partners to claim the credit for taxes paid to another state, the Department would
still honor the distribution provisions of the partnership agreement, including Section XX,
even though Louisiana would collect less individual income tax. In this case the root cause
of the reduced Louisiana income tax collection is not the method of the distribution of
partnership income but instead the character of La. R.S. 47:33, which allows the credit for
income taxes paid to another state.
If you have any questions or need additional information, please call Michael Pearson,
Senior Policy Consultant or Danielle B. Clapinski, Attorney, Policy Services Division, at
219-2780.

Sincerely,

Cynthia Bridges
Secretary
By
Danielle B. Clapinski
Attorney
Policy Services

This correspondence constitutes a private letter ruling (PLR) by the Louisiana Department of Revenue, as
provided for by section 61:III.101 of the Louisiana Administrative Code. A PLR provides guidance to a
specific taxpayer at the taxpayer's request. It is a written statement that applies principles of law to a specific
set of facts or a particular tax situation. A PLR does not have the force and effect of law, and is not binding
on the person who requested it or on any other taxpayer. This PLR is binding on the department only as to
the taxpayer to whom it is addressed, and only if the facts presented were truthful and complete and the
transaction was carried out as proposed. It continues as authority for the department's position unless a
subsequent declaratory ruling, rule, court case, or statute supersedes it.