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FOR IMMEDIATE NEWS RELEASE NEWS RELEASE # 10 FROM: CLERK OF SUPREME COURT OF LOUISIANA The Opinions handed down on the 30th day of January, 2004, are as follows: BY KIMBALL, J.: 2003-C-0211 KEVIN ASSOCIATES, L.L.C. (SUCCESSOR IN INTEREST THROUGH MERGER TO YENDIS PROPERTIES, INC.) v. BRETT CRAWFORD, SECRETARY OF THE DEPARTMENT OF REVENUE, STATE OF LOUISIANA (Parish of E. Baton Rouge) For the reasons assigned, we find the commercial domicile of Yendis was in Louisiana. We also conclude that the Louisiana corporate income and franchise taxes sought to be imposed on Yendis does not conflict with the protections afforded by the Due Process or Commerce Clauses of the U. S. Constitution. Yendis is therefore not entitled to a refund of the taxes, penalties and interest it paid under protest. The judgments of the lower courts to the contrary are hereby reversed. REVERSED.

1/30/04

SUPREME COURT OF LOUISIANA
No. 03-C-0211 KEVIN ASSOCIATES, L.L.C. (SUCCESSOR IN INTEREST THROUGH MERGER TO YENDIS PROPERTIES, INC.) versus BRETT CRAWFORD, SECRETARY OF THE DEPARTMENT OF REVENUE, STATE OF LOUISIANA

ON WRIT OF CERTIORARI TO THE COURT OF APPEAL, FIRST CIRCUIT, PARISH OF EAST BATON ROUGE

KIMBALL, Justice Kevin Associates, L.L.C., filed the instant suit against the Louisiana Department of Revenue (hereinafter "the Department") seeking recovery of certain income and franchise taxes it paid under protest after receiving tax assessments from the Department. Because we find the commercial domicile of the taxpayer was in Louisiana and the imposition of the taxes at issue does not offend the Due Process and Commerce Clauses of the U.S. Constitution, we conclude the taxpayer is not entitled to a refund of the taxes, penalties and interest it paid under protest. The judgments of the lower court to the contrary are reversed. Facts and Procedural History This matter involves the former K&B family of corporations. K&B, Inc., a Delaware corporation, was the corporate parent and had three direct subsidiaries: Virginia Corporation, Valerie Corporation, and Yendis Properties, Inc. These three

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sister corporations were incorporated in Delaware in 1991. Virginia Corporation was formed to hold the stock of the K&B operating corporations in various states that managed the activities of the drug stores in the various states. Virginia Corporation was also the parent of K&B Services, Inc., a Louisiana corporation that performed administrative and bookkeeping services for all the K&B corporate entities. Valerie Corporation was formed to hold the intellectual property rights of K&B. Yendis Properties, Inc. (hereinafter "Yendis") was formed to hold the stock of various subsidiaries that owned real estate in Louisiana and other southern states and to make loans to affiliated corporations. The real estate owned by Yendis's subsidiaries consisted primarily of store properties that were leased to the drug stores. The instant suit concerns the tax liabilities of Yendis, which was set up as a Delaware holding company to acquire certain tax advantages.1 After conducting an audit, the Department issued a proposed deficiency assessment of Louisiana corporate income and franchise taxes plus interest and penalty for taxable years ending September 30, 1994 and September 30, 1995 in the total amount of $1,108,250.83 against Yendis. Yendis paid the assessment under protest and timely filed a Petition for Refund of Tax Paid Under Protest. In its petition for refund of the taxes paid under protest, Yendis alleged it had no liability to pay any Louisiana corporate income or franchise taxes because it did not conduct business within the State of Louisiana during the tax period. Rather, Yendis contended, it maintained its corporate office and domicile in Delaware and conducted its corporate activities in that state. Yendis further alleged its only sources of income were dividends paid to it by its subsidiaries,

Kevin Associates, L.L.C., is the successor by merger to Yendis. As a result of the merger in 1997, Yendis no longer has a separate corporate existence. Its rights and obligations, including alleged tax liabilities, were assumed by Kevin Associates. However, because the tax liabilities at issue were assessed against Yendis and the corporation under review in this case is designated as "Yendis" throughout the record, we will continue to refer to the entity at issue as Yendis in this opinion.
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which did business in Louisiana, Mississippi, and Texas, and interest received from loans made to corporations doing business in states other than Louisiana. After a bench trial, the district court rendered judgment in favor of Yendis, finding Yendis is entitled to a refund of the taxes paid under protest, plus interest and court costs. Although the district court issued written reasons for judgment, the basis for its decision in favor of Yendis remains unclear. The district court stated the issue in terms of whether Yendis is subject to Louisiana corporate income and franchise tax. It then cited the Department's argument that resolution of this issue turns on the commercial domicile of Yendis. The district court next reiterated Yendis's arguments that it cannot be taxed by Louisiana unless the tests required under the Due Process and Commerce Clauses are satisfied. Finally, the district court noted that the K&B shareholders devised a plan to form the Delaware corporations to escape taxation in Louisiana and determined there was nothing wrong with this conduct. After reciting the foregoing, the district court simply rendered judgment in favor of Yendis. The court of appeal affirmed the judgment of the district court. Kevin Associates, L.L.C. v. Crawford, 01-2652 (La. App. 1 Cir. 11/8/02), 834 So.2d 465. In reaching its decision, the court of appeal explained the concept of commercial domicile, and reviewed the arguments of the parties and the evidence presented in this case. The court of appeal concluded that "the evidence does not reveal manifest error by the trial court in its determination that a sufficient nexus for the establishment of a commercial domicile in Louisiana was not demonstrated." Id., 01-2652 at p. 5, 834 So.2d at 468-69. Additionally, the court of appeal determined that the record did not show any commercial activities by Yendis that would constitute "doing business" in Louisiana. Finally, the court of appeal stated that a non-resident parent company is not subject to the jurisdiction of Louisiana simply because one of its subsidiaries exists in this state. For these reasons, the court of appeal affirmed the determination
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of the district court that Yendis was entitled to a refund, with interest, of the taxes paid under protest. We granted certiorari upon the Department's application to consider the correctness of the lower courts' judgments that Yendis was entitled to a refund of the Louisiana taxes it paid under protest. Kevin Associates, L.L.C. v. Crawford, 03-0211 (La. 4/21/03), 847 So.2d 1177. Discussion The facts in this case are largely undisputed. The ultimate issue, whether the Department can properly require Yendis, a Delaware holding company, to pay Louisiana corporate income and franchise taxes, is, in this particular case, a legal one to be decided by applying the correct legal standards to the facts of this matter. Prior to trial, the parties executed a stipulation of facts that are binding upon both parties. The parties stipulated that during the taxable years at issue, K&B, Inc. was incorporated in and had legal domicile in Delaware and had three wholly-owned first-tier subsidiaries, Yendis, Valerie Corporation, and Virginia Corporation, that were also incorporated in and had legal domicile in Delaware. The parties further stipulated that during the taxable years at issue, the officers of Yendis were Sydney J. Besthoff, III, chairman of the Board; James J. LeBlanc, President; Ronald J. Dyer, Treasurer and Assistant Secretary; Virginia F. Besthoff, Secretary and Assistant Treasurer; and Robert Meyer, Assistant Secretary. With the exception of Robert Meyer, all members of the board of directors and the officers of Yendis were residents of New Orleans, Louisiana. Robert Meyer was a resident of Delaware and a partner in the Delaware law firm of Bayard, Handelman & Murdock, P.A. The parties also stipulated that Yendis had a bank account with PNC Bank in Delaware and the authorized signatories over this account during the years at issue were Sydney J. Besthoff, III, James LeBlanc, Virginia Besthoff, and Ronald Dyer. Robert Meyer was
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not an authorized signatory of Yendis's Delaware bank account. Another stipulation entered into by the parties was that during the taxable years at issue, funds were transferred by wire in and out of the Delaware bank accounts of Yendis, Valerie Corporation, and Virginia Corporation. Sydney J. Besthoff, III, James LeBlanc, Virginia Besthoff, Ronald Dyer, and Jan Raley, all residents of Louisiana, were authorized to issue wire instructions in reference to Yendis's Delaware bank account. Robert Meyer, a director and officer of Yendis, did not have wire transfer authority over Yendis's Delaware bank account. The parties further stipulated that all wire transfer instructions to PNC Bank in Delaware regarding Yendis's bank account were initiated in New Orleans, Louisiana. An additional stipulation was that, during the taxable years at issue, Yendis had no employees in the State of Delaware. Finally, the parties stipulated that during the years at issue, Yendis had executed with Bayard, Handelman & Murdock, P.A. an equipment lease for one drawer of a four-drawer file cabinet with lock and an Agreement for Provision of Services. The undisputed testimony presented at trial revealed that Yendis claimed the address of Robert Meyer's law firm as its Delaware address. Yendis's name was not listed on the building's directory, but K&B was listed on the directory. The reception area of the address was of a typical law firm and did not have anything with Yendis's name displayed. The law firm's receptionist was unfamiliar with Yendis. Yendis's original records were maintained in Delaware, in the leased file cabinet drawer. Yendis received mail from the Delaware Secretary of State and PNC Bank at its Delaware address. The mail was forwarded from Mr. Meyer's office to K&B Services at K&B Plaza in New Orleans, Louisiana. The forms were completed in Louisiana and were mailed back to the Delaware Secretary of State directly from New Orleans. Additionally, the bank statements were reconciled in New Orleans and then the original records were sent back to Delaware.
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In a consolidated federal tax return for the K&B group of corporations prepared by Arthur Andersen's New Orleans office, Yendis's address was listed as that of K&B Plaza in New Orleans. Evidence at trial showed instances in which Yendis used letterhead for its correspondence showing its address as K&B Plaza in New Orleans. Yendis's witnesses claimed the use of this letterhead was a clerical error. Yendis also received correspondence from Arthur Andersen at the New Orleans address. Yendis had no employees. Yendis received income in the form of dividends declared by its subsidiaries. The dividends declared by Yendis's subsidiaries were received into Yendis's Delaware bank account. Yendis then loaned the money received as dividends to its sister corporation, Virginia, and received interest income from those loans. Although Yendis made loans only to Virginia Corporation, the minutes of its November 26, 1991, annual meeting do not indicate that the corporation was restricted to making loans solely to Virginia. The minutes state that Yendis was "formed in August 1991 in order to receive dividends from its subsidiaries and make loans to affiliated debtor corporations." The minutes further provide that the loans would be made pursuant to a "Master Borrowing Note Agreement to other affiliated or subsidiary entities operating in K&B, Incorporated's 7-state area." In July of every year, Ronald Dyer and Sydney Besthoff, III determined how the funds loaned by Yendis to Virginia were to be transferred within the corporate family and prepared a schedule of accounting for the various transactions. The actual funds were transferred within the corporate family in one day and began and ended in the K&B Services New Orleans account. The decisions regarding the transactions were made by Mr. Dyer and Mr. Besthoff at K&B Plaza in New Orleans, Louisiana. Wire transfers were executed in accordance with the schedule in Louisiana. After execution of the wire transfers, Mr. Dyer and Mr. Besthoff wrote and signed confirmation letters to the Delaware bank in Louisiana. Additionally, Mr. Dyer prepared annually in Louisiana
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a checklist showing the activities that were to take place for Yendis. Most of the annual board of directors' meetings were held in Delaware in the conference room of Mr. Meyer's law firm. Several meetings were held in New Orleans, with Mr. Meyer participating by telephone. The minutes of meetings were prepared in New Orleans before the meetings took place and were used as an agenda for the meetings. They were revised as necessary after the meeting was conducted. Additionally, several unanimous consents of the board of directors were executed in lieu of meetings. The unanimous consents generally dealt with Yendis's approval of its subsidiaries' actions as a stockholder. The unanimous consents were prepared by a New Orleans Law firm. Based on these facts, the Department contends that Yendis can be required to pay Louisiana corporate income and franchise taxes because the corporation was managed from Louisiana, and, therefore, was commercially domiciled in Louisiana. The Department argues that corporate records and management decisions for Yendis were actually made in Louisiana. The Department asserts that although Yendis claims it had an office in Delaware, its alleged office was only a mailing address for Mr. Meyer's law firm. Furthermore, the Department contends, Yendis rented only one drawer of a four-drawer file cabinet located in Mr. Meyer's firm, and the rental of this drawer cannot be considered rental of office space in Delaware. The Department argues that the decisions regarding the flow of funds among the corporations and the authorizations for the wire transfers were managerial decisions that were made in Louisiana. The Department also claims that all board of director activity regarding Yendis's management of its subsidiaries was undertaken in Louisiana. According to the Department, Yendis is subject to Louisiana corporate income and franchise tax because its commercial domicile is in Louisiana. Yendis, on the other hand, takes the position that its commercial domicile
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cannot be assigned to Louisiana. It asserts its sole purpose as a holding company was to receive dividends from its subsidiaries and to lend the received dividends to Virginia Corporation on an annual basis. Yendis contends its corporate plan was automatic and was directed and performed entirely within Delaware. Yendis further argues the activities of Mr. Dyer and Mr. Besthoff were ministerial in nature and were undertaken as employees of K&B Services, which was the paymaster for the entire group of K&B corporations. Finally, Yendis contends that the imposition of

Louisiana corporate income and franchise taxes would offend the Due Process Clause and the Commerce Clause of the U.S. Constitution. It is undisputed by the parties that under Louisiana income and franchise tax statutes, La. R.S. 47:243 and La. R.S. 47:606, the income and capital at issue in this case is allocable to the commercial domicile of the taxpayer. The concept of commercial domicile is an exception to the general rule that the situs of intangibles is at the legal domicile of the owner. North Baton Rouge Dev. Co., Inc. v. Collector of Revenue, 304 So.2d 293 (La. 1974); United Gas Corp. v. Fontenot, 241 La. 564, 129 So.2d 776 (1961). In North Baton Rouge Development Co., we explained commercial domicile as a concept "employed to permit the taxation of property of activity of Nonresident corporations by the state in which managerial activities occurred in quantity and character sufficient to avoid contention of a nonresident corporation that taxation of its activities and property located outside the bounds of the taxing state amounted to deprivation of property without due process of law." North Baton Rouge Dev. Co., 304 So.2d at 297. A commercial domicile exists where the corporation maintains a "paper domicile" in the state of incorporation such that the sole function performed in the incorporating state is to "breathe life into the corporation, while the corporation actually functions and is managed from offices maintained in another state." United Gas Corp. v. Fontenot, 241 La. 488, 508, 129
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So.2d 748, 755-56 (1961) (internal quotations omitted). Thus, a corporation may acquire a commercial domicile outside the state of its incorporation when it does not operate at its legal domicile, but maintains in another state its principal business office from which its management functions. United Gas Corp. v. Fontenot, 241 La. 564, 571, 129 So.2d 776, 778 (1961). A commonly used definition of the term "commercial domicile" is "the place from which the business is directed or managed." Michael J. McIntyre et al., Symposium: Designing a Combined Reporting Regime for a State Corporate Income Tax: A Case Study of Louisiana, 61 La. L. Rev. 699, 727 n.90 (2001) (citing Unif. Div. of Income for Tax Purposes Act

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