Oct 19, 2015
From KPMG TaxWatch
Recently, a Kentucky circuit court ruled in favor of a taxpayer in a dispute over whether certain related companies were required to file a Kentucky consolidated return. The taxpayer at issue, the South Carolina parent of a Kentucky subsidiary, requested an anonymous ruling from the Department of Revenue as to whether it should file a consolidated return with its subsidiary. The Department responded in the affirmative, and the taxpayer subsequently filed amended consolidated returns requesting tax refunds. The Department denied the refunds on the basis that (1) the facts presented in the ruling request were materially different than the actual facts and (2) the parent corporation was not an “includible corporation” under Kentucky law. The taxpayer appealed to the Kentucky Board of Tax Appeals, which upheld the denial of the taxpayer’s refund. The taxpayer then appealed the Board’s decision to a Kentucky circuit court.
The court began by noting that five types of corporations must be included in a consolidated return, including two types at issue in this case. Notably, under Kentucky law, “includible corporations” and “common parent corporations doing business in Kentucky” must file consolidated returns with their Kentucky affiliates. A statute defined “includible corporation” as any corporation doing business in Kentucky, excluding nine types of companies. One of the nine excluded companies were loss corporations with de minimis apportionment factors. A “common parent corporation” was defined as a “member of an affiliated group” that met certain ownership requirements. The taxpayer was doing business in Kentucky and met the requisite ownership requirements, thus, the issue before the court was whether the taxpayer was a member of an affiliated group. “Affiliated group” was defined as one or more chains of “includible corporations” connected through stock ownership with a common parent corporation, which “is an includible corporation if” certain conditions are met. The parties disagreed over the definition of “includible corporation.” The Department argued that the taxpayer—due to its losses and de minimis factors—was excluded from the statutory definition of an includible corporation and was therefore not a member of an affiliated group, as required for common parent corporation status. However, the taxpayer argued that there was a separate definition of “includible corporation” for purposes of determining whether a “common parent corporation” can be included in a consolidated return. The court agreed with the taxpayer. The definition of “affiliated group” specifically stated that a common parent “is an includible corporation if” it meets the requisite ownership requirements. In the court’s view, the use of the word “if” meant that a taxpayer was an includible corporation if the statutory conditions were met. The court also noted that it would render the separate category of “common parent corporations” superfluous if every common parent corporation also had to meet the separate statutory definition of “includible corporation.” For more information World Finance Corporation v. Department of Revenue, please contact Marc A. Caito at 317-951-2434.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.