Kansas Department of Revenue to Double-Tax Bank Income

Kansas Bankers Association and Tax Practitioners Take Issue with Costly KDR Interpretation

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We’ve recently learned of an interesting development that significantly impacts the Community Banking industry.   At the end of December, K·Coe participated in a call facilitated by the Kansas Bankers Association with multiple practitioners discussing a recent audit with the Kansas Department of Revenue (KDR).  We want to make sure that your management group is aware of the KDR’s position, and how it came about.

History:  In early 2019, the KDR conducted an audit of a bank holding company (it is not a K·Coe client).  As a result of the audit, the KDR determined that the bank holding company must include its bank’s income in the bank holding company’s Kansas corporate income tax return.  That is, the KDR took the position that the bank’s income is subject to both the Kansas Privilege Tax and the Kansas Corporate Income Tax.  This, of course, results in the bank’s income being taxed twice (and possibly three times if they are a C Corporation paying dividends).

Rationale:  The KDR’s rationale seems to be that because a bank holding company and the bank cannot file a consolidated return at the state level, the bank holding company cannot subtract the bank’s income from the bank holding company’s income. The KDR seems to believe that hundreds of banks are filing their returns paying double tax, but, as you know, it has been the long-standing practice to subtract the bank’s income from the bank holding company’s Kansas K-120.  All tax practitioners on the call indicated that they were filing bank Kansas income tax returns this way.

Potential Resolutions:  Several options were discussed on the call with the KBA, including:

  • Continue the fight with the KDR and employ a good lawyer to prove that how the KDR is interpreting is incorrect.
  • Suggest a proposed legislative clarification to make clear that bank income is subject only to the Kansas Privilege Tax.
  • Amend bank holding company federal and Kansas returns such that Kansas Line 1 Federal taxable income would reflect only the income of the bank holding company, and be sure that all future returns are prepared that way (without the bank’s income). (This is the way K·Coe has prepared C Corp tax returns with no additional subsidiaries other than the bank.)
  • Consider whether there is a need for the continued existence of bank holding companies (K·Coe believes a holding company provides significant benefits).

Current Status:  The Kansas Bankers Association is working with the audited bank holding company in attempt to resolve the audit.  However, given the KDR’s strong belief in its position, we doubt that the matter will be easily or quickly resolved.

The KDR’s determination applies to a C Corporation.  We do not know the KDR’s position regarding an S Corporation.  However, the Kansas statute specifically states that a shareholder in an S Corporation bank should subtract the bank’s income reported on the privilege tax return from federal adjusted gross income.  This statute recognizes that this income has already been taxed on the bank’s privilege tax return.

We will keep you updated as we learn more about this issue.

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