Out-of-state corporation ineligible to join Iowa consolidated return
TAX ALERT |
On March 24, 2017, the Iowa Supreme Court issued its decision in Myria Holdings, Inc. v. Iowa Dep’t of Revenue, determining that an out-of-state parent corporation, lacking nexus in Iowa, was ineligible to join in the filing of a consolidated Iowa income tax return.
The taxpayer, a Delaware corporation, owns several subsidiaries, including two Delaware limited liability companies that elected to be taxed as corporations for federal income tax purposes (collectively, subsidiaries). The subsidiaries were doing business in Iowa during the 2009 tax year—the year at issue. Myria maintains its primary place of business in Texas.
Myria and its Iowa subsidiaries (the Group) are in the business of natural gas pipeline transmission and storage. For the 2009 tax year, the Group filed federal and Iowa consolidated income tax returns. The Group’s consolidated federal return reported a net loss of approximately $62 million and the Iowa consolidated return reported an apportioned net loss of approximately $10 million.
The Iowa Department of Revenue determined that Myria was ineligible to be included in the consolidated return because it had not derived income from sources within the state during tax year 2009. That determination resulted in an assessment against the group of $2,558,989, plus interest and penalties. In the course of various administrative hearings, the Group argued that it provided managerial, administrative, strategic planning and financial services to its subsidiaries. It also argued that it did derive income from Iowa sources due to its receipt of monies from its subsidiaries in the form of distributions from earnings and from payments it received under a tax allocation agreement. The department’s final order concluded that Myria was ineligible to be included in the consolidated filing because it did not derive taxable income from the state as its receipt of distributions from its subsidiaries were incident to owning and controlling the subsidiaries, which activities are exempted from causing Iowa income tax nexus, and because the monies it received under the tax allocation agreement were for reimbursement of the subsidiaries’ income tax expenses. On Sept. 10, 2014, the district court issued a ruling affirming the department’s position. The Group then appealed to the Iowa Supreme Court (Court).
The department relied on two Iowa corporate income tax statutes in making its determination. The first provides that an affiliated corporation may join a consolidated return if the corporation is doing business in the state or deriving income from sources within the state. The second statute exempts a foreign corporation from having taxable nexus in Iowa under certain circumstances, including if the parent’s Iowa activities are limited to those performed due to ‘owning and controlling a subsidiary corporation,’ and provided it has no physical presence in the state. The Court held that in this context, the term corporation applies to a limited liability company taxed as a corporation for federal income tax purposes.
On appeal, Myria argued that the activities it performed on the subsidiaries’ behalf, which activities were performed outside of Iowa, were not limited to the type of activities an owner would perform. The activities included ‘overseeing the subsidiaries and extensively coordinates with them’ in various areas including tax compliance, financial reporting, intragroup distributions of earning, and other legal and financial matters, as well as ‘setting strategic priorities for the Group’s underlying enterprises.’ In addition, the Group alleged Myria assisted the subsidiaries with day-to-day operations, made interest payments to lenders, and implemented a tax allocation agreement providing ‘working capital’ for the subsidiaries. Myria also contended that possession of intangible property in Iowa, in the form of stock and money, should have established the requisite taxable nexus.
The Court rejected the Group’s arguments. It noted that the management and administration activities that Myria performed on behalf of the subsidiaries doing business in Iowa are considered ‘routine features’ of ownership and control, and thus do not create nexus. In addition, the Court determined that the ownership of subsidiary stock and money from reimbursements also fell within the ownership and control safe harbor. The Court further stated that as ‘Myria lacked a taxable nexus with Iowa’ the Court need not consider whether the distributions or reimbursements would constitute taxable income. Therefore, because Myria did not establish nexus in Iowa, Myria was ineligible to be included in the consolidated return.
The Iowa Supreme Court has offered guidance as to when a parent, with no physical presence in the state, may or may not have income tax nexus. Out-of-state holding companies may be able to contest nexus by avoiding the establishment of a physical presence within the state and by limiting their activities in the state to those related to ownership and management-related functions, thus qualifying for the safe harbor afforded foreign corporations. Alternatively, foreign corporations that may benefit the group by joining in the filing of a consolidated return should consider a review of their activities in Iowa in order to determine if they exceed the safe-harbor threshold or if they do have a qualifying physical presence in the state. Corporations that own subsidiaries active in Iowa, as well as Iowa-based corporations with subsidiaries active outside the state, may be affected by this ruling and should speak to their tax advisors about how Myria Holdings, Inc. may impact their filing positions.