Kentucky ~ Corporate Income Tax: Ruling That Taxpayer Was Entitled to File Consolidated Return Vacated

The Kentucky Circuit Court for Franklin County has vacated its previous ruling that a South Carolina company was entitled to file a consolidated corporation income tax return with its wholly-owned Kentucky subsidiary because it met all the relevant statutory standards to qualify as a common parent corporation doing business in the state (TAXDAY, 2015/10/13, S.13). The filing of a consolidated return would have resulted in a sizeable refund for the taxpayer for the four-year tax period in question. In reversing its decision, the court determined that it was based on an incomplete and, thus, erroneous construction of the definitional meanings of “includible corporation” and “common parent corporation” under the Kentucky consolidated return statute.

Furthermore, the court affirmed the Kentucky Board of Tax Appeal’s conclusion that the taxpayer fell within one of nine exceptions to the definition of “includible corporation” because the taxpayer’s payroll, property, and sales factors were either de minimis or zero. The taxpayer’s Kentucky payroll was zero because its only Kentucky employee performed part of her services in Kentucky and the remainder of her services in Tennessee; her services performed in Tennessee were not incidental to her services performed in Kentucky; she was a resident of Tennessee; and her activities in the state were at all times controlled by a South Carolina corporation. Likewise, the Kentucky property factor was zero even though its employee used both a laptop and a car while working in Kentucky. Under Kentucky law, the value of a car used by an employee while working in Kentucky must be assigned to the state to which the employee’s compensation is assigned or to the state in which the automobile is licensed. Since the taxpayer was required to assign the employee’s payroll to Tennessee, and the car was registered in Tennessee, the car could not be included in the Kentucky property factor. The value of the laptop while it was used in Kentucky for a limited number of days was de minimis when compared to the taxpayer’s total property holdings. The taxpayer’s Kentucky sales factor was zero because it did not derive any income from the activities of its employee except for the management fee paid to it by its subsidiary for services rendered by the taxpayer. The management fee did not exclusively cover the activities of taxpayer’s employees in Kentucky, but it also covered accounting, payroll, management, and other administrative services performed by the taxpayer’s employees at its headquarters in South Carolina. Therefore, the taxpayer was required to source the management fee to South Carolina since the income-producing activities were largely performed at the taxpayer’s headquarters in South Carolina rather than in Kentucky.

The court also concluded that a letter ruling that the Kentucky Department of Revenue (DOR) sent to the taxpayer indicating it could file a consolidated return was not binding because it was submitted anonymously and contained facts that were materially different from the facts that the taxpayer submitted in its amended tax return, thus preventing the DOR from making a complete and accurate application of the relevant statutes. Finally, the court did not find any evidence that the DOR violated the Kentucky Constitution in denying the taxpayer’s amended return. There was no evidence that the DOR did anything other than apply the letter of the law to the facts presented to it in the taxpayer’s amended return.

World Acceptance Corp. v. Kentucky Department of Revenue, Franklin County Circuit Court (Kentucky), No. 14-CI-01193, November 9, 2015, ¶203-137



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