Com., Revenue Cabinet v. Gossum
| Decision Date | 01 September 1994 |
| Docket Number | 94-SC-216-TX,Nos. 92-SC-1041-T,s. 92-SC-1041-T |
| Citation | 887 S.W.2d 329 |
| Parties | 18 Employee Benefits Cas. 2094 COMMONWEALTH of Kentucky, REVENUE CABINET; C. Emmett Calvert, former Secretary of the Revenue Cabinet; Kim Burse, Secretary of the Revenue Cabinet; Commonwealth of Kentucky, Finance and Administration Cabinet; L. Rogers Wells, Jr., former Secretary of the Finance and Administration Cabinet; W. Patrick Mulloy, Secretary of the Finance and Administration Cabinet; and Kentucky State Treasury; Robert Mead CPA, former State Treasurer; Frances Jones Mills, State Treasurer; individuals in their official capacities only, Appellants/Cross-Appellees, v. Tom GOSSUM, T.C. Lusk, Harry J. Donahue, Amos L. Harris, Encil Dukes, Willard McLean, Hack Riddle, George Aldridge, John Tensley, Herbert Mayfield, Junior Letts, James McKnight, Fred Johnson, Buford Wilson, Kenneth Holloway, James Ricker, Paul Jasper, Jerry Bearden and James W. Castle, individually and as representatives of a class; Kenneth G. Nielsen and Samuel L. Cox, individually and as representatives of a class; Willodyne C. Sievert and Arthur Peter, III, individually and as representatives of The Kentucky Federation of Chapters of the National Association of Retired Federal Employees, Chapter 1610, and Council of The Kentucky Chapters of The Retired Officers Association, Appellees/Cross-Appellants. |
| Court | United States State Supreme Court — District of Kentucky |
Michael J. Denny, Legal Services Div., Revenue Cabinet, Frankfort, Donald L. Cox, Scott R. Cox, Lynch, Cox, Gilman & Mahan, Louisville, Maryellen B. Allen, Asst. Atty. Gen., Frankfort, for appellants/cross-appellees.
Thomas J. Luber, Virginia H. Snell, Holliday Hopkins Thacker, Wyatt, Tarrant & Combs, Louisville, Len W. Ogden, Jr., Paducah, James D. Asher, Whitesburg, Teddy B. Gordon, Todd Bolus, Louisville, for appellees/cross-appellants.
This appeal is from the judgment of Marshall Circuit Court for which transfer was granted. This controversy involves whether, and to what extent, federal retirees are entitled to refunds of state taxes paid on their federal retirement annuities.
Before its amendment, effective July 13, 1990, KRS 141.021 exempted state retirement annuities, regardless of amount, from state income tax, but exempted federal retirement annuities only up to $4,000. In 1989, the United States Supreme Court held a similar Michigan statute violative of the federal constitutional doctrine of intergovernmental tax immunity. Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989).
In response to the Davis decision, Kentucky's General Assembly in 1990, exempted all federal retirement benefits from state income taxation, thereby treating the retirement benefits of retired state, local and federal governmental employees equally. (See KRS 141.021, effective July 13, 1990.) Following the Davis decision, federal retirees residing in Kentucky (Gossum, et al.), filed a class action in Marshall Circuit Court seeking refunds of taxes paid on any federal retirement benefits received during the five-year period preceding the Davis decision. The Revenue Cabinet conceded that the statute was invalid, but contested the refund issue by questioning the retroactivity of Davis.
The circuit court reasoned that inasmuch as the Commonwealth has consented by statute to refund taxes paid under an unconstitutional provision (KRS 134.590), the retroactivity of Davis is essentially a moot question; refunds being in order as a matter of state law. The trial court also ruled: a) that the two-year limitation period in the case of taxes held unconstitutional (KRS 134.590), as opposed to the four-year period for other refunds (KRS 134.580 and KRS 141.235), does not violate due process or equal protection, because there is a reasonable basis for, and a legitimate state interest in, the distinction, b) that the taxpayers must pursue their refunds under KRS 134.590, whereunder refunds may be available only for the two years preceding the year in which this litigation was commenced, and c) that because the amount of taxes due is in litigation, subsection (6) rather than subsection (2) of KRS 134.590 governs the time for which applications for refunds must be made, i.e., within two years from the date the amount due is determined through this litigation. Both sides appealed, putting all of the trial court's major rulings in issue.
Appellants contend that federal law does not require Kentucky to refund income taxes paid by federal retirees on federal retirement benefits if a procedure exists to challenge the tax in question before it is paid. In Harper v. Virginia Dept. of Taxation, 509 U.S. ----, 113 S.Ct. 2510, 125 L.Ed.2d 74 (1993), the United States Supreme Court concluded that the Virginia Supreme Court decision that denied retroactivity of Davis was in error. (See Harper v. Virginia, Dept. of Taxation, 241 Va. 232, 401 S.E.2d 868 [1991].) The United States Supreme Court also held that the state court had erroneously applied the factors set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), in denying relief to petitioners therein, as to all taxable events occurring before Davis was decided. Harper is unambiguous in its holding that Davis applies retroactively, without resort to the test for retroactivity articulated in Chevron, supra.
However, the Supreme Court therein did not mandate payment of refunds to the Virginia retirees, but rather concluded that "federal law does not necessarily entitle (the federal retirees) to a refund." Instead, the United States Supreme Court remanded the case to the Supreme Court of Virginia "to provide relief consistent with federal due process principles." (See Harper v. Virginia, Dept. of Taxation, 242 Va. 322, 410 S.E.2d 629 [1991].) Thus, the U.S. Supreme Court ruled that if Virginia provided its federal retirees with an opportunity to obtain relief in a predeprivation hearing prior to requiring payment of the tax, no refund of taxes paid by federal retirees was federally mandated. The Supreme Court defined the procedures which would qualify for federal due process purposes as: predeprivation processes as an opportunity that exists for the contesting taxpayer to be permitted under state law to bring suit to enjoin imposition of a tax prior to its payment, or by allowing taxpayers to withhold payment and then interpose their objections as defenses in a tax enforcement proceeding. See Reich v. Collins, 263 Ga. 602, 437 S.E.2d 320 (1993). See James B. Beam Distilling Co. v. Georgia, 501 U.S. 529, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991), wherein the United States Supreme Court required retroactivity and disagreed with using the Chevron Oil analysis. See also Hagge v. Iowa Dept. of Revenue and Finance, 504 N.W.2d 448 (Iowa 1993), wherein the Supreme Court of Iowa ordered refunds to be paid as Iowa did not provide the type of predeprivation remedies mandated by Harper.
We arrive at the question of whether Kentucky provides predeprivation remedies which are adequate to satisfy the due process requirements established in Harper. Where no such meaningful predeprivation procedures exist, then a state is constitutionally required to provide its citizens with "backward-looking relief". McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990) and Harper, supra.
The Revenue Cabinet asserts that because a taxpayer may seek review of an assessment without first paying the tax, these procedures constitute sufficient predeprivation remedies and, thus, no "backward-looking" relief is required under federal law.
Kentucky's system is structured so that a taxpayer is coerced into paying the tax in advance to avoid financial sanctions. The Supreme Court has held that in such cases the due process clause of the Fourteenth Amendment obligates the state to provide meaningful backward-looking relief to rectify any unconstitutional deprivation.
We have long held that, when a tax is paid in order to avoid financial sanctions or a seizure of real or personal property, the tax is paid under "duress" in the sense that the State has not provided a fair and meaningful predeprivation procedure....
Any Kentucky taxpayer who fails to file an income tax return or to pay income taxes when due under KRS Chapter 141 is subject to an array of fines and civil and criminal penalties. KRS 141.990; KRS 131.180. Civil penalties for failure to make payments or file returns can be as much as 20% of the total tax due. If a taxpayer does not make an estimated payment when due (or underpays an estimate), he is subject to a penalty of as much as 10% of the amount. If the Cabinet's assessment is deemed the result of the taxpayer's negligence, an additional 10% penalty is levied; if the assessment is determined to be the result of taxpayer fraud, the penalty jumps to 50%. If it is determined that the tax was willfully withheld, the taxpayer is guilty of a Class D felony. Furthermore, all taxes payable to the state which are not paid when due thereafter accrue interest at the adjusted prime interest rate. KRS 131.183.
Under KRS 131.180(4), if a taxpayer fails to timely file a return, the Revenue Cabinet may estimate the tax due, assess the tax at twice the amount estimated to be due, and then impose a penalty up to an amount equal to 50% of the assessed amount. The Commonwealth also has broad powers to require immediate payment of taxes prior to any challenge to an assessment if it believes that "any tax claim for any ... reason is being endangered." The taxpayer's only recourse becomes filing a bond to avoid garnishment. And, only after the bond is filed can a taxpayer challenge the assessment. Finally, a taxpayer cannot escape some payment where he has failed in his challenge to an assessment at the Board of Tax Appeals, and desires to appeal the...
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