Opinion
NO. 2008-CA-001888-MR
07-03-2014
DEPARTMENT OF REVENUE, FINANCE AND ADMINISTRATION CABINET, COMMONWEALTH OF KENTUCKY APPELLANT v. AT&T CORPORATION (AND SUBSIDIARIES) APPELLEE
BRIEFS AND ORAL ARGUMENT FOR APPELLANT: Laura Ferguson Frankfort, Kentucky BRIEF FOR APPELLEE: Mark F. Sommer Mark A. Loyd Stewart Douglas Hendrix Louisville, Kentucky ORAL ARGUMENT FOR APPELLEE: Mark F. Sommer Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE JUDITH E. MCDONALD-BURKMAN, JUDGE
ACTION NO. 08-CI-01272
OPINION
AFFIRMING
BEFORE: ACREE, CHIEF JUDGE; STUMBO AND VANMETER, JUDGES. STUMBO, JUDGE: The Commonwealth of Kentucky, Department of Revenue (hereinafter referred to as "Revenue"), appeals from an order of the Jefferson Circuit Court which found that AT&T was entitled to a refund because, among other things, KRS 141.200 was ambiguous. We agree and affirm the judgment of the trial court.
AT&T is a publicly-traded corporation organized under the laws of New York and has hundreds of subsidiaries across the nation. Approximately twenty of those subsidiaries were located in Kentucky during the tax periods at issue. The subsidiaries not located in Kentucky are all organized under other states' laws. This case involves specific provisions of Kentucky's income tax statutes as they pertain to corporations. KRS 141.040 and KRS 141.200 govern corporate income tax returns. The version of KRS 141.040 in effect during the tax periods at issue stated in pertinent part:
(1) Every corporation organized under the laws of this state, every corporation having its commercial domicile . . . in this state, and every foreign corporation owning or leasing property located in this state or having one (1) or more individuals receiving compensation . . . in this state, except those corporations listed in paragraphs (a) to (i) of this subsection, shall pay for each taxable year a tax to be computed by the taxpayer on taxable net income at the rates specified in subsections (2), (3), and (4) of this section:The version of KRS 141.200 in effect during the tax periods at issue stated in pertinent part:
(a) S corporations; . . .
(f) Insurance companies, . . . insurers, and reciprocal underwriters; . . .
(i) Corporations having no individuals receiving compensation . . . in this state, and whose only owned or leased property located in this state is located at the premises of a printer with which it has contracted for printing, if such property consists of the final printed product, property which becomes a part of the final printed product, or copy from which the printed product in produced.
(1) As used in this section, unless the context requires otherwise:
(a) "Affiliated group" means affiliated group as defined in Section 1504(a)[ ] of the Internal Revenue Code and related regulations;
(b) "Consolidated return" means a Kentucky corporation income tax return filed by members of an affiliated group in accordance with this section. The determinations and computations required by this chapter shall be made in accordance with the provisions of Section 1502 of the Internal Revenue Code and related regulations, except as required by differences between this chapter and the Internal Revenue Code, Corporations exempt from taxation under KRS 141.040 shall not be included in the return;
(c) "Separate return" means a Kentucky corporation income tax return in which only the transactions and activities of a single corporation are considered in making all determinations and computations necessary to calculate taxable net income, tax due, and credits allowed in accordance with the provisions of this chapter.
(2) Every corporation doing business in this state, except those exempt from taxation under KRS 141.040, shall, for each taxable year, file a separate return unless the corporation was, for any part of the taxable year, a member of an affiliated group electing to file a consolidated return in accordance with subsection (3) of this section
(3)(a) An affiliated group, whether or not filing a federal
consolidated return, may elect to file a consolidated return which includes all members of the affiliated group.
(b) An affiliated group electing to file a consolidated return under paragraph (a) of this subsection shall be treated for all purposes as a single corporation under the provisions of this chapter. All transactions between corporations included in the consolidated return shall be eliminated in computing net income in accordance with KRS 141.010(13), and in determining the property, payroll, and sales factors in accordance with Section 1 of this Act.
(c) Any election made in accordance with paragraph (a) of this subsection shall be made on a form prescribed by the cabinet and shall be submitted to the cabinet on or before the due date of the return including extensions for the first taxable year for which the election is made.
(d) Any election to file a consolidated return pursuant to paragraph (a) of this subsection shall be binding on both the cabinet and the affiliated group for a period beginning with the first month of the first taxable year for which the election is made and ending with the conclusion of the taxable year in which the ninety-sixth consecutive calendar month expires.
(e) For each taxable year for which an affiliated group has made an election in accordance with paragraph (a) of this subsection, the consolidated return shall include all corporations which are members of the affiliated group.
In general terms, Section 1504a of the Internal Revenue Code states that an affiliated group consists of corporations connected through stock ownership to a common parent corporation. In this case, AT&T would be the common parent corporation and the subsidiaries located nationwide would be the other corporations connected through stock ownership.
For taxable years 1995, 1996, and 1997, AT&T elected to file consolidated returns. In those returns, AT&T included all of its subsidiaries with property or employees in Kentucky (hereinafter referred to as the Kentucky subsidiaries) and all of its subsidiaries without any form of physical presence in the state (hereinafter referred to as non-Kentucky subsidiaries). One such non-Kentucky subsidiary was an insurance company called American Ridge. AT&T later sought to amend its consolidated returns to include only the Kentucky subsidiaries and requested refunds for the excess taxes. AT&T believed only the Kentucky subsidiaries were part of the affiliated group that was to be listed on the consolidated return. Revenue denied these claims on the basis that all of AT&T's subsidiaries nationwide comprised the affiliated group for taxation purposes and are treated as a single corporation under the statute.
On January 4, 2008, the Kentucky Board of Tax Appeals (KBTA) entered an order which found for Revenue. The KBTA also allowed an adjustment to the consolidated return by removing American Ridge, the insurance company, from the consolidated return because it was exempt from taxation pursuant to KRS 141.040(f). Revenue conceded this issue at the KBTA. The KBTA concluded that Revenue's interpretation of KRS 141.200 was correct, that all subsidiaries of AT&T must be included on the consolidated return.
AT&T appealed the KBTA's decision to the Jefferson Circuit Court. AT&T argued that KRS 141.200 is ambiguous and unconstitutional and that the non-Kentucky subsidiaries fall under KRS 141.040 and should not be included in the consolidated returns. The trial court ultimately agreed with every argument raised by AT&T. The trial court found KRS 141.200 to be ambiguous and unconstitutional. The court held that AT&T's interpretation of the statute was correct and awarded the company a judgment in the amount of $5,706,354. This appeal followed.
Initially, we note that the long-standing practice of this Court is to refrain from reaching constitutional issues when other, non-constitutional grounds can be relied upon. Furthermore, we appreciate that a proper respect for the legislative branch obliges us to assume the constitutionality of legislative enactment. Therefore, we must not reach a constitutional issue if other grounds are sufficient to decide the case.Baker v. Fletcher, 204 S.W.3d 589, 597-598 (Ky. 2006) (citation and footnote omitted). We agree with the trial court that KRS 141.200 is ambiguous and entitles AT&T to a refund; therefore, we will decide this case on the non-constitutional grounds.
"The issue presented . . . is purely a matter of law and is subject to de novo review by this Court." Revenue Cabinet v. Hubbard, 37 S.W.3d 717, 719 (Ky. 2000) (citation omitted).
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. This is particularly so in the matter of pointing out the subjects to be taxed.George v. Scent, 346 S.W.2d 784, 789 (Ky. 1961) (citations omitted).
We do not overlook the concomitant and equally as firm rule . . . that an intention of the Legislature to grant an exemption from taxation will not be presumed or implied, since taxation of all is the rule and exemption is the exception. But the rule calls for no strained construction adverse to the apparent intention of the Legislature. It requires a normal and reasonable construction.
AT&T argues that its non-Kentucky subsidiaries are exempt from taxation pursuant to KRS 141.040; therefore, they are not required to be listed on the consolidated return as stated by KRS 141.200(1)(b). Revenue, on the other hand, argues that all of AT&T's subsidiaries must be listed on the consolidated return because all of its subsidiaries, both Kentucky and non-Kentucky subsidiaries, are part of its affiliated group as defined by Section 1504a of the Internal Revenue Code. This shows the ambiguity in the statute because it is capable of being understood in more than one way.
The trial found that KRS 141.200 was ambiguous because subsection (1)(b) "is contrary to the mandates of subsections (3)(a), (b), and (e)." Subsection (1)(b) states that those corporations exempt from taxation under KRS 141.040 shall not be included on the consolidated return; however, subsections (3)(a), (b), and (e) state that all members of the affiliated group must be listed on the consolidated return. We agree and find that the ambiguity should be resolved in AT&T's favor.
KRS 141.200(1)(b) states that corporations exempt under KRS 141.040 shall not be included on the consolidated return. The KBTA and Revenue acknowledged this when they allowed American Ridge to be removed from the consolidated return. We believe that the non-Kentucky subsidiaries, like American Ridge, should also be exempt from being included on the consolidated return because of KRS 141.040. The trial court found that KRS 141.040(1)(i) would apply to the non-Kentucky subsidiaries. That subsection exempts from taxation those corporations which have no employees in Kentucky and whose only property located in this state is printed material located at a printer shop. We do not believe this subsection applies because the non-Kentucky subsidiaries did not even have printed material in Kentucky. We do believe, however, that the main body of KRS 141.040(1) applies because it states that "every foreign corporation owning or leasing property located in this state or having one (1) or more individuals receiving compensation . . . in this state" shall be taxed. Here, the non-Kentucky subsidiaries are foreign corporations, but they do not own or lease property in this state and have no individuals receiving compensation in this state; therefore, they cannot be taxed.
We are required to resolve ambiguities in taxing statutes in favor of the taxpayer. George, supra. By doing so in this case, we find persuasive AT&T's argument that only the Kentucky subsidiaries are to be included on the consolidated return even though KRS 141.200(3) states that all members of the affiliated group must be included.
For the foregoing reasons, we affirm the judgment of the Jefferson Circuit Court.
ALL CONCUR. BRIEFS AND ORAL ARGUMENT
FOR APPELLANT:
Laura Ferguson
Frankfort, Kentucky
BRIEF FOR APPELLEE: Mark F. Sommer
Mark A. Loyd
Stewart Douglas Hendrix
Louisville, Kentucky
ORAL ARGUMENT FOR
APPELLEE:
Mark F. Sommer
Louisville, Kentucky