How did original Revenue Ruling 01-018 treat continuously outstanding debt under a multiyear master loan, and what later change affected floor-plan financing?

Plain-English summary

The original ruling included the lowest balance continuously outstanding under a multiyear master loan agreement as long-term borrowed capital.

However, the PDF begins with a historical note saying a 2002 statute later excluded specified floor-plan financing for taxable periods beginning after June 25, 2002. Revenue Ruling 02-015 revised this guidance to reflect that change.

Substance over individual advances

The agreement lasted more than one year and allowed repeated borrowing and repayment, but some debt remained outstanding throughout the taxable year. The Department treated the arrangement's substance as continuous long-term operational financing.

The amount included in the franchise-tax base was the minimum balance at any point during the year—the amount owed for the entire year.

Original examples

The ruling applied that result to an automobile dealer's inventory-secured master loan and to a corporation's general revolving financing. Both balances fluctuated but never reached zero.

The automobile floor-plan example is historical. The official note says later La. R.S. 47:603(5) changed qualifying floor-plan treatment after June 25, 2002.

Common questions

Q: Did repayment of individual draws within one year keep all debt out of borrowed capital?

A: No.

Q: What amount entered the base?

A: The minimum balance outstanding during the year.

Q: Can the automobile-dealer example be used for periods after June 25, 2002?

A: Not without applying the later statutory floor-plan exclusion and revised Revenue Ruling 02-015.

Citations and references

• La. R.S. 47:603 — borrowed-capital definition and later floor-plan exclusion discussed in the official note
• 2002 La. Acts 38 — later floor-plan amendment
• State v. Banana Selling Co., 170 So. 30 (La. 1936)
• Collector of Revenue v. Maison Blanche Corp., 126 So. 2d 704 (La. App. 1961)
• Weiss v. Stearn, 265 U.S. 242 (1924)
• Diedrich v. Commissioner, 457 U.S. 191 (1982)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 01-018

Original ruling text

Historical Note: Subsequent to the issuance of this Revenue Ruling, 2002 La. Acts 38 enacted La.
Rev. Stat. Ann. § 47:603(5), which specifically excludes certain “floor plan” type financing
arrangements that would otherwise meet the statutory definition of borrowed capital. For taxable
periods beginning after the effective date of the Act, June 25, 2002, these statutory provisions will
apply. See Revenue Ruling 02-015 for additional information.
Revenue Ruling
No. 01-018
December 28, 2001
Corporation Franchise Tax
Inclusion of Certain Indebtedness in the Franchise Tax Base
Purpose: The purpose of this revenue ruling is to inform those taxpayers that are subject to the
corporation franchise tax that indebtedness that exists under a master loan agreement for more than
a year is considered long-term debt and therefore is included in the borrowed capital component of
the borrower’s franchise tax base.
Discussion:
The facts presented are as follows. Borrower is a business organization that is subject to the
Louisiana corporation franchise tax. Borrower and lender have entered into a master loan
agreement. The term of the master loan agreement is more than one year. During the term of the
agreement the borrower has the right to borrow and repay funds, but at no time can outstanding
borrowings exceed a set amount. Interest charges vary under the terms of the master loan
agreement. The agreement requires the borrower to grant certain securities, maintain certain
conditions, and make certain repayments. A portion of the loaned amount is borrowed and repaid
within a year, however additional funds are borrowed under the agreement between the time the
first amount was borrowed and repaid. During the borrower’s taxable year there is always some
outstanding indebtedness. Although under the master loan agreement there are a series of payments
and repayments that can appear to be short-term transactions between the parties, the master loan
agreement is, in substance, used by the borrower to satisfy a need for continuous long-term
financing of its operations.
The Louisiana corporation franchise tax was originally created with the enactment of the Louisiana
Franchise Tax Act, 1932 La. Acts 8. The franchise tax is imposed on taxable capital employed in a
domestic or foreign corporation’s business activities in this state. There are three components of
taxable capital: issued and outstanding capital stock; surplus and undivided profits; and borrowed
capital. Borrowed capital, which is the subject of this revenue ruling, is defined as “all indebtedness
of the corporation, maturing more than one year from the date incurred, or which is not paid within
one year from the date incurred regardless of maturity date.” At the time of its enactment, the
inclusion of borrowed capital in the franchise tax base was a fairly new concept.

Revenue Ruling No. 01-018
Page 2 of 3
Shortly after the adoption of the tax, the Louisiana Supreme Court acknowledged that the
Legislature included borrowed capital in the tax base in order to prevent corporations from reducing
their base by issuing small dollar amounts of capital stock and borrowing large sums to finance their
operations. The court recognized that if this were allowed, corporations would only be taxed on the
amount of capital stock, despite the fact that the borrowed amounts significantly contributed to the
profitability of the corporation. See State v. Banana Selling Co., 170 So. 30 (La.1936).
A fundamental principal in the application of tax laws is the elevation of the substance of a
transaction over its form. Weiss v. Stearn, 265 U.S. 242 (1924), Diedrich v. C. I. R., 457 U.S. 191
(1982). This principal has been applied to Louisiana’s corporation franchise tax. State v. Banana
Selling Co., 170 So. 30 (La.1936), Collector of Revenue v. Maison Blanche Corp., 126 So.2d 704,
(La.Ct.App.1961). In Collector of Revenue v. Maison Blanche Corp., 126 So.2d 704, 708 (La.App.
1961), the Fourth Circuit Court of Appeal stated that the Collector had the right to seek the
substance of the transaction rather than its mere form, the former being controlling in the matter of
establishing tax liability.
The measure of taxation for the franchise tax is the capital employed by the corporation, which
includes indebtedness that is not paid within a year. Despite the fact that certain portions of the debt
under the master loan agreement are paid within a year, the purpose of the transaction as a whole is
to provide long-term financing to the borrower. Therefore, this debt must be included in the
franchise tax base or a corporation could avoid inclusion of capital employed by the corporation by
structuring transactions in such a way that they appear to be short-term debt. To find otherwise
would allow the form of the transaction, rather than its substance, to control the tax consequences.
Conclusion:
Indebtedness that exists under a master loan agreement for more than a year is long-term debt and
must be included in the borrowed capital component of the borrower’s franchise tax base. The
amount to be included in the base is the minimum loan balance outstanding at any point during the
year. This is the amount by which the borrower has been indebted to the lender for the entire year.
Examples:
The following examples are provided to illustrate the application of this revenue ruling. They are
not the only situations to which this revenue ruling applies.

1. The master loan agreement is between a lender and automobile dealership. The lender requires
   that the dealer give it a security interest in each vehicle purchased with the loaned funds. Each
   vehicle is identified by its vehicle identification number. The lender may require that an amount
   equivalent to the funds lent be repaid as each vehicle is sold. During the course of the dealer’s
   taxable year, the total loan balance may fluctuate, but is never paid down to zero. Because the
   lender has provided capital to the dealer for more than one year, the indebtedness must be included
   in the dealer’s franchise taxable base. The amount to be included in the base is the amount
   outstanding under the master loan agreement for more than a year, which is the minimum loan

Revenue Ruling No. 01-018
Page 3 of 3
balance outstanding at any point during the year. In keeping with the substance over form principal,
the indebtedness to be included in the tax base is determined with reference to the loan agreement
and the balance outstanding, without reference to any secondary or ancillary obligations securing
the indebtedness, such as the security in each vehicle.

2. The master loan agreement is between a lender and a corporation. Under the terms of the master
   loan agreement, the borrower is entitled to borrow funds up to a set dollar amount. The borrower
   agrees that a specified maximum debt to equity ratio will not be exceeded and that in the event the
   borrower defaults on any of its loans, all amounts outstanding under the master loan agreement are
   immediately due and payable. The lender may require a security interest in anything purchased with
   the funds or may require some other type of security device such as a mortgage. During the course
   of the corporation’s taxable year, the corporation regularly borrows and repays variable amounts
   depending on its cash needs. While the total loan balance may fluctuate during the year, it is never
   paid down to zero. Because the lender has provided capital to the corporation for more than one
   year, the indebtedness must be included in the corporation’s franchise taxable base. The amount to
   be included in the base is the amount outstanding under the master loan agreement for more than a
   year, which is the minimum loan balance outstanding at any point during the year.
   Cynthia Bridges
   Secretary
   By:

Leonore F. Heavey
Attorney
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is issued
under Section 61:III.101(C) of the Louisiana Administrative Code 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.