JOHNSON CONTROLS, INC.; SECURITY GROUP, INC. AND SUBSIDIARIES, INCLUDING SARGENT & GREENLEAF, INC., WILLIS NORTH AMERICA, INC. (F/K/A WILLIS CORROON CORPORATION) AND AFFILIATES; BUNZL USA, INC. AND SUBSIDIARIES, INCLUDING MAK-PAK, INC., TREDEGAR CORPORATION AND SUBSIDIARIES, PREDECESSOR IN INTEREST TO TREDEGAR INDUSTRIES, INC. AND SUBSIDIARIES; AND COSMOS BROADCASTING CORPORATION AND AFFILIATES v. ROBBIE RUDOLPH, THE CURRENT SECRETARY OF THE FINANCE AND ADMINISTRATION CABINET, REVENUE DEPARTMENT; AND COMMONWEALTH OF KENTUCKY, FINANCE AND ADMINISTRATION CABINET, REVENUE DEPARTMENT
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RENDERED: May 5, 2006; 2:00 P.M.
NOT TO BE PUBLISHED
DISCRETIONARY REVIEW GRANTED BY KENTUCKY SUPREME COURT:
OCTOBER 24, 2007
(2006-SC-0416-DG)
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-001566-MR
JOHNSON CONTROLS, INC.;
SECURITY GROUP, INC. AND SUBSIDIARIES,
INCLUDING SARGENT & GREENLEAF, INC.,
WILLIS NORTH AMERICA, INC. (F/K/A WILLIS
CORROON CORPORATION) AND AFFILIATES;
BUNZL USA, INC. AND SUBSIDIARIES,
INCLUDING MAK-PAK, INC.,
TREDEGAR CORPORATION AND SUBSIDIARIES,
PREDECESSOR IN INTEREST TO
TREDEGAR INDUSTRIES, INC. AND SUBSIDIARIES;
AND COSMOS BROADCASTING CORPORATION
AND AFFILIATES
v.
APPELLANTS
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
CIVIL ACTION NOS. 00-CI-00523 AND 00-CI-00661
ROBBIE RUDOLPH, THE CURRENT SECRETARY OF
THE FINANCE AND ADMINISTRATION CABINET,
REVENUE DEPARTMENT; AND
COMMONWEALTH OF KENTUCKY,
FINANCE AND ADMINISTRATION CABINET,
REVENUE DEPARTMENT
OPINION
REVERSING AND REMANDING
** ** ** ** **
APPELLEES
BEFORE:
BARBER, MINTON, AND TACKETT, JUDGES.
MINTON, JUDGE:
I.
INTRODUCTION.
While the Appellants’ administrative claims for income
tax overpayment languished in the Kentucky Revenue Cabinet, the
2000 session of the Kentucky General Assembly enacted H.B. 541,
which nullified these claims.
Appellants then filed declaratory
judgment actions in circuit court seeking to have the subsection
of Kentucky Revised Statutes Chapter (KRS) 141.200 that codified
H.B. 541 declared unconstitutional.
Before us is the appeal
from the unsuccessful declaratory judgment actions.
We hold
that the retroactivity period created by H.B. 541 exceeds the
constitutional limits and violates Appellants’ due process
rights.
Therefore, we reverse the circuit court.
II.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY.
Beginning in 1972, the Cabinet allowed unitary
businesses to file combined or unitary tax returns.1
For reasons
unnecessary to the resolution of this appeal, in 1988, the
1
See GTE v. Revenue Cabinet, 889 S.W.2d 788, 790 (Ky. 1994). A
“unitary business” is defined as “[a] business that has subsidiaries
in other states or countries and that calculates its state income
tax by determining what portion of a subsidiary’s income is
attributable to activities within the state, and paying taxes on
that percentage.” BLACK’S LAW DICTIONARY (8th ed. 2004). Similarly, a
“unitary tax” is “[a] tax of income earned locally by a business
that transacts business through an affiliated company outside the
state or country.” Id.
-2-
Cabinet issued a policy statement that “effectively halted the
filing of combined [unitary] returns.”2
GTE challenged the
Cabinet’s policy shift in a case that reached the Kentucky
Supreme Court in 1994.
On December 22, 1994, the Kentucky Supreme Court
decided in GTE’s favor, permitting unitary businesses to resume
the practice of filing unitary tax returns in Kentucky.
In
response to that decision, Appellants, twenty-six businesses
that claim to be legally entitled to file unitary tax returns,
each filed amended tax returns with the Cabinet seeking
reimbursement for taxes they claimed to have overpaid during the
period that the Cabinet’s policy prevented them from filing
unitary tax returns.3
Although the Cabinet purportedly acted on
the overpayment requests of other similarly situated businesses,
it took no immediate action on Appellants’ claims.
At its next regular session following the GTE
decision, 1996, the General Assembly enacted H.B. 599, which
abolished unitary returns for the tax years after December 31,
1995.
But that legislation had no effect on Appellants’ pending
claims for repayment.
These claims were still pending before
the Cabinet when the General Assembly convened its 1998 regular
2
3
GTE, 889 S.W.2d at 790.
See KRS 134.580, which authorizes refunds to any taxpaying
entity for tax overpayments, provided that the refund application
was made within four years from the date the payment was made.
-3-
session.
H.B. 321.
In that session, the General Assembly enacted
That bill did not retroactively nullify Appellants’
pending claims.
Rather, the statute only provided that no post-
GTE repayment claims would be paid during the biennial budget
period.
In court action challenging H.B. 321, the Franklin
Circuit Court declared it unconstitutional, a decision the
Cabinet appealed to this Court.
But before this Court could
decide the appeal, H.B. 321 expired by its own terms; and we
dismissed the appeal as moot.4
Appellants’ claims for overpayment were actively
pending with the Cabinet when the General Assembly convened for
its 2000 session.
The General Assembly, apparently alarmed that
the appellants’ pending claims could significantly drain the
state’s treasury, enacted H.B. 541, which substantially amended
KRS 141.200.
Specifically, after enactment of H.B. 541,
KRS 141.200(9)5 provided that
[n]o claim for refund or credit of a tax
overpayment for any taxable year ending on
or before December 31, 1995, made by an
amended return or any other method after
4
The facts regarding bills passed by the General Assembly in
1996 and 1998 is largely drawn from Appellants’ motion for summary
judgment before the trial court. To the extent that any factual
recitations are disputed, they are presented in the light most
favorable to Appellants, the party against whom summary judgment was
granted. See Steelvest, Inc. v. Scansteel Service Center, Inc., 807
S.W.2d 476, 480 (Ky. 1991) (citing Paintsville Hosp. Co. v. Rose,
683 S.W.2d 255 (Ky. 1985)).
5
Although it was not substantively amended, KRS 141.200(9) was
recodified as KRS 141.200(17) after the filing of this action.
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December 22, 1994, and based on a change
from any initially filed separate return or
returns to a combined return under the
unitary business concept or to a
consolidated return, shall be effective or
recognized for any purpose.
Similarly, after the enactment of H.B. 541, KRS 141.200(10)6
provided that
[n]o corporation or group of corporations
shall be allowed to file a combined return
under the unitary business concept or a
consolidated return for any taxable year
ending before December 31, 1995, unless on
or before December 22, 1994, the corporation
or group of corporations filed an initial or
amended return under the unitary business
concept or consolidated return for a taxable
year ending before December 22, 1994.
The effect of H.B. 541 was to extinguish retroactively
Appellants’ pending claims for tax overpayment.
Arguing H.B. 541 to be unconstitutional, Appellants
filed two separate declaratory judgment actions in the Franklin
Circuit Court to have the retroactive portions of that law
declared unconstitutional.
Those two cases were consolidated;
and the circuit court granted summary judgment to the Cabinet,
expressly finding that H.B. 541 was not unconstitutional.
The
Appellants have appealed that ruling to this Court.
6
Although it was not substantively amended, KRS 141.200(10) was
recodified as KRS 141.200(18) subsequent to the filing of this
action.
-5-
III.
A.
DISCUSSION AND ANALYSIS.
Propriety of Dual Administrative and Declaratory
Judgment Proceedings.
Initially, we were concerned about whether this appeal
was properly before us because the Appellants filed their
declaratory judgment actions while their administrative claims
for tax overpayment were pending.
Normally, such parallel
actions regarding the same subject matter and parties are
potentially problematic because, generally speaking, a party
seeking to have a statute declared unconstitutional must show
that the application of the statute has caused injury.7
At the
time these declaratory judgment actions were filed in circuit
court, the Appellants had suffered no harm from the application
of KRS 141.200 because neither the Cabinet nor the Kentucky
Board of Tax Appeals had relied upon that statute to deny
Appellants’ overpayment claims.
And it appeared to us that the
Appellants should have exhausted their administrative remedies8
7
Commonwealth v. DLX, Inc., 42 S.W.3d 624, 626 (Ky. 2001)
(“[i]n other words, until a statute has been applied, there can be
no unconstitutional application. This is the basis for the rule
that one must first show injury as the result of a statutory
application, before that application may be attacked as
unconstitutional.”).
8
See, e.g., Board of Regents of Murray State Univ. v. Curris,
620 S.W.2d 322, 323 (Ky.App. 1981) (“[s]ubject to limited
exceptions, none of which are present in this case, exhaustion of
administrative remedies must precede judicial review of an
administrative agency's action. Thus, even though the court had
subject-matter jurisdiction, proper judicial administration mandates
judicial deference until after exhaustion of all viable remedies
before the agency vested with primary jurisdiction over the
matter.”); DLX, 42 S.W.3d at 625 (“[a]s a general rule, exhaustion
-6-
by finishing the proceedings before the Cabinet and Board of Tax
Appeals before proceeding in circuit court.9
So in order to
allay our concerns and to broaden our understanding of the
parties’ positions, we asked for supplemental briefs.
And after
having examined those briefs and considering oral arguments, we
have decided that exhaustion of administrative remedies is not
required under these unique facts.
It is well settled that administrative bodies, such as
the Cabinet and the Board of Tax Appeals, lack the power to
declare a statute unconstitutional.10
Thus, exhaustion of
administrative remedies is not required when a statute is
challenged as being unconstitutional on its face.11
As the
parties’ supplemental briefs make clear, Appellants raise a
facial challenge to KRS 141.200’s constitutionality.
So the
exhaustion of administrative remedies doctrine is inapplicable,
meaning that the Appellants were free to file their declaratory
judgment actions in circuit court before the termination of
of administrative remedies is a jurisdictional prerequisite to
seeking judicial relief.”).
9
KRS 131.370(1) provides, in relevant part, that “[a]ny party
aggrieved by any final order of the Kentucky Board of Tax
Appeals . . . may appeal to the Franklin Circuit Court or to the
Circuit Court of the county in which the party aggrieved resides or
conducts his place of business in accordance with KRS Chapter 13B.”
10
DLX, 42 S.W.3d at 626.
11
Id.
-7-
their administrative claims with the Cabinet.12
Likewise, since
the administrative bodies lacked the power to declare
KRS 141.200 unconstitutional, it would have been futile for the
Appellants to seek that type of relief from those bodies.
So
this case also fits within the futility exception to the
exhaustion of administrative remedies requirement.13
Satisfied
that no procedural impediment exists, we may examine this appeal
on its merits.
B.
Standard of Review.
In assessing the propriety of the trial court’s grant
of summary judgment to the Cabinet, we recognize that summary
judgment was appropriate only if the Cabinet showed that
Appellants “could not prevail under any circumstances.”14
In
ruling on a motion for summary judgment, the trial court must
view the evidence in the light most favorable to the party
opposed to the motion.15
And when we review a trial court’s
decision to grant summary judgment, we must determine whether
the trial court correctly found that there were no genuine
12
Kentucky Retirement Systems v. Lewis, 163 S.W.3d 1, 3 (Ky.
2005) (“a party is not required to exhaust all administrative
remedies when the statute is alleged to be void on its face.”).
13
Id. (“[e]xhaustion of remedies is likewise not required when
continuation of an administrative process would amount to an
exercise in futility.”).
14
Steelvest, 807 S.W.2d at 480.
15
Id.
-8-
issues of material fact.16
Since findings of fact are not at
issue here, the trial court’s decision is entitled to no
deference.17
Since Appellants are challenging the constitutionality
of a statute, we must bear in mind that “[i]t is by now well
established that legislative Acts adjusting the burdens and
benefits of economic life come to the Court with a presumption
of constitutionality . . . .”18
In Kentucky, “[t]he test of the
constitutionality of a statute is whether it is unreasonable or
arbitrary.”19
Finally, a statute is constitutionally valid “if a
reasonable, legitimate public purpose for it exists, whether or
not we agree with its ‘wisdom or expediency.’”20
C.
Is H.B. 541 Special Legislation?
Appellants’ first main argument is that H.B. 541 is
special legislation that violates Section 59 of the Kentucky
Constitution.
That section prohibits the General Assembly from
16
Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.App. 1996).
17
Id.
18
19
20
Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1976).
Accord Buford v. Commonwealth, 942 S.W.2d 909, 911 (Ky.App. 1997)
(“[a] strong presumption exists in favor of the constitutionality of
a statute.”).
Buford, 942 S.W.2d at 911.
Id. (quoting Walters v. Bindner, 435 S.W.2d 464, 467 (Ky.
1968)).
-9-
passing any “local or special acts” regarding, among other
things, “the assessment or the collection of taxes . . . .”
According to Appellants, once H.B. 541 was enacted in
2000, the four-year time limit of KRS 134.580 for filing tax
overpayment requests for 1995 and any preceding years had
already elapsed.
So no other entities could have legally sought
relief for any alleged overpayment occurring before December 31,
1995.
And since they were the only entities with pending and
unresolved overpayment claims for years preceding 1995,
Appellants contend that H.B. 541’s sole purpose was to destroy
their pending overpayment claims through retroactive legislation.
Generally, “the term ‘special law’ is legislation
which arbitrarily or beyond reasonable justification
discriminates against some persons or objects and favors
others.”21
But legislation is not “special legislation” simply
because it does not directly apply to every person in the
Commonwealth.22
Rather, in order to be special legislation, the
law must apply disparately within the class of people to whom it
was directed.
In other words,
[l]aws which apply to and operate uniformly
upon all members of any class of persons,
places, or things, requiring legislation
21
City of Louisville v. Klusmeyer, 324 S.W.2d 831, 834 (Ky.
1959).
22
Commonwealth v. Moyers, 272 S.W.2d 670, 673 (Ky. 1954) (“[a]
law is not local or special merely because it does not relate to the
whole state or to the general public.”).
-10-
peculiar to themselves in the matters
covered by the laws in question, are general
and not special. Laws which are framed in
general terms and are not restricted in
locality, but operate equally upon all
groups of objects, which having regard to
the purpose of the legislation or
distinguished by characteristics
sufficiently marked and important to make
them a class by themselves, are
declared . . . to be general.23
So “in order for a law to be general in its constitutional sense
it must meet the following requirements:
(1) It must apply
equally to all in a class, and (2) there must be distinctive and
natural reasons inducing and supporting the classification.”24
This describes the two-pronged Schoo test that is used as the
benchmark for determining whether legislation is special or
general.
As for the first Schoo prong, the portions of
KRS 141.200 at issue are, on their face, applicable to any
business or corporate entity desiring to file an amended return
based on the switch to the unitary filing method, provided that
this switch occurred after December 22, 1994.
Thus, H.B. 541 is
not special legislation because it “uniformly operates on and
applies to all persons and claims within its scope and range.”25
The fact that only a small group of taxpayers is potentially
23
King v. Commonwealth, 194 Ky. 143, 238 S.W. 373, 376 (1922).
24
Schoo v. Rose, 270 S.W.2d 940, 941 (Ky. 1954).
25
Commonwealth v. McCoun, 313 S.W.2d 585, 588 (Ky. 1958).
-11-
affected by the legislation does not mean that the legislation
is special legislation.26
The second prong of the Schoo test is also satisfied.
The clear reason underlying the General Assembly’s passage of
H.B. 541 was to forestall a loss of funds from the state
treasury.
Raising or preserving state revenues is a legitimate
legislative goal.27
Choosing December 22, 1994, as the cutoff
date for switching to a unitary tax return enabled the General
Assembly, in its collective wisdom, a way to avoid depleting the
state treasury.
Thus, H.B. 541 was rationally related to
effectuating its permissible purpose.
Overall, therefore, we
find that H.B. 541 is not special legislation.
D.
Does H.B. 541 Violate the Due Process Clause?
Appellants’ second main argument is that H.B. 541’s
retroactive effect deprives them of due process.
Because of the
26
Kentucky Milk Marketing and Anti-Monopoly Commission v. The
Borden Co., 456 S.W.2d 831, 835 (Ky. 1969) (“[i]n any event the fact
that a legislative act deals with a special subject does not make it
special legislation. All acts must deal with a special subject,
such as alcoholic beverages, game and fish, conduct of elections,
etc.”).
27
See, e.g., United States v. Carlton, 512 U.S. 26, 40 (Scalia,
J., concurring) (“[r]evenue raising is certainly a legitimate
legislative purpose . . . .”) See also, e.g., Wilson v. Gipson,
753 P.2d 1349, 1351-1352 (Okla. 1988) (“[i]t is within the
legitimate power of the legislature to take steps to preserve
sufficient public funds to ensure that the government will be able
to continue to provide those services which it believes benefits the
citizenry.”).
-12-
excessive period of retroactivity contained in that law, we
agree.
Retroactive periods in legislation are nothing new.
In fact, the United States Supreme Court “repeatedly has upheld
retroactive tax legislation against a due process challenge.”28
So the fact that H.B. 541 acts retroactively does not, in and of
itself, make it unconstitutional.
According to United States v. Carlton, the seminal
case in this area, “[t]he due process standard to be applied to
tax statutes with retroactive effect . . . is the same as that
generally applicable to retroactive economic legislation[.]”29
Thus, the overarching test used to analyze such legislation is
the familiar rational basis test.30
In order to determine if a retroactive tax statute
passes the rational basis test, however, the Carlton court set
forth a two-part test.
28
29
30
First, it looked at the statute to find
Carlton, 512 U.S. at 30. See also Usery, 428 U.S. at 16
(“[b]ut our cases are clear that legislation readjusting rights and
burdens is not unlawful solely because it upsets otherwise settled
expectations.”).
Carlton at 512 U.S. at 30.
Id. at 30-31 (quoting Pension Benefit Guaranty Corporation v.
R.A. Gray & Co., 467 U.S. 717, 729-730 (1984) (internal quotation
marks omitted) (“[p]rovided that the retroactive application of a
statute is supported by a legitimate legislative purpose furthered
by rational means, judgments about the wisdom of such legislation
remain within the exclusive province of the legislative and
executive branches.”).
-13-
if it was arbitrary or was enacted for a legitimate purpose.31
Second, it focused on whether the act was promptly enacted and
“established only a modest period of retroactivity.”32
As noted in our discussion of whether H.B. 541 was
special legislation, the General Assembly’s purported purpose in
enacting the statute was to avoid the potential loss of revenue
caused by filing amended returns on a unitary basis for years
before 1995.
The statute is rationally related to accomplishing
that legitimate purpose, and whether we believe the statute was
the wisest or the best method of accomplishing that purpose is
irrelevant to our inquiry.
But we are constrained to find that the period of
retroactivity contained in H.B. 541 is so lengthy as to
constitute a due process violation.
We are well aware that
because H.B. 541 scuttled what Appellants considered to be their
right under formerly established law to receive reimbursement
31
Id. at 32 (“[w]e conclude that the 1987 amendment’s
retroactive application meets the requirements of due process.
First, Congress’ purpose in enacting the amendment was neither
illegitimate nor arbitrary.”).
32
Id. The Cabinet argues in vain that there is no “modesty”
requirement under Carlton. However, many courts interpreting
Carlton have found such a requirement, including one case explicitly
relied upon by the Cabinet. See Tate & Lyle, Inc. v. C.I.R.,
87 F.3d 99, 107 (3d Cir. 1996) (“[t]here [in Carlton], the Supreme
Court set forth a two-part test for determining whether the
retroactive application of a tax statute violates due process.
First, for retroactivity to be upheld, it must be shown that the
statute has a rational legislative purpose and is not arbitrary; and
second, that the period of retroactivity is moderate, not
excessive.”).
-14-
for overpayment is, in and of itself, of no consequence as
“[t]ax legislation is not a promise, and a taxpayer has no
vested right in the Internal Revenue Code.”33
But, at some
point, the rights of a taxpayer to proceed under particular
provisions of a taxation code become settled enough so that a
taxpayer must be permitted to order his financial affairs in
regards to those laws.34
Thus, the Supreme Court opined in
Carlton that the period of retroactivity must be “modest.”
No hard and fast rule exists for what is or is not a
permissibly modest period of retroactivity.
But our research
has shown that nearly all of the post-Carlton reported cases35
involve challenges to statutes containing retroactive periods of
less than one year.36
In the case at hand, the period of
33
Carlton, 512 U.S. at 33. Similarly, under Kentucky law “[i]t
is generally recognized that the right to a refund of illegally or
improperly collected taxes does not derive from the common law, but
is a matter of legislative grace.” Dept. of Conservation v. Co-De
Coal Co., 388 S.W.2d 614, 615 (Ky. 1965). And it is clear that
matters of legislative grace may be “granted, withdrawn or
restricted at the will of the legislature.” Univ. of Kentucky v.
Guynn, 372 S.W.2d 414, 416 (Ky. 1963).
34
See Carlton, 512 U.S. at 37-38 (O’Connor, J., concurring)
(“[t]he governmental interest in revising the tax laws must at some
point give way to the taxpayer’s interest in finality and repose.”).
35
Unfortunately, no Kentucky appellate court has had occasion to
cite Carlton. Thus, we must turn to the decisions of the federal
courts and our sister state courts for guidance.
36
Indeed, although the majority did not expressly adopt her
rationale, Justice O’Connor’s concurring opinion in Carlton sets
forth a bright line one-year limitation on the permissible period of
retroactivity for a taxation statute. Carlton, 512 U.S. at 38
(O’Connor, J., concurring) (“[a] period of retroactivity longer than
the year preceding the legislative session in which the law was
enacted would raise, in my view, serious constitutional
-15-
retroactivity is over five years because H.B. 541 was enacted in
2000 and purports to take away tax returns filed as of December
1994.37
We have examined the cases relied upon by both the
trial court and the Cabinet in favor of H.B. 541.
Of those
cases, only three were decided after Carlton enunciated the
modesty doctrine for retroactive tax legislation.38
So those
three are most relevant to the issue at hand.
Of those three cases, two involve challenges to
retroactive administrative regulations promulgated by the United
States Treasury Department and Internal Revenue Service.39
Thus,
as those cases do not involve statutes, they are easily
questions.”). In fact, even though Carlton first explicitly set
forth the modesty requirement, the federal courts have previously
expressed concern regarding tax statutes with periods of
retroactivity longer than one year. See, e.g., U.S. v. Darusmont,
449 U.S. 292, 296-297 (1981) (holding that the permissible period of
retroactivity for federal taxation statutes “has been confined to
short and limited periods required by the practicalities of
producing national legislation.”). Surprisingly, the estimable
judge Learned Hand expressed concern about periods of retroactivity
exceeding twelve months as far back as 1930. Cohan v. Commissioner
of Internal Revenue, 39 F.2d 540, 545 (2d Cir. 1930). (“Nobody has
a vested right in the rate of taxation, which may be retroactively
changed at the will of Congress at least for periods of less than
twelve months; Congress has done so from the outset.”)
37
As Appellants filed for refund of overpayments for the four
years preceding the GTE decision, H.B. 541’s period of retroactivity
is actually from about five to about nine years.
38
See Montana Rail Link, Inc. v. U.S., 76 F.3d 991 (9th Cir.
1996); Tate & Lyle, Inc., 87 F.3d 99; A. Tarricone, Inc. v. U.S.,
4 F.Supp.2d 323 (S.D.N.Y. 1998).
39
323.
Tate & Lyle, Inc., 87 F.3d 99; A. Tarricone, Inc., 4 F.Supp.2d
-16-
distinguishable from the case at hand.
That distinction is
further highlighted by the fact that the administrative agencies
involved in those two cases apparently had the discretionary
power to determine the retroactive effects of tax regulations.40
So the only relevant authority relied upon by the Cabinet is
Montana Rail Link, Inc.
Montana Rail Link, Inc. is distinguishable from the
case at hand for two main reasons.
First, Montana Rail Link,
Inc. contains no discussion of whether the retroactivity period
in its challenged statute is modest, as is required by Carlton.
Second, the statute at issue in Montana Rail Link, Inc. was
40
A. Tarricone, Inc, 4 F.Supp.2d at 326 (“[w]hile retroactive
application of a statute is disfavored, a federal agency will have
the power to promulgate retroactive rules if ‘that power is conveyed
by Congress in express terms.’ Bowen v. Georgetown Univ. Hosp.,
488 U.S. 204, 208 (1988). At the time in question, Congress had
expressly conveyed that power to the Secretary of the Treasury: The
Secretary may prescribe the extent, if any, to which any ruling or
regulation, relating to the internal revenue laws, shall be applied
without retroactive effect. 26 U.S.C. § 7805(b) (West 1989)”);
Tate & Lyle, Inc., 87 F.3d at 107 (“[b]ased on the Supreme Court’s
holding in Carlton, the Tax Court found the six year period in this
case excessive, and thus, violative of the Due Process Clause. We
find, however, that Carlton is distinguishable: Carlton involved
the retroactive application of a statute, and here we are dealing
with the retroactive application of a regulation. The retroactivity
of treasury regulations is governed by I.R.C. § 7805(b), which
states:
The Secretary may prescribe the extent, if any, to which any ruling
or regulation, relating to the internal revenue laws, shall be
applied without retroactive effect.
Clearly Congress has determined that treasury regulations are
presumed to apply retroactively. The extent to which newly
promulgated regulations shall not apply retroactively is a matter of
discretion left to the Secretary.”) (Footnote omitted.) (Emphasis
in original.).
-17-
primarily focused on protecting the rights of retired railroad
workers, whereas, the General Assembly in our case was solely
concerned with protecting state funds.
Thus, we find that
Montana Rail Link, Inc. is an insufficient basis to support
H.B. 541’s retroactivity period.
The five- to nine-year retroactivity period enacted in
H.B. 541 appears to be greater than that approved for any
similar statute by a court in the post-Carlton era.
Although we
recognize that enactments of the General Assembly are entitled
to deference, that deference is not so unlimited as to permit
the General Assembly to delay five to nine years to settle
claims of Kentucky taxpayers.
Had the General Assembly enacted
H.B. 541 in 1996, at its first session following the GTE
decision, the outcome of this appeal may well have been
different.
But as it stands, the Cabinet is asking us to
approve a statute with a potential period of retroactivity far
in excess of any approved since Carlton.
We agree with the Supreme Court of South Carolina’s
learned opinion that “[a]t some point . . . the government's
interest in meeting its revenue requirements must yield to
taxpayers’ interest in finality regarding tax liabilities and
credits.
That point has been reached in this case; under the
facts and circumstances here, the retroactivity period is simply
-18-
excessive.”41
In short, we find that the portions of H.B. 541
currently codified at KRS 141.200(17)-(18) are an
unconstitutional infringement upon Appellants’ due process
rights.
In reaching our decision, we reject the Cabinet’s
sovereign immunity defense.
It is settled law that a taxing
entity must provide a post-deprivation remedy for a taxpayer
aggrieved by an unconstitutional statute.
In McKesson Corp. v.
Div. of Alcoholic Beverages and Tobacco, the United States
Supreme Court held that
[i]f a State places a taxpayer under duress
promptly to pay a tax when due and relegates
him to a postpayment refund action in which
he can challenge the tax's legality, the Due
Process Clause of the Fourteenth Amendment
obligates the State to provide meaningful
backward-looking relief to rectify any
unconstitutional deprivation.42
41
Rivers v. State, 490 S.E.2d 261, 265 (S.C. 1997) (striking
down tax legislation with two to three year period of retroactivity
on due process grounds). See also City of Modesto v. National Med,
Inc., 27 Cal.Rptr.3d 215, 222 (Cal.Ct.App. 2005) (striking down a
municipal business license tax because “the period of retroactivity
sought by the City is not ‘modest.’ The 2004 guidelines would be
applied to the 1996 through 2000 tax years, up to eight years before
those guidelines were adopted. Generally in California, courts have
upheld the retroactive application of tax laws only where such
retroactivity was limited to the current tax year. As noted by
Justice O'Connor, concurring in United States v. Carlton, a period
of retroactivity longer than the year preceding the legislative
session in which the law was enacted would raise serious
constitutional issues.”) (Internal citation omitted.).
42
496 U.S. 18, 31 (1990) (internal footnote omitted)
(emphasis in original).
-19-
And in Revenue Cabinet v. Gossum, our Supreme Court held that
Kentucky’s system is structured so that a
taxpayer is coerced into paying the tax in
advance to avoid financial sanctions. The
Supreme Court has held [in McKesson Corp.]
that in such cases the due process clause of
the Fourteenth Amendment obligates the state
to provide meaningful backward-looking
relief to rectify any unconstitutional
deprivation.43
Thus, Kentucky must provide a method for Appellants to
receive any funds they improperly paid under the
unconstitutional portions of H.B. 541, which it has done under
the tax refund statutes codified at KRS 134.580 and 134.590.
Nevertheless, the Cabinet contends that H.B. 541 contains a
withdrawal of the Commonwealth’s waiver of sovereign immunity
contained in those tax refund statutes.
Upholding the Cabinet’s
sovereign immunity claim would, therefore, improperly extinguish
Appellants’ clear right to seek a post-deprivation remedy.
E.
Other Constitutional Issues.
Because we have found that the challenged portions of
H.B. 541 violate Appellants’ due process rights, we will not
belabor this opinion by engaging in a detailed analysis of the
remainder of Appellants’ supplemental arguments.
But we will
briefly address them because of the importance of this case.
Like their due process claim, Appellants’ equal
protection argument is also analyzed under the rational basis
43
887 S.W.2d 329, 332 (Ky. 1994) (emphasis in original).
-20-
test, albeit without any apparent requirement that the period of
retroactivity be modest.44
We have already determined that
H.B. 541 is rationally related to the legitimate governmental
interest of preserving previously collected revenue.
Thus,
Appellants’ equal protection argument must fail.
Appellants next claim that H.B. 541 represents a
violation of the separation of powers contained in sections 27
and 28 of the Kentucky Constitution because, in enacting that
legislation, the General Assembly retroactively overruled GTE.
We reject this argument.
Clearly, the General Assembly
possesses the exclusive power to write and amend Kentucky’s tax
code.45
Furthermore, the General Assembly possesses the
unquestioned right to take action in response to decisions of
44
See Stephens v. State Farm Mutual Auto. Ins. Co., 894 S.W.2d
624, 627 (Ky. 1995) (holding that a statue does not “violate the
equal protection clause merely because the classifications made by
its laws are imperfect. The uniformity principle is not violated
nor is the equal protection of laws violated if there is a
reasonable basis or rational justification. When the objective is
legitimate and the classification is rationally related to that
objective, it is not constitutionally arbitrary.”); Weiand v. Board
of Trustees of Kentucky Retirement Systems, 25 S.W.3d 88, 92 (Ky.
2000) (“[a]s a general rule, a statute is presumed valid and will
survive an equal protection challenge if it can be shown that the
classification drawn by the statute is rationally related to a
legitimate state interest.”).
45
Commonwealth, ex rel. Armstrong v. Collins, 709 S.W.2d 437,
448 (Ky. 1986) (“[t]he General Assembly has the basic constitutional
power and responsibility to tax and to spend the public's money.
This power, as we have seen in prior decisions, is exclusive to the
General Assembly and includes the power to use a budget bill to
repeal, amend, modify and suspend existing statutes.”).
-21-
Kentucky courts.46
Thus, the General Assembly did not violate
the Kentucky Constitution’s separation of powers doctrine when
it enacted H.B. 541 in response to GTE.
We express no opinion on Appellants’ arguments that
H.B. 541 violates the “takings clauses” of the federal and
Kentucky Constitutions which prohibit the taking of private
property for public use.
Appellants’ brief clearly provides
that they are advancing their takings argument only if H.B. 541
is found to be constitutionally sound, which it is not.47
Finally, we also express no opinion on Appellants’
argument that H.B. 541 violates Section 51 of the Kentucky
Constitution, which requires the republication of any previously
enacted legislation amended by a new statute.
not raise this argument before the trial court.
Appellants did
Thus, it is not
cognizable on appeal.48
46
Telamarketing Communications, Inc. v. Liberty Partners, 798
S.W.2d 462, 463 (Ky. 1990) (“[t]he General Assembly has a perfect
right to change the common law and previous court decisions . . .
.”).
47
See Appellants’ Brief, p. 23 (“[a]lternatively, should this
Court rule finds [sic] that H.B. 541 is constitutional, that
provision works a taking of the Appellants[’] refund claim and
associated monies.”).
48
Hutchings v. Louisville Trust Co., 276 S.W.2d 461, 466 (Ky.
1955) (“[i]n the first place, it is the accepted rule that a
question of law which is not presented to or passed upon by the
trial court cannot be raised here for the first time.”).
-22-
IV.
CONCLUSION.
Because the retroactivity period of H.B. 541 is so
excessive as to violate due process, the trial court’s order
granting summary judgment to Appellees is reversed and this
matter is remanded for further proceedings consistent with this
opinion.
Lest this opinion be misconstrued, we are not stating
that Appellants are entitled to relief in their pending claims
for tax overpayments.
Rather, we only hold that they are
entitled to receive a full, final, and prompt resolution of
those claims on their merits.
ALL CONCUR.
-23-
BRIEFS AND ORAL ARGUMENT FOR
APPELLANTS:
BRIEFS AND ORAL ARGUMENT FOR
APPELLEES:
Bruce F. Clark
Margaret R. Grant
Erica L. Horn
Frankfort, Kentucky
Laura M. Ferguson
Frankfort, Kentucky
C. Christopher Trower
Atlanta, Georgia
Paul H. Frankel
Michael A. Pearl
New York, New York
AMICUS CURIAE BRIEFS FOR
GANNETT SATELLITE INFORMATION
NETWORK, INC.; COURIER JOURNAL
AND LOUISVILLE TIMES CO.;
GANNETT DIRECT MARKETING
SERVICES, INC.; GANNETT RIVER
STATES PUBLISHING CORP.;
COURIER CELLULAR CORPORATION;
COMPUTER EMPORIUM; AND
COURIER BROADWAY CORP.:
Thomas J. Luber
Mitzi D. Wyrick
Jennifer Starr
Louisville, Kentucky
-24-
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