Opinion
NO. 2013-CA-000987-MR
10-31-2014
DEPARTMENT OF REVENUE, COMMONWEALTH OF KENTUCKY; AND THOMAS MILLER, IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF THE DEPARTMENT OF REVENUE APPELLANTS v. ARMSTRONG UTILITIES, INC. APPELLEE
BRIEFS AND ORAL ARGUMENT FOR APPELLANT: Douglas M. Dowell Frankfort, Kentucky BRIEF FOR APPELLEE: Mitzi D. Wyrick Thomas J. Luber Louisville, Kentucky ORAL ARGUMENT FOR APPELLEE: Mitzi D. Wyrick Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE PHILLIP J. SHEPHERD, JUDGE
ACTION NO. 07-CI-00422
OPINION AFFIRMING IN PART, REVERSING IN PART AND REMANDING
BEFORE: ACREE, CHIEF JUDGE; MAZE AND THOMPSON, JUDGES. THOMPSON, JUDGE: The Department of Revenue, Commonwealth of Kentucky, and Thomas Miller, in his official capacity as Commissioner of the Department of Revenue (collectively referred to as Revenue), appeal from a judgment of the Franklin Circuit Court awarding Armstrong Utilities, Inc. refunds of ad valorem taxes, with interest. Revenue presents the following issues: (1) whether Armstrong may sustain an action for a refund of taxes assessed pursuant to a statute that has not been held facially unconstitutional but held unconstitutional as applied; (2) whether the circuit court erred when it concluded non-mutual collateral estoppel applied; (3) whether Armstrong was taxed in violation of the uniformity clause contained in Section 171 of the Kentucky Constitution; (4) whether refunds for the 2002 and 2003 tax years are barred by settlement agreements entered into between Armstrong and Revenue; and (5) whether Armstrong is entitled to interest on any refunds awarded.
Armstrong is a cable television company. During the 1990-2003 tax years, Revenue assessed Armstrong's property taxes pursuant to the public service corporation (PSC) tax set forth in Kentucky Revised Statutes (KRS) 136.120. Until the effective date of its amendment on January 1, 2006, when cable television companies were removed from the purview of the statute, the statute provided for the ad valorem tax assessment of the property of certain PSC's including "cable television companies" as well as "every other like company or business performing any public service."
During the period in question, Armstrong paid a total of $381,785.72 in PSC taxes to the Commonwealth. However, it consistently took the position it was being taxed in violation of Section 171's "uniformity clause" which states "[taxes … shall be uniform upon all property of the same class." Armstrong accompanied its PSC tax payments with letters protesting its obligation to pay the tax and requesting a refund of property tax overpayments. Armstrong maintained Revenue could not tax it under KRS 136.120 because direct broadcast satellite (DBS) companies were not taxed in the same manner. Therefore, it claimed refunds of the taxes paid for the years in question, less the amount of corporation license taxes it would have paid had it not been subject to the ad valorem tax.
After Revenue denied Armstrong's refund requests for the 1990, 1991, 1992, 1993, 1994, 1996 and 1997 tax years, Armstrong appealed to the Kentucky Board of Tax Appeals. The appeals were held in abeyance pending a decision in Insight Kentucky Partners II, L.P. v. Commonwealth of Kentucky Revenue Cabinet, et al. 01-CI-01528.
The Insight litigation was commenced by a cable television company in the Franklin Circuit Court. Like Armstrong, Insight contended Revenue's assessment of taxes against it pursuant to KRS 136.120 while not assessing a DBS company's taxes under the same statute was unconstitutional under the uniformity clause.
While in abeyance and with Insight pending, Armstrong and Revenue entered into settlement agreements for the years 1997, 1999, 2000, 2001, 2002, and 2003. In anticipation of a decision in Insight, the agreements for 1997, 1999, 2000, and 2001, provide refunds will be made only if KRS 136.120 is found unconstitutional by a final judgment "of the Court of Appeals or Supreme Court of Kentucky."
The 2002 agreement was executed on October 28, 2002, and the 2003 agreement on November 18, 2003. Neither agreement contains the same "final judgment" language as did the earlier agreements. Both agreements state "as a final and complete settlement of this controversy, the parties agree to the following terms and conditions," including that Armstrong "shall pay all the applicable state and local property tax on the assessment of $8,000,000, and shall not in the future request or seek a refund of any taxes paid relative to this assessment." After the agreements were executed, Armstrong filed its refund claims for the years 2002 and 2003.
In 2004, the Franklin Circuit Court rendered its opinion and order in Insight. It concluded: "Since no substantial distinction exists between cable and DBS companies for the purpose of raising revenue, the Court holds that applying KRS 136.120 to cable companies and not DBS companies is arbitrary and violated section 171's uniformity requirement." Inexplicitly, and with Armstrong's refund claims pending, Revenue did not appeal the Insight opinion and order.
Following the Insight opinion and order, Armstrong filed this action pursuant to KRS 418.040 and Kentucky Rules of Civil Procedure (CR) 57 seeking a judgment declaring Armstrong's right to its claimed tax refunds, with interest. After discovery, Armstrong filed a motion for summary judgment and Revenue filed a response and cross-motion for summary judgment to which Armstrong responded. Following oral argument, the Franklin Circuit Court granted Armstrong's motion for summary judgment.
The circuit court ruled the settlement agreements did not preclude Armstrong's declaratory judgment action. It further ruled Revenue was bound by the Insight decision and precluded from arguing KRS 136.120 was constitutional. The circuit court directed Revenue to issue Armstrong refunds in the amount of $234,288.29 for years that included 2002 and 2003, plus interest totaling $216,428.00.
Revenue argues Armstrong is not entitled to a refund because KRS 134.590 provides for refunds only "[w]hen the appropriate state government agency determines that a taxpayer has paid ad valorem taxes into the state treasury when no taxes were due or has paid under a statute held unconstitutional[.]" It asserts any refund is barred by sovereign immunity. It urges a restrictive reading of the statute and for this Court to deny Armstrong refunds for taxes assessed unconstitutionally by Revenue but not assessed pursuant to a statute declared unconstitutional.
We interpret a statute as a matter of law. Commonwealth v. Garnett, 8 S.W.3d 573, 575 (Ky.App. 1999). In Monumental Life Ins. Co. v. Department of Revenue, 294 S.W.3d 10, 19 (Ky.App. 2008), the Court recited the rules of statutory construction, including that the statute must be given a literal interpretation unless its language is ambiguous. However, it is also a rule of statutory interpretation that "courts should reject a construction that is unreasonable and absurd, in preference for one that is 'reasonable, rational, sensible and intelligent[.]"' Id. (quoting Commonwealth v. Kerr, 136 S.W.3d 783, 785 (Ky.App. 2004)).
Our courts have "jealously guarded" the established principle contained in the uniformity clause that "equality and uniformity in taxation" is required. Great Atlantic & Pacific Tea Co. v. Kentucky Tax Commission, 278 Ky. 367, 128 S.W.2d 581, 587 (1939). As evidenced by the tax refund statutes, it is equally guarded by our General Assembly. It is incomprehensible that the General Assembly intended that a taxpayer assessed taxes in an unconstitutional manner to have only prospective relief. Whether by reason of an unconstitutional statute or application of a constitutional statute, the General Assembly intended to grant relief to taxpayers unconstitutionally taxed. "We find no merit to Revenue Cabinet's contention that no refunds are due or owing insofar as no statute was declared unconstitutional. It is the obvious intent of the refund statutes to provide a remedy to taxpayers who were taxed pursuant to an unconstitutional tax[.]" Commonwealth, Revenue Cabinet v. Gossum, 887 S.W.2d 329, 333 (Ky. 1994).
Having held Armstrong's claim for a refund is proper, we address the effect of the Insight opinion and order and Revenue's failure to appeal in that case on the present litigation. In Kentucky, the mutuality requirement of res judicata was abandoned by the adoption of "non-mutual collateral estoppel, applicable when at least the party to be bound is the same party in the prior action." Moore v. Commonwealth, 954 S.W.2d 317, 319 (Ky. 1997). The elements of collateral estoppel are: "(1) identity of issues; (2) a final decision or judgment on the merits; (3) a necessary issue with the estopped party given a full and fair opportunity to litigate; [and] (4) a prior losing litigant." Id.
Armstrong asserted offensive collateral estoppel against Revenue, a state agency. In United States v. Mendoza, 464 U.S. 154, 159-60, 104 S.Ct. 568, 572, 78 L.Ed.2d 379 (1984), the United States Supreme Court held non-mutual offensive collateral estoppel could not be applied to the U.S. government because of the geographic size of government litigation, the volume of cases, and because the U.S. government routinely litigates "legal questions of substantial public importance." Kentucky has taken a somewhat different view when applying the doctrine to state and local governments.
In Revenue Cabinet v. Samani, 757 S.W.2d 199 (Ky.App. 1988), an inheritance tax statute was held unconstitutional in a prior circuit court decision that Revenue did not appeal. In a subsequent declaratory judgment action filed by a different taxpayer challenging the constitutionality of the same statute, the circuit court held Revenue was collaterally estopped from asserting the constitutionality of the statute. Upon review, this Court emphasized the doctrines of res judicata and issue preclusion are based on "rules of justice and fairness." Id. at 202. Although collateral estoppel may be applied to Revenue, the doctrine was not applicable to the facts. Id.
The issue was addressed by our Supreme Court in City of Covington v. Board of Trustees of Policemen's and Firefighters' Retirement Fund, 903 S.W.2d 517 (Ky. 1995). Citing Samani, the Court confirmed that, in Kentucky, a state or local government may be bound by collateral estoppel. However, as in Samani, the Court found the doctrine was not applicable under the facts. Id. at 522. Its reasoning lends insight into the factors to be considered when determining whether it would be just and fair to apply the doctrine.
The City filed a declaratory judgment action against the Board of Trustees of Policemen's and Firefighters' pension fund seeking a determination as to the method of calculating firefighter and police retirees' age and service pensions and disability benefit pensions. Id. at 518. The issue of non-mutual collateral estoppel arose because of this Court's decision in City of Covington v. Peare, 769 S.W.2d 761 (Ky.App. 1989). Although the appeal was dismissed on procedural grounds, in dicta, this Court stated terminal leave pay (unusual sick and vacation time) should be included as part of the annual salary in computing age and service pensions. Id. at 763. The case was remanded to the circuit court.
As noted by the Court in City of Covington, 903 S.W.2d at 519, on remand, the circuit court entered a judgment in favor of the retirees. The City did not appeal.
The Court gave four reasons why it declined to apply non-mutual collateral estoppel:
First, the Peare case involved 2 retirees whereas the present litigation involves approximately 74 retirees who have been retired for quite some time and are now seeking retroactive increases in their pensions together with interest. The stakes are much higher. Secondly, the Appellees could have joined in the Peare case. The retirees are represented on the Pension Board andId. at 522.
apparently were fellow officers of Peare and Vastine. Thirdly, the City perhaps contemplated joining the county retirement system which it later did and future retirees would not have been affected by the Peare decision. We believe that justice and fairness as enunciated in the Samani case would preclude the imposition of the doctrine of collateral estoppel in these circumstances.
Fourthly, the Peare case is not preclusive as the Court of Appeals decided it upon procedural grounds. The substantive comments were mere dicta.
What can be gleaned from the sparse case law in this Commonwealth on the application of non-mutual collateral estoppel to a state agency is it will preclude the Commonwealth from relitigating an issue resolved adversely to it in a prior action involving a different party only in limited situations. There may be a variety of reasons why the Commonwealth would chose not to appeal an unfavorable decision including the time and expense of an appeal compared to its potential liability, the strength of the record, and the public significance of the issue at the time the decision is rendered. Nevertheless, there are cases where the state government should be subject to the same equitable doctrine as a private litigant. We believe this is such a case.
First, Insight was a single cable company challenging the ad valorem tax imposed. Likewise, Armstrong is a single cable company and makes the identical challenge. Therefore, the stakes in Armstrong's case are not "much higher." Id. Secondly, Armstrong could not join in the pending Insight litigation because its cases were held in abeyance by the Board pending the Insight decision. Thirdly, as evidenced by the settlement agreements reciting they were contingent upon a "final judgment" in Insight, Revenue believed it would be bound by an adverse decision in Insight in Armstrong's case. Finally, Insight determined the substantive issue presented as to whether a cable television company could be treated differently than a DBS company in the assessment of ad valorem taxes.
Additionally, we believe the application of non-mutual collateral estoppel is appropriate for other reasons. Insight and this case overlapped in time and subject matter. Revenue knew Armstrong's requests for refunds were pending when it chose not to appeal Insight. Finally, KRS 136.120 was amended effective January 1, 2006, and does not include cable television companies so that the issue is not a significant issue that will arise in the future. See City of Seattle, Executive Services Dept. v. Visio Corp., 108 Wash. App. 566, 31 P.3d 740 (Wash. App. Div. 1, 2001) (applying similar reasoning in applying collateral estoppel to the City)). Under the unique facts presented, Revenue is precluded from arguing the application of KRS 136.120 was constitutional.
We now address whether the 2002 and 2003 settlement agreements preclude Armstrong from recovering refunds for those years. Before doing so, we note that although Revenue argued to the circuit court that the 1997, 1999, 2000, and 2001 settlements precluded any refunds for those years, it has abandoned that argument on appeal.
"A settlement agreement is a type of contract which is governed by contract law." Ford v. Ratliff, 183 S.W.3d 199, 202 (Ky.App. 2006). "If the language of a contract is unambiguous, the meaning of the language is a question of law, and the intent of the parties must be discerned from the words used in the instrument." Id. at 203. (Internal quotation omitted).
The 2002 and 2003 settlement agreements state they are a compromise of the controversy between Armstrong and Revenue and that Armstrong "shall not in the future request or seek a refund of any taxes paid relative to this assessment" for the respective years. (Emphasis added). Despite the clear language of the agreements, Armstrong sought a refund of the taxes paid for the years 2002 and 2003 after the agreements were executed. We agree with Revenue that the refunds claimed for 2002 and 2003 are precluded by the unambiguous terms of the agreements.
Revenue's final contention is Armstrong was not entitled to interest on the refunds awarded. Again, it points out that it is a state agency entitled to immunity. Because a state can only be sued with its consent, "a statute waiving sovereign immunity must be strictly construed and cannot be read to encompass the allowance of interest unless so specified." Powell v. Board of Education of Harrodsburg, 829 S.W.2d 940, 941 (Ky.App. 1991). The general rule is that "unless authorized by statutes, interest is not collectible on taxes due the state, county, or subdivision thereof, nor on a refund thereof." City of Somerset v. Bell, 156 S.W.3d 321, 330 (Ky.App. 2005) (quoting Commonwealth ex rel. Allphin v. St. Matthews Gas & Elec. Shop, Inc., 286 S.W.2d 911, 912 (Ky. 1956)).
In Commonwealth of Kentucky, Revenue Cabinet v. St. Ledger, 955 S.W.2d 539, 544 (Ky.App. 1997), this Court noted KRS 134.590 "does not authorize the payment of interest. By contrast, KRS 134.580, the statute applicable to all refunds except those of ad valorem and unconstitutional taxes, does authorize interest." We held the taxpayers were not entitled to interest on their refunds. Id. at 544.
In City of Somerset, we again addressed the question of whether interest is recoverable under KRS 134.590. In that case, we likewise held that because the statute did not explicitly allow interest on refunds of ad valorem taxes, "we cannot infer intent to require the payment of interest." City of Somerset, 156 S.W.3d at 330.
We conclude St. Ledger and City of Somerset are distinguishable. Neither case involved a PSC taxed pursuant to KRS 136.120. KRS 131.183 (2)(b)(1) provides in pertinent part that "[i]nterest shall be allowed and paid upon any overpayment as defined in KRS 134.580 in respect of any of the taxes provided for in Chapters 131, 132, 134, 136, 137, 138, 139, 140, 141, 142, 143, 143A, and 243 of the Kentucky Revised Statutes and KRS 160.613 and 160.614[.]" (Emphasis added). KRS 134.580 defines overpayment as "the excess of the tax payments made over the correct tax liability determined under the terms of the applicable statute without reference to the constitutionality of the statute." Armstrong overpaid the taxes in the years in question pursuant to Chapter 136 and, therefore, KRS 131.183(2)(b)(1) explicitly provides for interest on the refunds owed to Armstrong.
For the reasons stated, the opinion and order of the Franklin Circuit Court is affirmed except that we reverse the award of refunds and interest for the years 2002 and 2003.
ALL CONCUR. BRIEFS AND ORAL ARGUMENT FOR APPELLANT: Douglas M. Dowell
Frankfort, Kentucky
BRIEF FOR APPELLEE: Mitzi D. Wyrick
Thomas J. Luber
Louisville, Kentucky
ORAL ARGUMENT FOR APPELLEE: Mitzi D. Wyrick
Louisville, Kentucky