Court Opinion

ID: 9706234
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:36:34.328677+00
Date Added: 2024-06-11T18:22:20.626369
License: Public Domain

*404SCHRODER, Justice,
concurring in result.
While the majority utilizes the correct legal framework and arrives at the correct result, I disagree with some observations and portions of the analysis in its opinion. Therefore, I write a separate, albeit legally similar, opinion.
From 1972 through 1988, the Revenue Cabinet (the “Cabinet”) interpreted KRS 141.120 to allow corporations to file unitary tax returns. In 1988, the Cabinet issued Revenue Policy 41P225, which prohibited the filing of unitary returns, and required separate returns.1 GTE challenged the Cabinet’s policy shift in a case that reached this Court in 1994. In an opinion rendered December 22, 1994, this Court decided in GTE’s favor. GTE v. Revenue Cabinet, 889 S.W.2d 788 (Ky.1994). GTE interpreted KRS 141.120 as allowing unitary filing, and invalidated RP 41P225 under the doctrine of contemporaneous construction. Id. at 792. Because their taxes would have been lower under the unitary method of filing, a number of corporations, seeking refunds, thereafter amended their returns to unitary returns for various years in which RP 41P225 was in effect. Although the Cabinet acted on some of the refund claims, it took no immediate action on Appellees’ claims.
The Cabinet began tracking actual and potential claimants and the amount of their claims by the end of 1995. At that time, the Cabinet estimated the claims to be worth about $50 million. In the first legislative session following the GTE decision, 1996, the General Assembly enacted H.B. 599, which abolished the filing of unitary returns for tax years ending on or after December 31, 1995. This legislation, however, had no effect on the pending refund claims.
In October 1996, the Cabinet estimated unpaid refund claims to be worth approximately $160 million, which rose to $177 million by April 1997. In response, to avoid a huge loss to the general fund, at the next legislative session, 1998, the General Assembly included in the 1998-2000 budget bill, a measure which prohibited the Revenue Cabinet from paying any post-GTE refund claims. H.B. 321, § 33. Several parties challenged the prohibition. The Franklin Circuit Court invalidated the provision on grounds that it did not comply with the “reenactment and republication” provisions of Section 51 of the Kentucky Constitution. The Cabinet appealed to the Court of Appeals. While the appeal was pending, H.B. 321 expired on its own terms (in 2000), and the Court of Appeals dismissed the appeal as moot.
The claims had risen to nearly $200 million at the end of June 1998, with $65 million of that being interest. At the 2000 legislative session, faced with this massive drain of the state treasury as a result of the pending refund claims, the General Assembly enacted H.B. 541, the legislation at issue in this case. H.B. 541 substantially amended KRS 141.200, and (1) prohibited refund claims for taxable years ending on or before December 31, 1995, made by amended return filed after December 22, 1994, based on a change from separate to unitary return, and (2) prohibited corporations from filing unitary returns for tax years ending before December 31, 1995, unless the corporations filed unitary returns on or before December 22, 1994, for tax years ending before December 22, 1994. The effect of H.B. 541 was to extinguish Appellees’ refund claims.
Two declaratory judgment actions were filed in the Franklin Circuit Court seeking *405to have the retroactive portions of H.B. 541 declared unconstitutional. The two cases were consolidated and the circuit court, finding the legislation constitutional, granted summary judgment to the Cabinet. The Court of Appeals reversed on grounds that the period of retroactivity was excessive. This Court granted discretionary review.
It is well settled that a tax act is not necessarily unconstitutional because it is retroactive. Welch v. Henry, 305 U.S. 134, 147, 59 S.Ct. 121, 83 L.Ed. 87 (1938). Retroactive tax legislation satisfies the Due Process Clause provided that it “ ‘is supported by a legitimate legislative purpose furthered by rational means.’ ” United States v. Carlton, 512 U.S. 26, 30-31, 114 S.Ct. 2018, 129 L.Ed.2d 22 (1994) (quoting Pension Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984)). The United States Supreme Court has repeatedly upheld retroactive tax legislation against a due process challenge. Id. at 30, 114 S.Ct. 2018 (citing United States v. Hemme, 476 U.S. 558, 106 S.Ct. 2071, 90 L.Ed.2d 538 (1986); United States v. Darusmont, 449 U.S. 292, 101 S.Ct. 549, 66 L.Ed.2d 513 (1981); Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87 (1938); United States v. Hudson, 299 U.S. 498, 57 S.Ct. 309, 81 L.Ed. 370 (1937); Milliken v. United States, 283 U.S. 15, 51 S.Ct. 324, 75 L.Ed. 809 (1931); Cooper v. United States, 280 U.S. 409, 50 S.Ct. 164, 74 L.Ed. 516 (1930)).
The General Assembly’s purpose in enacting H.B. 541 was to prevent a massive loss to the state treasury as a result of the GTE decision.2 In United States v. Carlton, the United States Supreme Court held that the prevention of a “significant and unanticipated revenue loss” satisfies due process as a legitimate legislative purpose for a retroactive tax statute. 512 U.S. at 32,114 S.Ct. 2018. Carlton involved a new estate tax provision, 26 U.S.C. Section 2057, enacted on October 22, 1986, which granted a deduction for half the proceeds of “any sale, of employer securities by the executor of an estate” to “an employee stock ownership plan.” Id. at 28,114 S.Ct. 2018. The purpose of the deduction was to promote employee ownership. Congress initially estimated a revenue loss from Section 2057 of approximately $300 million over a five year period. Id. at 31-32, 114 S.Ct. 2018. On December 10, 1986, Carlton, executor of an estate, used estate funds to purchase MCI stock for $11.2 million which he resold two days later to the MCI ESOP for $10.6 million, a loss of $600,000, for the express purpose of claiming a tax deduction of $5.3 million (half the proceeds of the sale) under Section 2057, reducing the estate tax by $2.5 million.
Shortly after its passage, Congress realized that the expected revenue loss from Section 2057 could be as much as $7 billion, because of a loophole in the law which did not limit the deduction to situations in which the decedent owned the securities immediately before death. Id. at 32, 114 S.Ct. 2018. To protect the treasury against this massive loss, on December 22, 1987, approximately one year after Carlton’s stock transaction, Congress amended Section 2057 to require that the securities *406sold to an ESOP must have been owned by the decedent immediately before death. The 1987 amendment was made retroactive as if it had been contained in the statute as originally enacted in October, 1986. Id. at 29, 114 S.Ct. 2018. Carlton’s December, 1986, transaction was invalidated, causing the estate to incur a significant loss.
The Court upheld the 1987 amendment’s retroactivity against Carlton’s due process challenge. The Court held that the prevention of a “significant and unanticipated revenue loss” was a legitimate legislative purpose, and that the amendment was a rational means of achieving said purpose. Id. at 32, 35, 114 S.Ct. 2018. The Court recognized that while Congress might have chosen to make up the loss by burdening equally “innocent” taxpayers, through general prospective taxation, it was not arbitrary nor unreasonable to choose to prevent the loss by retroactively denying the deduction to taxpayers who had engaged in purely tax-motivated (albeit legal) stock transfers. Id. at 32, 114 S.Ct. 2018. The Court found Carlton’s detrimental reliance upon the provision and lack of notice insufficient to establish a due process violation, as “[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.” Id. at 33, 114 S.Ct. 2018. The Court observed with approval that the period of retroactivity was short, just over one year. Id. at 32-33, 114 S.Ct. 2018. The period was therefore one that did not upset longstanding and settled taxpayer expectations. See id. at 37-38, 114 S.Ct. 2018 (O’Connor, J., concurring).
Similarly, H.B. 541 serves the legitimate legislative purpose of preventing a massive loss to the state treasury as a result of refund claims being filed in the wake of GTE. The legislature’s decision to prevent the loss by prohibiting amended returns under the unitary method filed after December 22, 1994 (the date GTE was rendered) for years prior to 1995 is rationally related to that purpose. The Franklin Circuit Court and Court of Appeals correctly found as such.
The Court of Appeals erred, however, in concluding that H.B. 541 nevertheless violated due process because its period of retroactivity was excessive. The Court of Appeals misinterpreted Carlton as setting a bright-line rule as to what is an acceptable period of retroactivity, relying on the Court’s approval of the “modest” (slightly over one year) period of retroactivity in that ease. The consideration of “modesty” relates to a taxpayer’s right at some point to settled expectations. See Carlton, 512 U.S. at 37-38,114 S.Ct. 2018 (O’Connor, J., concurring). In this regard, the United States Supreme Court has indicated that where a taxpayer had no notice or could not have anticipated a change in a tax (as in Carlton) that it is plausible a tax could attempt to reach so far into the past as to offend due process. Welch, 305 U.S. at 148, 59 S.Ct. 121. The Court has never established a bright-line rule as to what this period would be. Rather, whether a retroactive tax act “transgress[es] the constitutional limitation” depends upon the facts and circumstances of the particular case. Id. at 147, 59 S.Ct. 121; Milliken v. United States, 283 U.S. 15, 21, 51 S.Ct. 324, 75 L.Ed. 809 (1931).
The Court has indicated, however, that where at the time of the taxable event the taxpayer had notice of even a potential change in a tax law, due process is not offended when the retroactive period encompasses the time of the taxable event. See Milliken, 283 U.S. at 21, 24, 51 S.Ct. 324; see also Welch, 305 U.S. at 147-148, 59 S.Ct. 121. At the time of the taxable event in this case (the receipt of income during the years RP 41P225 was in effect), the Appellees were fully aware that their tax liability would be computed under the separate return method. They paid their *407taxes under the separate return method. They were not permitted to file unitary, and could have had no “settled expectations” to the contrary. At this point, if there were any “settled expectations” they were the Commonwealth’s, not the taxpayers’. King v. Campbell County, 217 S.W.3d 862, 870 (Ky.App.2006). Nor did Appellees obtain a vested right in a refund following the GTE decision. See id. at 869-870. The Appellees’ expectations could not be deemed settled or vested in this case. As the majority noted, the legislature’s intent to supercede GTE became apparent almost immediately — at the first legislative session following GTE, the General Assembly began a process of legislatively undoing the decision.3 As the influx of claims increased, so did the General Assembly’s response, culminating in its response here, H.B. 541. Therefore, I agree with the majority that the period of retro-activity does not impact due process under the facts of this case, given the clear and lengthy notice, the lack of settled expectations, and the lack of detrimental reliance.
Finally, while it is well settled that due process requires “meaningful backward-looking relief'’ for taxes collected in violation of the law or constitution, the taxes paid by the Appellees under the separate return method were neither illegal, nor unconstitutional. McKesson Corp. v. Div. of Alcoholic Beverages and Tobacco, 496 U.S. 18, 31, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990); Reich v. Collins, 513 U.S. 106, 114, 115 S.Ct. 547, 130 L.Ed.2d 454 (1994).
As to the remaining issues, I concur with the result reached by the majority as well.

. The policy permitted unitary reporting only if the subsidiaries were a sham or paper corporation with limited viable activities. GTE v. Revenue Cabinet, 889 S.W.2d 788, 790 (Ky.1994).

. The legislative purpose of H.B. 541 could not be more clear:
“[I]f we don't do this [pass H.B. 541], it could cost us up to $ 190 million ... These corporations that are involved did not plan their business based on filing the way that they are now attempting to come back and get refunds ... But now they want to come back and raid the state treasury ... to the tune of $190 million. And that’s what this bill is all about ... [I]f we don't do it, then we better figure out how to cut the budget $190 million.” Remarks of Chairman Mob-erly, Transcript of Hearing on H.B. 541, February 22, 2000.

. A legislative body must have reasonable opportunity to act. Welch, 305 U.S. at 149, 59 S.Ct. 121.