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Cincinnati, New Orleans and Texas Pacific Railway Company v. Kentucky Department of Revenue

684 S.W.2d 303 (1985)

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Cincinnati, New Orleans and Texas Pacific Railway Company v. Kentucky Department of Revenue

Kentucky Court of Appeals

684 S.W.2d 303 (1985)

Facts

Southern Railway Company (Southern) and its subsidiary, Cincinnati, New Orleans and Texas Pacific Railway Company (Pacific) (collectively, the railway companies) (plaintiffs) did business in Kentucky and other states. The railway companies, along with the other subsidiaries of Southern, pooled their railroad operations, using the same management and allowing their employees to do work for the other company. If an employee of one company did work for the other company, the employee’s company was reimbursed by the other company. For example, if a Pacific employee performed work for Southern, Southern would reimburse Pacific for the work the Pacific employee performed. To determine the tax liability of the railway companies in Kentucky, the Kentucky Department of Revenue (the department) (defendant) applied Kentucky’s apportionment formula. Kentucky had adopted the Uniform Division of Income for Tax Purposes Act, so it used a three-factor apportionment formula, looking at the property, payroll, and sales of a company in Kentucky as compared with the company’s total property, payroll, and sales. In determining the payroll factor to use for apportioning the income of the railway companies, the department included the compensation of Southern’s employees for work performed for Pacific in the apportionment formula for Pacific’s income. The department reasoned that compensation should be included in the formula of the company for which the work was performed, regardless of which company employed the worker. The trial court disagreed with the department and held that an employee’s compensation should be included in the formula of the company that employed him, even if the work for which he was being compensated was performed for a different company. The department appealed.

Rule of Law

Issue

Holding and Reasoning (Combs, J.)

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