Supreme Court Rules on Kentucky Taxation of Municipal Bond Interest

​​​On May 19, 2008, the US Supreme Court ruled in case of the Kentucky Department of Revenue et al. v. Davis et ux., Docket 06-666, that Kentucky's individual income tax exemption for interest income from bonds issued by Kentucky or its subdivisions does not violate the Commerce Clause even though Kentucky required tax to be paid on interest income from bonds issued by other states or their subdivisions.

Prior to action by the Court, there was a question of whether a decision by the Court would have an impact Wisconsin's tax treatment of municipal bond interest. Wisconsin's income tax law with respect to this issue is not identical to Kentucky law. Therefore, pending the decision of the Court, the department entered into the following two types of agreements with taxpayers to extend the statute of limitations to adjust Wisconsin income tax returns with respect to this issue.

  1. “Protective Claim” amended returns- In the event the Court ruled against Kentucky and the decision was determined to affect the Wisconsin tax treatment of municipal bond interest, the time period to act of the amended return filed was extended to a set time beyond the date of the decision. In the event of decision in favor of Kentucky, stipulated point 5 of the extension agreement provided that, the refund claimed on the amended return would automatically be denied without further action by the department.

If the taxpayer wishes to appeal the denial of the refund claim that was automatic as of the May 19, 2008, decision, the appeal must be sent within 60 days of the May 19, 2008 decision (July 18, 2008) to:

Wisconsin Department of Revenue
Resolution Unit
Mail Stop 5-144
Post Office Box 8906
Madison, Wisconsin 53708-8906

  1. Extension to file claim for refund - For taxpayers that did not file an amended return, but wanted to protect their right to file a claim for refund at a later date, the department entered into an agreement whereby the statute of limitations for filing a claim for refund for this issue was held open pending the Court's final decision.

A taxpayer who entered into the “Agreement Extending Time to File Claim for Refund” for this case has 6 months after the May 19, 2008 decision date (November 19, 2008) to file amended returns to claim refunds, subject to denial by the department, for years covered by the extension agreement.

Questions regarding the agreements, claims for refund, and appeals relating to this issue can be directed to Dawn Wenzel at (608) 266-3190.

June 11, 2008