IN RE APPEAL OF BARTON-DOBENIN

• Decision Date: 21 July 2000
• Docket Number: No. 83,423.,83,423.
• Citation: 9 P.3d 9,269 Kan. 851
• Parties: IN THE MATTER OF THE APPEAL OF JOSEPH & ELIZABETH BARTON-DOBENIN FROM AN ORDER OF THE DIVISION OF TAXATION ON ASSESSMENT OF INCOME TAX, PENALTY, AND INTEREST.
• Court: Kansas Supreme Court

269 Kan. 851

9 P.3d 9

IN THE MATTER OF THE APPEAL OF JOSEPH & ELIZABETH BARTON-DOBENIN FROM AN ORDER OF THE DIVISION OF TAXATION ON ASSESSMENT OF INCOME TAX, PENALTY, AND INTEREST.

No. 83,423.

Supreme Court of Kansas.

Opinion filed July 21, 2000.

C. David Newbery, of Newbery & Ungerer, of Topeka, argued the cause and Douglas C. Fincher, of the same firm, was with him on the briefs for appellant.

James Bartle, general counsel, Kansas Department of Revenue, argued the cause and was on the brief for appellee.

The opinion of the court was delivered by

DAVIS, J.:

Taxpayers Joseph and Elizabeth Barton-Dobenin appeal from an order issued by the Board of Tax Appeals (BOTA) denying them a Kansas individual income tax credit for the 1995 tax year for taxes paid to the Czechoslovakian Republic. The taxpayers argue that the Department of Revenue's interpretation of K.S.A. 79-32,111(a) (Ensley 1989) allowing a partial credit for taxes paid to other states but not for taxes paid to other nations, violated the Foreign Commerce Clause of the United States Constitution. U.S. Const. art I, § 8, cl. 3. For the reasons set forth, we affirm.

Taxpayers Joseph and Elizabeth Barton-Dobenin, husband and wife, are citizens of the United States and have been residents of the state of Kansas since 1958. Joseph Barton-Dobenin was born and raised in Czechoslovakia. He emigrated to the United States and in 1948, all of his family's property in Czechoslovakia was seized by the Communist regime.

Joseph, along with his brothers Cyrill and George, successfully reclaimed title to their family's property in 1993. The property consists of income-producing commercial real estate in the cities of Prague and Nachod, as well as 6,000 acres of farmland and timber. Joseph owns a one-third general partnership interest in the commercial property in Prague and in the farmland and timber, as well as a one-half general partnership interest in the commercial property in Nachod.

Joseph spent 15 weeks in Prague engaged in the management of his partnership interests in 1995 and spent the other 37 weeks of the year primarily in Kansas where he participated in the management of the partnership interests through activities such as telephone conversations, correspondence, management of personnel, and document review.

The income from Joseph's partnership interests is deposited in a Prague bank. According to testimony from Joseph, the majority of the income is reinvested in the various partnerships and some is also spent pursuing charitable interests in the Czechoslovakian Republic. Funds not expended or committed to charitable purposes in the Czechoslovakian Republic are periodically converted to United States dollars and transferred to the bank account held by the taxpayers in Manhattan, Kansas. The taxpayers filed a 1995 federal income tax return reporting Czechoslovakian source income in the amount of $1,625,890. On that income, the taxpayers paid the Czechoslovakian Republic income taxes in the amount of $726,280. The taxpayers' United States federal income tax return reported a federal income tax liability in the amount of $677,297. However, the taxpayers were granted a federal income tax credit in the amount of $615,028 for foreign taxes paid to the Czechoslovakian Republic. Thus, the taxpayers' total United States federal income tax liability on their Czechoslovakian source income was $62,269.

The taxpayers reported a total adjusted gross income of $1,776,731 in their 1995 Kansas income tax return which included the Czechoslovakian source income of $1,625,890. The total Kansas income tax due was $113,074. The taxpayers then attempted to claim a credit in the amount of $104,028 for taxes paid to the Czechoslovakian Republic under the authority of K.S.A. 79-32,111 (Ensley 1989), which at that time allowed a partial credit for the amount of income taxes paid by a resident individual to another state. This claimed credit would have reduced the total Kansas income tax liability to $9,046 and resulted in the taxpayers receiving a Kansas refund in the amount of $3,654 when previous payments of taxes were taken into account.

The Kansas Department of Revenue disallowed the tax credit, finding that foreign taxes were not taxes paid to another state under the statute. The Department of Revenue assessed the taxpayers a balance due in the amount of $100,374 plus interest of $4,014.96. The taxpayers paid this amount under protest and appealed the Department of Revenue's assessment. After an administrative hearing, the hearing officer denied the taxpayers' appeal. The taxpayers then appealed to BOTA.

Before BOTA, the taxpayers argued (1) that the word "state" in K.S.A. 79-32,111(a) (Ensley 1989) should be interpreted to include foreign nations; (2) in the alternative, the statute is ambiguous and should be interpreted to allow the credit; (3) if the statute does not include foreign nations, it violates the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution; and (4) if the statute does not include foreign nations, it violates the Foreign Commerce Clause. The taxpayers stipulated that if the tax credit was allowed, it should be in the amount of $104,028.

BOTA held that the definition of "state" in K.S.A. 79-32,111(a) (Ensley 1989), did not include foreign nations. BOTA also held that it was without authority to address the taxpayers' Equal Protection Clause and Foreign Commerce Clause claims and affirmed the Department of Revenue's denial of the partial tax credit provided in K.S.A. 79-32,111(a) (Ensley 1989). The taxpayers appealed BOTA's decision to the Court of Appeals and the matter was transferred to this court pursuant to K.S.A. 20-3018(c).

Although the taxpayers raised several issues before BOTA, the sole issue raised in this appeal is whether the application of K.S.A. 79-32,111(a) (Ensley 1989) to the taxpayers violates the Foreign Commerce Clause of the United States Constitution. The constitutional question raised is one of first impression in this state. It must also be noted that our decision, while significant to the taxpayers in this case, will have limited application. In 1997, the Kansas Legislature amended K.S.A. 79-32,111(a) to include foreign nations within the definition of the word "state," with the effect of allowing a limited tax credit for taxes paid to foreign nations. L. 1997, ch. 126, § 48.

Normally, the standard of review regarding appeals from BOTA is governed by the Kansas Act for Judicial Review and Civil Enforcement for Agency Actions, K.S.A. 77-601 et seq. However, the sole issue in this case involves the taxpayers' claim that K.S.A. 79-32,111(a) (Ensley 1989) is unconstitutional because it violates the Foreign Commerce Clause of the United States Constitution. BOTA did not have jurisdiction to address the constitutionality of the statute. See Zarda v. State, 250 Kan. 364, 370, 826 P.2d 1365 (1992) (stating that BOTA has no authority to determine the constitutionality of a statute and that the issue must be raised when the case is on appeal before a court of law). Thus, the merits of the question raised are to be addressed for the first time in this appeal. Standard of Review

"The constitutionality of legislative enactments is presumed, and all doubts must be resolved in favor of a statute's validity." State v. Wilkinson, 269 Kan. 603, Syl. ¶ 1, 9 P.3d 1 (2000). Recently, this court in State ex rel. Tomasic v. Unified Gov. of Wyandotte Co./Kansas City, 264 Kan. 293, 300, 955 P.2d 1136 (1998), clearly articulated the standard to be applied when the constitutionality of a statute is challenged on appeal:

"`"The constitutionality of a statute is presumed, all doubts must be resolved in favor of its validity, and before the statute may be stricken down, it must clearly appear the statute violates the constitution. [Citations omitted.]

"`"In determining constitutionality, it is the court's duty to uphold a statute under attack rather than defeat it and if there is any reasonable way to construe the statute as constitutionally valid, that should be done. [Citations omitted.]

"`"Statutes are not stricken down unless the infringement of the superior law is clear beyond substantial doubt. [Citations omitted.]"'"

Discussion

The statute in question, K.S.A. 79-32,111(a) (Ensley 1989), states:

"The amount of income tax paid to another state by a resident individual, resident estate or resident trust on income derived from sources in another state shall be allowed as a credit against the tax computed under the provisions of this act. Such credit shall not be greater in proportion to the tax computed under this act than the adjusted gross income for such year derived in another state while such taxpayer is a resident of this state is to the total Kansas adjusted gross income of the taxpayer."

Thus, the statute provided a credit against Kansas income tax liability for taxes paid to another state. It did not, however, provide a credit against tax liability for taxes paid to a foreign nation. The federal government, on the other hand, does provide a tax credit for taxes paid in foreign nations, whether the foreign nation characterizes such taxes as national, state, or local. See 26 U.S.C. § 901 (1994).

The Foreign Commerce Clause of the United States Constitution, like the Interstate Commerce Clause, comes from Art. I, § 8, cl. 3, which provides that "Congress shall have Power ... to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." The Commerce Clause represents not only an affirmative grant of power to Congress but also a negative command to the states that they may not, through the enactment of statutes or regulations, discriminate against or unduly burden interstate or foreign commerce. See Quill Corp. v. North Dakota, 504 U.S. 298, 309, 119 L. Ed.2d 91, 112 S. Ct. 1904 (1992). This negative command is sometimes referred to as the "dormant"...