The Debate over Kentucky Combined Returns

By Miles, Jennifer; Brendon, McKibbin | The CPA Journal, November 1994 | Go to article overview

The Debate over Kentucky Combined Returns


Miles, Jennifer, Brendon, McKibbin, The CPA Journal


On February 11, 1994, the Kentucky Court of Appeals reversed a circuit court decision in Revenue Cabinet, Commonwealth of Kentucky v. GTE, No. 93-CA-000737. The circuit court had held that GTE and its unitary subsidiaries had the right under Ken. Rev. Stat. 141.120 to file a combined Kentucky state income tax return. e Court of Appeals, in reversing the lower court's decision held that "Kentucky's corporate income tax scheme presumes separate filings for corporations."

Because Kentucky has incorporated Uniform Division of Income for Tax Purposes Act (UDITPA) provisions in its statutes, GTE argued that combined returns should be permitted. UDITPA is silent on combined reporting. However, UDITPA Sec. 2 requires a multistate taxpayer to apportion business income based on a formula of property, payroll, and sales within a state relative to totals everywhere. Further, Sec. 18 of UDITPA, the so-called "equitable relief" provision, states that "if the allocation and apportionment provisions...do not fairly represent the extent of the taxpayer's business activity in a state, the taxpayer may petition for, or the [tax administrator] may require, in respect to all or any part of the taxpayer's business activity, if reasonable...any other method to effectuate an equitable allocation and apportionment to the taxpayer's income." Although having no direct bearing to Kentucky, other states that do not have specific combined reporting statutes have relied on general UDITPA principles and permitted combined filing.

The Kansas Supreme Court in Pioneer Container Corp. v. Beshears, 235 Kan. 745, 684 P.2d 396 (Kan. 1984), acknowledged that, while UDITPA does not mention combined reporting, its silence does not preclude the use of the combined reporting method. See also, e.g., Coca Cola Company v. Dept. of Revenue, 533 P.2d 788 (Ore. 1975); Joslin Dry Goods Company v. Dolan 615 P.2d 16 (Colo. 180); and Caterpillar Tractor Co. v. Lenckos, 417 N.E. 2d 1343 (Ill. 1981).

GTE filed its Kentucky income tax return on a combined basis relying on Ken. Rev. Stat. 141.120, Kentucky's UDITPA-based statutes. The circuit court ruled that this was a proper reflection of GTE's Kentucky income. The Court of Appeals, however, held that the Kentucky apportionment statute has "no application to the issue of reporting methods" and that "Kentucky's corporate income tax scheme presumes separate legal entity filings for corporations" even if the operations of the subsidiaries "are integrated or interrelated" (i.e., "unitary") as in the case of GTE. The Court noted that Ken. Rev. Stat. 141.200 explicitly requires affiliated companies to file separate returns. Another statute allows the State to require combined returns from corporations engaged in intercorporate transactions that reduce taxable net income (Ken. Rev. Stat. 141.205).

The Kentucky Supreme Court has previously held that corporations engaged in a unitary business could be required to file on a combined basis. …

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