GTE SOUTH, INC., N/K/A VERIZON SOUTH, INC. v. COMMONWEALTH OF KENTUCKY, REVENUE CABINET; AND KENTUCKY BOARD OF TAX APPEALS
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APRIL 2, 2004; 10:00 a.m.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2003-CA-000773-MR
GTE SOUTH, INC., N/K/A
VERIZON SOUTH, INC.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE WILLIAM L. GRAHAM, JUDGE
ACTION NO. 01-CI-01363
v.
COMMONWEALTH OF KENTUCKY,
REVENUE CABINET; AND
KENTUCKY BOARD OF TAX APPEALS
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE:
JOHNSON, TAYLOR AND VANMETER, JUDGES.
JOHNSON, JUDGE:
GTE South Incorporated, n/k/a Verizon South,
Inc., has appealed from an order entered by the Franklin Circuit
Court on March 10, 2003, which vacated a decision of the
Kentucky Board of Tax Appeals that had set aside a sales and use
tax assessment against GTE1 for the taxable period of February 1,
1
In their briefs to this Court, the parties refer to Verizon South, Inc. by
its predecessor GTE South, Inc. We will do the same.
1991, through September 30, 1993.
Having concluded that the
circuit court erred in its determination that the Revenue
Cabinet substantially complied with the notice requirements
contained in KRS2 131.081(8), KRS 131.110(1) and KRS 139.620(1),
and having further concluded that the trial court failed to make
findings concerning the amount of the setoff the Revenue Cabinet
is entitled to claim against a refund due GTE for the same time
period, we reverse and remand for further proceedings consistent
with this Opinion.
During the time period relevant to this appeal, GTE
was in the business of providing local telephone service in a
number of states, including Kentucky.
In November 1996 the
Revenue Cabinet decided to audit GTE’s sales and use tax records
for the period of February 1, 1991, through September 30, 1996.
The audit, which was completed in October 1997, resulted in a
sales and use tax assessment against GTE in the amount of
$11,344,190.16.3
Sometime in October 1997, the Revenue Cabinet
mailed GTE an assessment letter dated October 16, 1997,4 which
2
Kentucky Revised Statutes.
3
The Revenue Cabinet also audited GTE for the taxable period of February 1,
1987, through January 31, 1991, which resulted in an assessment against GTE
in the amount of $28,275,861.80. The Revenue Cabinet later reduced its
assessment against GTE for this period to $969,618.40, which GTE paid in
full. GTE currently has a refund claim pending before the Board concerning
the taxes it paid during this period.
4
While the date of the letter is undisputed, the date the letter was mailed
and the date it was received are very much in dispute and are at the center
of this case.
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set forth the basis and amount of the assessment.5
The
assessment letter stated that formal notices of tax due,
including the interest and any penalties assessed against GTE,
would be mailed separately and “may be expected within five (5)
days.”
The assessment letter further provided that any protest
“must be filed with the Cabinet within forty-five (45) days from
the notice date on the computerized tax statements.”
On October
24, 1997, GTE received formal notices of tax due for the period
of February 1, 1991, through September 30, 1996, in an envelope
postmarked October 21, 1997.6
GTE protested the assessment, arguing, inter alia,
that the Revenue Cabinet had failed to perform its assessment
for the taxable period of February 1, 1991, through September
30, 1993,7 within the four-year statute of limitations period
prescribed in KRS 139.620(1).8
GTE maintained that the Revenue
5
The assessment letter contained a narrative report along with supporting
schedules setting forth the basis of the assessment. The majority of the tax
deficiency assessed against GTE for this period was related to the revenue it
received from certain carrier access charges.
6
The notices
period, which
any penalties
notice of tax
of tax due included interest assessed against GTE for this
amounted to $3,852,517.82. The Revenue Cabinet did not assess
against GTE for this period. The “notice date” listed on each
due is October 17, 1997.
7
GTE paid the taxes assessed against it for the taxable period of October 1,
1993, through September 30, 1996.
8
KRS 139.620(1) provides, in relevant part, as follows:
As soon as practicable after each return is
received, the cabinet shall examine and audit it. If
the amount of tax computed by the cabinet is greater
than the amount returned by the taxpayer, the excess
shall be assessed by the cabinet within four (4)
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Cabinet had until October 20, 1997, to assess any taxes against
it for the period of February 1, 1991, through September 30,
1993.9
GTE argued that the assessment against it for this period
was void due to the fact the Revenue Cabinet failed to provide
the statutory required notice of assessment prior to the October
20, 1997, deadline.10
The Revenue Cabinet issued a final ruling in the
matter on December 3, 1998.
The Revenue Cabinet maintained that
GTE was responsible for the $370,313.33 assessment against it
for the period of February 1, 1991, through September 30, 1993.11
The Revenue Cabinet took the position that the assessment letter
“complie[d] with the notice requirements of KRS 131.110.”
GTE
years from the date the return was filed[.] . . . A
notice of such assessment shall be mailed to the
taxpayer. The time herein provided may be extended
by agreement between the taxpayer and the cabinet.
GTE also contested the Revenue Cabinet’s assertion that it was required to
pay taxes on the revenue it received from carrier access charges. The
Revenue Cabinet subsequently withdrew the portion of the assessment related
to the carrier access charges, which reduced GTE’s overall tax liability for
the period of February 1, 1991, through September 30, 1993, to $370,313.33.
9
On August 14, 1996, GTE and the Revenue Cabinet entered into a written
agreement extending the deadline for any assessment covering the taxable
period of February 1, 1987, through August 31, 1993, to October 20, 1997.
GTE and the Revenue Cabinet both agree that the assessment for the taxable
period relevant to this appeal, February 1, 1991, through September 30, 1993,
had to be completed by October 20, 1997.
10
GTE contended that the assessment letter, which was dated October 16, 1997,
failed to provide the notice required by KRS 139.620(1).
11
The Revenue Cabinet acknowledged that GTE was entitled to a refund in the
amount of $274,489.07 concerning an overpayment with respect to certain sales
and use taxes it paid for the period of April 1991 through March 1993. The
Revenue Cabinet offset this amount against the $370,313.33 GTE owed for the
period of February 1, 1991, through September 30, 1993, which resulted in a
net tax liability of $95,824.26.
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appealed the Revenue Cabinet’s ruling to the Board of Tax
Appeals.12
GTE argued before the Board that the assessment letter
failed to satisfy the notice requirements contained in KRS
131.081(8),13 KRS 131.110(1),14 and KRS 139.620(1).
In sum, GTE
claimed the assessment letter was insufficient notice since it
did not contain any information concerning the amount of
interest or penalties assessed against it by the Revenue
Cabinet.
GTE maintained that pursuant to KRS 131.081(8), the
Revenue Cabinet was required to provide this information prior
to the expiration of the four-year statute of limitations period
prescribed in KRS 139.620(1).15
In addition, GTE contended that
even if the assessment letter was deemed to satisfy the notice
12
See KRS 131.110(5).
13
KRS 131.081(8) provides, in relevant part, as follows:
The cabinet shall include with each notice of
tax due a clear and concise description of the basis
and amount of any tax, penalty, and interest assessed
against the taxpayer, and copies of the agent’s audit
workpapers and the agent’s written narrative setting
forth the grounds upon which the assessment is made.
14
KRS 131.110(1) provides that “[t]he Revenue Cabinet shall mail to the
taxpayer a notice of any tax assessed by it[,]” and that “[t]he assessment
shall be due and payable if not protested in writing to the cabinet within
forty-five (45) days from the date of notice.”
15
As previously discussed, the interest assessed against GTE for the period
of February 1, 1991, through September 30, 1993, was set forth in the notices
of tax due, which were postmarked October 21, 1997. GTE insisted that these
notices were untimely since they were mailed after the October 20, 1997,
deadline.
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requirement, it was mailed after the October 20, 1997,
deadline.16
On October 10, 2000, a hearing was held before the
Board concerning the issues raised by GTE in its appeal.
Several witnesses testified at the hearing, including GTE’s
staff auditor, Richard Ehle.
Ehle explained that he was
involved in the audit that concerned the period of February 1,
1991, through September 30, 1996.
Ehle testified that he
received an assessment letter addressed to him concerning this
period on October 27, 1997.
Ehle explained that he was
initially unsure of the date he received the assessment letter,
but that he later became aware of the date when he was presented
with a handwritten Post-it note that was attached to the
letter.17
Ehle testified that the Post-it note indicated that he
received the letter on October 27, 1997.18
Ehle testified that
he recognized the handwriting on the note as his own.
Ehle
stated that he received the notices of tax due for the period of
February 1, 1991, through September 30, 1996, on October 24,
1997.
On cross-examination, Ehle acknowledged that it was not
16
GTE raised this issue for the first time before the Board. Interestingly,
GTE failed to retain the envelope in which the letter was sent, which likely
would have contained a postmark date indicating when it was mailed.
17
Ehle testified that he first became aware of the Post-it note approximately
two weeks prior to the hearing.
18
The Post-it note, which was signed by Ehle, stated that he received the
letter at approximately 2:30 p.m. on October 27, 1997.
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unusual for his secretary or supervisor to open his mail before
it reached his desk.19
Several employees from the Revenue
Cabinet also testified at the hearing concerning the mailing
system employed by the Revenue Cabinet.
The Revenue Cabinet was
unable, however, to produce any witness who could verify the
date the assessment letter was mailed.
On September 7, 2001, the Board entered an order
setting aside the assessment against GTE for the period of
February 1, 1991, through September 30, 1993.
The Board
concluded that the assessment against GTE for this period was
untimely and therefore void.
The Board’s order stated, in
relevant part, as follows:
In accordance with the statute of
limitations as described in KRS 139.110(1),
the Cabinet had to provide GTE with notice
of any assessment against it for the taxable
period September 1993 on or before October
20, 1997.
Sections 131.081(8), 131.110(1) and KRS
139.620(1) of the Kentucky Revised Statutes
must be construed to harmonize the statutes
so as to give effect to all of them, and in
such a way that they do not become
meaningless or ineffectual. Commonwealth v.
Phon, Ky., 17 S.W.3d 106, 107-108 (2000).
The proper construction of KRS §§
131.081(8), 131.110(1) and KRS 139.620(1)
requires that five elements of information
must be timely provided to a taxpayer in
19
It is important to note that Ehle never stated that he opened the envelope
in which the letter was sent; he simply testified as to the date that he
received the letter. As previously discussed, GTE failed to retain the
envelope in which the letter was sent.
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order for the taxpayer to have received
notice of an assessment. The five elements
are: (1) a clear and concise description of
the basis and amount of tax, (2) a clear and
concise description of the basis and amount
of penalty, (3) a clear and concise
description of the basis and amount of
interest, (4) copies of the agent’s audit
work papers; and (5) the agent’s written
narrative setting forth the grounds upon
which the assessment is made.
The October 16, 1997[, assessment]
letter did not contain elements (2) and (3);
that is, it did not inform GTE of the
interest and penalty assessed. Therefore,
under KRS 131.081(8) the October 16,
1997[, assessment] letter did not constitute
notice of the assessment against GTE for the
February 1, 1991[,] through September 30,
1993[,] taxable periods.20
In order for GTE to have received
timely notice under the statutes, both the
October 17, 1997[,] Notices of Tax Due and
the October 16, 1997[, assessment] letter
would had to have been mailed to GTE, as
evidenced by the postmark, on or before
October 20, 1997.21
. . .
GTE did not receive timely notice of
the assessment against it in the amount of
$370,313.33 for the taxable periods February
1, 1991[,] through September 30, 1993, and
therefore, such assessment is null and void.
. . .
20
The Board also found that the assessment letter was mailed after the
October 20, 1997, deadline. In addition, the Board found that the Revenue
Cabinet had failed to establish that it “has a regular system or scheme for
mailing that ensures timely mailing of tax assessments[.]”
21
As previously discussed, the envelope in which the notices of tax due were
sent had an October 21, 1997, postmark date.
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The Board orders the Revenue Cabinet’s
final ruling reversed, and the assessment
against GTE in the amount of $370,313.33 is
set aside.
As there is no valid and binding
assessment or liability against which the
Cabinet may offset this refund, the Cabinet
is ordered to authorize payment of the
refund to GTE in the amount of $274,489.07,
plus interest.
The Revenue Cabinet appealed the Board’s decision to
the Franklin Circuit Court.22
In its appeal to the circuit
court, the Revenue Cabinet argued, inter alia, that the Board’s
finding that the assessment letter was untimely was “without
support of substantial evidence.”23
On December 19, 2002, the
circuit court entered an opinion and order affirming the Board’s
decision, which stated, in relevant part, as follows:
The Board determined that the
assessment letter dated October 16, 1997[,]
was mailed untimely (after October 20,
1997). This finding of fact is supported by
substantial evidence in the record.
Mysteriously, this letter did not receive a
postmark en route to [GTE]. Thus, the Board
was forced to rely upon circumstantial
evidence to determine whether the letter was
22
Pursuant to KRS 131.370(1), “[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.” Any decision rendered pursuant to this provision is subject to direct
review by the Court of Appeals. See KRS 13B.160.
23
The Revenue Cabinet also took issue with the Board’s conclusion that it had
to provide GTE with notice of any assessment against it for the taxable
period of February 1, 1991, through September 30, 1993, by October 20, 1997.
In sum, the Revenue Cabinet maintained that it was only required to perform
the “act of assessment” within the four-year statute of limitations period
prescribed in KRS 139.620(1).
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mailed on or before October 20, 1997. The
postmark and arrival dates for other
correspondence between the Cabinet and [GTE]
provide ample evidence to support the
Board’s decision. All other letters sent by
the Cabinet that were postmarked on or
before October 20, 1997[,] were received by
[GTE] on or before October 24, 1997.
However, the assessment letter in question
did not arrive at [GTE] until October 27,
1997. It is more than reasonable to
conclude that the assessment letter was not
mailed until after October 20, 1997, and
therefore was untimely [citation to record
omitted].24
. . .
[GTE] has a tax refund claim pending in
the amount of $274,489.07. The Cabinet
argues that refund claims are governed by
equitable principles, citing Shannon v.
Hughes, 270 Ky. 530, [109 S.W.2d 1174]
(1937). Federal courts allow the government
to make an equitable set-off for an
underpayment against any refund claimed by a
taxpayer, even if that underpayment could
not be assessed due to the applicable
statute of limitations. Lewis v. Reynolds,
284 U.S. 281[, 52 S.Ct. 145, 76 L.Ed. 293]
(1932). The United States Court of Claims
supported this reasoning by pointing out
that federal taxpayers have been granted
equitable recoupment despite failure to file
a timely claim for a refund. Dysart v.
United States, [169 Ct.Cl. 276,] 340 F.2d
624 ([Ct.Cl.] 1965). In other words, if the
taxpayer can offset a tax assessment for one
period with an untimely refund claim for the
24
The circuit court agreed with the Board’s construction of KRS 131.081(8),
KRS 131.110(1) and KRS 139.620(1). That is to say, the circuit court
concluded that the Revenue Cabinet was required to provide GTE with both the
assessment letter and the notices of tax due concerning the taxable period of
February 1, 1991, through September 30, 1993, by the October 20, 1997,
deadline. Nevertheless, the circuit court reasoned that the assessment
letter would have been sufficient to achieve the purpose for which the notice
statutes were intended if it had been timely mailed.
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same period, then the government should be
given the reciprocal privilege.
Equitable considerations do not support
the Cabinet’s desire to offset [GTE’s]
refund in this case. In its brief, [GTE]
pointed out that the Cabinet has always
prohibited taxpayers from using the doctrine
of equitable recoupment. The Cabinet did
not contradict that statement, nor could
this Court find any published Kentucky
appellate court opinions applying equitable
recoupment. Unlike the federal tax cases
cited by the Cabinet, Kentucky taxpayers
have not been allowed to offset tax
assessment with untimely refund claims.
Thus, as a matter of equity, the Cabinet
should not be allowed to offset a valid
refund claim by the amount of an untimely
assessment otherwise uncollectible.
On December 30, 2002, the Revenue Cabinet filed a
motion to alter, amend or vacate the circuit court’s opinion and
order.
The Revenue Cabinet argued that the Board’s finding that
the assessment letter was untimely was unsupported by the
evidence.
On March 10, 2003, the circuit court entered an order
granting the Revenue Cabinet’s motion to alter, amend or vacate.
The order stated, in relevant part, as follows:
The Court, in its Order of December 19,
2002, made a critical factual error in
reaching its conclusions on the timeliness
of the mailing of the assessment letter. In
its Order, the Court cited as a relevant
fact that the October 16, 1997, assessment
letter did not have a postmark date stamped
upon the envelope at the time of delivery.
This factual finding was incorrect and led
the Court to circumstantial conclusions
which were prejudicial to the Cabinet.
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In actual fact, the postmark date of
the October 16, 1997[,] assessment letter
could not be determined because GTE, the
Respondent herein, could not produce the
envelope in which the letter had arrived.
This was despite the fact that GTE could
produce the envelopes for all other
assessment and notice of tax due letters
sent to GTE concerning this audit and a
related audit. In light of this correction,
the Court must re-examine its holding that
the Board of Tax Appeals’ conclusion that
the Revenue Cabinet’s notice of assessment
was not timely mailed was supported by
substantial evidence in the record.
. . .
Reference to the evidence cited by the
Board in its Order reveals that the Board’s
conclusion that the October 16,
1997[, assessment] letter was mailed
untimely, could only be based upon the
evidence of the post-it-note attached to the
letter by Rick Ehle of GTE.[ ] Ehle, at the
hearing before the Board, testified that he
had discovered a post-it-note attached to
the October 16th letter indicating that he
had received the letter on October 27th.
Ehle also testified, however, that he was
not the first person at GTE who would have
received this letter. This post-it-note,
which was not discovered until well after
Ehle’s deposition, was not furnished to the
Revenue Cabinet until shortly before the
Board’s hearing. Ehle had no specific
memory of making the post-it-note, but
identified it as his handwriting.
. . .
Again, we repeat, the postmarked
envelope in which the letter arrived at GTE
was never found or produced.
. . .
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The evidence before the Board clearly
demonstrates that the Revenue Cabinet proved
conclusively and convincingly a regular
system for the mailing of assessment
letters, including particular attention to
those involving an impending statute of
limitations deadline. The substantial
weight of the evidence from the hearing only
supports the conclusion that this
presumption applies to support the Cabinet’s
position that the October 16th letter was
mailed on or before the October 20th
deadline. The johnny-come-lately post-itnote is insufficient evidence as a matter of
law to support the Board’s finding that the
assessment letter was mailed after the
October 20th deadline. As a consequence,
the Board’s finding to the contrary is
arbitrary and must be set aside [emphasis
omitted].
The Court reaffirms the portions of its
Order holding that the assessment letter
constitutes sufficient notice under the
statute.
The Court, however, does not reaffirm
the portions of its Order holding that there
is no offset against another pending tax
refund claim by GTE. In light of the above
holding, this issue is no longer central to
the Court’s decision in this case. But the
tax refund statutes (KRS 139.770 and KRS
134.580) only allow refunds for an
“overpayment of tax.” Our review of
additional authorities cited by the Cabinet
has convinced us that the Court’s initial
analysis of this issue in its December 19,
2002[,] Order[ ] is also incorrect. The
principles of equitable recoupment
previously cited by the Court do not apply
to the issue of whether GTE South made an
over-payment of taxes in a separate
transaction.
WHEREFORE, the Revenue Cabinet’s Motion
to Alter, Amend or Vacate the Court’s
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December 19, 2002, Judgment is GRANTED. The
Board’s Order, that the Cabinet’s assessment
letter of October 16, 1997, IS HEREBY SET
ASIDE AND VACATED. The Cabinet’s Tax
Assessment under the October 16, 1997[,]
letter, IS HEREBY ORDERED REINSTATED.
This appeal followed.
GTE raises three issues on appeal.
First, GTE asserts
that the circuit court erroneously substituted its judgment on
the weight of the evidence for that of the Board when it held
that the evidence was insufficient as a matter of law to support
the Board’s finding that the assessment letter was mailed after
the October 20, 1997, deadline.
Second, GTE contends that the
circuit court erred by concluding that the assessment letter
constituted sufficient notice under the relevant statutes.25
Third, GTE claims that it is entitled to a refund for the time
period that is in dispute and that the Revenue Cabinet is not
entitled to a setoff of the alleged liability against this
refund.
We begin our analysis by setting forth the proper
standard of review.
When a circuit court is charged with the
task of reviewing the final decision of an administrative
agency, such as the Board of Tax Appeals, its review is limited
25
GTE also takes issue with the circuit court’s conclusion that the evidence
before the Board demonstrated that the Revenue Cabinet “proved conclusively
and convincingly a regular system for the mailing of assessment letters[.]”
As previously discussed, the Board found that the Revenue Cabinet failed to
establish that it “has a regular system or scheme for mailing that ensures
timely mailing of tax assessments[.]” We need not address this issue,
however, as its resolution is not central to our disposition of this appeal.
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by KRS 13B.150(2) to a determination of whether the agency’s
decision is:
(a)
In violation of constitutional or
statutory provisions;
(b)
In excess of the statutory authority of
the agency;
(c)
Without support of substantial evidence
on the whole record;
(d)
Arbitrary, capricious, or characterized
by abuse of discretion;
(e)
Based on an ex parte communication
which substantially prejudiced the
rights of any party and likely affected
the outcome of the hearing;
(f)
Prejudiced by a failure of the person
conducting a proceeding to be
disqualified pursuant to KRS
13B.040(2); or
(g)
Deficient as otherwise provided by law.
Whether the Revenue Cabinet provided GTE with due and
timely notice of the tax assessment levied against it for the
period of February 1, 1991, through September 30, 1993, presents
a mixed question of fact and law.26
“When considering questions
of law or mixed questions of fact and law, the reviewing Court
has greater latitude in determining whether the findings were
supported by evidence of probative value than when only a
26
See, e.g., Kentland Elkhorn Coal Corp. v. Yates, Ky.App., 743 S.W.2d 47, 49
(1988); and Harry M. Stevens Co., Inc. v. Workmen’s Compensation Board,
Ky.App., 553 S.W.2d 852 (1977).
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question of fact is at issue.”27
As previously discussed, GTE
first takes issue with the circuit court’s determination that
“[t]he johnny-come-lately post-it-note [was] insufficient as a
matter of law to support the Board’s finding that the assessment
letter was mailed after the October 20th deadline.”
When the
party with the burden of proof on a factual issue is successful
before an administrative tribunal, as in the case sub judice,28
the issue on appeal is whether substantial evidence supports the
agency’s conclusions.29
“Substantial evidence has been defined
as some evidence of substance and relevant consequence, having
the fitness to induce conviction in the minds of reasonable
people.”30
Moreover, it is well-settled that a reviewing court
may not substitute its judgment for that of an administrative
tribunal “as to the weight of the evidence on questions of
fact.”31
Findings of fact shall not be set aside unless clearly
27
Purchase Transportation Services v. Estate of Wilson, Ky., 39 S.W.3d 816,
817-18 (2001).
28
Clearly, the burden was on GTE to establish the facts necessary to support
its statute of limitations defense. Cf., Wimmer v. City of Ft. Thomas,
Ky.App., 733 S.W.2d 759, 761 (1987)(stating that pleading the statute of
limitations is an affirmative defense and the burden lies with the party
asserting the defense to show his entitlement to it). See also Woods v.
Commissioner of Internal Revenue, 92 T.C. 776, 779 (U.S.Tax Ct. 1989).
29
See, e.g., Special Fund v. Francis, Ky., 708 S.W.2d 641, 643 (1986).
30
Burton v. Foster Wheeler Corp., Ky., 72 S.W.3d 925, 929 (2002)(citing
Smyzer v. B.F. Goodrich Chemical Co., Ky., 474 S.W.2d 367, 369 (1971)).
31
KRS 13B.150(2). See also Paramount Foods, Inc. v. Burkhardt, Ky., 695
S.W.2d 418, 419-20 (1985); and Revenue Cabinet v. Kentucky-American Water
Co., Ky., 997 S.W.2d 2, 8 (1999).
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erroneous and a factual finding is not clearly erroneous if it
is supported by substantial evidence.32
Based on the lack of evidence to support the Board’s
finding on this issue, we agree with the circuit court’s
reversal of the Board’s determination that the assessment letter
was mailed untimely.
The Board appears to have premised its
finding on Ehle’s testimony that he received the assessment
letter on October 27, 1997.33
Ehle, however, never stated that
he opened the envelope in which the letter was sent; he simply
testified as to the date that he received the letter.34
In fact,
Ehle testified that it was not unusual for his secretary or
supervisor to open his mail before it reached his desk.
As
previously discussed, the burden was on GTE to establish the
facts necessary to support its statute of limitations defense.
“A party pleading the statute of limitations as a bar to
assessment establishes a prima facie case by showing that the
statutory notice was mailed beyond the normally applicable
32
See, e.g., Johnson v. Galen Health Care, Inc., Ky.App., 39 S.W.3d 828, 832
(2001); and Uninsured Employers’ Fund v. Garland, Ky., 805 S.W.2d 116, 117
(1991).
33
The Board cited Ehle’s testimony from the October 10, 2000, hearing and
James Gaither’s deposition testimony in support of its determination that the
assessment letter was mailed untimely. Gaither was Ehle’s supervisor during
the time period relevant to this appeal. In his deposition, Gaither stated
that he first came into contact with the assessment letter on October 27,
1997, when Ehle presented him with the letter and the attached Post-it note.
34
Likewise, Gaither simply testified as to the date that he received the
letter from Ehle.
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period provided by the statute of limitations.”35
Like the
circuit court, we conclude that the scant evidence before the
Board concerning the alleged untimeliness of the assessment
letter was insufficient “to induce conviction in the minds of
reasonable people[;]”36 and accordingly, GTE failed to satisfy
its burden on this issue.
Consequently, the circuit court
correctly reversed the Board’s determination that the assessment
letter was mailed after the October 20, 1997, deadline.
GTE further contends that the circuit court erred by
concluding that the assessment letter constituted sufficient
notice under the relevant statutes.
In sum, GTE maintains that
“[s]trict compliance with the notice requirements of KRS §§
131.110(1), 139.620(1) and 131.081(8) is required.”
GTE’s
argument is premised upon its interpretation of KRS 131.081(8),
KRS 131.110(1) and KRS 139.620(1).
GTE contends that before a
taxpayer will be deemed to have received notice of an
assessment, the aforementioned statutes, when read together,
require that the notice of the assessment include the following:
(1) a clear and concise description of the basis and amount of
any tax assessed against the taxpayer; (2) a clear and concise
description of the basis and amount of any penalty assessed
against the taxpayer; (3) a clear and concise description of the
35
Woods, 92 T.C. at 779.
36
Burton, 72 S.W.3d at 929.
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basis and amount of any interest assessed against the taxpayer;
(4) copies of the agent’s audit workpapers; and (5) the agent’s
written narrative setting forth the grounds upon which the
assessment is made.37
We agree with GTE’s construction of KRS
131.081(8), KRS 131.110(1) and KRS 139.620(1).
It is well-established that doubtful language in
statutes imposing taxes should be resolved in favor of the
taxpayer.38
As the former Court of Appeals stated in George v.
Scent:39
Taxing laws should be plain and
precise, for they impose a burden upon the
people. That imposition should be
explicitly and distinctly revealed. If the
Legislature fails so to express its
intention and meaning, it is the function of
the judiciary to construe the statute
strictly and resolve doubts and ambiguities
in favor of the taxpayer and against the
taxing powers.40
37
See KRS 131.081(8).
38
WDKY-TV, Inc. v. Revenue Cabinet, Commonwealth of Kentucky, Ky.App., 838
S.W.2d 431, 433 (1992).
39
Ky., 346 S.W.2d 784, 789 (1961) (citing Frank Fehr Brewing Co. v.
Commonwealth ex rel. Oates, 296 Ky. 667, 178 S.W.2d 197 (1944)).
40
Id. See also Matter of Protest of Strayer, 716 P.2d 588, 592 (Kan.
1986)(holding that “[t]ax statutes are penal, and thus must be strictly
construed in favor of the taxpayer”); First National Bank of Springfield v.
Dept. of Revenue, 421 N.E.2d 175, 177 (Ill. 1981)(holding that “[t]axing
statutes are to be strictly construed, and their language is not to be
extended or enlarged by implication beyond its clear import, but in cases of
doubt such laws are construed most strongly against the government and in
favor of the taxpayer”); and KTVO, Inc. v. Bair, 255 N.W.2d 111, 112-13 (Iowa
1977)(noting that “[i]n construing tax statutes doubt is resolved in favor of
the taxpayer”). The historical underpinnings for the general rule that
taxing statutes are to be strictly construed in favor of the taxpayer can be
traced to Chief Justice Marshall’s declaration in M’Culloch v. Maryland, 17
U.S. (4 Wheat) 316, 431, 4 L.Ed. 579 (1819), that “[t]he power to tax
involves the power to destroy[.]”
-19-
We conclude that KRS 131.081(8), KRS 131.110(1) and
KRS 139.620(1) were intended to provide the taxpayer with notice
of any tax, interest or penalties assessed against him, as well
as the basis of such assessment within a timely fashion, so as
to allow for a protest of the assessment if necessary.
KRS
139.620(1) provides that “[i]f the amount of tax computed by the
cabinet is greater than the amount returned by the taxpayer, the
excess shall41 be assessed by the cabinet within four (4) years
from the date the return was filed” [emphasis added].
KRS
131.110(1) provides that “[t]he Revenue Cabinet shall mail to
the taxpayer a notice of any tax assessed by it[,]” and that
“[t]he assessment shall be due and payable if not protested in
writing to the cabinet within forty-five (45) days from the date
of notice” [emphases added].
KRS 131.110(1) further provides
that any protest “shall be accompanied by a supporting statement
setting forth the grounds upon which the protest is made”
[emphasis added].
In order for the taxpayer to make an informed decision
concerning its right to protest a tax assessment, the
41
It is a fundamental rule of statutory construction that the word “shall” is
to be treated as mandatory unless the context requires otherwise. See, e.g.,
Alexander v. S & M Motors, Inc., Ky., 28 S.W.3d 303, 305 (2000). See also
KRS 446.010(29). Furthermore, our Supreme Court recently stated in
Commonwealth v. Phon, Ky., 17 S.W.3d 106, 108 (2000), that “statutes should
be construed in such a way that they do not become meaningless or
ineffectual” [footnote omitted].
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Legislature enacted KRS 131.081(8), which details the
information that is to be provided to the taxpayer as follows:
(8) The cabinet shall include with each
notice of tax due a clear and concise
description of the basis and amount of any
tax, penalty, and interest assessed
against the taxpayer, and copies of the
agent’s audit workpapers and the agent’s
written narrative setting forth the grounds
upon which the assessment is made.
Taxpayers shall be similarly notified
regarding the denial or reduction of any
refund or credit claim filed by a taxpayer
[emphasis added].
Central to our holding in this case is a determination
of the Legislature’s intent as to the application of the fouryear statute of limitations.
The Revenue Cabinet takes the
position that this four-year limitation applies only to the
assessment of the tax.
Thus, the Revenue Cabinet contends that
it was not required to provide the taxpayer with the five
elements of information within the four-year period.
The
Revenue Cabinet did send GTE an assessment letter in the fouryear period which contained the basis and amount of the tax
assessed against it for the period of February 1, 1991, through
September 30, 1993, along with the audit workpapers and agent’s
written narrative for that period.42
However, it was not until
October 24, 1997, that GTE received formal notices of tax due
42
As previously discussed, GTE failed to establish that the assessment letter
was untimely mailed after the October 20, 1997, deadline.
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which included the interest assessed against it for the period
in question, in an envelope postmarked October 21, 1997.
When KRS 131.081(8) is read in conjunction with KRS
131.110(1) and KRS 139.620(1), we are persuaded that KRS
131.081(8) requires the Cabinet to include with each notice of
tax due the five elements set forth in the statute within the
four-year statute of limitations period contained in KRS
139.620(1).
In the case sub judice, the timely assessment
letter contained three of the required five elements, but the
remaining two elements (interest and lack of penalty) were not
provided until the untimely notice of tax due was sent.
While
the Revenue Cabinet contends that it substantially complied with
the requirements of the statutes, we hold that the clear
language of the statutes in question leaves no room for
substantial compliance.
Consequently, we are of the opinion
that strict compliance with the notice requirements contained in
KRS 131.081(8), KRS 131.110(1) and KRS 139.620(1) is mandated.
To hold otherwise would, at a minimum, render KRS 131.081(8)
meaningless or ineffectual.43
While our holding on the notice issue favors GTE, we
accept the Revenue Cabinet’s alternative argument that GTE is
not entitled to a refund concerning the sales and use taxes it
43
To adopt the Revenue Cabinet’s construction of the statutes in question
would have the effect of extending the time period for providing the taxpayer
with the elements listed in KRS 131.081(8) indefinitely.
-22-
paid for the period of April 1991 through March 1993, since it
did not “overpay” its taxes for that period.44
KRS 139.770,
which governs claims for refunds or credits for taxes paid,
provides that “[t]he taxes paid pursuant to the provisions of
this chapter shall be refunded or credited in the manner
provided in KRS 134.580.”45
KRS 134.580(2) authorizes the
Revenue Cabinet to issue a refund or credit for “any overpayment
of tax and any payment where no tax was due.”46
Thus, an
“overpayment” or “payment where no tax was due” must occur
before a refund is authorized.47
Stated another way, the
taxpayer is only entitled to a refund if he has overpaid his tax
liability.
44
As previously discussed, GTE had claimed a refund of $274,489.07 for
overpayment of its sales and use taxes during this period.
45
See KRS 139.770(1).
46
KRS 134.580(4) provides, in relevant part, as follows:
Nothing in this section shall be construed to
authorize the agency to make or cause to be made any
refund except within four (4) years of the date
prescribed by law for the filing of a return
including any extension of time for filing the return
. . . except in any case where the assessment period
has been extended by written agreement between the
taxpayer and the cabinet[.]
The Revenue Cabinet concedes that GTE’s refund request for the period of
April 1991 through March 1993 was timely filed.
47
Pursuant to KRS 134.580(1)(b), “‘[o]verpayment’ or ‘payment where no tax
was due’ means the tax liability under the terms of the applicable statute
without reference to the constitutionality of the statute.”
-23-
In Lewis v. Reynolds,48 the United States Supreme Court
noted long ago that this issue “‘involves a redetermination of
the entire tax liability.
While no new assessment can be made,
after the bar of the statute has fallen, the taxpayer,
nevertheless, is not entitled to a refund unless he has overpaid
his tax.’”49
The Supreme Court went on to hold:
An overpayment must appear before refund is
authorized. Although the statute of
limitations may have barred the assessment
and collection of any additional sum, it
does not obliterate the right of the
[government] to retain payments already
received when they do not exceed the amount
which might have been properly assessed and
demanded [emphasis added].50
The principles enunciated by the Supreme Court in
Lewis have become ingrained in the jurisprudence of tax law.51
Although this issue appears to be one of first impression in
Kentucky, we see no reason to deviate from this majority rule.
Consequently, we conclude that even though the assessment and
collection of GTE’s tax liability for the period of April 1991
48
284 U.S. 281, 52 S.Ct. 145, 76 L.Ed. 293, modified by, 284 U.S. 599, 52
S.Ct. 264, 76 L.Ed. 514 (1932).
49
Id. 284 U.S. at 283 (quoting Lewis v. Reynolds, 48 F.2d 515, 516 (10th Cir.
1931)).
50
Id. 284 U.S. at 283.
51
See IES Industries, Inc. v. United States, 349 F.3d 574, 581 n.5 (8th Cir.
2003); Bachner v. Commissioner of Internal Revenue, 109 T.C. 125, 130-32
(U.S.Tax Ct. 1997); Allen v. United States, 51 F.3d 1012, 1014-15 (11th Cir.
1995); Angle v. United States, 996 F.2d 252, 256 (10th Cir. 1993); Bankers
Trust Corp. v. New York City Department of Finance, 301 A.D.2d 321, 330
(N.Y.App.Div. 2002); and Sprint Communications Co. v. State Board of
Equalization, 47 Cal.Rptr.2d 399, 402-03 (Cal.App. 1995).
-24-
through March 1993, is now barred by the statute of limitations,
the Revenue Cabinet has the right to retain prior excess
payments for that same time period to the extent that they do
not exceed the amount “which might have been properly assessed
and demanded.”52
Unfortunately, the circuit court failed to
determine the amount of tax that had been assessed against GTE
for the period of April 1991 through March 1993.
As previously
discussed, the Revenue Cabinet contends GTE underpaid its sales
and use taxes in the amount of $370,313.33 for the period of
February 1, 1991, through September 30, 1993.
This period
overlaps by eight months the period for which GTE has requested
a refund.
Consequently, this matter must be remanded to the
circuit court for a factual determination of whether the refund
amount requested by GTE for the period of April 1991 through
March 1993 exceeds the amount assessed against it for that same
time period.
GTE will be entitled to a refund for any such
excess; otherwise, the entire refund will be exhausted as an
offset against the tax liability for that period which might
have been properly assessed and demanded.
Based on the foregoing reasons, the order of the
Franklin Circuit Court is reversed, and this matter is remanded
for further proceedings consistent with this Opinion.
ALL CONCUR.
52
Lewis, 284 U.S. at 283.
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BRIEFS FOR APPELLANT:
Erica L. Horn
Bruce F. Clark
Frankfort, Kentucky
BRIEF AND ORAL ARGUMENT FOR
APPELLEE, REVENUE CABINET:
Stephen G. Dickerson
Frankfort, Kentucky
ORAL ARGUMENT FOR APPELLANT:
Erica L. Horn
Frankfort, Kentucky
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