MONUMENTAL LIFE INSURANCE COMPANY VS. THE DEPARTMENT OF REVENUE , ET AL.
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RENDERED: JUNE 27, 2008; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2005-CA-002148-MR
MONUMENTAL LIFE INSURANCE COMPANY,
SUCCESSOR IN INTEREST TO COMMONWEALTH
LIFE INSURANCE COMPANY
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER L. CRITTENDEN, JUDGE
ACTION NO. 03-CI-01652
THE DEPARTMENT OF REVENUE, FORMERLY
KNOWN AS THE REVENUE CABINET, FINANCE AND
ADMINISTRATION CABINET, COMMONWEALTH OF
KENTUCKY; LOUISVILLE/JEFFERSON COUNTY
METRO GOVERNMENT, FORMERLY KNOWN AS
CITY OF LOUSVILLE, KENTUCKY AND JEFFERSON
COUNTY, KENTUCKY; AND KENTUCKY BOARD OF
TAX APPEALS
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE: THOMPSON, JUDGE; BUCKINGHAM AND HENRY, SENIOR
JUDGES.1
1
Senior Judges David C. Buckingham and Michael L. Henry sitting as Special Judges by
assignment of the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
KRS 21.580.
HENRY, SENIOR JUDGE: Monumental Life Insurance Company (Monumental)
appeals from an opinion and order of the Franklin Circuit Court affirming an order
of the Kentucky Board of Tax Appeals (Board) that denied Monumental's tax
refund claims for the tax years 1990 through 1996. Monumental also appeals from
the Board's denial of its request for relief from additional tax assessments issued
by the Revenue Cabinet (Cabinet), the City of Louisville, and Jefferson County for
the tax years 1995 through 1998.2 The primary issues raised are (1) whether the
Cabinet erroneously treated the value of investment corporate stock held by
Monumental when computing its tax liability pursuant to Kentucky Revised
Statutes (KRS) 136.320 for the years 1990 through 1996 (referred to by the parties
as the “capital stock tax”), and (2) whether the Cabinet properly subjected assets
booked as “separate accounts” to taxation during the years 1995 through 1998.
Monumental is a domestic life insurance company which conducts
business within the Commonwealth of Kentucky and is, therefore, subject to KRS
136.320, which requires that it pay a property tax on its “taxable capital” and
“taxable reserves.”3 Taxable capital is taxed at a rate of 0.7% , while taxable
reserves are taxed at the significantly lower rate of 0.001%. KRS 136.320(3).
Taxable capital includes the fair cash value of the company's intangible property,
2
For convenience, we include appellees the City of Louisville and Jefferson County in our
references to the Cabinet. These governmental units support the Cabinet's determinations.
3
All references to KRS 136.320 are to the statute as it existed prior to 1998, when the tax was
changed to include a premium tax.
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including shares of stock, less taxable reserves and exempt intangible property.
KRS 136.320(2)(a). Taxable reserves consists of reserves on all outstanding
insurance policies and contracts multiplied “. . . by the percentage determined by
dividing capital, less exempt intangible personal property, by capital including
exempt intangible personal property.” KRS 136.320(2)(b). During the period at
issue Monumental also paid local option ad valorem taxes levied by the City of
Louisville and Jefferson County that were determined on the basis of its taxable
capital as certified by the Cabinet.
In anticipation of the resolution of St. Ledger v. Revenue Cabinet, 912
S.W.2d 34 (Ky. 1995), vacated by remand, St Ledger v. Kentucky Revenue
Cabinet, 517 U.S. 1206, 116 S.Ct. 1821, 134 L.Ed.2d 927 (1996), on remand, St.
Ledger v. Revenue Cabinet, 942 S.W.2d 893 (Ky. 1997), cert. dismissed, St.
Ledger v. Kentucky Revenue Cabinet, 521 U.S. 1146, 118 S.Ct. 1146, 138
L.Ed.2d 1057 (1997), Monumental began filing annual protective refund claims
with the Cabinet, the City of Louisville and Jefferson County. St. Ledger 4 dealt
with the constitutionality of KRS 136.020 (which, among other things, imposed a
corporate ad valorem tax on various property, including stock) and KRS
136.030(1) (which exempted from ad valorem taxes the stock held by individual
shareholders of corporations which paid Kentucky taxes on at least 75% of its
4
Unless the context indicates otherwise, references to St. Ledger refer to the 1997 Kentucky
Supreme Court decision in the cause.
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total property).5 As further discussed below, the St. Ledger decision expressly
held KRS 136.020 and KRS 136.030(1) to be unconstitutional.
Following the finality of St. Ledger, Monumental adopted the
position that all stock assets should be excluded from the ad valorem tax
calculations imposed under KRS 136.320. It accordingly filed its 1997 and 1998
tax returns reflecting this position. The Cabinet initially accepted the Monumental
method, though the Cabinet states that this was a result of auditor error.
Following the Kentucky Supreme Court's decision in St. Ledger, the
Cabinet began processing the many refund claims owed taxpayers as a result of the
decision, including Monumental's protective refund claims filed between 1991 and
1996. In calculating the tax due, rather than excluding stock altogether pursuant
to Monumental's proposed method, the Cabinet treated Monumental's stock assets
as exempt intangible personal property in the KRS 136.320 calculations resulting
in a total refund due of $1,470,357.49. Monumental protested the Cabinet's refund
amount on the basis that St. Ledger required that stock holdings be altogether
excluded from the formula. Using this method, Monumental calculated a total
refund due of $8,107,668.00 plus additional interest.
During the protest process, the Cabinet again audited Monumental's
1998 return. As a result of the audit the Cabinet determined that Monumental had
failed to include in its ad valorem report holdings booked to an account titled
“separate accounts,” which consists primarily of pension and retirement assets
5
This statute is sometimes referred to in the record as the “exemption statute.”
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held in Monumental's name for future payout to retirees. The Cabinet thereafter
recomputed Monumental's 1998 tax liability to include these assets, with the result
that Monumental's liability increased from $48,672 to $3,061,280. The Cabinet
also recomputed Monumental's tax liability for the years 1995 through 1998 to
take into account separate account assets, and assessed an additional
$2,895,878.42 for those years.6
The matter was brought before the Board which, after an evidentiary
hearing, upheld the Cabinet's ruling. The Franklin Circuit Court affirmed the
Board's ruling. This appeal followed.
STANDARD OF REVIEW
KRS 131.370 sets out the appeals procedure from an order of the
Board, and provides that such appeals are to be “in accordance with KRS Chapter
13B.” According to KRS 13B.150(2), we may not substitute our judgment for that
of the agency as to the weight of the evidence on questions of fact. KRS
13B.150(2) further provides that we may reverse the KBTA's final order, in whole
or in part, only if we find that the order 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;
6
These assets had similarly not been taxed in years prior to 1995; however, pursuant to the
applicable statute of limitations, 1995 was as far back as the Cabinet could go.
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(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.
Consistent with the general standard applicable to appeals from
administrative agencies, courts are limited to reviewing findings of fact based on
the substantial evidence rule. Where the administrative agency's findings of fact
are supported by substantial evidence, those findings are binding on the reviewing
court; this is true even though there may be conflicting evidence in the record.
Urella v. Kentucky Bd. of Medical Licensure, 939 S.W.2d 869 (Ky. 1997); H & S
Hardware v. Cecil and Kentucky Unemployment Insurance Commission, 655
S.W.2d 38, 40 (Ky.App. 1983). Substantial evidence is evidence taken by itself or
as a whole that “has sufficient probative value to induce conviction in the minds of
reasonable men.” Commonwealth of Kentucky, Cabinet for Human Resources v.
Bridewell, 62 S.W.3d 370, 373 (Ky. 2001). Issues of law, however, as always, are
reviewed de novo. Gosney v. Glenn, 163 S.W.3d 894, 898 (Ky.App. 2005); Reis
v. Campbell County Bd. of Educ., 938 S.W.2d 880 (Ky. 1996) (Legal errors of
administrative body may always be corrected by reviewing court).
ST. LEDGER'S EFFECT UPON TAXABILITY OF STOCK
Monumental alleges that as a result of the Kentucky Supreme Court's
decision in St. Ledger, its stock holdings are not subject to ad valorem taxes, and
must be excluded from any part of the tax computation under KRS 136.320.
Monumental asserts that St. Ledger did not merely alter how the capital stock tax
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was to be calculated, but instead mandated that all stock be excluded from the tax
calculation. Under its interpretation, the Kentucky Supreme Court's opinion was
sufficiently broad so as to sever from KRS 136.320 as unconstitutional the
statute's reference in Section (1)(a) to “shares of stock.” Thus, Monumental
contends that all stock must be excluded from the calculations under KRS
136.320. Under Monumental's calculation, stock is factored completely out of the
tax calculation (this method is referred to in the record as the “exclusion method”),
whereas the Cabinet uses stock holdings in its calculations to first include stock in
the calculation of capital under Section (1)(a), and then to deduct the value of the
stock as “exempt intangible personal property” in the calculations in Sections
(2)(a) and (2)(b) (this method is referred to in the record as the “exemption
method”). Pursuant to the resulting mathematics, the exclusion method results in a
lower tax liability than the exemption method.
Because this argument involves the interpretation of St. Ledger and
KRS 136.020 – issues of law – our standard of review is de novo. Goseny v.
Glenn, supra.
The issues in St. Ledger concerned the corporate shares tax contained
in KRS 132.020(1), which imposed an ad valorem tax on stock shares, and the
exemption statute contained in KRS 136.030(1).7 KRS 132.020(1) levied an ad
valorem tax of twenty-five cents upon each one hundred dollars of value of,
7
Also addressed in St. Ledger was the constitutionality of KRS 132.030, the bank deposits tax,
which treated taxation of in-state and out-of state bank deposits differently. The Court's ruling in
that regard is not relevant to our present discussion.
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among other things, shares of stock. Pursuant to the exemption statute, KRS
136.030(1), individual shareholders were “not required to list their shares for ad
valorem taxation so long as the corporation pays taxes to the state of Kentucky on
at least 75% of its total property.” Based on the United States Supreme Court
decision in Fulton Corp. v. Faulkner, 516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d
796 (1996), the St. Ledger Court first held that the exemption statute violated the
Commerce Clause as discriminatory against out-of-state corporations, and, was,
therefore, unconstitutional. United States Constitution, Art. 1 § 8, c. 3.
Having held the exemption statute, KRS 136.030(1), unconstitutional,
the Court then considered whether the corporate shares ad valorem tax under KRS
132.020(1) could remain in effect. Relying on the expressed policy of the
Commonwealth that double taxation is prohibited, it concluded that shares of
stock could not be taxed pursuant to KRS 132.020(1), and likewise struck it as
unconstitutional in recognition that the legislature had originally enacted the
exemption statute, KRS 136.030(1), to avoid double taxation of Kentucky's
corporate shareholders. Since striking only the exemption statute and leaving
KRS 132.020(1) intact “would result in the taxation of not only corporations but
also their shareholders,” KRS 132.020 was likewise declared invalid insofar as it
taxed shares of stock. The decision in St. Ledger explained the Court's reasoning
as follows:
[T]his Court has ruled that double taxation is against
public policy and will be permitted only when the
Legislature has clearly declared a contrary policy.
-8-
Kentucky Power Co. v. Revenue Cabinet, Ky., 705
S.W.2d 904 (1985). As we determined in George v.
Scent, Ky., 346 S.W.2d 784 (1961), statutes are to be
construed in a manner which avoids double taxation in
any form, even if the double taxation is the result of
imposition of a tax by another governmental authority.
Thus, by enacting the Exemption Statute, the Legislature
clearly indicated that the double taxation of Kentucky's
corporate shareholders should be avoided. Accordingly,
we must consider the Corporate Shares Tax and the
Exemption Statute inseparable, because the striking of
the Exemption Statute would result in the taxation of not
only corporations, but also their shareholders, a result in
direct contravention of the expressed intent of the
General Assembly.
Id. at 897.
In summary, St. Ledger struck down KRS 136.030(1) as
unconstitutional pursuant to the federal commerce clause, and KRS 132.020 to
avoid double taxation. Despite this relatively straight-forward holding, in support
of its argument Monumental claims that St. Ledger held “that stock assets could
not be subject to valuation-based ad valorem taxation.” However, not only does
St. Ledger make no such statement, but the Court in that decision declined to
disturb any of its previous holdings specifically approving the ad valorem taxation
of corporate shares. Moreover, KRS 136.320 is not mentioned at all in the St.
Ledger opinion.
With the foregoing said, we believe the argument in this case is not
about whether or not stock holdings are to be taxed in Kentucky as a result of St.
Ledger. We believe that under the Cabinet's method they are not.8 However,
8
We note that following the St. Ledger decision the General Assembly repealed KRS 136.030
and removed the reference to stock from KRS 132.020. Monumental’s refund claims apply to
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Monumental appears to believe that St. Ledger changed the character of shares of
corporate stock into something akin to radioactive material for purposes of
taxation: not only can the shares themselves not be taxed, they cannot even be
briefly exposed to other taxable assets of the same character in order to calculate a
tax. We believe this is this an excessively extravagant extension of St. Ledger.
We find nothing in the St. Ledger opinion which purported to affect KRS
136.020's use of stock in its formulas. As such, the principal underpinning of
Monumental's argument is, we believe, based upon a misinterpretation of St.
Ledger.
While we believe Monumental's misinterpretation of St. Ledger
substantially defeats its arguments challenging the Cabinet's computation method,
we next address whether the Cabinet properly applied KRS 136.020 in calculating
the tax liability for the years 1991 through 1996. The version of KRS 136.020 in
effect during the time period we are concerned with stated as follows:
1) Each life insurance company incorporated under the
laws of and doing business in Kentucky shall value as of
January 1 and report to the Revenue Cabinet by July 15,
1966, and by April 1 each year thereafter, on forms
prescribed by the Revenue Cabinet, the following:
(a) The fair cash value of the company's intangible
personal property, hereinafter referred to as "capital,"
times when the prior versions of those statutes were still in effect. Even though KRS 136.320
has neither been repealed nor amended to delete its reference to shares of stock as a component
of “capital,” after St. Ledger the Cabinet exempted their value from the tax imposed by that
statute. However, we believe that St. Ledger did not specifically require such an exemption.
While a number of possible reasons for this concession by the Cabinet come to mind (see, e.g.,
St. Ledger at 903, Graves, J., dissenting in part) no specific reason has been offered by the
Cabinet.
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consisting of all money in hand, shares of stock, notes,
bonds, accounts, and other credits, exclusive of due and
deferred premiums, whether secured by mortgage,
pledge, or otherwise, or unsecured. [Emphasis added].
(b) The fair cash value of the company's intangible
personal property exempt from taxation by law.
(c) The aggregate amount of company's reserves,
reduced by the amount of due and deferred premiums,
maintained in accordance with the applicable provisions
of KRS 304.6-040 and 304.6-130 to 304.6-180, on all
outstanding policies and contracts supplementary
thereto.
(d) Such other information as may be required by the
Revenue Cabinet to accurately determine the fair cash
value of each company's "taxable capital" and "taxable
reserves."
(2) Based on information supplied by each company and
such other information as may be available, the Revenue
Cabinet shall value each company's "taxable capital" and
"taxable reserves" as follows:
(a) "Taxable capital" shall be determined by deducting
"taxable reserves" from "capital," less exempt intangible
personal property.
(b) "Taxable reserves" shall be determined by
multiplying the aggregate amount of reserves as
computed in subsection (1)(c) of this section by the
percentage determined by dividing "capital," less exempt
intangible personal property, by "capital," including
exempt intangible personal property.
(3) An annual tax of seventy cents ($0.70) on each one
hundred dollars ($100) of the fair cash value of "taxable
capital" and one-tenth of one cent ($0.001) on each one
hundred dollars ($100) of the fair cash value of "taxable
reserves" shall be imposed for state purposes. The tax
shall be in lieu of all excise, license, occupational, or
other taxes imposed by the state, county, city, or other
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taxing district, except as provided in subsections (4), (5),
and (6) of this section.
(4) The county in which the principal office of the
company is located may impose a tax of fifteen cents
($0.15) on each one hundred dollars ($100) of "taxable
capital."
(5) The city in which the principal office of the company
is located may impose a tax of fifteen cents ($0.15) on
each one hundred dollars ($100) of "taxable capital."
(6) The Revenue Cabinet shall by September 1 each year
bill each company for the state taxes. It shall
immediately certify to the county clerk of the county in
which the principal office of the company is located the
value of "taxable capital" subject to local taxation. The
county clerk shall prepare and deliver a bill to the sheriff
for collection of taxes collectible by the sheriff and shall
certify the value to all other collecting officers of
districts authorized to levy a tax.
(7) Each company's real and tangible personal property
shall be subject to taxation at fair cash value by the state,
county, school, and other taxing districts in which such
property is located in the same manner and at the same
rates as all other property of the same class.
(8) Taxes on property subject to taxation under this
section shall be subject to the same discount and
penalties as provided in KRS 134.020 and shall be
collected in the same manner as taxes on property locally
assessed, except that the state tax on the "taxable capital"
and "taxable reserves" shall be collected directly by the
Revenue Cabinet.
(9) Any taxpayer subject to taxation under this section
may protest in the manner provided in KRS 131.110.
The interpretation of a statute is a matter of law. Commonwealth v.
Garnett, 8 S.W.3d 573, 575-6 (Ky.App. 1999). The primary purpose of judicial
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construction is to carry out the intent of the legislature. In construing a statute, the
courts must consider “the intended purpose of the statute-and the mischief
intended to be remedied.” “A court may not interpret a statute at variance with its
stated language.” SmithKline Beecham Corp. v. Revenue Cabinet, 40 S.W.3d 883,
885 (Ky.App. 2001). The first principle of statutory construction is to use the
plain meaning of the words used in the statute. See Revenue Cabinet v. O'Daniel,
153 S.W.3d 815 (Ky. 2005); KRS 446.080(4). “[S]tatutes must be given a literal
interpretation unless they are ambiguous and if the words are not ambiguous, no
statutory construction is required.” Commonwealth v. Plowman, 86 S.W.3d 47, 49
(Ky. 2002). We lend words of a statute their normal, ordinary, everyday meaning.
Id. “We are not at liberty to add or subtract from the legislative enactment or
discover meanings not reasonably ascertainable from the language used.”
Commonwealth v. Harrelson, 14 S.W.3d 541, 546 (Ky. 2000). The courts should
reject a construction that is “unreasonable and absurd, in preference for one that is
‘reasonable, rational, sensible and intelligent [.]’” Commonwealth v. Kerr, 136
S.W.3d 783, 785 (Ky.App. 2004); Commonwealth v. Kash, 967 S.W.2d 37, 43-44
(Ky.App. 1997).
First, we note that KRS 136.020 expressly provides for the inclusion
of “shares of stock” in the initial calculation of “capital.” In this respect, it is
treated the same as, for example, money, notes, and bonds. Thus the plain
language of the statute supports the Cabinet's method and is adverse to
Monumental's method.
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Second, we believe the complete exclusion of stock from the
calculations described in KRS 136.320, as proposed by Monumental, yields an
illogical and absurd result. As previously discussed, at the times in issue the
intangible assets of domestic life insurance companies were taxed at two different
rates. “Taxable capital” was taxed at the rate of $0.70 per $100 (or to use terms
more illustrative of the sums in issue here, $700,000 per $100 million) and its
“taxable reserves” were taxed at the rate of $0.001 per $100 (or $1,000 per $100
million). While we need not get into the specific math, it is important to note that
the method proposed by Monumental (the exclusion method) allocates more value
to taxable reserves, whereas the Cabinet's method (the exemption method)
allocates more to taxable capital. Thus it is not difficult to see why Monumental,
or, indeed, any rational taxpayer would want to increase taxable reserves and
decrease taxable capital. Because of the differential in tax rates, such allocation
results in a lower tax liability.
Monumental's method, however, results in what we believe to be a
manifestly illogical result. For example, under the method proposed by
Monumental, its 1995 tax return would report total capital equal to negative $145
million. Such a result cannot be reconciled with the sort of logic one normally
expects to find in tax statutes.
Moreover, if the situation is considered whereby two hypothetical
domestic life insurance companies with the same dollar amount of “taxable
capital,” one with substantial stock holdings and the other with little or no stock in
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its investment portfolio, the former would pay much less tax. Such disparate
treatment would violate Section 171 of the Kentucky Constitution, which requires
uniform taxation of all property within the same class. This difficulty is avoided
entirely if stock is exempted rather than excluded in calculating the tax.
In addition, we believe the method used by the Cabinet follows the
calculation procedures as set forth in KRS 136.020, and, to the extent the statute
could be construed as ambiguous, the Cabinet's view is a reasonable interpretation
of the statute it is charged with enforcing.
Alternatively, however, Monumental argues that the doctrine of
contemporaneous construction requires the application of the exclusion method in
the tax calculations under KRS 136.020. Monumental offers two reasons for this:
first, because the Cabinet initially “accepted” this method in its audits of
Monumental's 1997 and 1998 returns, and (2) because the Cabinet has used this
method in relation to partnership interests and mutual funds.
The doctrine of contemporaneous construction means
that where an administrative agency has the
responsibility of interpreting a statute that is in some
manner ambiguous, the agency is restricted to any longstanding construction of the provisions of the statute it
has made previously. Practical construction of an
ambiguous law by administrative officers continued
without interruption for a very long period is entitled to
controlling weight.
GTE v. Revenue Cabinet, Com. of Ky., 889 S.W.2d 788, 792 (Ky. 1994) (citation
and internal quotation omitted).
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The doctrine of contemporaneous construction has no application
under the facts of this case. We cannot accept either that the Cabinet's acceptance
of Monumental's method in its initial audits for a two-year period—which the
Cabinet contends resulted from auditor error—amounted to a “construction” of the
law, or that the two-year time frame during which the Cabinet “accepted” the
method satisfies the requirement of a “long-standing” period of time within the
meaning of the doctrine. See Revenue Cabinet v. Lazarus, Inc., 49 S.W.3d 172
(Ky. 2001). Moreover, stock is distinguishable from partnership interests and
mutual funds because stock is specifically listed in KRS 136.020 whereas
partnership interests and mutual funds are not.
Under this argument heading Monumental also argues that the Board
erred by excluding evidence concerning the Cabinet's policies to avoid double
taxation in relation to partnership interests and mutual funds. Monumental sought
to present the evidence in connection with its argument for the application of the
contemporaneous construction doctrine. However, as noted above, KRS 136.020
is not concerned with partnership interests and mutual funds, and evidence relating
to those assets was accordingly not relevant to the issues at bar. Thus we do not
believe the Board abused its discretion by disallowing the evidence.
WHETHER MONUMENTAL'S SEPARATE ACCOUNT ASSETS
ARE SUBJECT TO TAX
Monumental argues that the Cabinet erred by assessing a tax liability
against its “separate accounts” assets for the years 1995 through 1998. The
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separate account assets consist principally of retirement fund amounts held for
distribution to retirees in the future.
Monumental and like companies are permitted to create separate
accounts pursuant to KRS 304.15-390. The pertinent provisions of that statute
provide:
(1) A domestic life insurer may establish one (1) or more
separate accounts, and may allocate thereto, in
accordance with the terms of a written contract or
agreement, any amounts paid to the insurer in connection
with a pension, retirement or profit-sharing plan, life
insurance, or an annuity which are to be applied to
provide benefits payable in fixed or in variable dollar
amounts or in both.
....
(3) Assets allocated to a separate account shall be valued
at their market value on the date of valuation, or if there
is no readily available market, then in accordance with
the terms of the applicable contract or agreement; except,
that the portion of the assets of such separate account at
least equal to the insurer's reserve liability with regard to
the guaranteed benefits and funds referred to in
subsection (1) of this section, if any, shall be valued in
accordance with rules otherwise applicable to the
insurer's assets.
....
(6) Amounts allocated by domestic life insurers to
separate accounts in the exercise of the power granted by
this section shall be owned by the insurer and the insurer
shall not be, or hold itself to be, a trustee, in respect to
such amount.
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KRS 136.020(1)(a) defines "capital" as “consisting of all money in
hand, shares of stock, notes, bonds, accounts, and other credits, exclusive of due
and deferred premiums, whether secured by mortgage, pledge, or otherwise, or
unsecured.” (Emphasis added). Upon the application of the plain language of the
statute, the holdings booked into the “separate accounts” account clearly fall
within the statutory definition. Monumental does not seriously dispute this but,
rather, relies upon a variety of theories to shield the account from taxation.
First, Monumental contends that the account is shielded from taxation
based upon the doctrine of contemporaneous construction. Monumental underpins
this argument by alleging that for over 20 years it has not reported this account for
taxation purposes, the Cabinet audited those returns and accepted the exclusion of
the account, and, therefore, the Cabinet has a long-standing construction of
excluding the account from taxation. The Cabinet alleges, however, that it was
never its policy to exclude holdings booked to the account but, rather, the
substance of the account only came to light during the 1998 audit when
Monumental finally provided an itemized listing of the assets booked to the
account. The Cabinet faults Monumental for deficient reporting over the 20 or so
past years and states that when it realized that the assets booked to the account
were taxable, it immediately assessed current and back taxes. Contemporaneous
construction cannot be asserted by a taxpayer to, in effect, create for itself an
amnesty for a long period of failing to self-report taxable assets. “Mere nonaction
upon the part of the officers of the state is not to be treated as contemporaneous
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construction. Nor can the Cabinet change the law through mistake.” Lazarus,
Inc., at 175 (internal citation and quotation marks omitted).
Alternatively, Monumental contends that the account is not subject to
taxation because it has no cash value. It alleges that it merely holds legal title to
the assets booked to the account, but that the retirement/pension beneficiaries hold
equitable title to the assets and that, therefore, the account assets are specifically
tied to a guaranteed benefit or payment in connection with pension retirement
plans. It follows, Monumental alleges, that the assets have no value to tax.
As noted above, KRS 304.15-390(6) provides that “[a]mounts
allocated by domestic life insurers to separate accounts in the exercise of the
power granted by this section shall be owned by the insurer and the insurer shall
not be, or hold itself to be, a trustee, in respect to such amount.” We believe that
Monumental's position is inconsistent with the plain language of the statute.
We further note that KRS 136.020 provides no exception for
retirement and pension assets. If the legislature sought to exclude such items, it
could have easily said so.
While Monumental may raise a valid point in distinguishing pension
and retirement funds from other types of accounts, it is not our function to set tax
policy which is, in effect, what Monumental asks us to do. “To do such would be
a complete violation of the separation of powers doctrine set forth in Kentucky's
Constitution.” St. Ledger v. Com., Revenue Cabinet, 942 S.W.2d 898, 893 (Ky.
1997). For this Court to deem the retirement and benefit funds held by
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Monumental in its “separate accounts” account to be excluded from tax “would, in
effect, be this Court delving into a realm our Constitution left squarely within the
power of the Legislative Branch.” Id. As such, we will not disturb the Cabinet's
treatment of the account.
As its third rationale for nontaxability of the account Monumental
alleges that ERISA9 Section 514(a) bars the imposition of an ad valorem tax on the
account. Monumental does not cite us to its preservation of this issue as required
by CR 76.12(4)(c). In its December 4, 2003, Order, the Board stated
“[Monumental] failed to raise the issue of ERISA in its Petition of Appeal, or in
any other pleading except its brief, including the pre-hearing compliance statement
and the supplemental pre-hearing compliance statement. Therefore it failed to
preserve this issue for review by this Board. The board will not consider the
ERISA issue. Stoner Creek Stud v. Revenue Cabinet, Ky.App. 746 S.W.2d 73
(1987).” As we have otherwise not been cited to Monumental's proper
preservation of the issue, we will likewise not address this argument on the merits.
Shelton v. Commonwealth, 992 S.W.2d 849, 852 (Ky.App. 1998).
As its final rationale for nontaxability of the account Monumental
alleges that the back assessments were improper under the retroactivity provisions
of KRS 132.290. More specifically, Monumental contends that KRS 132.290
permits only omitted property to be assessed retroactively, but that it reported the
grand total of the account in its reporting forms, and therefore no retroactive
9
Employee Retirement Income Security Act of 1974. 29 U.S.C. § 1001. et. seq.
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assessments are permitted under the statute. KRS 132.290 provides, in relevant
part, as follows:
(1) . . . . Any personal property which has not been listed
for taxation, for any year in which it is taxable, by the
due date of that year shall be deemed omitted property.
(2) All omitted property shall be assessed retroactively
in the manner provided by law at any time within five (5)
years from the date when it became omitted . . . .
The Board made the following findings relevant to this issue:
A life insurance company such as Monumental is
required to file an “Annual Statement” (sometimes
referred to as a “Blue Book”) with the Commonwealth of
Kentucky Department of Insurance reporting its general
account assets and liabilities, and, if applicable, an
“Annual Statement of the Separate Accounts”
(sometimes referred to as a “Green Book”).
Monumental reported the separate accounts as a single
line item on their Blue books, but failed to list them on
line 1 of their capital stock tax returns as capital, as
required by KRS 136.320.
The separate accounts, and accompanying detail, are
listed in the Green Books, which are financial statements
separate and apart from the Blue Book.
....
The Green Books, which detailed the separate accounts,
were normally not provided to Revenue when the tax
return and Blue Books were filed.10
In summary, the foregoing findings reflect that Monumental reported
the grand total of the separate accounts account in its filings with the Cabinet, but
failed to file the supporting subaccounts which would disclose to the Cabinet that
10
Citations to record omitted.
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items booked to the account were taxable. Most significantly, taxable items were
not listed for KRS 136.320 taxation purposes. Thus, we believe the separate
accounts account for the periods in question qualify as “omitted” under KRS
132.290, and, accordingly, the Cabinet properly applied the retroactivity
provisions of the statute.
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UNLAWFUL SINGLING-OUT OF MONUMENTAL
Monumental alleges that the Cabinet is singling them out for tax
treatment in violation of Section 171 of the Kentucky Constitution, which requires
uniformity in taxation. It argues that “Post-St. Ledger, the simple fact is that in a
state of 4 million residents, only Monumental is being taxed on the value of its
stock assets; a plain violation of uniformity.”
Monumental does not cite us to its preservation of this issue as
required by CR 76.12(4)(c), nor does it provide citations to any of the evidence in
the record which allegedly supports this argument. Accordingly, we will not
address this issue upon the merits.
ACCORD AND SATISFACTION
Monumental contends that the Cabinet's re-audits and tax liability
assessments for the years 1995-1998 are barred by the doctrine of accord and
satisfaction. It alleges that because following the initial audits the Cabinet “stated
at the administrative protest(s) the amount it would accept in full payment of
Monumental's obligation” was an accord, and Monumental's subsequent
satisfaction of that amount by payment or tax credit was a satisfaction.
Under the doctrine of accord and satisfaction, "[a]n offer in
satisfaction of a claim must be accompanied by an express condition that the
acceptance is in full satisfaction of the claim and that the offeree takes the money
subject to such condition. In lieu of an express condition, the circumstances must
clearly indicate to the creditor that this condition is present." Bruestle v. S & M
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Motors, Inc., 914 S.W.2d 353, 354 (Ky.App. 1996) (quoting Rauch v. Shots, 533
N.E.2d 193, 194 (Ind.Ct.App.1989)); Liggons v. House & Associates Ins., 3
S.W.3d 363, 365 (Ky.App. 1999).
We do not believe that the doctrine of accord and satisfaction is
applicable under the facts of this case. KRS 132.290 sets forth by statute the
procedures relevant to omitted property. The statute does not prevent re-audits,
and Monumental cites us to no authority which would prevent the procedures
undertaken by the Cabinet to assess back taxes. As previously discussed, the
Board found Monumental at fault for failing to report the underlying details of its
separate accounts account and for failing to include applicable items in its KRS
136.320 filings. As the new information came to light, the Cabinet was, we
believe, entitled to follow the statutory provisions contained in KRS 132.290 to
assess back-taxes.
KRS 131.081
Monumental contends that the assessment of deficiency interest
added to the assessed tax for the years 1995-1998 must be abated pursuant to KRS
131.081(8), a part of the “Tax Payers' Bill of Rights.” It alleges that “KRS
131.081(8) . . . automatically abates penalties and interest which arise due to a
taxpayer's reasonable reliance on written advice received from the Cabinet.”
Though KRS 131.081 was amended in 1998, 2000, 2005, and 2006,
Section (8) has provided throughout this period as follows:
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(8) The department 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.
The provision does not appear to address the issue of interest and
penalty abatement. In any event, Monumental does not cite us to the written
advice from the Cabinet it relied upon in failing to properly report its separate
accounts in its filings. Hence we are unpersuaded by this argument.
CONCLUSION
For the foregoing reasons the judgment of the Franklin Circuit Court
is affirmed.
BUCKINGHAM, SENIOR JUDGE, CONCURS.
THOMPSON, JUDGE, DISSENTS AND FILES SEPARATE
OPINION.
THOMPSON, JUDGE, DISSENTING: I respectfully dissent. I have
no doubt that the Kentucky legislature has repealed taxation on stock owned by
shareholders of corporations, which includes Monumental. In addition, the
taxation of Monumental’s separate account is repugnant to basic principles of
taxation. The separate account consists of pension funds and annuities placed in
the account by Monumental on behalf of the plan participants. Because the
Legislature has abolished taxes on the value of stock held by shareholders in this
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state, each of these tax computations are a direct or indirect taxation of
shareholders.
Initially, I believed the trial court utilized an improper method to
review the findings of the administrative agency herein. The trial court
erroneously applied the substantial evidence standard of review to all issues raised
by the parties. The issues raised are questions of law, fact, or mixed questions of
law. As to the questions of law, when an issue is purely one of interpretation of
law or presents a mixed question of law and fact, our review is de novo. Epsilon
Trading, Inc. v. Revenue Cabinet, 775 S.W.2d 937 (Ky.App. 1989).
As the majority recognizes, St. Ledger involved the commerce clause
and KRS 132.020. However, our Supreme Court provided further analysis and
reaffirmed the expressed public policy of the Commonwealth against double
taxation as it applies to taxation of a corporation and its shareholders. Although
there is no constitutional provision forbidding double taxation, public policy
dictates that taxation of the same property twice not be enforced except in cases
where the legislature has clearly declared a contrary policy. City of Louisville v.
Aetna Fire Ins. Co., 284 Ky. 154, 143 S.W.2d 1074 (1940). So strong is the
public policy that if the legislative intent is less than clear, a “statute should be
construed so as to avoid double taxation in any form.” Kentucky Power Company
v. Revenue Cabinet, 705 S.W.2d 904 (Ky. 1985).
I am convinced that the legislature has, without exception, re-affirmed
its intent to avoid double taxation of our citizens. Post-St. Ledger, the exemption
-26-
statute was repealed and reference to stock deleted from KRS 132.020. In doing
so, it must be presumed that the legislature was aware of the St. Ledger decision.
St. Clair v. Commonwealth, 140 S.W.3d 510 (Ky. 2004). Although it could have
equally taxed both in-state and out-of-state corporations and their shareholders,
the legislature chose to eliminate the tax on shareholders on the value of their
corporate shares and adhere to this Commonwealth’s public policy against double
taxation.
The majority believes the Supreme Court’s opinion was limited
strictly to KRS 132.020 but I am not persuaded. Our highest Court’s intent was to
declare all ad valorem taxes on the ownership of corporate shares forbidden unless
the legislature clearly states to the contrary. If, as the majority suggests, our
judicial opinions are limited to the facts presented without bearing on future cases,
our law is destined to stagnation and no longer a moving stream guided in its
journey by precedent. See Hilen v. Hayes, 673 S.W.2d 713, 718 (Ky. 1984).
Applying the mathematical computation performed by the Cabinet,
Monumental’s stock was not merely “exposed” to taxable assets; it was
transformed into a taxable asset. The majority ignores the testimony of the lone
expert, Professor Richard Pomp, who affirmatively testified that the exemption
method used by the Cabinet resulted in the taxation of stock. He explained:
If this were as simple as on line one you include the
shares and on line 2 you exclude the shares then
obviously you have eliminated the effect of the shares.
But that is not what is going on here at all. The
calculation is much more complicated that that. And
-27-
because of the complication, excluding the shares has a
different impact from exempting the shares. Excluding
the shares means taking the shares out of the calculation
entirely. Exempting means treating them wherever the
word exempt appears in the formula as being put in that
part of the process, that step in the formula.
And whether you treat it as excluded or you treat it as
exempt, mathematically it has a very different effect.
That's the first part of this case.
And, therefore, it really follows as a matter of logic that
if you exclude the shares, you get a lower tax. But if you
exempt the shares and you get a higher tax, then the
exemption is a way of indirectly taxing the shares. The
exemption does not have a neutral effect in this case.
It does lead to a higher tax compared to excluding the
shares.
An applicant before an administrative agency bears the burden of
proof and must provide sufficient evidence to establish a prima facie case for the
relief sought. See City of Louisville, Div. of Fire v. Fire Service Managers Assoc.
ex rel. Kaelin, 212 S.W.3d 89, 94 (Ky. 2006); Danville-Boyle County Planning
and Zoning Commission v. Prall, 840 S.W.2d 205 (Ky. 1992). However,
Monumental established through the testimony of Professor Pomp that it was
entitled to the relief sought, and the Cabinet elected not to introduce any expert
testimony.
In reliance on the sole expert testimony, I believe that the majority’s
understanding of this rather complex computation is amiss and is unsupported by
evidence in the record. There is an undesirable consequence of including stock in
the tax computation: a portion of taxable reserves is shifted to taxable capital
when the stock is exempted rather than excluded. Because of the difference in the
-28-
tax rates under the statute, the exemption method results in a substantially higher
tax. Indeed, if there were no difference in the tax consequences if either method
were used, there would be no controversy.
The majority states in its opinion that following the finality of St.
Ledger, Monumental adopted the position that all stock assets should be excluded
from the ad valorem tax calculations imposed under KRS 136.320. This statement
is in error. Before St. Ledger, Monumental and the Cabinet adopted the position
that all stock assets should be excluded from ad valorem tax calculations. It was
only after St. Ledger that the Cabinet adopted the position that stock assets should
be included in the ad valorem tax calculations imposed under KRS 136.320.
Although KRS 136.320 does not impose a direct tax on stock, the
majority’s interpretation permits an indirect tax that is equally offensive. A state
cannot tax indirectly that which it cannot tax directly. See Square D Co. v.
Kentucky Board of Tax Appeals, 415 S.W.2d 594, 599 (Ky. 1967). Thus, I would
hold that to avoid double taxation, shares of stock must be excluded rather than
exempted, under KRS 136.320.
The majority recites that the result of excluding shares is illogical. I
disagree. Both state and federal tax laws permit taxpayers to allocate assets into
non-taxable sources. Two common situations support my statement. While two
taxpayers may own the same amount of assets, one may own more non-taxable
bonds. Likewise, two citizens may earn the same income yet one pays lower taxes
-29-
because of contributions to retirement accounts, depreciation of real estate, interest
expenses, etcetera.
I am also in disagreement with the majority’s reasoning and result
regarding the taxation of the separate account. In my opinion, this once again
constitutes double taxation.
A purchaser of an annuity or a contributor to a pension plan has paid
taxes or has deferred the payment of taxes on the funds invested in the annuity or
pension plan. These funds are placed into the care and custody of Monumental
Insurance Company. To again tax these funds as an asset of Monumental
Insurance Company constitutes double taxation of the participant in the retirement
plan or annuity and diminishes the income to that third party by the taxation of the
account.
If an individual desires to establish a pension plan and places his
pension plan into the trust of his stockbroker or his bank and designates that
shares of stock be purchased by his pension plan for his retirement, those shares
will not be taxed. However, if that same person were to invest his pension plan
with Monumental who utilizes their expertise to invest shares of stock on his
behalf for his retirement, then his shares will be taxed. This is unequal taxation
and in direct violation of the legislature’s mandate that the value of the possession
of shares of stock not be taxed.
The majority places blame on Monumental for its failure to report the
assets. The facts, however, demonstrate that Monumental did not pay taxes on the
-30-
separate account because the Cabinet deemed the account not to be taxable. The
majority ignores what I consider to be the crucial facts.
Professor Pomp testified that separate accounts are similar to reserves
in that the assets in the accounts are not operating capital but are held for the
payment of retirement benefits.
Dennis Van Meighem is a specialist in the taxation of insurance
companies. He testified that a separate account is a segregated account, distinct
from the company's liabilities and assets. The records of the account are kept in a
“green book” and all gains and losses are allocated solely to that account. A
separate account is distinctive in the respect that its liabilities are always equal to
its assets. Any gains from the account are transferred to the company's “blue
book” which reflects the company's operating capital. As a result, there is no net
worth attributable to a separate account. The legal owner of the assets is the
insurance company, which has the ability to execute investment decisions but the
equitable owner is the contract holder; the third party participant in the pension
plan or the annuity.
Colleen Lyons, who was employed by Monumental in the tax
department from 1984 through 1998, testified that in preparation for the
company's capital stock tax return, she did not include the company's separate
account and had never received any notice from the Cabinet that it considered
separate accounts taxable.
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Nancy Moore Marshall testified to facts relevant to the Cabinet's
treatment of separate accounts for the purpose of calculating capital stock tax.
From 1980 through 1998, she worked in the division of the Cabinet that mandated
the capital stock tax. During those eighteen years, she was unaware of the Cabinet
taxing any separate accounts.
James Livers testified that in the 1980's or 1990's the issue arose as to
whether separate accounts should be included in the capital stock tax. Apparently,
the issue was affirmatively resolved and the tax was applied to at least one
taxpayer. However, there was no documentation to support his recollection. Mr.
Livers excused the Cabinet's failure to previously impose a tax on Monumental's
separate account to an oversight by the Cabinet.
I also do not believe that because KRS 304.15-390 designates the
insurer as the “owner” of the separate account, the assets are necessarily taxed
under KRS 136.620. KRS 136.320(1) requires that an insurance company report
the fair cash value of “all money in hand, shares of stock, notes, bonds, accounts,
and other credits . . . .” “Fair cash value” is the value of the property to a buyer
who “would obtain by his purchase the same interest held by the seller, and would
also obtain thereby all of the rights of the seller.” Commonwealth ex. Rel. Reeves
v. Sutcliffe, 155 S.W.2d 243, 245 (Ky. 1941).
Applying the definition to this case, even if the separate account
could be sold, a buyer of Monumental's interest would obtain only legal title and
not the value of the assets. This distinction was noted in Kentucky Power Co. v.
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Revenue Cabinet, 705 S.W.2d 904 (Ky. 1985), wherein the Court recognized that
legal title and equitable title have different monetary values. When legal and
equitable title are separated the “legal interest is virtually worthless because of
itself it owns nothing and can exercise no control over the property.” Id. at 905.
The title vested in Monumental is solely for the purpose of managing
the investments in the account for the benefit of the equitable title holders, the
retirement/pension beneficiaries. As revealed by the expert testimony,
Monumental cannot fund its operating capital from the assets or otherwise pay its
debt from that source. A buyer would receive nothing more. In a similar
situation, if Monumental were to enter into a bankruptcy, these accounts would
not constitute an asset of the bankruptcy estate. Similarly, if a creditor obtained a
judgment against Monumental, they could not execute or attach these separate
accounts to collect their judgment. Thus, the specification of Monumental as the
owner of the separate account does not include it within the ambit of KRS
136.320.
Moreover, absent from KRS 136.320 is any reference to separate
accounts. Although separate accounts may consist of cash, stock, bonds and other
intangibles, it is obvious from the legislature's enactment of KRS 304.15-390 that
it recognized a separate account as a distinct financial unit unique to domestic life
insurers. Thus, it is reasonable to construe the statute in a way to exclude separate
accounts.
-33-
Until Monumental filed its protest claiming a refund substantially
higher than that calculated by the Cabinet, it had never been taxed on its separate
account assets. Although its green book was not submitted with its return on an
annual basis, Monumental provided its blue book which advised the Cabinet of its
separate account retirement assets. Yet, the Cabinet consistently failed to request
that Monumental submit its green book or any other documents detailing the
contents of its separate account. For over twenty years, which included audit
years, the Cabinet never questioned the omission of the separate account.
In my opinion, the actions of the Cabinet have a strong implication of
retaliation and the contentious proceedings before the Board constitutes arbitrary
conduct toward Monumental.
In conclusion, I would reverse the decision of the circuit court and
remand the case to the Cabinet for a calculation of the Monumental’s refund based
on the exclusion of its stock assets, plus any interest owed. I would further hold
that the Cabinet cannot tax Monumental’s separate account.
-34-
BRIEFS FOR APPELLANT:
Mark F. Sommer
Mark A. Lloyd
Louisville, Kentucky
William A. Chittenden III
Chicago, Illinois
ORAL ARGUMENT FOR
APPELLANT:
Mark F. Sommer
Louisville, Kentucky
BRIEF AND ORAL ARGUMENT FOR
APPELLEE, THE DEPARTMENT OF
REVENUE:
Stephen G. Dickerson
Laura M. Ferguson
Frankfort, Kentucky
BRIEF FOR APPELLEE,
LOUISVILLE/JEFFERSON COUNTY
METRO GOVERNMENT:
Gary E. Siemens
Robert P. Benson, Jr.
Louisville, Kentucky
John M. Shardein
Asst. Jefferson County Attorney
Louisville, Kentucky
-35-
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