Opinion ID: 1990251
Heading Depth: 1
Heading Rank: 8

Heading: 1972-1988The Cabinet Accepts and Then Rejects Combined Reporting.

Text: As noted above, formulary apportionment of interstate income was early on associated with the unitary business concept and combined reporting. Thus, although UDITPA does not itself include reporting provisions, the General Assembly's 1966 adoption of the UDITPA apportionment scheme was perceived by the Revenue Cabinet and by the courts as an embrace or a confirmation of combined or unitary reporting in Kentucky. That perception was based not only on case law upholding the use of combined reporting together with formulary apportionment, for example Mobil Oil Corporation, supra, Butler Bros. v. McColgan, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991(1942) and Edison California Stores, Inc., supra , but also on the fact that UDITPA is designedly consistent with a combined-reporting regime. In particular, as originally enacted in Kentucky, the UDITPA scheme required that [a]ll business income shall be apportioned pursuant to the property, payroll, and sales factors mentioned above. KRS 141.120(9) (1966). The law defined business income as income arising from transactions and activity in the regular course of a trade or business of the taxpayer. KRS 141.120(1)(a) (1966). But taxpayer was left undefined, and thus the state was free to include in its approach to taxpayers the unitary business concept and to require combined reports where appropriate if it so chose. [4] Encouraging such an approach in Kentucky, aside from the tenor of the times, was the fact that even apart from UDITPA, Kentucky law recognized the notion of multi-corporate income accounting. KRS 141.205(1) (1966), for example, provided that [t]he department may require any parent corporation or subsidiary corporation doing business within this state to file a consolidated return covering the entire operations of the parent corporation and its subsidiaries, whenever it finds that the inter-corporate transactions of the related group tend to reduce the net income of the corporation, or corporations, doing business within this state below the amount that would probably result if such corporation, or corporations, was not a member of the related group. For these reasons, and perhaps others, in 1972 the Revenue Cabinet began allowing unitary businesses to file combined or unitary reports under KRS 141.120. In 1974, the General Assembly apparently endorsed this policy by amending KRS 141.205 to provide expressly for combined as well as consolidated returns: The department may require either a consolidated return or a combined return from any or all corporations conducting intercorporate transactions whenever the department finds that such intercorporate transactions reduce taxable net income ... below the amount which would result if the transactions were at arms-length. The Cabinet's combined-return policy continued, with the acquiescence of the General Assembly, until 1988. In September of that year, however, the Cabinet abruptly made an about face. Without any legislative changes in the tax laws, the Cabinet issued Revenue Policy 41P225, by which it purported to limit combined reporting to parent-subsidiary relationships in which the subsidiary was a mere paper corporation with limited viable activities. The effect of this policy shift was essentially to halt the filing of combined reports in Kentucky.