Mississippi Supreme Court casino ruling opens door to spreading tax credits to affiliates
by Ted Carter
Published: March 14,2014
Look for gaming operators and other corporate entities in Mississippi to file amended income tax returns based on a February state Supreme Court ruling that Isle of Capri Casinos can spread its tax credits among affiliate operations.
The court ruled against the state Department of Revenue in its appeal of a 2012 Harrison County Chancery Court decision in favor of Isle of Capri Casinos Inc., a St. Louis-based gaming company with casino and hotel operations in Natchez and Vicksburg.
This means “you can file” tax credits across all of your entities that operate under joint and several liability, said Jon Seawright, a Baker Donelson tax group lawyer who took part in the case.
Baker Donelson issued an advisory after the ruling that amended returns should be considered by Mississippi taxpayers who have previously filed a corporate income and franchise tax return that adhered to DOR instructions not to apply credits across member groups.
“I’m sure there will be some amended returns” filed by corporate taxpayers that have joint and several liability arrangements with their affiliated operations,” Seawright said.
He said he expects gaming companies will be especially eager to file new returns. Normally, gaming license fees casinos pay create more tax credits than the casino needs, he noted.
Jones Walker gaming sector lawyers Tommy Shepherd and John Fletcher say the narrow facts of the Capri case make it “very difficult” to predict the impact the ruling will have beyond “this particular case or even this specific company.”
Shepherd and Fletcher, nonetheless, advise against assuming the DOR is correct in how it interprets the use of a tax credit or tax incentive. “Given the Department of Revenue’s recent trend of aggressively auditing and challenging credits and other tax incentives, all taxpayers — not just gaming entities — should take a close look at how they apply those incentives to determine of the department is attempting to impose restrictions not contained within the statutes,” the lawyers said in an email.
DOR spokeswoman Kathy Waterbury said the agency has not yet determined how broadly to interpret the February ruling. “We are reviewing the effect of that decision. We have a whole lot of credits — and they all are based upon different criteria. We have got to figure out how the decision will affect each one,” she said.
In the case of Isle of Capri’s Mississippi operations for tax years 2007 to 2011, one subsidiary with considerable taxable income sought to offset some of that tax liability by using significant tax credits generated by four of Isle of Capri’s affiliated entities. The entities had generated the credits through payment of fees for gaming licenses, Seawright said.
Noting the joint and several liability among these entities, the court ruled: “The regulations make it clear that each entity in Isle of Capri’s affiliated group is liable for the sum total of tax liability on the combined return.”
Conversely, the DOR interpreted the statute that authorized the gaming license credit to apply only to the income tax generated by the use of the license. It’s interpretation led the DOR to issue a substantial assessment, which included taxes, penalties and interest..
Seawright said a 1987 Mississippi Supreme Court ruling in General Motors Corp. v. Miss. State Tax Commission carried significant sway in the court’s ruling. GMC had applied its credit to affiliate GM Finance Corp. The 1987 ruling held that the tax credits of one entity can be used to offset the combined tax liability of an affiliated group of entities.
In the Capri ruling, the Supreme Court concluded if DOR applied an incorrect interpretation of nearly identical statutory language in General Motors, “the same interpretation is equally incorrect now.”
Mississippi changed its statutes after the GMC ruling but did not include gaming operators in the new law, Seawright said.
The Baker Donelson lawyer said he and others in the firm are still studying the Capri ruling but a consensus could develop that it may have significant influence in any rehearing of the much-watched Equifax case or to new similar cases.
In that summer 2013 Equifax ruling, Mississippi’s Supreme Court upheld the DOR use of an alternative tax apportionment method in calculating the tax liability of Georgia-based Equifax Credit Services. The use of the market-based apportionment method rather than the statutorily authorized cost-performance standard increased the company’s income tax for the tax year in question from zero to more than $700,000.
In ruling for the DOR., the Supreme Court’s upheld long-standing instructions to chancery courts that an assumption of correctness in interpretation of tax statutes rests with the taxing authority.
An argument against that holding is a key part of the filing Equifax recently made in seeking a U.S. Supreme Court review of the Mississippi ruling.
Capri, Seawright said, appears to “mitigate some of the potential impacts of the Equifax case.”
In Capri, he said, the judges “talk about standards of review and what is appropriate.”
Specifically, the assumption of correctness can’t apply when a faulty interpretation is made, the court said.
“Unquestionably,” the DOR is entitled to deference in interpreting tax law, the court said, but emphasized that deference does not apply when a statute is interpreted incorrectly.
Assessing that language, Seawright said it could be an opening for taxpayers to go to Chancery Court and actually attain a “fresh review.”
Isle of Capri Casinos’ St. Louis headquarters did not respond to a request for comment on the Mississippi Supreme Court’s upholding of its use of tax credits. The gaming company, however, said in a press statement earlier this month its third quarter 2014 income (ending Jan. 26) was “impacted by the reversal of a $2-million litigation accrual due to a recent favorable court ruling.” It was not clear in the Capri statement that the ruling was the reversal of the DOR assessment.
In the Q3 report, Capri reported Mississippi net revenues decreased from $25.9 million to $22.9 million.
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