United States

Kentucky: Circuit Court Vacates Previous Judgment; Rules Parent Corporation Cannot File Consolidated Return with Kentucky Subsidiary

Dec 14, 2015
From KPMG TaxWatch

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A Kentucky circuit court recently vacated an earlier decision in which it had held that a Parent company taxpayer could file a consolidated return with its Kentucky subsidiary. The Parent taxpayer requested an anonymous ruling from the Department of Revenue as to whether it could 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 then 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 was not an “includible corporation” under Kentucky law. The Parent appealed to the Kentucky Board of Tax Appeals, which upheld the denial of the refund. The Parent then appealed the Board’s decision to a Kentucky circuit court.

Under Kentucky law, “includible corporations” and “common parent corporations doing business in Kentucky” must file consolidated returns with their Kentucky affiliates.  A statute defines “includible corporation” as any corporation doing business in Kentucky, excluding nine types of companies. One of the nine excluded companies are loss corporations with de minimis apportionment factors.  A “common parent corporation” is a “member of an affiliated group” that meets certain ownership requirements. The Parent was doing business in Kentucky and met the requisite ownership requirements, thus, the issue before the circuit court was whether it 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. Thus, the dispute arose over the definition of “includible corporation.”  The Department argued that the Parent— due to its losses and de minimis factors—was excluded from the statutory definition of an includible corporation and therefore was not a member of an affiliate 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” is included in a consolidated return. In its initial decision issued August 14, 2015, the circuit court agreed that there was a separate definition and the Parent was an “includable corporation.” However, after the Department filed a motion to vacate the previous judgment, the court reversed course. Specifically, the court determined that the Parent’s interpretation of the relevant code sections ignored the plain meaning of the statutes, violated internal logic, and were contrary to legislative history. In short, the court determined that the Parent must meet the general definition of “includible corporation,” and there was no separate definition for purposes of determining common parent corporation status. Thus, because the Parent had losses and de minimis apportionment factors, the court concluded that it could not qualify as an “includible corporation.”  Next, the court concluded that the letter ruling that was not binding because it was submitted anonymously and contained facts that were materially different from the facts that were presented on the amended returns. As such, the Department had been unable to make a complete and accurate application of the relevant statutes when it issued the ruling. For more information on World Finance Corporation v. Dep’t 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.