Opinion ID: 1622161
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Heading: are the corporate shares tax and exemption statute severable?

Text: The Revenue Cabinet argues that prospectively, all shares of corporate stock owned by Kentucky residents must be taxed at the rate of $.25 per $100 of value under KRS 132.020. They assert that there is nothing discriminatory about this method of taxation and that without KRS 136.030(1)'s exemption, Kentucky's ad valorem taxation of shares would be nondiscriminatory. Moreover, the Revenue Cabinet maintains that a judicial declaration of total exemption is prohibited by the explicit directives of Ky. Const. §§ 3, 170, 172, and 174, which require all property to be taxed unless exempted in our Constitution. Specifically, the Revenue Cabinet argues that in both Gillis v. Yount, Ky., 748 S.W.2d 357 (1988), and Yount v. Calvert, Ky.App., 826 S.W.2d 833 (1991), dis. rev. denied (1992), Kentucky appellate courts, in voiding unconstitutional ad valorem tax rates, left undisturbed the general classifications of KRS 132.020. We disagree. The Corporate Shares Tax under KRS 132.020 and the companion Exemption Statute under KRS 136.030(1) fit together as hand and glove. In interpreting this tax scheme, this Court has consistently recognized the Legislature's intention to avoid the double taxation of both a corporation and its shareholders. We addressed the dangers of double taxation in Commonwealth v. Walsh's Trustee, 133 Ky. 103, 117 S.W. 398, 399 (1909), a case involving an attempt to tax certain corporate stock, where we maintained: Throughout the whole scheme of taxation adopted by this state there is an evident purpose to avoid double taxation, not alone in not taxing the same property twice in the same year for the same purpose, but as well in not taxing the same thing, whatever its form, twice in the same year for the same purpose. Double taxation is recognized as oppressive, and, where it is imposed upon some classes of property and not upon others, works an inequity that is fundamentally vicious. While the Constitution requires that all property shall be taxed (Const. § 171) and the General Assembly is prohibited from exempting any property by section 170 of the Constitution, it is not required that every phase of property shall be taxed. Nor is it. Nor has it ever been. We later addressed the issue of whether stock owned by an individual was subject to the intangibles tax in Commonwealth ex rel. Hopkins v. Fidelity Trust Co., 147 Ky. 77, 143 S.W. 1037 (1912). In that case we described the intangibles tax scheme as one in which: An orderly system of taxation is thus worked out, pursuant to legislative will; for when we have noted the similarity of the obligations imposed, both upon domestic and foreign corporations . . . and the exemptions of stockholders' liability for taxation upon their shares, we have followed a plain and reasonable deduction of the legislative intent, as expressed in its language, and as was doubtless its spirit. Id. 143 S.W. at 1039. Moreover, this Court has ruled that double taxation is against public policy and will be permitted only when the Legislature has clearly declared a contrary policy. 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. Likewise, there is ample precedent for invalidating the entire Corporate Shares Tax scheme. In Martin v. High Splint Coal Co., 268 Ky. 11, 103 S.W.2d 711, 712 (1937), involving an ad valorem tax scheme which exempted all real estate, the trial court held that the exemption was void, was in direct conflict with Ky. Const. § 170, and that when the exemption was eliminated from the tax scheme, it was obvious that the Legislature would not have enacted any part of the legislation without the exemption being retained therein. Basically, the trial court declared the entire act invalid. Id. 103 S.W.2d at 713. Affirming the trial court's decision, this Court stated: The last remaining question is, [w]hat effect does our holding have upon the raising of revenue for state purposes through ad valorem tax assessments and collections? It might be argued that the involved chapter 98 of the 1936 session should be held valid in all of its parts except the exempting of real estate, but if that course should be adopted, then the first section of the chapter (expressly declaring that real estate should be exempted from taxation . . .) would, if permitted to stand, either exempt real estate from taxation for state purposes, or place a rate on it of 50 cents for each $100 valuation thereof, which latter result might follow from taking out of section 2 of that chapter the words except real estate. Clearly, the Legislature never contemplated such latter result if, and provided the exemption of real estate should be held invalid. . . . . . . . As we have seen, practically the entire purpose of the enactment of the involved chapter 98 of the 1936 acts was to exempt real estate. . . . Under the governing rule, as so universally declared, it cannot be said with any degree of accuracy that the Legislature would have enacted any part of the chapter with the exception of real estate eliminated therefrom. The eliminated part being unconstitutional and void, as we have found, it follows that the entire chapter must be held invalid. . . . Id. at 717-18. In addition, the Revenue Cabinet's reliance upon Gillis v. Yount, Ky., 748 S.W.2d 357 (1988), and Yount v. Calvert, Ky.App., 826 S.W.2d 833 (1991), is misplaced. The common issue under attack in those cases was the unconstitutional classification of property, principally under Ky. Const. § 171, not Commerce Clause violations, as in the present case. For us to invalidate KRS 136.030(1) alone would, in essence, be a legislative act which exceeds this Court's authority under Sections 27 and 28 of Kentucky's Constitution. Those sections create three distinct branches of the state government and prevent one branch from exercising or usurping the power that properly belongs to another branch. Furthermore, under Ky. Const. § 47, the Legislature is the only branch that has the constitutional authority to tax. This power cannot be exercised by either the executive or judicial branches. Long Run Baptist Ass'n v. Louisville and Jefferson County Metropolitan Sewer Dist., Ky.App., 775 S.W.2d 520, 522 (1989); City of Paducah v. T.C.B., Inc., Ky.App., 817 S.W.2d 234, 236 (1991). Thus, to invalidate only the Exemption Statute would be a form of judicial activism prohibited by our Constitution. From the foregoing it is evident that the Exemption Statute and the Corporate Shares Tax are intertwined and interdependent; one would have not been adopted without the other. We recognized this result in our original decision in St. Ledger where we correctly stated: The determination that KRS 136.030(1) is valid necessarily prohibits this Court from finding that the Commonwealth's ad valorem tax scheme, as a whole, is constitutionally invalid. 912 S.W.2d at 43 (emphasis added). It is equally clear that the invalidation of KRS 136.030(1) alone, would subject previously exempt shareholders to the tax under KRS 132.020. Essentially, the Revenue Cabinet asks this Court to judicially enact a new tax by invalidating only the Exemption Statute. To do such would be a complete violation of the separation of powers doctrine set forth in Kentucky's Constitution. Indeed, for this Court to invalidate the Exemption Statute and to uphold the Corporate Tax Scheme would, in effect, be this Court delving into a realm our Constitution left squarely within the power of the Legislative Branch. Thus, we find the entire tax scheme, including both KRS 132.020 and KRS 136.030(1), invalid under Fulton Corp., supra .