2021 Kentucky Revised Statutes Chapter 141 - Income taxes 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.
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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)
(2)
This section shall apply to taxable years beginning on or after January 1, 2019.
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 passthrough 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
(e)
(f)
(g)
(3)
(a)
(b)
(c)
(d)
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;
"Taxpayer" means any corporation subject to the tax imposed under this
chapter;
"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
"United States" means the fifty (50) states of the United States, the District of
Columbia, and United States' territories and possessions.
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.
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.
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.
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
(4)
(5)
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.
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.
(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
(6)
(7)
(8)
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.
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.
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.
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
(b)
(c)
(d)
(e)
(f)
States;
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;
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;
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 passthrough entity's unitary income;
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;
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
(g)
(h)
(9)
(a)
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;
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
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.
As a filing convenience, and without changing the respective liability of the
(b)
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.
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.
Effective: April 15, 2020
History: Amended 2020 Ky. Acts ch. 91, sec. 12, effective April 15, 2020. -- Amended
2019 Ky. Acts ch. 196, sec. 5, effective June 27, 2019. -- Created 2018 Ky. Acts ch.
207, sec. 120, effective April 27, 2018.
Legislative Research Commission Note (4/15/2020). 2020 Ky. Acts ch. 91, sec. 76
provides that the changes made to this statute in Section 12 of that Act apply to
taxable years beginning on or after January 1, 2019.
Legislative Research Commission Note (6/27/2019). This statute was amended in 2019
Ky. Acts ch. 151, sec. 48 (HB 354) and ch. 196, sec. 5 (HB 458). Although HB 354
was enacted, 2019 Ky. Acts ch. 196, sec. 16 (HB 458) repealed certain sections of
that prior Act, including Section 48, and directed the Reviser of Statutes to not codify
them. Therefore, the amendment to this statute in 2019 Ky. Acts ch. 151, sec. 48, was
not codified.
Legislative Research Commission Note (4/27/2018). Pursuant to 2018 Ky. Acts ch.
207, sec. 154, the provisions created for this statute in that Act apply to taxable years
beginning on or after January 1, 2019.
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