Angel Investor Tax Credit v. CAPCO: More Bang for the Buck?

AuthorRachel Jenny
Pages671-687

Page 671

I Introduction-Louisiana's Business Climate

Louisiana has traditionally performed poorly in attracting businesses, increasing jobs, and retaining the state's talented and intelligent youth. Even though Louisiana has the highest percentage of native born residents in the United States, it loses many more people to other states than it attracts.1 Consequently, it is one of the slowest growing states in the country in terms of population.2 Louisiana is one of only two southern states with more people moving out than moving in.3 A loss of 75,000 citizens due to domestic migration was experienced over the most recent five-year period reported by the Census Bureau.4 The population flight has been further exacerbated by Hurricanes Katrina and Rita. Those citizens who were previously committed to a life in Louisiana, but who were forced to leave temporarily, are discovering that the grass may actually be greener on the other side of the Sabine River. A loss of this many citizens, regardless of the cause, corresponds to a loss of desperately needed revenues for the state.

A large portion of this migration can be attributed to job opportunities in Louisiana that are inferior to those of neighboring states. No doubt, the "brain drain" suffered by Louisiana has been a disconcerting problem. Convincing Louisiana's youth to stay and pursue higher education in the state has been difficult. Trying to hold onto young people after graduation has been even harder. Louisiana's poor business climate, particularly lacking in high-paying and diverse job opportunities, is partly to blame for this phenomenon.Page 672

This comment will compare and contrast the two attempts of the Louisiana Legislature to turn around the state's economic outlook. Section II introduces Louisiana's innovative first attempt at stimulating venture capital investments, the CAPCO Program, and follows with an outline of some of the program's problems. Section III details the newly enacted Angel Investor Tax Credit and compares it with CAPCO while noting improvements as well as shortcomings. Finally, Section IV questions the need for such tax credit programs as a stimulus for Louisiana's economy and recommends some alternatives.

II The First Effort at Stimulating Growth-CAPCO Program

In 1983, the Louisiana Legislature, recognizing the need to address the problems facing the state, implemented a tax incentive program to help jumpstart the state's economy. The Louisiana Capital Companies Tax Credit Program ("CAPCO Program") was designed to assist in the formation and expansion of new businesses, thus creating new jobs in the state.5 This new program was intended to help provide venture capital to qualified Louisiana businesses by providing tax incentives to investors in capital companies who would distribute the needed capital.6 Louisiana became an innovator with the CAPCO Program, as it was the first state in the country to attempt to encourage a venture capital community in such a manner. Since Louisiana's action in 1983, many other states have followed suit, instituting their own versions of the certified capital company program.7

A How It Works

The Louisiana CAPCO Program, as it currently exists, operates in the following manner. Any person is entitled to a tax creditPage 673 equal to thirty-five percent of their cash investment in the certified capital fund of a certified Louisiana capital company (termed a "CAPCO").8 Insurance companies get an even better deal, receiving a one hundred percent credit against their premium tax liability for their investment in a certified Louisiana capital company, but they have to take the credit in equal portions over ten years.9 The term "certified Louisiana capital company" is defined by the legislature as a legal entity, whether for-profit or non-profit, whose primary business activity is the investment of cash for the purpose of acquiring equity in, or providing financing assistance as a licensed business and industrial development corporation to, qualified Louisiana businesses in need of capital for survival, expansion, new product development, or other similar business purposes, and is certified as meeting the program's criteria.10

Louisiana has strict requirements for continuing certification of a CAPCO's investment pools as certified capital. To be initially certified as a CAPCO, the company must have had an initial capitalization of $200,000 or greater.11 To continue certification, a CAPCO must follow a set schedule for making qualified investments from each of its investment pools. Within three years of the investment date for each investment pool, at least fifty percent of the pool must be invested, with at least thirty percent invested in qualified investments.12 Five years from the investment date, eighty percent of the pool must be invested, with at least fifty percent of the pool invested in qualified investments.13

The program also places limitations on what is a "qualified investment" by a CAPCO. The investment must further or attempt to further economic development within Louisiana.14 It must either be a cash investment resulting in equity in a qualified Louisiana business or an amount to provide cash financial assistance to a qualified Louisiana business through a licensedPage 674 Louisiana business and industrial development corporation.15 A qualified investment also may be: an equity investment or a debt investment maturing within five years from the origination of the debt investment in an approved qualified venture fund;16 an equity or a debt investment in an approved Louisiana based economic development infrastructure project;17 or an equity or a debt investment in an approved qualified technology fund.18 The CAPCO statutes expressly exclude the following from being a qualified investment for continuing certification purposes: investments in businesses primarily engaged in oil and gas exploration and development, gaming, real estate development for resale, banking, lending (with a few exceptions), insurance, or professional services provided by accountants, lawyers, or physicians;19 investments in associates of certified Louisiana CAPCOs;20 any portion of a CAPCO's investments in qualified Louisiana businesses that exceeds fifteen percent of its total certified capital;21 qualified investments that are already claimed by another Louisiana CAPCO;22 and reciprocal investments or loans made between certified CAPCOs.23

"Qualified Louisiana businesses," the intended beneficiaries of the CAPCO Program, are businesses that meet each of the following requirements at the time of investment or as the direct result of investment.24 First, the business must: (1) primarily operate or perform substantially all of its production in Louisiana or be headquartered in Louisiana with a substantial portion of its assets located in Louisiana; (2) be in need of capital; (3) be in retail, product manufacturing, processing, or assembly, research and development, or providing services; and (4) have at least eighty percent of its employees receiving eighty percent of itsPage 675 payroll domiciled in Louisiana.25 Second, the business's net worth, together with its affiliates, must not exceed $18 million.26

Third, the business and its affiliates must not have more than $6 million in average annual net income.27 Fourth, no more than 500 employees may work for the business and its affiliates.28 If a business is classified as a qualified Louisiana business upon the first investment by a CAPCO, it retains the classification for each subsequent qualified investment by that CAPCO.29

A CAPCO may be decertified, either voluntarily or involuntarily. If the CAPCO fails to meet the requirements of the program, particularly by failing to follow the investment schedule and failing to make qualified investments, it is subject to involuntary certification.30 If the only violation is that one of the CAPCO's investment pools is not following the investment schedule, only the noncomplying investment pool is decertified.31

If a CAPCO or one of its investment pools is involuntarily decertified, some of the associated tax credits may be subject to repayment or forfeiture. If the CAPCO or one of its investment pools was never in compliance with the investment schedule, meaning it never met the year three investment requirement, all income and premium tax credits already claimed must be repaid and any remaining credits are forfeited.32 If the CAPCO or investment pool complied with the third-year requirement in the investment schedule, but failed to meet the fifth-year investment requirement, only insurance premium tax credits that have or will be claimed after the third year from the investment date must be repaid or forfeited.33 Decertification of the CAPCO after it has fully complied with the investment schedule does not result in any credit repayment or forfeiture.34Page 676

Voluntary decertification may be accomplished at any time by sending written notice and remitting to the Department of Revenue the amount of tax credits to be repaid pursuant to the same provisions as for involuntary decertification.35 The CAPCO, as a subrogee to Louisiana's right to repayment, then has to recover from its investors the sums paid back to the state.36 Voluntary decertification under certain circumstances, and with the state's approval, will not result in any tax credit forfeiture or retaliation.37

A taxpayer claims the CAPCO tax credit for the year in which the investment is made.38 The credit used may not be greater than the taxpayer's tax liability for that tax...

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