Kentucky: Loss Corporation with de minimis Factors Includible in Kentucky Consolidated Return
Kentucky has its own unique mandatory nexus consolidated return filing method for corporations, which was enacted in 2005. Some of the provisions defy tax logic, if there is such a thing. For example, there is a provision that can exclude from the consolidated return a corporation with de minimis apportionment factors that realizes a loss. Rules such as this, and others, can create dynamic, rather than static, tax filing groups.
In World Acceptance Corp. & World Fin. Corp. of Kentucky v. Kentucky Dep’t of Rev., 14-CI-01193, (Ky. Cir. Ct. Aug. 12, 2015), the Franklin Circuit Court of Kentucky reversed a Final Order of the Kentucky Board of Tax Appeals (“Board”) (Order No. K-24682) and held that certain factors were present that would require the taxpayer to file a mandatory nexus consolidated return together with its subsidiary.
In 2011, World Acceptance Corporation (“WAC”), which is a corporation incorporated in South Carolina, sent the Kentucky Department of Revenue (“Department”) an anonymous letter requesting advice about whether it should file consolidated tax returns that would include World Finance Corporation of Kentucky (“WCFKY”), a subsidiary wholly owned by WAC. In the letter, WAC explained that it was headquartered in a state other than Kentucky, but it had two employees that spent 45-60 days in Kentucky annually providing services to the company. Certain costs were also allocated to the Kentucky subsidiary from WAC. The Department responded that WAC should file a consolidated return along with WFCKY, but later reversed itself and determined that WAC and WFCKY could not file a consolidated return.
WAC and WFCKY appealed to the Board. The Board concluded that the Department of Revenue was not bound by its anonymous letter ruling. It also concluded that the Department correctly determined that WAC’s Kentucky property, payroll and sales factors were de minimis [KRS 141.200(9)(e)7] and that WAC was not an includible corporation and could not file a consolidated return. WAC and WFCKY appealed to the Franklin County Circuit Court.
In reversing the Board, the Court first analyzed KRS 141.200(10) which provides that a consolidated return includes an includible corporation in an affiliated group or a common parent corporation doing business in Kentucky. In determining whether WAC was a “common parent corporation”, the Court looked to the definition in KRS 141.200(9)(c) which defines a common parent corporation by reference to 141.200(9)(b)1. The Court concluded that WAC was doing business in Kentucky under the standard set forth in KRS 141.010(25). The Court then analyzed several factors and concluded that WAC was a common parent corporation because it owned at least 80% of the vote and 80% of the value of at least one other includible corporation; WAC owned 100% of WFCKY.
Finally, the Court evaluated whether WAC and WCFKY were includible corporations, a requirement to being included in a consolidated return, focusing on WAC. The dispute between WAC and the Department was whether KRS 141.200(9)(b)1 determines whether the common parent corporation is an includible corporation or whether KRS 141.200(9)(e) determines whether the common parent corporation is an includible corporation. The Department argued that WAC fell into one of nine exceptions to the definition of “includible corporation” under KRS 141.200(9)(e), namely, that it was a corporation that realized a net operating loss and had Kentucky payroll, property, and sales factors that were de minimis. WAC argued that KRS 141.200(9)(e) does not apply to common parent corporations and instead applies only to subsidiary corporations. Applying the rules of statutory construction, the Court agreed with WAC, holding that the Department had ignored the plain meaning of KRS 141.200(9)(b)1, which applies to common parent corporations. Therefore, the Court reversed the Board’s Order and held that WAC and WFCKY must file a consolidated tax return.
The World Acceptance case is the first mandatory nexus case that has found its way outside of the Department to the Board and to the Courts. So, it will be interesting to see how the de minimis factor loss corporation rule is ultimately construed. It is also important to watch what ultimately, if anything, happens to a taxpayer’s ability to rely on an anonymous ruling of the Department, particularly when there is not as much administrative guidance as taxpayers might like in Kentucky.