COMMONWEALTH V. AUTOZONE DEVELOPMENT CORP.
REVENUE AND TAXATION: INCOME SHELTER AND NEVADA REIT
PANEL: TAYLOR PRESIDING; LAMBERT, WINE CONCUR
DATE RENDERED: 10/12/2007
COA affirmed Order of the Franklin Circuit Court which affirmed a decision of the Kentucky Board of Tax Appeals (KBTA) determining that AutoZone Development Corporation (AutoZone) was entitled to a tax deduction for dividends paid to shareholders which was appealed (and lost) by the Commonwealth.
AutoZone is a Nevada corporation that began doing business in Kentucky in 1995. AutoZone owns and leases land and buildings in Kentucky for the operation of its business. AutoZone is a federally qualified Real Estate Investment Trust (REIT) pursuant to 26 U.S.C. §§ 856-859 of the United States Internal Revenue Code. AutoZone timely filed its Kentucky corporate income tax returns for the years 1995-1997. On those returns, AutoZone claimed a deduction from gross income for dividends paid to its shareholders. This deduction resulted in ninety-five percent of AutoZone’s income being sheltered from Kentucky’s corporate income tax.
COA was presented with a pure question of law – whether KRS 141.010(13) permits a federally qualified REIT to claim a deduction from gross income for dividends paid shareholders for the purpose of calculating the REIT’s net income on its state tax return.
In its October 10, 2005, order, KBTA concluded that 26 U.S.C. § 857(b)(2)(B)2 of the Internal Revenue Code permits a federally qualified REIT to claim a deduction for dividends paid to shareholders during the relevant taxable year.
KRS 141.010(13) clearly and unmistakably defines “net income” as gross income minus all deductions from gross income allowed by Chapter 1 of the Internal Revenue Code. Under Chapter 1 of the Internal Revenue Code, the dividends paid deduction is specifically codified in 26 U.S.C. § 857(b)(2)(B)
The issue of whether the dividends paid deduction, as codified in 26 U.S.C. § 857(b)(2)(B), is an allowable deduction under KRS 141.010(13) has never been addressed in this Commonwealth. COA looked at Revenue Cabinet v. General Motors Corporation, 794 S.W.2d 178 (Ky.App. 1990) in which it was recognized that taxable income, as utilized in the Internal Revenue Code (26 U.S.C. § 63(a)), and net income, as used in KRS 141.010(13), are virtually “the same.” As the deduction for dividends paid is also utilized to arrive at and effectively reduce a REIT’s taxable income for federal taxation purposes, we hold that the deduction for dividends paid, as codified in 26 U.S.C. § 857(b)(2)(B), is the functional equivalent of an allowable deduction from gross income under KRS 141.010(13).
Held the deduction for dividends paid, codified in 26 U.S.C. § 857(b)(2)(B), is an allowable deduction to gross income of a REIT under KRS 141.010(13).
Digested by Michael Stevens