April 1, 2014

Say What You Mean and Mean What You Say – Kentucky Department of Revenue Renegs on Letter Ruling

Written By

By Erica Horn

The controversy in World Acceptance Corporation, et al. v. Commonwealth of Kentucky, Finance & Administration Cabinet, Department of Revenue, Kentucky Board of Tax Appeals, File No. K13-R-18, emanates from the fact that the Department provided a letter ruling stating the taxpayers should file consolidated returns, but after the returns were filed reflecting significant refund claims, the Department changed its position. World Acceptance Corporation (“WAC”) and its wholly-owned subsidiary, World Finance Corporation of Kentucky (“WFCKY”) (collectively “Taxpayers”) appealed the Department of Revenue’s denial of its income tax refund claims for tax years 2007 through 2010.

The issue presented is whether WAC and WFCKY are required by Kentucky law to file consolidated Kentucky corporation income tax returns for the relevant periods. Kentucky requires a “common parent corporation doing business in this state” to file a consolidated tax return if the parent owns more than 80% in stock and value of the subsidiary. KRS § 141.200(10). The Department acknowledged the parent company met the 80% requirement and had nexus in Kentucky. WAC had an employee working in the Commonwealth 30-60 days per year and WFCKY paid a management fee to WAC.

After receiving the refund claims, however, the Department claimed the parent, WAC, must, and does not, meet the definition of “includible corporation” because WAC was either (i) a corporation realizing a net operating loss whose property, payroll and sales factors were de minimis, or (ii) a corporation for which the sum of the property, payroll and sales factors was zero. KRS § 141.200(9)(e)(7) and (8). Corporations fitting in either of those two categories are excluded from the definition of “includible corporation”. The taxpayers argue the definition of “includible corporation” applicable to a “common parent corporation” is set forth at KRS § 141.200(9)(b), and, even if the Department was correct that KRS § 141.200((9)(e)(7) and (8) were applicable, WAC’s apportionment factors were not de minimis (per the Department’s own letter ruling) and thus, could not be zero.

The case has been fully briefed and was argued to the Board in March 2014.