By Lagios, Nina; Rothstein, Jack
The CPA Journal , Vol. 65, No. 5
The Supreme Court of Kentucky recently held that a unitary group has a statutory right to file a combined income tax return. In reversing the decision of the Court of Appeals, the Supreme Court rejected the Revenue Cabinet's position requiring certain affiliated companies to file separate income tax returns (GTE v. Revenue Cabinet, S.Ct. of Kentucky, No. 94-SC-168-DG, 11-22-94).
GTE and its subsidiaries are a telecommunications service group that operates in all 50 states. GTE owns all the stock in its subsidiaries and shares many functions with them, such as long-term planning, purchasing, budgeting, financing, and advertising. Additionally, members of the GTE group share corporate officers and directors, and there were frequent transfers of management personnel between the entities. GTE filed a combined Kentucky income tax return from 1984 to 1987. In 1988, with the adoption of Revenue Policy No. 41P225, the Revenue Cabinet disallowed GTE's use of a combined return.
The Revenue Cabinet adopted this revenue policy in an attempt to reconcile their position with the decision in Armco, Inc. v. Revenue Cabinet, 748 S.W. 2d 372 (1988). In Armco, the Kentucky Supreme Court held that the net income of Armco and its Domestic International Sales Corporation should be combined because of their unitary nature. Based on this decision, the Revenue Cabinet limited combined reporting to situations that involve sham or paper corporations with limited viable activities.
GTE argued that this sudden change in policy and statutory interpretation was unlawful and that failure to apportion income between unitary groups violated due process.
From 1972 to 1987, the Revenue Cabinet relied on KRS 141.120 as the authority to permit affiliated corporations engaged in a unitary business to file a combined Kentucky income tax return. KRS 141.120 contains the essential elements of the Uniform Division of Income for Tax Purposes Act (UDITPA).
Although the inclusiveness of the term "taxpayer," defined in KRS 141. …