THE REVENUE CABINET, COMMONWEALTH OF KY. VS. ASWORTH CORPORATION , ET AL.
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RENDERED: NOVEMBER 20, 2009; 10:00 A.M.
TO BE PUBLISHED
MODIFIED: FEBRUARY 5, 2010; 10:00 A.M.
Commonwealth of Kentucky
Court of Appeals
NO. 2007-CA-002549-MR
AND
NO. 2008-CA-000023-MR
REVENUE CABINET (N/K/A FINANCE
AND ADMINISTRATION CABINET,
DEPARTMENT OF REVENUE),
COMMONWEALTH OF KENTUCKY
APPELLANT/CROSS-APPELLEE
APPEAL AND CROSS-APPEAL FROM FRANKLIN CIRCUIT COURT
v.
HONORABLE THOMAS D. WINGATE, JUDGE
ACTION NO. 06-CI-00288
ASWORTH CORPORATION (N/K/A
ASWORTH, LLC), HT-FORUM, INC.
(N/K/A HTF, LLC); AND D AVIATION
SERVICES, INC. (N/K/A D AVIATION
SERVICES, LLC
APPELLEES/CROSS-APPELLANTS
OPINION
AFFIRMING IN PART, REVERSING IN PART,
AND REMANDING
** ** ** ** **
BEFORE: CLAYTON, NICKELL, AND VANMETER, JUDGES.
VANMETER, JUDGE: The Revenue Cabinet, Commonwealth of Kentucky (n/k/a
Finance and Administration Cabinet, Department of Revenue) (the Cabinet)
appeals from the Franklin Circuit Court’s order reversing the order of the
Kentucky Board of Tax Appeals (Board). Asworth Corporation (n/k/a Asworth,
LLC), D Aviation Services, Inc. (n/k/a D Aviation Services, LLC), and HT-Forum,
Inc. (n/k/a HTF, LLC), (collectively the Corporations) cross-appeal from the same
order. For the following reasons, we affirm the circuit court’s order to the extent
that it held that the Corporations have a tax nexus with Kentucky. We reverse
insofar as it applied the three-factor apportionment method and ordered an
immediate refund.
While this matter was pending before the Board, the parties stipulated
to, inter alia, the following facts.1 The Corporations were created under the laws
of either Nevada or Delaware, all with their principal places of business in
Chicago, Illinois. The Corporations “manage investments in various legal
entities.” None of the Corporations had any property, employees, or payroll in
Kentucky during the tax years at issue. Nor have the Corporations ever been
domiciled in Kentucky. Their sole connection with Kentucky was their “receipt of
a distributive share of partnership income received from the profits of variously
named and organized partnerships doing business in Kentucky.” Board Order at 2.
1993-1996
1
We quote at times from the parties’ stipulations.
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For the taxable periods ending on January 31 of 1993, 1994, 1995,
and 1996, “Asworth filed Kentucky corporation income tax returns . . . and paid
Kentucky corporate income tax calculated by using the standard three-factor
apportionment formula (property, payroll, and receipts) under KRS2 141.120 to
apportion its multistate income to Kentucky, and included the property, payroll and
receipts of” both Asworth and Conwood Company, LP, a Delaware limited
partnership of which Asworth owned a 99% limited partnership interest. Conwood
is a Delaware limited partnership which has its principal place of business in
Tennessee, and which also conducts business in Kentucky. “Asworth also filed
Kentucky corporation license tax returns and paid the Kentucky corporate license
tax of KRS 136.070 using the same methodology it utilized for corporate income
tax for” these tax years.
Based on its audit of Asworth for these tax years, the Cabinet
concluded that although Asworth was not required to file a corporation license tax
return, it owed additional taxes, plus applicable interest and penalties. The Cabinet
excluded Asworth’s receipts and all of its affiliated entities in assessing the
additional taxes, including “only Conwood receipts in Kentucky [presented in the
formula] over Conwood receipts everywhere in the calculation(s).” That is, the
Cabinet utilized a single-factor apportionment formula.
Asworth paid the taxes as assessed by the Cabinet, and then filed
amended returns requesting a refund for the taxes it paid in relation to its original
2
Kentucky Revised Statutes.
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returns, as well as the increased amount it paid in relation to the Cabinet’s audit
assessment, plus the applicable interest and penalties. Asworth argued “that it had
no nexus with Kentucky under KRS Chapter 141, and therefore was not subject to
corporate income tax.” The Cabinet denied Asworth’s request for a refund, and
Asworth appealed to the Board.
1997-1999
For the taxable periods ending January 31, 1997, and December 31 of
1997, 1998, and 1999, the Corporations each filed Kentucky corporation income
tax returns and paid Kentucky corporation income tax. Through various corporate
structure changes and transfers not pertinent here, at some point D Aviation
Services and HT-Forum acquired ownership interests in Conwood.
Thereafter, the Corporations filed amended returns requesting refunds
for the sums they paid for these taxable periods, plus interest. The Corporations
argued that they did not have any tax liability in Kentucky. The Cabinet denied the
requests for refunds,3 and the matters were eventually appealed to the Board.
Procedural Posture
On appeal to the Board, the Corporations’ appeals were consolidated
pursuant to a motion which indicated that the appeals concerned the same issues,
related to the same tax, and involved related entities. Ultimately, the Board held
that “KRS 141.040 did not reach the distributive share paid to [the Corporations]
by partnerships doing business in the Commonwealth” since they did not own
3
While the Cabinet never ruled on Asworth’s claim regarding any refund for the taxable period
ending January 31, 1997, the parties agree that the outcome here will also apply to that claim.
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property, lease property, or have any employees receiving compensation in
Kentucky. Thus, the Corporations did not have a “physical presence” in Kentucky
and were not subject to Kentucky corporation income tax.
On appeal, the circuit court reversed, holding that the Corporations
were “subject to tax on their distributive share income from partnerships doing
business both within and without Kentucky pursuant to KRS 141.206.” The circuit
court calculated the amount owed based upon the ratio of sales, property, and
payroll in Kentucky to total sales, property, and payroll everywhere in the United
States (the three-factor method). This appeal and cross-appeal followed.
Following oral argument on the merits of the case, the Corporations
moved for leave to correct a mathematical error in the circuit court’s order and to
allow the parties to brief issues concerning 2008 Regular Session House Bill
(H.B.) 704 or to remand the case to the circuit court for review of H.B. 704. The
Cabinet, in response, stated that it did not oppose the motion. Thereafter, this court
granted the Corporations’ motion, ordering a mathematical revision of the circuit
court’s order entered December 4, 2007, taking judicial notice of the enactment of
2008 Ky. Acts, c. 132 § 8 (repealed and reenacted by H.B. 216, 2009 Gen.
Assem., Reg. Sess. (Ky. 2009) (enacted)), (collectively the Bills), and granting
leave for the parties to brief issues concerning the Bills. These issues will be
addressed following our discussion of the circuit court’s order reversing the order
of the Board.
Whether Statutes Require Taxation
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First, the Corporations argue on cross-appeal that the circuit court
erred by finding that the Corporations are subject to taxation pursuant to KRS
141.206(5). We disagree.
KRS 141.040(1) provides4 that with certain exceptions, the following
shall pay for each taxable year a tax on taxable net income: “every foreign
corporation owning or leasing property located in this state or having one (1) or
more individuals receiving compensation as defined in KRS 141.120(8)(b) in this
state[.]” The Corporations argue that since the parties stipulated that the
Corporations did not own property, lease property, or have individuals receiving
compensation in Kentucky, they are not subject to Kentucky corporate income tax.
The Cabinet argues that the circuit court correctly held that regardless of KRS
141.040(1), the Corporations are subject to taxation pursuant to KRS 141.206(5),
which provides:
Nonresident individuals and corporations which are
partners in a partnership or shareholders in an S
corporation which does business within and without
Kentucky are taxable on their proportionate share of the
distribute income passed through the partnership or S
corporation attributable to business done in Kentucky.
Simply put, we agree with the Cabinet and the circuit court that the plain language
of KRS 141.206(5) subjects the Corporations to taxation. A different result is not
compelled, as the Corporations suggest, by the fact that KRS 141.206(5) does not
contain the words “shall pay.” We hold that the words “are taxable” are sufficient
4
Unless otherwise noted, we quote from the statutes as in effect July 15, 1996.
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to impose tax liability in this situation. Further, a different result is not compelled
by any subsequent amendments to these statutes.
Void for Vagueness
The Corporations assert that KRS 141.206 is void for vagueness. In
Bd. of Trs. of the Judicial Form Ret. Sys. v. Attorney Gen., 132 S.W.3d 770 (Ky.
2003), the Kentucky Supreme Court held that unintelligible legislation was a
nullity. Specifically, the court stated:
The void-for-vagueness doctrine is most often
applied in the context of the First Amendment, the
criminal law, and punitive civil laws. See, e.g. Martin v.
Commonwealth, Ky., 96 S.W.3d 38, 59-60 (2003) (First
Amendment); Jones v. Commonwealth, Ky., 830 S.W.2d
877, 880 (1992) (criminal law); Vill. of Hoffman Estates
v. Flipside, 455 U.S. 489, 499-500, 102 S.Ct. 1186,
1193-94, 71 L.Ed.2d 362 (1982) (civil penalties).
However, while statutes affecting those areas should
receive the most rigorous review and are most commonly
held void for vagueness, non-punitive civil, regulatory, or
spending statutes are also invalid if they are so
unintelligible as to be incapable of judicial interpretation.
In that circumstance, the statute often is declared void for
“unintelligibility” or “uncertainty” as opposed to
“vagueness.”
The most oft-cited expression of this doctrine in
Kentucky is Folks v. Barren County, 313 Ky. 515, 232
S.W.2d 1010 (1950), in which our predecessor court was
asked to interpret a statute allowing boards of education
to finance new school buildings through direct appeals to
voters. The Court noted the following proposition of
law:
It is not for us to say the Legislature does not have
the right to be indirect where it could be direct, or to be
obscure and confusing where it could be clear and
simple. But where the law-making body, in framing the
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law, has not expressed its intent intelligibly, or in
language that the people upon whom it is designed to
operate or whom it affects can understand, or from
which the courts can deduce the legislative will, the
statute will be declared to be inoperative and void.
Id. at 778. We hold that this principle has no applicability to the instant statute.
The legislative will expressed in KRS 141.206(5) is intelligible. It
expresses the policy that nonresident corporations, such as the Corporations herein,
which are partners in a partnership doing business within and without Kentucky
are taxable on their proportionate share of distributive income passed through the
partnership attributable to business done in Kentucky. The Corporations’
allegations of deficiencies—absence of tax rate, “imposition” language, lack of
clarity—are without merit. The applicable tax rate is supplied by KRS 141.040.
As noted above, the statute contains imposition language. And, the statute is
sufficiently clear. This conclusion is supported in part by the fact that Asworth
filed a corporate income tax return in the first place. The statute is not void for
vagueness, i.e., unintelligibility.
Commerce Clause
Next, the Corporations argue that subjecting them to tax under KRS
141.206(5) violates the Commerce Clause. We disagree.
To withstand an attack on Commerce Clause grounds, a tax must be:
(1) nondiscriminatory toward interstate commerce; (2) applied to one or more
activities with a substantial nexus with the taxing state; (3) fairly apportioned; and
(4) fairly related to services provided by the state. Revenue Cabinet v. Ashland
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Oil, Inc., 888 S.W.2d 701, 704 (Ky.App. 1994) (quoting Complete Auto Transit v.
Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977)).
While the Corporations assert in their brief that taxing them under
KRS 141.206(5) violates each of the Complete Auto Transits prongs, they seriously
argue only with regard to the second prong. The Corporations cite Quill Corp. v.
North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992), in arguing
that the “substantial nexus” requirement can only be satisfied through a physical
presence with the taxing state, which is a status the Corporations do not have with
Kentucky. In addressing the sales and use taxes at issue in Quill, the Supreme
Court reaffirmed its previous bright-line rule that “a vendor whose only contacts
with the taxing State are by mail or common carrier lacks the ‘substantial nexus’
required by the Commerce Clause.” 504 U.S. at 311, 112 S.Ct. at 1912. However,
the Supreme Court recognized that it had not articulated the same physicalpresence requirement in reviewing other types of taxes. 504 U.S. at 314, 112 S.Ct.
at 1914. Thus, the applicability of Quill’s physical presence requirement to
income tax cases, such as the matter before us, is unclear. Nevertheless, even if a
substantial nexus requires a physical presence in Kentucky, for the reasons stated
hereafter we hold that the Corporations in fact have such a nexus.
Again, while the Corporations do no business in Kentucky, at various
times they have owned up to a 99% limited and/or general partnership interest in,
and have received distributive shares of partnership income from the profits of, a
partnership which does business in Kentucky. Such a partnership unquestionably
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has received protection and benefits from Kentucky, thereby enabling the
distribution of income to the Corporations. We hold that this connection gives rise
to a substantial nexus with, and/or a physical presence within, Kentucky. Accord
Borden Chemicals & Plastics, L.P. v. Zehnder, 726 N.E.2d 73, 79-82 (Ill.App.
2000) (commerce clause does not prohibit Illinois from assessing replacement tax
on a limited partner which has no connection with the State of Illinois other than
investing in a partnership). The cases from other jurisdictions cited by the
Corporations and/or the tax expert’s testimony below regarding the physical
presence standard do not compel a different result.
Due Process Clause
Next, the Corporations argue that subjecting them to tax under KRS
141.206(5) violates the Due Process Clause of the Fourteenth Amendment. We
disagree.
The Quill court explained that “[t]he Due Process Clause ‘requires
some definite link, some minimum connection, between a state and the person,
property or transaction it seeks to tax[.]’” 504 U.S. at 306, 112 S.Ct. at 1909
(quoting Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-45, 74 S.Ct. 535,
539, 98 L.Ed. 744 (1954)). The Court has “framed the relevant inquiry as whether
a defendant had minimum contacts with the jurisdiction ‘such that the maintenance
of the suit does not offend “traditional notions of fair play and substantial
justice.”’” Quill, 504 U.S. at 307, 112 S.Ct. at 1910 (quoting International Shoe
Co. v. Washington, 326 U.S. 310, 316, 66 S.Ct. 154, 158, 90 L.Ed. 95 (1945)).
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The Corporations argue that they have no “definite link” or “minimum connection”
with Kentucky. However, as with our Commerce Clause analysis, we hold that the
Corporations’ ownership interest in, and receipt of income from, a partnership
doing business in Kentucky provides the requisite link for taxation under the Due
Process Clause. Accord Borden Chemicals & Plastics, L.P., 726 N.E.2d at 78-79.
Apportionment
The Cabinet argues that since the circuit court concluded that the
Corporations were subject to taxation pursuant to KRS 141.206(5), it should have
used the single-factor formula found therein to calculate the amount owed.
Instead, the circuit court applied the three-factor formula found in KRS
141.120(8). We agree that KRS 141.206(5) contains the proper apportionment
formula.
The circuit court held that the three-factor formula found in KRS
141.120(8) provided the correct method for calculating the taxes the Corporations
owed, as that method “seems to be logical from a legal standpoint. To prevent the
[Corporations] from applying this method, would possibly infringe on the
[Corporations’] constitutional rights.” Thus, the circuit court concluded not that
the legislature intended for taxpayers to use the three-factor formula in situations
such as these, but instead that prohibiting taxpayers from using the three-factor
formula would subject the formula to possible constitutional problems. We
disagree with the circuit court’s reasoning.
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“The cardinal rule of statutory construction is to ascertain and give
effect to the intent of the legislature.” Ky. Ins. Guar. Ass’n v. Jeffers ex rel. Jeffers,
13 S.W.3d 606, 610 (Ky. 2000). As set forth above, KRS 141.206(5) provides that
nonresident corporations “are taxable on their proportionate share of the
distributive income passed through the partnership . . . attributable to business done
in Kentucky” if they are partners in a partnership “which does business within and
without Kentucky[.]” Further, KRS 141.206(5)(a) provides: “Business done in
Kentucky is determined by the ratio of gross receipts from sales to purchasers or
customers in Kentucky or services performed in Kentucky to the total gross
receipts from sales or service everywhere.” The plain language of these provisions
compels a finding that the legislature intended for the amount of tax owed under
this section to be calculated using the formula found therein. Accordingly, the
circuit court erred by applying instead the formula found in KRS 141.120(8).
The question then becomes whether the application of this formula to
the matter sub judice is constitutional. The Supreme Court explained in Container
Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 293940, 77 L.Ed.2d 545 (1983):
Under both the Due Process and the Commerce
Clauses of the Constitution, a state may not, when
imposing an income-based tax, “tax value earned outside
its borders.” In the case of a more-or-less integrated
business enterprise operating in more than one State,
however, arriving at precise territorial allocations of
“value” is often an elusive goal, both in theory and in
practice. For this reason and others, we have long held
that the Constitution imposes no single formula on the
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States, and that the taxpayer has the “distinct burden of
showing by ‘clear and cogent evidence’ that [the state
tax] results in extraterritorial values being taxed . . . .”
(Internal citations omitted.) Here, the application of the formula found in KRS
141.206(5) will not result in extraterritorial values being taxed, as the provision
requires taxation of the “proportionate share of the distributive income passed
through the partnership . . . attributable to business done in Kentucky.” Again,
“[b]usiness done in Kentucky is determined by the ratio of gross receipts from
sales to purchasers or customers in Kentucky or services performed in Kentucky to
the total gross receipts from sales or service everywhere.” KRS 141.206(5)(a).
This necessarily excludes extraterritorial values.
The Corporations argue that we should remand, directing the Board to
admit into evidence and consider a tax expert’s opinion regarding which formula to
apply. However, we believe that the Board’s error, if any, in failing to admit this
evidence was harmless. First, the Board never reached the issue of which formula
should apply since it held that the Corporations did not have the appropriate nexus
with Kentucky. Second, the tax expert essentially opined that the three-factor
formula is preferable from a policy perspective because it accounts for two key
business inputs that the single-factor formula does not. Nevertheless, this court’s
role is not to decide policy. Rather, it is to “ascertain and give effect to the intent
of the legislature.” Ky. Ins. Guar. Ass’n, 13 S.W.3d at 610.
Payment Motion
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Finally, the Cabinet argues that the circuit court erred by granting the
Corporations’ motion seeking immediate payment of their refunds. We agree.
Under KRS 131.365 and KRS 134.580, a refund payment is not due
immediately. KRS 131.365(4) directs that payment shall be ordered on appeal.
This section provides: “In the case of any appeal, any taxes, interest, or penalty
paid but found by the board to be in excess of that legally due shall be ordered
refunded to the taxpayer.” The Cabinet argues that this statute is silent regarding
the timing of any payment; however, we hold that the plain language directs that
any payment shall be ordered upon appeal.
KRS 134.580(2) provides:
When money has been paid into the State Treasury
in payment of any state taxes, except ad valorem taxes,
whether payment was made voluntarily or involuntarily,
the appropriate agency shall authorize refunds to the
person who paid the tax, or to his heirs, personal
representatives or assigns, of any overpayment of tax and
any payment where no tax was due. When a bona fide
controversy exists between the agency and the taxpayer
as to the liability of the taxpayer for the payment of tax
claimed to be due by the agency, the taxpayer may pay
the amount claimed by the agency to be due, and if an
appeal is taken by the taxpayer from the ruling of the
agency within the time provided by KRS 131.340 and it
is finally adjudged that the taxpayer was not liable for the
payment of the tax or any part thereof, the agency shall
authorize the refund or credit as the Kentucky Board of
Tax Appeals or courts may direct.
A refund payment under this statute is not due until the matter is “finally
adjudged” by either the Board or a court. Thus, pursuant to these two statutes, the
Corporations are not entitled to immediate payment of any refund.
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The Bills
The Corporations assert that the Bills are invalid because they
unconstitutionally and retroactively deprive the Corporations of interest on their
tax refunds and/or claims. We disagree.
The Bills amended KRS 131.183, 141.044, 141.235 and 134.580 to
provide, in part, that for tax refunds issued after a certain date, interest may begin
to accrue as late as the date of filing an amended return, and at a rate of “prime
minus 2%.” The Bills also provide that these changes apply “retroactively on all
outstanding refund claims for taxable years ending before December 31, 1995, and
shall apply to all claims for such taxable years pending in any judicial or
administrative forum.” For numerous reasons, discussed below, the Corporations
challenge the Bills’ validity, including, but not limited to their contention that the
Bills deprive them of interest on their overpayment for the interim period between
the payment of the tax, or the due date of the return, and the date of filing the
amended return, and that the retroactive effect of the Bills is unconstitutional.
First, the Corporations argue that the Bills are unconstitutional under
due process provisions of federal and state law. In particular, the Corporations
argue that they are constitutionally entitled to refunds on any overpayments of tax,
and that interest constitutes part of the overpayment which must also be refunded.
They claim not only that the Bills improperly deprive them of interest on their
overpayments for up to four years, but also that the retroactively payable interest
rate was improperly reduced to prime rate minus 2%.
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Regardless of whether interest is considered part of an overpayment of
tax, “[t]ax legislation is not a promise, and a taxpayer has no vested right in the
Internal Revenue Code.” United States v. Carlton, 512 U.S. 26, 33, 114 S.Ct.
2018, 2023, 129 L.Ed.2d 22 (1994). Neither is there a vested right in Title XI5 of
KRS, relating to Revenue and Taxation. Justice Stone explained in Welch v.
Henry, 305 U.S. 134, 146-47, 59 S.Ct. 121, 125, 83 L.Ed. 87 (1938):
Taxation is neither a penalty imposed on the taxpayer
nor a liability which he assumes by contract. It is but
a way of apportioning the cost of government among
those who in some measure are privileged to enjoy its
benefits and must bear its burdens. Since no citizen
enjoys immunity from that burden, its retroactive
imposition does not necessarily infringe due process[.]
The Supreme Court “repeatedly has upheld retroactive tax legislation
against a due process challenge.” 512 U.S. at 30, 114 S.Ct. at 2021. As long as
retroactive application of the Bills to the statutes is “rationally related to a
legitimate legislative purpose,” due process is not violated. Id. at 35, 114 S.Ct. at
2024. Retroactive application of tax legislation has been held to be rationally
related to the legitimate governmental purpose of raising revenue, in order to
prevent a “significant and unanticipated revenue loss.” Id. at 32, 114 S.Ct. at 2023.
The issue then is whether retroactive application of the Bills rationally
furthers the legitimate governmental purpose of raising revenue, to prevent a
significant and unanticipated revenue loss. The Corporations argue that the fiscal
notes to both Bills indicate that the Bills are to have no fiscal impact on the
5
KRS Chapters 131 to 144.
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Commonwealth and thus, raising revenue could not have been the purpose of the
Bills. However, while the Bills may not expressly state their expected fiscal
impact, such an omission is not dispositive to the determination of whether the
Bills rationally further the purpose of raising revenue.
“Revenue raising is certainly a legitimate legislative purpose, and any
law that retroactively adds a tax, removes a deduction, or increases a rate rationally
furthers that goal.” Id. at 40, 114 S.Ct. at 2027. (Scalia, J., concurring) (internal
citations omitted). The Bills at issue herein have the effect of potentially
shortening the time period for which a taxpayer may accrue interest on an
overpayment of tax, and decreasing the rate at which said interest accrues---effects
clearly intended to increase revenue for the Commonwealth. Since the Bills
rationally further the legitimate governmental purpose of raising revenue, we hold
that they satisfy the “rational basis” test articulated in Carlton.
The Corporations also contend that the four-year period of
retroactivity in this case fails to meet the “modesty requirement” of retroactive tax
legislation under Carlton. However, contrary to the Corporations’ assertion, the
holding in Carlton did not establish such a “modesty requirement;” rather, the
majority simply noted with favor that “Congress acted promptly and established
only a modest period of retroactivity.” Id. at 32, 114 S.Ct. at 2023. This suggests
to us that the period of retroactivity is to be considered in determining whether the
legislation rationally furthers a legitimate governmental purpose. Here, the Bills
retroactively applied to all outstanding refund claims for taxable years ending prior
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to the Bills’effective dates, and to all claims for those taxable years pending in any
judicial or administrative forum. We hold that the retroactive period extending to
outstanding claims as of the Bills’ effective dates does not violate the due process
clause.
Second, the Corporations claim that the Bills violate equal protection
provisions of federal and state law because their effective dates treat similarly
situated taxpayers differently.6 In other words, the Corporations assert that
taxpayers who receive refunds after the effective dates will receive interest for a
shorter period of time, and calculated at a lower rate, than taxpayers who received
refunds prior to these dates.
Germane to the Corporations’ claim is the well-established power of
the government to tax and to enact legislation which controls the revenue system.
“The broad discretion as to classification which a legislature possesses in the field
of taxation has long been recognized.” Commonwealth, Revenue Cabinet v. Smith,
875 S.W.2d 873, 875 (Ky. 1994). “Further, in a taxation case, unless a rational
basis for such law can be completely refuted, then the law may stand as
constitutional.” Id.
“Statutes are presumed to be valid and those concerning social or
economic matters generally comply with federal equal protection requirements if
the classifications that they create are rationally related to a legitimate state
6
The Fourteenth Amendment to the United States Constitution requires persons who are
similarly situated to be treated alike. Durham v. Peabody Coal Co., 272 S.W.3d 192, 195 (Ky.
2008) (citing City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432, 439, 105 S.Ct. 3249,
3254, 87 L.Ed.2d 313, 320 (1985)).
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interest.” Durham v. Peabody Coal Co., 272 S.W.3d 192, 195 (Ky. 2008) (citing
City of Cleburne, Tex. v. Cleburne Living Ctr., 473 U.S. 432, 440, 105 S.Ct. 3249,
3254, 87 L.Ed.2d 313, 320 (1985)). “A statute complies with Kentucky equal
protection requirements if a ‘reasonable basis’ or ‘substantial and justifiable
reason’ supports the classifications that it creates.” Durham, 272 S.W.3d at 195
(quoting Elk Horn Coal Corp. v. Cheyenne Res., Inc., 163 S.W.3d 408 (Ky.
2005)); Waggoner v. Waggoner, 846 S.W.2d 704 (Ky. 1992). This “rational basis”
test is the same for due process, as discussed above, and again, the Bills satisfy its
requirements. Consequently, the Corporations’ equal protection claim is without
merit.
Third, the Corporations argue that application of the Bills constitutes
an unconstitutional “taking” of the Corporations’ interest in their refund claims and
tax overpayments under the Fifth Amendment to the United States Constitution,
the takings clause, and Ky. Const. § 13.7
[I]t is . . . well settled that [the due process] clause
[of the 5th Amendment] is not a limitation upon the
taxing power conferred upon Congress by the
Constitution; in other words, that the Constitution
does not conflict with itself by conferring, upon
the one hand, a taxing power, and taking the same
power away, on the other, by the limitations of the
due process clause. And no change in the situation
here would arise even if it be conceded, as we think
it must be, that this doctrine would have no application
in a case where, although there was a seeming exercise
7
The Fifth Amendment provides: “nor shall private property be taken for public use, without just
compensation.” Ky. Const. § 13 provides: “nor shall any man’s property be taken or applied to
public use without the consent of his representatives, and without just compensation being
previously made to him.”
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of the taxing power, the act complained of was so
arbitrary as to constrain to the conclusion that it was
not the exertion of taxation, but a confiscation of
property; that is, a taking of the same in
violation of the 5th Amendment; or, what is equivalent
thereto, was so wanting in basis for classification as to
produce such a gross and patent inequality as to
inevitably lead to the same conclusion.
Brushaber v. Union Pac. R.R., 240 U.S. 1, 24-25, 36 S.Ct. 236, 244, 60 L.Ed. 493
(1916) (holding, in part, that the retroactive effect of certain income tax provisions,
fixing an earlier date as the time from which the income was to be computed, did
not violate the due process clause of Fifth Amendment.); see A. Magnano Co. v.
Hamilton, 292 U.S. 40, 44, 54 S.Ct. 599, 601, 78 L.Ed. 1109 (1934) (The due
process clause “is applicable to a taxing statute . . . only if the act be so arbitrary as
to compel the conclusion that it does not involve an exertion of the taxing power,
but constitutes, in substance and effect, the direct exertion of a different and
forbidden power, as, for example, the confiscation of property.”). Here, the
adjustment of the interest rate on tax refunds is not such an exertion of the
legislative taxing power so as to constitute a “taking” of property for public use.
Thus, the Corporations argument in this respect fails.
Fourth, the Corporations assert that the Bills violate Ky. Const. § 51,
which provides, in pertinent part: “No law enacted by the General Assembly shall
relate to more than one subject, and that shall be expressed in the title[.]”
Specifically, the Corporations contend that the Bills’ title “An act relating to fiscal
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matters and declaring an emergency” contains more than one subject and
insufficiently expresses the subject matter contained therein.
In Commonwealth ex rel. Armstrong v. Collins, 709 S.W.2d 437, 443
(Ky. 1986), the Kentucky Supreme Court confirmed that the portion of § 51 cited
above permits a legislative act to pertain to only a single subject, which must be
described in the act’s title. Nevertheless, this section of the Constitution “has
always been liberally construed, with all doubts being resolved in favor of the
validity of the legislative action.” Id. “The purpose of the section is said to be to
prevent the enactment of ‘surreptitious’ legislation.” Id. (citing Bowman v.
Hamlett, 159 Ky. 184, 188, 166 S.W. 1008, 1009 (1914); Dawson v.
Commonwealth, Dep’t of Transp., 622 S.W.2d 212 (Ky. 1981)).
In E. Ky. Coal Lands Corp. v. Commonwealth, 127 Ky. 667, 702-03,
106 S.W. 260, 271 (1907), the court held that the title “A act relating to revenue
and taxation” did not violate § 51, reasoning that “‘[n]one of the provisions of a
statute should be regarded as unconstitutional, where they all relate directly or
indirectly to the same subject, have an natural connection, and not foreign to the
subject expressed in its title.’” Id. (quoting Phillips v. Cin. & Cov. Bridge Co., 59
Ky. (2 Met.) 219 (1859)). “In L. & O. Turnpike Co. v. Ballard, 59 Ky. (2 Met.)
165 (1859), it was said: ‘A more liberal construction of this clause of the
Constitution will be not only more consistent with the objects intended to be
accomplished by it, but will be found necessary in the practical business of
legislation.’” E. Ky. Coal, 127 Ky. at 703-04, 106 S.W. at 271.
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Here, the Corporations do not contend that the Bills contain
surreptitious legislation; rather, they take issue with the title itself. However, under
a liberal construction historically afforded to § 51, we hold that the portions of the
Bills at issue herein, relating to tax refunds, properly fall within the category of
“fiscal matters” and thus, the title of the Bills sufficiently express the subject
matter contained therein.
Lastly, the Corporations aver that the Bills are impermissible special
legislation in violation of Ky. Const. § 59, which prohibits the General Assembly
from passing local or special acts concerning various subjects, including “To
regulate the rate of interest.” The Corporations argue that the Bills arbitrarily treat
taxpayers who received refunds prior to the effective dates differently from those
who will receive refunds after those dates, and disproportionately classify interest
rates for refunds and assessments, for no distinct or natural reason.
“Classification is a necessary feature and power of legislation, as it is
impossible for any extensive code of laws to apply to every person or subject in the
state.” City of Louisville v. Commonwealth, 134 Ky. 488, 496, 121 S.W. 411, 413
(1909). In Ravitz v. Steurele, 257 Ky. 108, 120, 77 S.W.2d 360, 366 (1934), the
court held constitutional an act which “provides an extensive, efficient system for
the control, regulation, and the general supervision of the class of money lenders
embraced by it.” In so ruling, the court reasoned that the act’s “intendment and
purpose is to control, regulate, and supervise the business of the money lenders
classified by it, and, in so far as it deals with the subject of interest, it does so
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incidentally and as a part of the system of regulation and control therein provided.”
Id. Thus, “[a]s its provisions relate to interest, it is not a local or special law[.]”
Id.
By the same token, insofar as the Bills at issue herein deal with the
subject of interest, they do so incidentally and as part of a system of controlling,
regulating, and supervising tax refunds. The effective dates, after which taxpayers
are susceptible to different interest rates, are neither arbitrary nor unreasonable,
and do not undertake in any way to fix or regulate the rate of interest. Thus, the
challenged portions of the Bills herein are not impermissible special legislation in
violation of Ky. Const. § 59 with respect to regulating the rate of interest.
The Franklin Circuit Court’s order is affirmed in part, reversed in part,
and remanded for further proceedings.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT
FOR APPELLANT/CROSSAPPELLEE:
BRIEFS AND ORAL ARGUMENT
FOR APPELLEES/CROSSAPPELLANTS:
Laura Ferguson
Frankfort, Kentucky
Mark F. Sommer
Louisville, Kentucky
Jennifer S. Smart
Lexington, Kentucky
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