Now, on this 18th day of January, 1989, the above captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas.
This Board, being fully advised in the premises, finds and concludes as follows:
1. This is an appeal by First National Bank of Manhattan from an order dated December 30, 1987 of the Director of Taxation requiring that the privilege tax return of First National Bank of Manhattan (FNB) be determined without the loss sustained by Bancorp, the holding company for FNB.
2. The appeal was timely filed with this Board pursuant to KSA 74-2438. Briefs were filed by both parties and the Board finds form the record the following:
3. Bancorp was formed in 1973 to acquire the outstanding shares of FNB in order for the Hostetler family to gain control of FNB. Pursuant to federal law a bank is not allowed to own its own stock. Forming a holding corporation such as Bancorp was the only method for the Hostetler family to gain control of FNB.
Consolidated returns were not filed in previous years by FNB for two reasons. First, it never occurred to the bank originally because they were one of the first holding companies in the state. Second and more importantly, during the 1`970's the holding company has very little debt and therefore very little interest expense. As Bancorp accumulated stock, they acquired debt to purchase the stock. The interest deductions then became important to the consolidated return.
4. The debt is secured by the assets of FNB. FNB makes transfers to Bancorp in the form of dividends in order to make payment on the debt. Bancorp performs no function except as a holder of debt for FNB securities.
5. For 1981 and 1982 Federal income FNB filed returns separate from Bancorp. The returns were later amended to consolidate the two entities under Federal code provision of IRC 1502. Kansas form 130 was filed and later amended to be consistent with the Federal filings. The Director of Taxation took exception to consolidating the returns and assessed a deficiency against FNB.
6. The Director objected to the consolidation because FNB is a privilege tax filer under KSA 79-32,138. A hearing was conducted by the Director and an order issued. At the hearing FNB sought to reduce its tax liability by including Bancorp's interest expense in the computation of its own taxable income, either through combination or consolidation.
7. The order from the Director of Taxation determined that Bancorp was created for the purpose of benefiting and sharing the ownership and business interests of the shareholder of the shareholder of FNB itself. Because of the different tax subjects of the tow entities the Director concluded it was not appropriate to consolidate or combine filing. Further, the Director determined FNB and Bancorp were not unitary and there was no reason to treat them as a single entity.
8. On appeal FNB argues they should be allowed to deduct the Bancorp loss through consolidation of income as utilized for federal income tax or in the alternative deduct the loss through a unitary combination with Bancorp.
9. FNB files its privilege tax return pursuant to KSA 79-1107. This statute states "every national bank . . . doing business within the state shall pay to the state for the privilege of doing business with the state, a tax measured by its net income . . ."
10. KSA 79-1109 defines net income to be used in computing the privilege tax return. Net income is generally Kansas taxable income as defined in KSA 79-32, 138 with modification for interest income form the United States and interest which is exempt for taxation.
11. KSA 79-1110 provides that every national banking association ". . . shall be subject to other provisions of the Kansas income tax application other corporations"
12. Kansas taxable income of a corporation taxable under KSA 79-32,138(a) shall be the corporations' federal taxable income for the taxable year with the following modifications . . . (d) if any of its income from sources within Kansas . . . its Kansas taxable income shall be the sum resulting after application of sub sections (a)-( c ). (Subsections (b) and ( c ) are not applicable to this taxpayer.)
KSA 79-32-142(a) states that when two or more corporations file federal income tax returns on a consolidated basis and if each corporation derives all income and expenses within Kansas then such corporation shall file consolidated returns for purposed of determining their Kansas income tax liability as if they were one corporation.
12. The taxpayer has argued that reading KSA 79-1107, 79-1109, 79-1110 and 79-32,142 together provides a legislative mandate that the taxpayers shall compute Kansas income using the consolidated federal income as a basis. KSA 79-32,138 provides the basis is Federal taxable income. KSA 79-32,109(a) provides that any term used in the Kansas Income Tax Act has the same meaning as when used in a comparable context in the Federal Internal Revenue Code (IRC) of 1954 and amendments thereto. In reading KSA 79-32,138 and KSA 79-32.109(a) together, the returns if consolidated for federal purposes shall be consolidated for state purposes.
Section 1501 of the IRC gives the ability for an affiliated group of corporations to make a single corporate return and it they elect to file consolidated returns then the tax is computed on a consolidated basis.
14. The taxpayer interprets KSA 79-1110 to require that when a corporation files a Federal consolidated return and all their corporate income is derived from within Kansas, KSA 79-32,142 will apply to privilege tax filers and the corporations shall file a consolidated return for purposes of determining Kansas income tax liability.
15. The state argues that the taxpayer and Bancorp have their own separate taxable income and they are consolidated for Federal tax purposes. The principal measure for income and privilege taxes if fixed to the federal taxable income of a single corporation. The statute is written in the singular form, denoting each corporation. Under this statute each corporation begins its tax computation under its own separate taxable income.
16. The state also argues that KSA 79-32,142 (a) and (b) cannot be made applicable for several reasons. First to allow consolidation would be taxing Bancorp at privilege tax rates even though it is clearly not a member of the statutory designated class of privilege taxpayers. Second by combining the two corporations there would be a different tax rate, carryback period, and income measures.
17. The Board finds the income base of privilege taxpayer shall be that of the payer as a single entity and not in combination with any other entity that is under a separate set of tax laws, even if the reference points for beginning taxable income are set out in the same statute. The type of income may be similar but there are different adjustments to be made to the privilege tax as well as different tax rates to be applied to the privilege taxpayer. These differences keep the corporate filer from falling under the separate structure set up for privilege tax filing.
18. The taxpayer argues in the alternative that even if they are not combined, they should be, because they are a unitary business.
21. The state argues that they are dissimilar filers. Bancorp had no function or purpose other than the ownership of stock in First Bank. There was no other purpose. There were no employees and no property. There were no activities and no functional relationship in the operation of FNB.
23. The Board hereby denies the taxpayers appeal to treat the two businesses as a combined or a unitary business for tax purposes.
22. The Board finds there is a lack of unity of operation between the Bancorp and First Bank. Bancorp serves no purposes other than to hold the banks stock. The Bancorp performs no operation which assist the functioning of the Bank.
24. The Board concludes that the Director's order should be sustained.
IT IS, THEREFORE, BY THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS, CONSIDERED AND ORDERED that, for the reasons more fully set forth herein, the above described appeal must be, and the is hereby, denied.
If any party to this appeal feels aggrieved by this decision, they may file a written request for a rehearing with this Board. The written request for rehearing shall set forth specifically and in adequate detail the particular and specific respects in which it is alleged that the Board's order is unlawful, unreasonable capricious, improper or unfair. A copy of the request, together with all documents submitted therewith, shall be mailed to the opposing party at the same time the request is mailed to the opposing party at the same time the request is mailed to the Board. Failure to notify the opposing party shall render any subsequent order voidable. The written request must be received by the Board within thirty (30) days the Board has not received a written request for a rehearing, this order will become a final order from which no further appeal is available.
IT IS SO ORDERED
KEITH FARRAR, CHAIRMAN ________________________
FRED L. WEAVER, MEMBER ________________________
VICTOR ELLIOTT, MEMBER ________________________
CONRAD MILLER, JR, MEMBER ________________________
CHARLES F. LAIRD, MEMBER ________________________
DAVID C. CUNNINGHAM, SECRETARY ________________________
JAMES P. DAVIDSON, ATTORNEY ________________________