GTE v. Revenue Cabinet

GTE v. Revenue Cabinet

Opinion

 [*789] OPINION OF THE COURT BY JUSTICE WINTERSHEIMER

This appeal is from a decision of the Court of Appeals which reversed a judgment of the Franklin Circuit Court and held that GTE and Subsidiaries did not have the right to file a combined Kentucky Income Tax Return pursuant [**2]  to KRS 141.120.

The issue here is whether an interpretation of KRS 141.120 provides GTE and Subsidiaries with the right to file such a combined Kentucky Income Tax Return.

The circuit judge emphasized that the 64 stipulations of fact agreed to by the parties revealed an interlocking inter-relationship among the members of GTE. The circuit judge concluded that there was sufficient satisfaction of the "three unities" test addressing unity not only of ownership but also of use and operations so that this case was governed by Armco, Inc. v. Revenue Cabinet, Ky., 748 S.W.2d 372 (1988) in which this Court upheld the reasoning by Revenue then that the net income of Armco and its Domestic International Sales Corporation should be combined because of their unitary nature. The Court of Appeals distinguished this dispute from the DISC situation presented in Armco because the circumstances of GTE did not involve a mere paper corporation such as a DISC.

The appellate panel announced that the post-Armco  interpretation of KRS 141.120 in Revenue Policy 41P225 applied despite a contrary reading of the same statute for the previous 16 years from 1972 to 1988  [**3]  as requiring  [*790]  unitary reporting. The policy permits unitary reporting only if the subsidiaries are a sham or paper corporation with limited viable activities. The Court of Appeals determined that selecting a business structure was the option of the business which must then live with its consequences including any adverse tax results. The Court of Appeals perceived no express statutory mandate for a combined unitary corporate income tax return in the statute. This Court granted discretionary review.

GTE, a New York Corporation, and Subsidiaries, is a large telecommunications service company that operates in all 50 states through a multi-corporate structure consisting of four basic business groups: telephone operations, communication products, electrical products and communication network services. These business groups are vertically integrated and GTE owns all the stock of its subsidiaries. Many management functions, such as long-term planning, public and governmental relations, purchasing, budgeting, financing and advertising are performed centrally. Members of the GTE group share corporate officers and directors. Management level personnel transfer freely among the several corporate [**4]  members of the GTE group.

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