January 19, 2022
Kentucky Department of Revenue submits income tax regulation on financial institution apportionment for final review
The Kentucky Department of Revenue (Department) has submitted for final review amendments to 103 Ky. Admin. Reg. 16:270 (the regulation), regarding the apportionment of receipts of financial organizations that were previously subject to the Bank Franchise Tax. House Bill 458 sunset the Bank Franchise Tax after 2020, so the corporate income tax applied to income from banks, savings and loans institutions, and companies defined as financial organizations, beginning in 2021 (see Tax Alert 2019-0688).
The regulation, if finalized as currently drafted, would adopt sourcing rules similar to those under the Bank Franchise Tax by incorporating the definitions and sourcing provisions in Ky. Rev. Stat. Sections 136.500, 136.535 and 136.530.
The definitions in Ky. Rev. Stat. Section 136.500 would mostly be incorporated into Section 1 of the regulation. In a notable change, however, the regulation would expand the definition of a financial organization to include any entity that is more than 50% owned, directly or indirectly, by a bank or a savings and loan holding company. The sourcing rules in Ky. Rev. Stat. Section 136.530, and related definitions in Ky. Rev. Stat. Sections 136.500 and 136.535, would be largely incorporated into Section 6 of the regulation.
The Department approved the regulation on October 14, 2021, and filed it with the Legislative Research Commission the following day. The regulation was sent to the Administrative Regulation Review Subcommittee, which considered it during its meeting on November 9, 2021. The regulation has been referred to the subject matter committee for final review. If the committee does not defer the regulation or find it deficient, the regulation will go into effect at the expiration of the 90-day review period, which would probably be in the next couple of months.
As anticipated, the amended regulation would adopt sourcing rules very similar to those of the old Bank Franchise Tax. The amended regulation, however, does not contain guidance on including a financial organization in a mandatory combined group or utilizing and sharing a net operating loss. The Department will soon be issuing draft forms for the 2021 combined returns, which may include guidance on these issues.