REQUEST LETTER
03-007
NAME
ADDRESS
PHONE
FAX
On behalf of my client, COMPANY("COMPANY"), I am requesting the rulings set forth below. COMPANY is the lessee under a lease of certain light rail transit cars (the "Equipment"). COMPANY is considering subleasing the Equipment to Utah Transit Authority ("OTHER COMPANY") under a sublease (the "Sublease") pursuant to which OTHER COMPANY would pay rent (the "Sublease Rent") to COMPANY. The Sublease will contain an option under which OTHER COMPANY will have the right to purchase the Equipment at the end of the term of the Sublease on payment of a certain amount (the "Sublease Purchase Option Amount"). The lessor of the Equipment (the "lessor") is not currently subject to Utah income tax. COMPANY is a political subdivision of the State of STATE. As such, it is not subject to United States federal income tax. Based upon the foregoing facts, your rulings are requested as follows:
1. COMPANY will not be subject to Utah income tax on the Sublease Rent or the Sublease Purchase Option Amount.
2. The Lessor will not be subject to Utah income tax on the Sublease Rent, the Sublease Purchase Option Amount, or otherwise as a result of the Sublease.
Please do not hesitate to give me a call if you should have any questions regarding the foregoing. Thank you for your assistance in this matter.
NAME
Cc: NAME
NAME
RESPONSE LETTER
May 6, 2003
NAME
ADDRESS
RE: Private Letter Ruling Request – Subleasing Equipment and the Utah Corporate Franchise Tax Consequences
Dear NAME,
We have received your request for a private letter ruling concerning a possible sublease between COMPANY (“COMPANY”) and OTHER COMPANY (“OTHER COMPANY”). OTHER COMPANY plans to sublease light rail cars from COMPANY with an option to purchase the cars at the end of the lease. Under these circumstances, you specifically ask whether COMPANY or the Lessor from whom COMPANY itself leases the light rail cars would be subject to Utah corporate franchise taxes because of the proposed sublease between COMPANY and OTHER COMPANY.
COMPANY Tax Consequences. You state that COMPANY, as a STATE political subdivision, is not subject to United Stated federal income tax. To be subject to Utah’s corporate franchise tax, an entity must first be a “corporation,” which is defined in Utah Code Ann. §59-7-101(8) to include “(a) entities defined as corporations under Sections 7701(a) and 7704, Internal Revenue Code; and (b) other organizations that are taxed as corporations for federal income tax purposes under the Internal Revenue Code.” Under Sections 7701(a) and 7704 of the Internal Revenue Code, a “corporation” includes associations, joint-stock companies, insurance companies, and publicly traded partnerships. We do not believe COMPANY satisfies the definition of “corporation” for Utah corporate franchise purpose. Although an association may, in the broadest sense, include any entity where a number of persons have united for a business purpose, we believe that the term, for purposes of Utah’s corporate franchise tax, means an organization treated as a corporation for federal tax purposes. Accordingly, if the United States does not consider COMPANY a corporation subject to federal income tax, then we would not consider it a “corporation” subject to Utah’s corporate franchise tax.
Lessor Tax Consequences. No information is provided about the Lessor, but we assume that it is a corporation subject to federal income tax and, should it have income tax nexus with Utah, Utah’s corporate franchise tax. You have stated that the Lessor is not currently subject to Utah income tax, which we interpret to mean that the Lessor does not currently have income tax nexus with Utah. At issue then, is whether the sublease between COMPANY and OTHER COMPANY would result in the Lessor obtaining income tax nexus with Utah. The presence of a nondomiciliary’s leased property in Utah may or may not, depending on the circumstances, establish nexus between the property owner and Utah for income tax purposes.
First, if either the lease between COMPANY and the Lessor or the sublease between COMPANY and OTHER COMPANY is treated, for federal tax purposes, as a sale of the rail cars rather than a lease of the rail cars, the Lessor would not be considered the owner of the rail cars for Utah corporate franchise purposes. Accordingly, the presence of the rail cars in Utah would not establish nexus for the Lessor in Utah, and the Lessor would have no Utah corporate franchise tax liability.
However, should the Lessor still be considered the owner of the rail cars brought into Utah, it could conceivably have nexus with Utah for income tax purposes. Various state courts have determined that the presence of a nondomiciliary’s leased property in a state affords that state a basis on which to impose its income tax. On the other hand, various state courts have also determined that an owner of leased property does not have income tax nexus with a state if that owner is a passive investor in the property and does not have leasing customers in the state. It is not known whether the Lessor is a party to the sublease between COMPANY and OTHER COMPANY or if the Lessor’s initial contract afforded COMPANY controlling rights in any subsequent sublease. Presumably, the Lessor is sufficiently removed from the sublease transaction so that it would not have income tax nexus, even though its leased property would be located in Utah.
At this time, however, without knowledge of the Lessor’s participation in, and rights under, the initial lease and subsequent sublease, we are unable to rule whether the Lessor would be a passive investor without income tax nexus with Utah. The facts and circumstances surrounding the lease and sublease could conceivably show the Lessor’s actions to be indicative of a regular and systematic business activity to exploit a market in Utah, and income tax nexus with Utah could be imposed.
Should you have any other questions, please contact us.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
03-007