KRS § 141.202 — KY Code / Title XI / Chapter 141 / Section 141.202
141.202 Requirement of taxpayer engaged in a unitary business with one or more other corporations to file a combined report -- Administrative regulations -- Taxable years beginning on or after January 1, 2019
Status: in_force

141.202 Requirement of taxpayer engaged in a unitary business with one or more

other corporations to file a combined report -- Administrative regulations --

Taxable years beginning on or after January 1, 2019.

(1) This section shall apply to taxable years beginning on or after January 1, 2019.

(2) As used in this section:

(a) "Combined group" means the group of all corporations whose income and

apportionment factors are required to be taken into account as provided in

subsection (3) of this section in determining the taxpayer's share of the net

income or loss apportionable to this state. A combined group shall include

only corporations, the voting stock of which is more than fifty percent (50%)

owned, directly or indirectly, by a common owner or owners;

(b) "Corporation" has the same meaning as in KRS 141.010, including an

organization of any kind treated as a corporation for tax purposes under KRS

141.040, wherever located, which if it were doing business in this state would

be a taxpayer, and the business conducted by a pass-through entity which is

directly or indirectly held by a corporation shall be considered the business of

the corporation to the extent of the corporation's distributive share of the pass-

through entity income, inclusive of guaranteed payments;

(c) "Doing business in a tax haven" means being engaged in activity sufficient for

that tax haven jurisdiction to impose a tax under United States constitutional

standards;

(d) 1. "Tax haven" means a jurisdiction that, during the taxable year has no or

nominal effective tax on the relevant income and:

a. Has laws or practices that prevent effective exchange of

information for tax purposes with other governments on taxpayers

benefitting from the tax regime;

b. Has a tax regime which lacks transparency. A tax regime lacks

transparency if the details of legislative, legal, or administrative

provisions are not open and apparent or are not consistently

applied among similarly situated taxpayers, or if the information

needed by tax authorities to determine a taxpayer's correct tax

liability, such as accounting records and underlying

documentation, is not adequately available;

c. Facilitates the establishment of foreign-owned entities without the

need for a local substantive presence or prohibits these entities

from having any commercial impact on the local economy;

d. Explicitly or implicitly excludes the jurisdiction's resident

taxpayers from taking advantage of the tax regime's benefits or

prohibits enterprises that benefit from the regime from operating in

the jurisdiction's domestic market; or

e. Has created a tax regime which is favorable for tax avoidance,

based upon an overall assessment of relevant factors, including

whether the jurisdiction has a significant untaxed offshore

financial or other services sector relative to its overall economy.

2. "Tax haven" does not include a jurisdiction that has entered into a

comprehensive income tax treaty with the United States, which the

Secretary of the Treasury has determined is satisfactory for purposes of

Section 1(h)(11)(C)(i)(II) of the Internal Revenue Code;

(e) "Taxpayer" means any corporation subject to the tax imposed under this

chapter;

(f) "Unitary business" means a single economic enterprise that is made up either

of separate parts of a single corporation or of a commonly controlled group of

corporations that are sufficiently interdependent, integrated, and interrelated

through their activities so as to provide a synergy and mutual benefit that

produces a sharing or exchange of value among them and a significant flow of

value to the separate parts. For purposes of this section, the term "unitary

business" shall be broadly construed, to the extent permitted by the United

States Constitution; and

(g) "United States" means the fifty (50) states of the United States, the District of

Columbia, and United States' territories and possessions.

(3) (a) Except as provided in KRS 141.201, a taxpayer engaged in a unitary business

with one (1) or more other corporations shall file a combined report which

includes the income, determined under subsection (5) of this section, and the

apportionment fraction, determined under KRS 141.120 and paragraph (d) of

this subsection, of all corporations that are members of the unitary business,

and any other information as required by the department. The combined report

shall be filed on a waters-edge basis under subsection (8) of this section.

(b) The department may, by administrative regulation, require that the combined

report include the income and associated apportionment factors of any

corporations that are not included as provided by paragraph (a) of this

subsection, but that are members of a unitary business, in order to reflect

proper apportionment of income of the entire unitary businesses. Authority to

require combination by administrative regulation under this paragraph

includes authority to require combination of corporations that are not, or

would not be combined, if the corporation were doing business in this state.

(c) In addition, if the department determines that the reported income or loss of a

taxpayer engaged in a unitary business with any corporation not included as

provided by paragraph (a) of this subsection represents an avoidance or

evasion of tax by the taxpayer, the department may, on a case-by-case basis,

require all or any part of the income and associated apportionment factors of

the corporation be included in the taxpayer's combined report.

(d) With respect to the inclusion of associated apportionment factors as provided

in paragraph (a) of this subsection, the department may require the inclusion

of any one (1) or more additional factors which will fairly represent the

taxpayer's business activity in this state, or the employment of any other

method to effectuate a proper reflection of the total amount of income subject

to apportionment and an equitable allocation and apportionment of the

taxpayer's income.

(e) A unitary business shall consider the combined gross receipts and combined

income from all sources of all members under subsection (8) of this section,

including eliminating entries for transactions among the members under

subsection (8)(e) of this section.

(f) Notwithstanding paragraphs (a) to (e) of this subsection, a consolidated return

may be filed as provided in KRS 141.201 if the taxpayer makes an election

according to KRS 141.201.

(4) The use of a combined report does not disregard the separate identities of the

taxpayer members of the combined group. Each taxpayer member is responsible for

tax based on its taxable income or loss apportioned or allocated to this state, which

shall include, in addition to the other types of income, the taxpayer member's share

of apportionable income of the combined group, where apportionable income of the

combined group is calculated as a summation of the individual net incomes of all

members of the combined group. A member's net income is determined by

removing all but apportionable income, expense, and loss from that member's total

income as provided in subsection (5) of this section.

(5) (a) Each taxpayer member is responsible for tax based on its taxable income or

loss apportioned or allocated to this state, which shall include:

1. Its share of any income apportionable to this state of each of the

combined groups of which it is a member, determined under subsection

(6) of this section;

2. Its share of any income apportionable to this state of a distinct business

activity conducted within and without the state wholly by the taxpayer

member, determined under KRS 141.120;

3. Its income from a business conducted wholly by the taxpayer member

entirely within the state;

4. Its income sourced to this state from the sale or exchange of capital or

assets, and from involuntary conversions, as determined under

subsection (8)(g) of this section;

5. Its nonapportionable income or loss allocable to this state, determined

under KRS 141.120;

6. Its income or loss allocated or apportioned in an earlier year, required to

be taken into account as state source income during the income year,

other than a net operating loss; and

7. Its net operating loss carryover.

(b) No tax credit or post-apportionment deduction earned by one (1) member of

the group, but not fully used by or allowed to that member, may be used in

whole or in part by another member of the group or applied in whole or in part

against the total income of the combined group, except as provided in

paragraph (c) of this subsection.

(c) If the taxable income computed pursuant to KRS 141.039 results in a net loss

for a taxpayer member of the combined group, that taxpayer member has a

Kentucky net operating loss, subject to the net operating loss limitations and

carry forward provisions of KRS 141.011. No prior year net operating loss

carryforward shall be available to entities that were not doing business in this

state in the year in which the loss was incurred. A Kentucky net operating loss

carryover incurred by a taxpayer member of a combined group shall be

deducted from income or loss apportioned to this state pursuant to this section

as follows:

1. For taxable years beginning on or after the first day of the initial taxable

year for which a combined unitary tax return is required under this

section, if the computation of a combined group's Kentucky net income

before apportionment to this state results in a net operating loss, a

taxpayer member of the group may carry over its share of the net

operating loss as apportioned to this state, as calculated under this

section and in accordance with KRS 141.120 or 141.121, and it shall be

deductible from a taxpayer member's apportioned net income derived

from the unitary business in a future tax year to the extent that the

carryover and deduction is otherwise consistent with KRS 141.011;

2. Where a taxpayer member of a combined group has a Kentucky net

operating loss carryover derived from a loss incurred by a combined

group in a tax year beginning on or after the first day of the initial tax

year for which a combined unitary tax return is required under this

section, then the taxpayer member may share the net operating loss

carryover with other taxpayer members of the combined group if the

other taxpayer members were members of the combined group in the tax

year that the loss was incurred. Any amount of net operating loss

carryover that is deducted by another taxpayer member of the combined

group shall reduce the amount of net operating loss carryover that may

be carried over by the taxpayer member that originally incurred the loss;

3. Where a taxpayer member of a combined group has a net operating loss

carryover derived from a loss incurred in a tax year prior to the initial

tax year for which a combined unitary tax return is required under this

section, the carryover shall remain available to be deducted by that

taxpayer member and any other taxpayer members of the combined

group, but in no case shall the deduction reduce any taxpayer member's

Kentucky apportioned taxable income by more than fifty percent (50%)

in any taxable year, other than the taxpayer member that originally

incurred the net operating loss, in which case no limitation is provided

except as provided by Section 172 of the Internal Revenue Code. Any

net operating loss carryover that is not utilized in a particular taxable

year shall be carried over by the taxpayer member that generated the loss

and utilized in the future consistent with the limitations of this

subparagraph; or

4. Where a taxpayer member of a combined group has a net operating loss

carryover derived from a loss incurred in a tax year during which the

taxpayer member was not a taxpayer member of the combined group, the

carryover shall remain available to be deducted by that taxpayer member

or other taxpayer members, but in no case shall the deduction reduce any

taxpayer member's Kentucky apportioned taxable income by more than

fifty percent (50%) in any taxable year, other than the taxpayer member

that originally incurred the net operating loss, in which case no

limitation is provided except as provided by Section 172 of the Internal

Revenue Code. Any net operating loss carryover that is not utilized in a

particular taxable year, shall be carried over by the taxpayer member that

generated the loss and utilized in the future consistent with the

limitations of this subparagraph.

(6) The taxpayer's share of the business income apportionable to this state of each

combined group of which it is a member shall be the product of:

(a) The apportionable income of the combined group, determined under

subsection (7) of this section; and

(b) The taxpayer member's apportionment fraction, determined under KRS

141.120, including in the sales factor numerator the taxpayer's sales associated

with the combined group's unitary business in this state, and including in the

denominator the sales of all members of the combined group, including the

taxpayer, which sales are associated with the combined group's unitary

business wherever located. The sales of a pass-through entity shall be included

in the determination of the partner's apportionment percentage in proportion to

a ratio, the numerator of which is the amount of the partner's distributive share

of the pass-through entity's unitary income included in the income of the

combined group as provided in subsection (8) of this section and the

denominator of which is the amount of pass-through entity's total unitary

income.

(7) The apportionable income of a combined group is determined as follows:

(a) The total income of the combined group is the sum of the income of each

member of the combined group determined under federal income tax laws, as

adjusted for state purposes, as if the member were not consolidated for federal

purposes; and

(b) From the total income of the combined group determined under subsection (8)

of this section, subtract any income and add any expense or loss, other than

the apportionable income, expense, or loss of the combined group.

(8) To determine the total income of the combined group, taxpayer members shall take

into account all or a portion of the income and apportionment factor of only the

following members otherwise included in the combined group as provided in

subsection (3) of this section:

(a) The entire income and apportionment percentage of any member, incorporated

in the United States or formed under the laws of any state, the District of

Columbia, or any territory or possession of the United States, that earns less

than eighty percent (80%) of its income from sources outside of the United

States, the District of Columbia, or any territory or possession of the United

States;

(b) Any member that earns more than twenty percent (20%) of its income, directly

or indirectly, from intangible property or service related activities that are

deductible against the apportionable income of other members of the

combined group, to the extent of that income and the apportionment factor

related to that income. If a non-United States corporation is includible as a

member in the combined group, to the extent that the non-United States

corporation's income is excluded from United States taxation pursuant to the

provisions of a comprehensive income tax treaty, the income or loss is not

includible in the combined group's net income or loss. The member's expenses

or apportionment factors attributable to income that is excluded from United

States taxation pursuant to the provisions of a comprehensive income tax

treaty are not to be included in the combined report;

(c) The entire income and apportionment factor of any member that is doing

business in a tax haven. If the member's business activity within a tax haven is

entirely outside the scope of the laws, provisions, and practices that cause the

jurisdiction to meet the definition established in subsection (2)(d) of this

section, the activity of the member shall be treated as not having been

conducted in a tax haven;

(d) If a unitary business includes income from a pass-through entity, the income

to be included in the total income of the combined group shall be the member

of the combined group's direct and indirect distributive share of the pass-

through entity's unitary income;

(e) Income from an intercompany transaction between members of the same

combined group shall be deferred in a manner similar to 26 C.F.R. 1.1502-13.

Upon the occurrence of any of the following events, deferred income resulting

from an intercompany transaction between members of a combined group

shall be restored to the income of the seller, and shall be apportionable income

earned immediately before the event:

1. The object of a deferred intercompany transaction is:

a. Resold by the buyer to an entity that is not a member of the

combined group;

b. Resold by the buyer to an entity that is a member of the combined

group for use outside the unitary business in which the buyer and

seller are engaged; or

c. Converted by the buyer to a use outside the unitary business in

which the buyer and seller are engaged; or

2. The buyer and seller are no longer members of the same combined

group, regardless of whether the members remain unitary;

(f) A charitable expense incurred by a member of a combined group shall, to the

extent allowable as a deduction provided by Section 170 of the Internal

Revenue Code, be subtracted first from the apportionable income of the

combined group, subject to the income limitations of that section applied to

the entire apportionable income of the group, and any remaining amount shall

then be treated as a nonapportionable expense allocable to the member that

incurred the expense, subject to the income limitations of that section applied

to the nonapportionable income of that specific member. Any charitable

deduction disallowed under this paragraph, but allowed as a carryover

deduction in a subsequent year, shall be treated as originally incurred in the

subsequent year by the same member, and this paragraph shall apply in the

subsequent year in determining the allowable deduction in that year;

(g) Gain or loss from the sale or exchange of capital assets, property described by

Section 1231(a)(3) of the Internal Revenue Code, and property subject to an

involuntary conversion shall be removed from the total separate net income of

each member of a combined group and shall be apportioned and allocated as

follows:

1. For each class of gain or loss, including short-term capital, long-term

capital, Internal Revenue Code Section 1231, and involuntary

conversions, all members' gain and loss for the class shall be combined,

without netting between the classes, and each class of net gain or loss

separately apportioned to each member using the member's

apportionment percentage determined under subsection (6) of this

section;

2. Each taxpayer member shall then net its apportioned business gain or

loss for all classes, including any apportioned gain and loss from other

combined groups, against the taxpayer member's nonapportionable gain

and loss for all classes allocated to this state, using the rules of Sections

1231 and 1222 of the Internal Revenue Code, without regard to any of

the taxpayer member's gains or losses from the sale or exchange of

capital assets, Internal Revenue Code Section 1231 property, and

involuntary conversions which are nonapportionable items allocated to

another state;

3. Any resulting state source income or loss, if the loss is not subject to the

limitations of Section 1211 of the Internal Revenue Code, of a taxpayer

member produced by the application of subparagraphs 1. and 2. of this

paragraph shall then be applied to all other state source income or loss of

that member; and

4. Any resulting state source loss of a member that is subject to the

limitations of Section 1211 of the Internal Revenue Code shall be

carried forward by that member, and shall be treated as state source

short-term capital loss incurred by that member for the year for which

the carryover applies; and

(h) Any expense of one (1) member of the unitary group which is directly or

indirectly attributable to the nonapportionable or exempt income of another

member of the unitary group shall be allocated to that other member as

corresponding nonapportionable or exempt expense, as appropriate.

(9) (a) As a filing convenience, and without changing the respective liability of the

group members, members of a combined reporting group shall annually

designate one (1) taxpayer member of the combined group to file a single

return in the form and manner prescribed by the department, in lieu of filing

their own respective returns.

(b) The taxpayer member designated to file the single return shall consent to act

as surety with respect to the tax liability of all other taxpayers properly

included in the combined report, and shall agree to act as agent on behalf of

those taxpayers for the taxable year for matters relating to the combined

report. If for any reason the surety is unwilling or unable to perform its

responsibilities, tax liability may be assessed against the taxpayer members.