Romantix Holdings, Inc., Romantix, Inc., Abv Management, Inc., Books, Inc., Ppi, Inc., Ppa, Inc., and Swan Books, Inc. v. Iowa Department of Revenue
16-0416
| Iowa Ct. App. | May 3, 2017Background
- Romantix Holdings, Inc. (Holdings) is a parent holding company owning the Romantix trademark and multiple subsidiaries; several subsidiaries operate retail stores in Iowa. Holdings itself did not directly sell products in Iowa.
- In 2007 Steven Brown acquired Holdings; the purchase involved a redemption loan and a 15‑year covenant not to compete, for which the Iowa subsidiaries guaranteed the debt.
- For tax years 2009–2010, Petitioners filed consolidated Iowa returns for the Iowa subsidiaries; treatment of acquisition‑loan interest and non‑compete amortization varied between years and between Holdings and the subsidiaries.
- The Iowa Department of Revenue (Director) concluded Holdings lacked taxable nexus in Iowa and therefore could not be included in the Iowa consolidated returns, and the Iowa subsidiaries could not deduct certain expenses incurred and paid by Holdings because the subsidiaries neither owed nor paid them.
- An ALJ partially reversed the Department on the expense deductions; the Director on remand reinstated disallowance. The district court affirmed the Director’s order; Petitioners appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Holdings must be included on Iowa consolidated returns (taxable nexus) | Holdings should be includable because it owned intangibles used by Iowa subsidiaries and thus had the functional equivalent of presence in Iowa | Holdings’ activities were limited to owning/controlling subsidiaries and fall within the safe harbor of Iowa Code § 422.34A(5); no taxable nexus | Holdings lacked taxable nexus; cannot join consolidated return (affirmed) |
| Whether Iowa subsidiaries may deduct acquisition‑loan interest | Subsidiaries argue they are liable/paid the debt (guarantors) and Holdings allocated the expenses to them, so they may deduct | Allocation among affiliates is not binding for Iowa tax purposes; subsidiaries did not owe or pay the disputed expenses | Deductions disallowed: subsidiaries failed to prove they owed and actually paid the expenses (affirmed) |
| Whether internal allocation counts as payment for deduction purposes | Allocation of expense by Holdings effectively paid the subsidiaries’ share for tax purposes | Iowa tax rules require actual legal liability and payment by the taxpayer; intercompany allocations do not bind Iowa | Allocation alone is insufficient; allocation does not substitute for payment or legal obligation (affirmed) |
| Whether amortization of covenant not to compete was a necessary/ordinary expense of subsidiaries | Petitioners contend amortization is deductible as related to business acquisition | Even if allocated, amortization must be a necessary and reasonable expense of the taxpayer claiming it; subsidiaries did not demonstrate this | Amortization disallowed as not shown to be a necessary and reasonable expense of the subsidiaries (affirmed) |
Key Cases Cited
- KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308 (Iowa 2010) (standard of judicial review for Department of Revenue decisions under Iowa Administrative Procedure Act)
- The Sherwin‑Williams Co. v. Iowa Dep’t of Revenue, 789 N.W.2d 417 (Iowa 2010) (explains ‘‘irrational, illogical, or wholly unjustifiable’’ standard for upholding agency interpretations)