Topeka — The Department of Revenue's method for determining whether one company owns another has no basis in law, the Kansas Supreme Court said in handing a corporation a $26 million victory in a tax case.
Friday's ruling in favor of Panhandle Eastern Pipe Line Co. left state officials wondering if other companies will now ask to have past taxes recalculated.
And it came as particularly unwelcome news to legislators trying to decide how to cover a looming $426 million gap in the state budget.
"It's not anything we needed," said Sen. Tax Committee Chairman Dave Corbin, R-Towanda.
For years, the Department of Revenue allowed two or more corporations to file combined income tax returns if one company owned more than 50 percent of another. The unofficial "bright line" rule did not appear anywhere in Kansas' statutes, court decisions or the department's own regulations.
In 1986, Panhandle Eastern filed amended corporate tax returns for 1981 through 1984 to reflect its ownership of National Helium Corp.
With the two companies' returns combined, Panhandle Eastern said, it was due $7.8 million in refunds from the state.
Revenue officials rejected the amended returns, saying Panhandle Eastern failed the department's 50 percent ownership test. The company turned to the state Board of Tax Appeals, which ignored the Revenue Department's unofficial test and ruled for the corporation.
On Friday, the Supreme Court said the Board of Tax Appeals was correct.
"The bright line test is only a rule of thumb used by auditors, not a published regulation or policy," Justice Bob Abbott wrote for the unanimous court.
With interest on the $7.8 million refund, Panhandle Eastern is due $26 million, the court said.
Department officials said Friday they will have to re-examine their rule because of the decision.
"This decision creates uncertainty for the department and for corporate taxpayers," Revenue Secretary Stephen Richards said.
Sen. Stan Clark, R-Oakley, a member of the tax committee, said he is troubled that the department never put its test into an administrative regulation. Such regulations are reviewed by the Department of Administration, the Attorney General's Office and the Legislature.
"There are general principles that should be in regulations that serve as guidelines, so we have consistency," Clark said.
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