Georgia Tax Tribunal Allows Deduction For Income Subject To Revised Texas Franchise Tax

The Georgia Tax Tribunal has held that a Georgia resident taxpayer was entitled to deduct pass-through income which was subject to the Revised Texas Franchise Tax (RTFT) in computing his Georgia taxable income.1 At issue was whether the amount subject to the Texas tax qualified for the deduction with respect to taxes imposed "on or measured by income."2

Flow-Through Entity Taxation

To reduce the impact of taxation by multiple states on the same income earned by flowthrough entities, Georgia, like many states, allows specific credits or adjustments in the computation of taxable income. For example, Georgia allows resident individuals to take a credit for taxes paid in other states on the same income.3 While this straightforward credit alleviates double taxation for taxpayers who reside in the same jurisdiction as a wholly-owned flow-through entity, complexities arise for taxpayers who own interests in an entity which does business in multiple jurisdictions, especially because some states (like Texas) treat flow-through entities as separate taxpayers and impose entity-level taxes.4 To address this potential double taxation, Georgia statutes allow resident taxpayers an adjustment in computing taxable income for a flow-through entity's income taxed in another state which imposes on the entity a tax on or measured by income.5

An individual's Georgia taxable net income generally consists of federal adjusted gross income subject to prescribed adjustments,6 including the adjustment at issue. Notably, the language in the adjustment for income taxed by another state contained in the Georgia statute includes the unique phrase "on or measured by income."

Background

In this matter, in 2008, a Georgia resident taxpayer held ownership interests in both: (i) a Georgia limited liability company treated as a partnership for federal and Georgia income tax purposes (Georgia LLC); and (ii) a Georgia S corporation treated as an S corporation for both federal and Georgia income tax purposes (Georgia S Corporation). Both Georgia LLC and Georgia S Corporation owned interests in a Texas limited liability company (Texas LLC). Georgia LLC and S Corporation, through their direct and indirect ownership of various pass-through entities, participated in the wholesale and distribution of alcoholic beverages.

Texas LLC was the reporting entity for a group of entities on a 2009 RTFT Report (covering Texas LLC's activities during the 2008 calendar year). In determining its "taxable margin" for purposes of computing the RTFT, Texas LLC used the "cost of goods sold" deduction method.7

The taxpayer filed a 2008 Georgia income tax return and reported income including his distributive shares of pass-through income from Georgia LLC and Georgia S Corporation. No adjustments related to the payment of the RTFT by Texas LLC were included in taxable income. Further, as Texas does not impose personal income tax, the taxpayer did not file a personal income tax return or pay personal income taxes to Texas for the 2008 calendar year (or any other year).

On May 1, 2012, Georgia LLC and Georgia S Corporation filed a request with the Georgia Department of Revenue for a letter ruling concerning application of the adjustment for income from pass-through entities subject to the RTFT. The Department denied the ruling request on July 13, 2012 based in part upon its belief that because Georgia does not consider the RTFT to be an "income tax," the adjustment was not applicable to passthrough income taxed by Texas.

In response, the taxpayer filed an amended 2008 Georgia income tax return dated September 12, 2012 that included a...