Court Opinion

ID: 9683615
Source: CourtListenerOpinion
Date Created: 2023-08-24 13:33:13.780165+00
Date Added: 2024-06-11T18:17:49.081129
License: Public Domain

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 I have no doubt that the Kentucky legislature has repealed taxation on stock owned by shareholders of corporations, which includes Monumental.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 *25in this 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-Si. Ledger, the exemption statute was repealed and reference to stock deleted from KRS 132.020.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 instate 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. Hays, 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 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 *26part 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 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 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 *27funds 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 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.
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 *28money 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, 287 Ky. 809, 155 S.W.2d 243, 245 (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. 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.
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.