Miller v. Johnson Controls, Inc.
| Citation | 296 S.W.3d 392 |
| Decision Date | 27 August 2009 |
| Docket Number | No. 2006-SC-000416-DG.,No. 2007-SC-000819-DG.,2006-SC-000416-DG.,2007-SC-000819-DG. |
| Parties | Jonathan MILLER, Secretary of the Finance and Administration Cabinet of the Commonwealth of Kentucky; Commonwealth of Kentucky, Department of Revenue, Appellants/Cross-Appellees, v. JOHNSON CONTROLS, INC.; Security Group, Inc. and Subsidiaries, Including Sargent & Greenleaf, Inc.; Willis North America, Inc. and Affiliates; Bunzl USA, Inc. and Subsidiaries Including Mak-Pak, Inc.; Tredegar Corporation, Inc. and Subsidiaries; Cosmos Broadcasting Corporation and Affiliates, Appellees/Cross-Appellants. |
| Court | United States State Supreme Court (Kentucky) |
This appeal addresses the constitutionality and application of certain amendments to the corporate tax statutes passed by the General Assembly in 2000 that barred the filing of combined tax returns under the unitary business concept and the issuance of tax refunds related to such a filing, even if by amended return, for the years prior to 1995. The Appellants (and Cross-Appellees) Jonathan Miller, et al., collectively on behalf of the Commonwealth of Kentucky, assert that the amended tax statutes satisfy all constitutional requirements, and that they were economic legislation enacted for a legitimate purpose, even though they disallow filing combined returns or collecting a refund thereon for the years before 1995. The Appellants also argue that the legislature effectively withdrew its consent to be sued for such refunds. Appellees (and Cross-Appellants) Johnson Controls, et al., argue that their due process rights will be violated if the 2000 amendments to the tax statutes are allowed to prevent them from getting a refund. They also claim denial of equal protection under the law and violation of other Kentucky Constitutional rights. Because we find that the tax statute amendments were enacted for the legitimate governmental purpose of regulating revenue, and that the amendments are rationally related to that purpose, there is no due process or other constitutional violation.
Beginning in 1988, the Kentucky Revenue Cabinet began interpreting KRS 141.120 to disallow the filing of a combined tax return under the unitary business concept. In Revenue Policy (RP) 41P225, the Cabinet determined to literally apply the language in KRS 141.120 which stated that such returns were disallowed. Prior to this, for sixteen years, the Cabinet had allowed qualified businesses to choose whether to file separate returns or a combined return under the unitary business concept. RP 41P225 made it clear that only separate returns would be allowed despite the fact that a group of corporations might function under a unitary business plan.
Many corporate enterprises function as clusters or chains of related corporations, often across many state lines. Determining how to apportion corporate income to allow for taxation in each state can be extremely difficult and can lend itself to tax "dodges" or fraud. One method to arrive at proper taxation for a specific part of a business chain is to simply tax each part separately. Another method, known as a combined return under a unitary business plan, lets the corporate entity file as a whole, then apportions the state tax according to some formula. There are pros and cons to both methods which are not germane here.
The Appellees originally filed separate tax returns. In 1994, this Court decided GTE v. Revenue Cabinet, Commonwealth of Kentucky, 889 S.W.2d 788 (Ky.1994), which held that related corporations (such as a parent and subsidiary) could file a combined tax return under the unitary business concept. After GTE was decided, the Appellees in this case sought to amend their returns by substituting combined returns under the unitary business concept as allowed in GTE, because they would owe less tax under such an approach and could therefore claim a refund of taxes they claim to have overpaid.
Recognizing that applying GTE would result in a significant and unanticipated revenue loss, the General Assembly repeatedly amended the relevant statutes to bar the type of combined returns under the unitary business plan that the Appellees amended to file, and to bar the payment of any tax refunds that would be due to persons filing this type of amended return. The Appellees claim these statutory amendments have denied them due process of law and violated equal protection.
Two statutes actually lie at the heart of this controversy: KRS 141.120 and KRS 141.200. Because they have been subject to significant amendment and shifting interpretations, some recounting of that history will be helpful in understanding this case.
GTE read the version of KRS 141.120 in effect at that time to "authorize multiple corporations engaged in a unitary business to file combined income tax returns." GTE, 889 S.W.2d at 791. As noted above, this meant that related corporations (e.g., a parent and subsidiary) could effectively file a single tax return. The Court so held despite the fact that KRS 141.200(1) at the time required that "[c]orporations that are affiliated must each make a separate return." The Court read "corporation" as used in KRS 141.200 to mean both individual corporations and groups of corporations that operated as a "unitary business." GTE, 889 S.W.2d at 793.1 This meant that GTE and its subsidiaries would be treated as a single business under the "unitary business concept" and they could therefore file a combined return.
The General Assembly amended KRS 141.120 substantially in 1996, directly in response to the Court's decision in GTE, with the change having retrospective effect to any tax year ending on or after December 31, 1995. See 1996 Ky. Acts ch. 239, §§ 1, 3. A section was added that read, "Nothing in this section shall be construed as allowing or requiring the filing of a combined return under the unitary business concept or a consolidated return." KRS 141.120(11).
KRS 141.200 was amended in its entirety, with its changes having retrospective effect to any tax year ending on or after December 31, 1995. See 1996 Ky. Acts ch. 239, §§ 2, 3. The "[c]orporations that are affiliated must each make a separate return" language was removed. In its place, the General Assembly included definitions of "affiliated group" and "consolidated returns," both of which referenced the federal Internal Revenue Code. The General Assembly also included language allowing "affiliated groups" to file "consolidated returns."
The effect of this legislation was to undo the "unitary business concept" injected into the law by GTE while allowing parent-subsidiary groups of corporations, like those involved in the GTE litigation, to file what amounted to a single return going forward from 1995. In other words, the General Assembly technically undid GTE, at least going forward, but implemented a substantially similar scheme under the "affiliated group" approach. This allowed the General Assembly to follow the national trend that GTE had recognized while giving it more control over the process than the judiciary.
Sometime in 1996 to 1998, the Revenue Cabinet realized that GTE's interpretation of KRS 141.120 was creating substantial tax refund liabilities for the state for the years prior to 1995. The General Assembly was not apprised of, or at least was not able to address, these problems until late in the 1998 Regular Session, when it was well into the budgeting process. Because legislative sessions were only held every other year then, the first chance to deal with the problem with direct legislation would come two years later. To at least temporarily patch the problem, the General Assembly inserted a provision in the 1998 Budget Bill barring the state treasury from paying out any refunds sought pursuant to the theory announced in GTE. The Budget Bill would only be in effect for two years, meaning the problem would have to be addressed fully in 2000.
In 2000, the General Assembly finally had a chance to deal directly with the emerging problem created by those corporations trying to file amended returns for years before 1995 to take advantage of GTE's interpretation of the version of KRS 141.120 in effect in those years.
It amended KRS 141.120 to remove the express bar on filings under the "unitary business concept" found in the 1996 version at KRS 141.120(11). See 2000 Ky. Act. ch. 543, § 2. This was not a rollback of the disapproval of the "unitary business concept," however.
Instead, the General Assembly again amended KRS 141.200 substantially to address the problem. See 2000 Ky. Act. ch. 543, § 1. The amendment added the following language:
(7) For any taxable year ending on or after December 31, 1995, except as provided under subsection (3) of this section, nothing in this chapter shall be construed as allowing or requiring the filing of:
(a) A combined return under the unitary business concept; or
(b) A consolidated return.
(8) No assessment of additional tax due for any taxable year ending on or before December 31, 1995, made...
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