Kentucky: Department Letter Ruling Not Binding, Refund Denial Upheld
In World Acceptance Corp. & World Fin. Corp. of Kentucky v. Kentucky Dep’t of Revenue, No. 2015-CA-001852-MR (Ky. Ct. App. Jan. 4, 2019), the Kentucky Court of Appeals affirmed an order of the Franklin Circuit Court of Kentucky which had affirmed the Kentucky Board of Tax Appeals, Final Order No. K-24682, File No. K13-R-18, dated August 29, 2014, and held that World Acceptance Corp. (WAC) and its subsidiary, World Finance Corporation of Kentucky (WFCKY), should not file a Kentucky mandatory nexus consolidated return under KRS 141.200(9) to (11), concluding that “WAC was not an ‘includible corporation’ because WAC’s payroll, property, and sales factors were either de minimis or zero.” The Court thus held that the taxpayers were not entitled to a refund of amounts that would have been owed had they been able to file consolidated returns. Note that effective for 2019, the General Assembly eliminated the mandatory nexus consolidated return method and replaced it with combined unitary reporting.
In amending their returns and requesting a refund, taxpayers had first sought an anonymous ruling from the Department of Revenue (“Department”) as to whether they should file consolidated returns for certain years. The Department ruled that they should. WAC and WFCKY thus amended their returns to file on the mandatory nexus consolidated return method and filed refund claims based on amounts that would result if WAC was considered an includable corporation, i.e., includable in such return. Under KRS 141.200(10)(b), taxpayers are required to file separate returns unless there is a common parent corporation doing business in Kentucky that has nexus with its affiliate. KRS 141.200(9)(c) defines “common parent corporation” as a member of an affiliated group that meets certain requirements, and “affiliated group” is 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 requirements are met.
Once WAC and WFCKY filed mandatory nexus consolidated returns and requested a refund, the Department denied the refund, stating that WFCKY was not authorized to file such a return because WAC was not an includible corporation pursuant to KRS 141.200(9)(e), particularly sections 7 and 8 of that statute. Those sections exclude from the definition of includible corporation any corporation that realizes a net operating loss whose Kentucky property, payroll, and sales factors are de minimis and any corporation for which the sum of the property, payroll, and sales factors are zero. The Department argued that because WAC recognized a net operating loss and had de minimis property, payroll, and sales factors, it was not an includible corporation. On appeal, the Court of Appeals agreed.
In holding for the Department, the Court of Appeals focused on the statutory construction of KRS 141.200. Per the Court, KRS 141.200(9)(e) contained the definition of “includible corporation” for both “common parent corporation” and other non-parent corporations. KRS 114.200(9)(b), meanwhile, defined ownership requirements for the entire affiliated group. Though the Court acknowledged the statute could have been written more clearly, under the rules of statutory construction, the Court held that it must presume that the Legislature acted intentionally in using specific, defined terms in certain sections and that it did not intend to “place a separate, and entirely alternative definition for the term ‘includable corporation’ within the section of the statute defining an ‘affiliated group.’” The Court also noted that the legislative history seemed to confirm such a reading. The Court concluded by rejecting the taxpayers’ other argument that the initial letter ruling from the Department should be binding because it turned out that the facts the taxpayers presented in requesting the ruling were slightly, but apparently materially, different than what turned out to be operative facts to the Department, the Board, the Circuit Court and the Court of Appeals. And, the Court rejected the taxpayers’ claim that the Department had violated the doctrine of contemporaneous construction, apparently holding that a 5-year-old ruling from the Department was not “long-standing” policy.
This case reaffirms the importance of including material operative facts with specificity in a ruling request if a taxpayer wishes to hold the Department to such ruling. Here, the facts included in the ruling request were arguably much the same as the facts that ultimately came out during the protest stage of the refund claim denial (for example, WAC had one employee instead of two working in Kentucky). Such a small difference may seem to many to be inconsequential, but here, the Court held that the difference was enough to render the Department’s ruling completely toothless. Taxpayers who seek an anonymous ruling request from the Department should focus on the facts and ensure that the facts as anonymized and presented in the ruling come with the actual facts of the particular taxpayer. As WAC and WFCKY have learned to date, what appears to be a tiny factual difference can have huge consequences. Further of note in this case was the Court’s ruling that a 5-year-old letter ruling may not be considered “long-standing” enough to warrant a taxpayer’s reliance on it when it comes to the doctrine of contemporaneous construction. Contemporaneous construction arguments can be difficult to make; here, the Court has given some insight into what it may consider to be long-standing, or not.