KBTA Holds That Taxpayers Were Not Entitled to File Unitary Returns and Failed to Properly Apportion Income to Kentucky
In Publishers Printing Co. and Subsidiaries v. Finance and Administration Cabinet, Order No. K-20589 (KBTA Jan. 20, 2010), the Kentucky Board of Tax Appeals (“KBTA”) held that the Kentucky Department of Revenue (“Department”) properly denied corporation income tax refunds to Publishers Printing Company and five subsidiaries (“Publishers”). In summary, the KBTA first held, without explanation, that Publishers’ refund claims were untimely because Kentucky’s four-year statute of limitations had expired before the claims were filed. The KBTA then held that Publishers’ unitary returns did not fairly represent the amount of business activities conducted in Kentucky and its income was therefore improperly apportioned. Finally, the KBTA held that Publishers was not unitary in nature and therefore was prohibited from filing returns on a unitary basis.
It is important to note that this case involved refund claims filed prior to the Supreme Court of Kentucky’s decision in GTE v. Revenue Cabinet, 889 S.W.2d 788 (Ky. 1994), which approved the use of the unitary methodology for filing corporate income tax returns. However, legislation enacted following GTE prohibited the use of the unitary methodology on both a prospective and retroactive basis. The constitutionality of that legislation is at issue in Dep’t of Revenue v. Johnson Controls, Inc. et al., 296 S.W.3d 392 (Ky. Aug. 27, 2009), rev’g, No. 2004-CA-001566-MR (Ky. App. May 5, 2006),motion for rehearing denied, (Ky. Nov. 25, 2009), pet. for cert. filed (U.S. Feb. 2, 2010).
In the Publishers Printing Co. case the KBTA found that Publishers was organized under Kentucky law and was involved in the business of printing, publication and sale of trade magazines distributed from Kentucky throughout the United States. The KBTA further found that some of the subsidiaries also served as holding companies for various assets and leasing companies for equipment and that only one subsidiary conducted business outside of Kentucky, and did so solely in Colorado. The KBTA also found that Publishers filed unitary tax returns in Kentucky and Colorado for tax years 1988 through 1991, combining all income and expenses and only apportioning income to those two states. The KBTA noted that Publishers sought refunds of Kentucky corporation income tax in the amount of $1,132,905.00, which were denied by the Department.
As indicated above, the KBTA first concluded, without explanation or analysis, that the four-year statute of limitations for filing refund claims for overpayments of corporation income tax had expired. Notwithstanding that conclusion, the KBTA went on to discuss the merits of the case, and held that under the statutes then in effect, all of Publishers’ net income was taxable by Kentucky because all of its property and payroll was in Kentucky. The KBTA further held that Publishers’ unitary returns did not fairly represent the extent of business activities in Kentucky and that the companies “escaped taxation on a substantial portion of its income by apportionment.” The KBTA held that Publishers, by filing unitary returns, failed to pay tax to Kentucky on income in the amount of $13,618,941.00 – or forty percent (40%) of its total income during the involved tax years.
The KBTA also determined that Publishers failed to demonstrate “a unity of operations, or a unity of use” or that its operations were integrated. It held that the subsidiaries “exist to serve Publishers and it does not serve them.” The KBTA therefore concluded that Publishers was not unitary in nature, and was not entitled to refunds of corporate income tax overpayments.
If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.