Keep Your Returns Separate, Please: Kentucky law Barring Unitary Returns Upheld as Constitutional

A recently-enacted law which bars the filing of unitary Kentucky returns for tax years ending on or before December 31, 1995 has been held constitutional by the Franklin Circuit Court in Kentucky. In Johnson Controls, Inc. v. Commonwealth of Kentucky, Revenue Cabinet, 00-CI-00523, 00-CI-00661 (Ky.Cir.Ct. (Franklin), Jul. 1, 2004), the effect of the law is to prevent claims for refunds by taxpayers who would have benefited from filing on a unitary rather than a separate-return basis claims said by the court to be worth $200 million, including interest. An appeal of the circuit court's July 1, 2004 decision is pending, so stay tuned to this State Tax Return channel for more news as this story develops...

Kentucky Revenue Cabinet Policy 41P225, the GTE Decision

The long-simmering controversy has its roots in Kentucky Revenue Policy 41P225, adopted by the Kentucky Revenue Cabinet (the "Cabinet") in 1988. From 1972 to 1988, the Cabinet allowed the filing of unitary returns, but Policy 41P225 ended that practice by barring unitary returns and requiring the filing of separate returns only. The Cabinet reversed its position and allowed the filing of unitary returns in 1993. In the meantime, however, several corporations challenged 41P225 in court and, on December 22, 1994, the Kentucky Supreme Court struck down the policy in GTE v. Revenue Cabinet.1 Post-GTE, many taxpayers who had previously filed separate returns would be entitled to lower tax payments when filing amended, unitary returns. The Cabinet began developing settlement guidelines to prepare for these inevitable refund claims.

The Kentucky Legislature Steps Into the Fray: House Bills 599, 321 and 541

The Kentucky Legislature did not sit on the sidelines as these events unfolded, but it enacted laws to limit the years for which such unitary returns could be filed. First, in 1996, the legislature enacted H.B. 599, which barred the filing of unitary returns for tax years after December 31, 1995. Unitary returns for tax years prior to that date could still be pursued. In 1998, the legislature adopted H.B. 321, which barred unitary returns filed after December 22, 1994 (the date of the GTE decision) for tax years before December 31, 1995. The Franklin Circuit Court struck down H.B. 321 in Elk River Res. v. Revenue Cabinet and, during the appeal of that decision, H.B. 321 expired in 2000 under its own terms. Thus, the appeal was dismissed as moot.

Finally, in 2000, the legislature enacted...