Commonwealth v. Louisville Gas & Elec. Co.
| Decision Date | 16 December 1938 |
| Parties | COMMONWEALTH v. LOUISVILLE GAS & ELECTRIC CO. |
| Court | Kentucky Court of Appeals |
Rehearing Denied June 16, 1939.
Appeal from Circuit Court, Jefferson County, Common Pleas Branch Second Division.
Proceeding by the Commonwealth, by M. J. Brennan, former revenue agent against the Louisville Gas & Electric Company, to reassess the franchise value of defendant's properties for certain years. From a judgment of the Circuit Court which on appeal from the county court refused to reassess the properties, the plaintiff appeals.
Affirmed.
David A. McCandless, B. W. Gilfillan, Lawrence J. Mackey, John Chandler, and Lawrence S. Grauman, all of Louisville, for the Commonwealth.
Crawford Middleton, Milner & Seelbach, Chas. W. Milner, Geo. W Norton, Jr., and Hubert Willis, all of Louisville, for appellee.
Henry M. Johnson, of Louisville, amicus curiæ.
MORRIS Commissioner.
Appellant by statement filed in the Jefferson county court sought to have that court re-assess the franchise value of appellee's properties for the years 1927 to 1933, inclusive, praying that: "All improper deductions and allowances in the assessment of defendant's property in each of the years made by the Tax Commission as the result of fraud, misrepresentation, and concealment upon the part of the defendant, and such as resulted from miscalculation and the application of wrong methods upon the part of the Commission, be treated as omitted property, *** and be now assessed against defendant."
That court refused to re-assess, as did the circuit court to which appeal was taken, and from judgment of the latter court appeal comes to this court.
Applicable sections of Kentucky Statutes, 1936 Edition, are: Sections 4051, 4260-1 et seq., 4077, 4078a, 4114i-10 to 4114i-12, all of which (save 4051) relate in some measure to the method and manner of proceedings by a revenue agent to assess omitted property, and define the duties and powers of the courts in respect to the assessment of omitted property. These duties and powers have been pointed out in opinions by this court. Stearns Coal & Lumber Company v. Commonwealth, 167 Ky. 51, 179 S.W. 1080; City of Covington v. Shinkle, 175 Ky. 530, 194 S.W. 766.
It may be doubted, in the light of the pleadings as presented in the courts below, and decisions of this court, that the procedure begun and followed was wholly befitting in the case there and here presented. Conceding, however, for the purpose of this case, that there may appear elements which would give the courts be low jurisdiction of some subject matter, we shall pass to the merits of the case.
We are assured by appellant that the "gravamen of the action is fraud by which the appellee obtained grossly, inadequate and illegal assessments in each of the years named." Appellant quotes Section 4051 of the Statutes, a penalizing statute, directed toward taxpayers who willfully make false statements, evading investments, convert taxable into non-taxable property, or resort to any device for the purpose of evading taxation. The penalty provided is a fine and the suffering of triple taxation. Counsel argues that every provision of the section, supra, has been violated by appellee. If it relied on the provision of this statute, the suit below was improperly begun and prosecuted. We take it, however, that appellant treated the provisions of this section as the dividing line mentioned by Justice Holmes in Bullen v. Wisconsin, 240 U.S. 625, 36 S.Ct. 473, 60 L.Ed. 830.
The initial fraudulent activity charged is the alleged segregation of the company's business, by incorporating different departments thereof into separate units, one, the Kentucky Coke Company, an industrial corporation, which under the law is not required to pay a franchise tax. Subsequently these various corporations were resolved into a group of affiliates, controlled by the same holding company under one direction.
It is charged that these arrangements resulted in a diversion of income by means of "inter-company contracts," whereby the greater portion of appellee's earnings were transferred to the non-franchise paying company, causing a suspension of common stock dividends, and allowing large dividends in the name of the non-franchise paying corporation.
Fraud was charged, in that the appellee made false statements of expenses and net income, by reporting each year a greater amount of depreciation than was set up on the company's books. Fraud in reporting (or not reporting) the value of its common stock, and in reporting that it had not paid cash dividends on its common stock during the respective years. Added to these charges is the contention that the commission in assessing adopted an incorrect method, thereby reaching erroneous results.
The Louisville Gas & Electric Company of Delaware is a holding company; the Kentucky Coke Company (called by appellant the "dummy") is a producing company and subsidiary of the holding company, as are the Ivyton Oil and Gas Company (Delaware) a producing company, and the Kentucky Pipe Line Company (Ind.) a producing company. There are also the Kentucky Pipe Line Company of Kentucky, a gas transportation company; the Louisville Hydro-Electric Company, an electric producing company, the Madison Light and Power Company, an operating company, and the Ohio Valley Transmission Company, an electric transmission company.
It is charged that upon the breaking up of the company into the various units there was executed inter-company agreements between the company and affiliates, whereby compensation for services to be rendered by each was so fixed as to screen the net income of appellee and its affiliates actually engaged in public utility business required to report, and center largely the profits of business in the non-franchise corporation, the Coke Company.
That under these inter-company contracts appellee, for fixed rentals, leased its generating plants and mines to the Coke Company, and agreed for the latter to manufacture in the company's plant electrical current to be sold to the appellee, at exorbitant prices, so as to permit huge profits for the Coke Company, and correspondingly reduce the earnings of the appellee. This arrangement was later extended to include the gas plants of appellee. The company in 1923 constructed a modern gas plant, which was later conveyed to the Coke Company, charging costs to the latter through its inter-company accounts. These contracts were renewed from time to time, appellant says, at exorbitant figures.
In 1928 the Louisville Hydro-Electric Company, an affiliate, completed its Louisville plant and began to furnish the bulk of electrical current to the appellee. This served to reduce the Coke Company's quantity of supply. It is alleged that the Hydro plant was out of commission during high river tides, but that the Louisville Company continued the service, for which it is charged it paid exorbitant prices to its affiliates. That in addition to the regular annual service, that is, generated current, the appellee agreed to and did pay the Coke Company approximately one and three-quarter million dollars for what was called the "stand-by service." The specific charge here is that the rental was in fact a bonus to the Coke Company, made for the fraudulent purpose of diverting the earnings to the non-franchise company, "all of which was paid by the Coke Company to the Delaware Company in the form of dividends."
This briefly described general plan of operation was carried on until 1933, at which time the Coke Company was dissolved and its property taken over by the appellee. It is charged that during the years involved the Coke Company was incorporated for the purpose of evading taxation under the net earning plan or method, and to enable the company to depress the value of its stock, thus avoiding taxation under the "stock and bond plan."
We have not gone more into detail as to the matters above stated, particularly for the reason that the briefs and the testimony adduced by appellant fail to point out wherein the method adopted by appellee in carrying on its business during the years in question was done for the purpose of evading taxation, as appellant had the burden of showing.
The evidence to which we have been pointed as bearing on evasion seems to be contained in an answer to a question propounded to an officer and attorney having general supervision of the various corporations, while testifying before the Federal Trade Commission in 1931. The question was in substance: "Why is it that the Louisville Gas and Electric Company of Kentucky does not operate the Waterside Station which it owns, instead of having it operated by another company, making payments to that company for current and stand-by service, and having that company make payments of dividends for rental to the holding company?"
In part the answer was:
Taking this excerpt from the witness' statements as being true it would hardly be considered as sufficient evidence that the plans and methods adopted and carried out by the corporation were fraudulent. The sole charge is that by these things having been done, the company evaded taxation upon a part of its taxable values. It has been held by the U.S. Supreme Court that a taxpayer has the right to reduce his taxes if the method be legal; in...
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