MYRIA HOLDINGS INC. & SUBS, Appellant,
IOWA DEPARTMENT OF REVENUE, Appellee.
from the Iowa District Court for Polk County, Michael D.
affiliated group of companies challenges the determination of
the Iowa Department of Revenue that the group's parent
company could not be included with its subsidiaries in an
Iowa consolidated tax return because it did not receive
taxable income under Iowa Code section 422.33(1). AFFIRMED.
Kimberley M. Reeder of The Law Office of Kimberley M. Reeder,
Morehead, Kentucky, and Christopher L. Nuss and William C.
Brown of Brown, Winick, Graves, Gross, Baskerville &
Schoenebaum, P.L.C., Des Moines, for appellant.
J. Miller, Attorney General, Donald D. Stanley Jr., Special
Assistant Attorney General, and Paxton J. Williams, Assistant
Attorney General, for appellee.
Iowa Department of Revenue (Department) issued a final order
concluding a foreign corporation was ineligible to join a
consolidated tax return with two of its subsidiaries doing
business in Iowa because it did not derive taxable income
from within Iowa under Iowa Code section 422.33(1). On
judicial review, the district court affirmed the agency's
final order. On appeal, the foreign corporation and its
subsidiaries contend the corporation properly joined the
consolidated return because it derived taxable income in the
forms of distributed earnings and each member's allocated
share of the group's consolidated tax liability. We
conclude the Department correctly concluded the foreign
corporation lacked taxable income from within the State of
Iowa and affirm the decision of the district court.
Background Facts and Proceedings.
Holdings Inc. (Myria) is a Delaware corporation with its
primary place of business in Texas. Myria holds an ownership
interest in several subsidiaries, including two Delaware
limited liability companies (LLCs) doing business in Iowa:
Natural Gas Pipeline Company of America LLC (NGPL) and NGPL
PipeCo LLC (PipeCo). Myria holds an eighty-percent membership
interest in PipeCo, the sole member of NGPL.
and its subsidiaries (the Group) are in the business of
natural gas pipeline transmission and storage. NGPL is the
principal operating subsidiary; it owns and operates a major
natural gas transmission and storage system primarily serving
markets in Iowa and other Midwestern states. PipeCo is the
sole member of NGPL; it owns real and personal property in
Iowa and leases it to NGPL. As the parent company, Myria owns
the subsidiaries and assists them with setting strategic
tax year 2009, Myria received two categories of payments from
NGPL and PipeCo: distributions of earnings and payments of
each member's allocated tax liability. Myria received the
distributions of earnings in accordance with its direct and
indirect membership interest in the
subsidiaries. Myria received
the allocated tax payments under a February 2008 Tax
Allocation Agreement that apportioned the affiliated
group's tax liability among its members.
the tax allocation agreement, Myria agreed to join a federal
consolidated tax return with PipeCo, NGPL, and other
subsidiaries; prepare and file all appropriate documents for
the consolidated return; and pay the Group's consolidated
tax liability. PipeCo and NGPL agreed to make quarterly
payments to Myria equal to their estimated quarterly federal
income tax liability at least thirty days before each
quarterly installment payment was due to the Internal Revenue
Service (IRS). Each entity remained responsible for
contributing its proportionate share of the group's
overall tax liability but only Myria would make tax payments
to the IRS. If the payments to Myria over the course of the
tax year exceeded the actual apportioned tax liabilities,
Myria promised to refund any overpayment. In addition, PipeCo
and NGPL assumed liability for and agreed to indemnify Myria
against responsibility for any subsidiary's tax
obligations, thus protecting Myria from the risk of
filed a federal consolidated return for tax year 2009 on
behalf of the Group. In the federal return, both PipeCo and
NGPL elected to be treated as corporations. The Group
reported a net loss of $62, 695, 855; only NGPL reported net
Group also filed an Iowa consolidated return for tax year
2009. See Iowa Code § 422.37 (2009). The return
reported an apportioned net loss of $10, 225, 151 and an
estimated overpayment of $2, 192, 762 for tax year 2009,
which it applied to its estimated tax liability for tax year
2010. Myria reported no Iowa receipts.
Department determined Myria was ineligible to be included in
the consolidated return because it had not derived taxable
income from within the state under Iowa Code section
422.33(1) during tax year 2009. The Department issued a
"Notice of Assessment" against the Group assessing
it for corporate income tax in the amount of $2, 558, 989
plus interest and penalties for tax year 2009. With Myria
excluded from the consolidated return, the Group's tax
liability was substantially greater.
Group protested the Department's assessment, arguing
Myria was eligible to be included in the consolidated return
because it derived taxable income from within
Iowa. The Department informally
rejected the Group's protest, and the Group sought a
contested hearing. The Department filed an answer, and the
matter proceeded to a hearing before an administrative law
hearing before the ALJ, the Group presented testimony from
Jason Francl, tax director of SteelRiver Infrastructure
Management U.S., LLC, an investment advisory and
management-services company that manages an investment fund
holding a twenty-three percent ownership interest in Myria.
Francl, who is also an officer and vice president of Myria,
testified that SteelRiver has a management-services agreement
with Myria under which Myria pays it to manage tax-filing
obligations and provide executive and leadership services. He
testified that he spends ten to twenty percent of his time
performing this work and that he works closely with legal,
treasury, and accounting colleagues to manage intragroup cash
distributions, make interest payments to lenders, prepare
financial reports, and manage the tax-compliance process for
the Group. Francl further testified that Myria provides
long-term financing for its subsidiaries' business
activities and-as the parent company-sets strategic
priorities for its subsidiaries.
posthearing brief, the Group argued Myria was properly
included in the consolidated return because it derived income
in tax year 2009 from its subsidiaries doing business in
Iowa. Specifically, the Group asserted Myria received
distributions of earnings-a portion of which were traceable
to the subsidiaries' business activities in Iowa-and
payments under the tax allocation agreement.
issued a proposed decision upholding the Department's
assessment. The Group appealed, and the director of the
Department issued a final order adopting the proposed
decision with certain amendments and clarifications.
Department's final order concluded Myria was ineligible
to join in the Group's consolidated tax return because
Myria did not derive taxable income under Iowa Code section
422.33(1). The order concluded that the distributed earnings
Myria received incident to its ownership interest in the
subsidiaries amounted to an activity of "[o]wning and
controlling a subsidiary corporation" and therefore did
not constitute "doing business in the state or deriving
income from sources within the state" within the meaning
of section 422.33(1). See id. § 422.34A(5).
Although PipeCo and NGPL are limited liability companies, the
Department concluded they must be treated as corporations for
purposes of Iowa's tax laws since they elected to be
taxed as corporations in the Group's federal consolidated
return. See id. ...