LPL Financial has filed a lawsuit against the U.S. government to claw back $5.4 million in tax refunds it has claimed for developing an old technology platform.
The company filed suit in the U.S. District Court for the Southern District of California on Thursday, demanding a refund of $5,405,573 that it said it was “erroneously denied” by the Internal Revenue Service for the tax years 2012 through 2014. LPL said it was entitled to exclusions under Section 199 of the U.S. Tax Code for the development of BranchNet, the proprietary technology platform it once licensed to its reps to deliver financial advice. That platform was phased out after LPL created a new platform for advisors called “ClientWorks.”
The tax code section cited by LPL was enacted as part of the American Jobs Creation Act of 2004 to support the U.S. manufacturing sector. Qualified activities are eligible for a deduction equal to 9% of the lesser of qualified production activities or taxable income for the year. Such deductions could lower an effective tax rate from 35% U.S. corporate tax to 32%. The deductions cannot exceed 50% of the company’s W-2 wages related to manufacturing or production.
The argument in LPL’s case has apparently come down to whether LPL’s platform was a service or a product. According to an IRS letter denying the tax refund, “gross receipts derived from services are not includible in domestic gross production receipts.”
LPL said that the platform was a comprehensive software platform that allowed financial professionals to give brokerage and financial advisory services to clients.
LPL said in its filing, “For example, the BranchNet software allowed for the entry and execution of buy or sell orders across asset classes and enabled real-time portfolio management through live market data feeds from major exchange and other sources. It also included several analytic tools, such as those allowing users to generate an immediate asset allocation overview for existing and prospective portfolios based on their investment objectives, and research tools, including a resource center with the capability to create several different types of reports for users. The BranchNet software also performed account-management-related functions, such as storing and showing client profile information, managing service requests, monitoring portfolio positions, displaying account balances, and tracking transaction history.”
LPL said in the filing that in 2012 it plowed $6.2 million into research and experimental expenses for employee wages and $20.6 million for independent contractors. For 2013, the company spent $8.25 million for these expenses in wages and $13.4 million for contractors. In 2014, the company spent $12.7 million in these expenses for wages and $11.6 million for contractors, according to the lawsuit.
The broker-dealer had also made a claim for tax credit from research activities, allowed under Section 41 of the Internal Revenue Code. LPL says that it has come to an agreement on that account, but that the IRS still owes LPL tax refunds for those activities.
The total refund LPL is requesting amounts to $2.067 million for 2012, $1.55 million for 2013 and $1.788 million for 2014.
LPL did not return a call for comment. An Internal Revenue Service spokesperson said the agency doesn’t comment on pending litigation.