Luckett v. Tennessee Gas Transmission Co.

• Decision Date: 05 February 1960
• Parties: James E. LUCKETT, Commissioner of Revenue, Commonwealth of Kentucky, et al., Appellant, v. TENNESSEE GAS TRANSMISSION COMPANY, Appellee.
• Court: United States State Supreme Court — District of Kentucky

Page 879

331 S.W.2d 879

James E. LUCKETT, Commissioner of Revenue, Commonwealth of Kentucky, et al., Appellant, v. TENNESSEE GAS TRANSMISSION COMPANY, Appellee.

Court of Appeals of Kentucky.

Feb. 5, 1960.

William S. Riley, Virginia R. Collins, Dept. of Revenue, Frankfort, for appellant.

Louis Cox, John Hopkins, Hazelrigg & Cox, Frankfort, John R. Cook, Jr., Lexington, for appellee.

William G. Craig, Byron, Sandidge Holbrook & Craig, Owensboro, for amicus curiae, Texas Gas Transmission Co.

MOREMEN, Judge.

Appellee, Tennessee Gas Transmission Company, is a foreign corporation which has qualified to do business in this state. It operates and maintains pipe lines and incidental machinery for the transmission of natural gas in interstate commerce. It owns property in about twenty-five counties.

KRS 136.120 created a franchise tax on public service corporations, and appellee is subject to that tax. Our inquiry concerns whether the method used by the Department of Revenue in the valuation of appellee's franchise was in accordance with the one prescribed by that statute.

The circuit court held that the Department of Revenue had failed to use the statutory method in evaluating appellee's properties, and ordered the Kentucky Tax Commission to re-assemble and assess the properties in accordance with the statute and the judgment entered, and decreed that the tangible properties of the company must be assessed at no higher level of their fair cash value than are like and similar properties in the Commonwealth of Kentucky. Hence this appeal by the Commission and the Department of Revenue.

KRS 136.160, the franchise valuation statute reads in part:

'The department shall fix the value of the capital stock in this state of foreign public service corporations by capitalizing the net income derived in this state, or shall fix the entire value of the capital stock of the corporation by some other method and then fix the value of the capital stock in this state by determining from the amount of gross receipts of the corporation the propertion which the gross receipts in this state, * * * bears to the entire gross receipts. The value of the capital stock in this state, less the assessed value of the tangible property * * * in this state, shall be the correct value of the corporate franchise of the corporation for taxation in this state.'

At the outset we wish to point out that the expression, 'capital stock' when used in franchise tax statutes has a particular meaning. Usually, and we suppose strictly speaking, the capital stock of a corporation is the money contributed by the corporators to the capital and represented by shares issued to subscribers. Burton v. Burton, 161 Cal.App.2d 572, 326 P.2d 855. It is evidence of rights in property. Southern Package Corporation v. State Tax Commission, 195 Miss. 864, 15 So.2d 436, 16 So.2d 856. The terms 'capital' and 'capital stock' are practically the equivalent of each other, but when considered as the basis for the imposition of a franchise tax, 'capital stock' means, not the stock share, but the property of the corporation. People ex rel. Tetragon Co. v. Sohmer, 162 App.Div. 433, 147 N.Y.S. 611.

When the statute (KRS 136.160) requires that 'the department shall fix the value of the capital stock in this state of foreign public service corporations' it is speaking of all property of the corporation, including the intangible value gained by the use of it as a going concern under governmental license and this property necessarily includes tangible property. Its object is to reach the intangible enhancement of the physical properties resulting from the use of this property under special privilege by the government.

The statute (KRS 136.160) requires that four steps must be taken to determine franchise value:

1. Fix the value of all the capital stock of the company.

2. Fix the value of the capital stock in this state.

3. From the amount established under item 2, deduct the assessed value of the tangible property in this state.

4. Accept as the correct value of the franchise the amount that results.

The parties do not disagree as to the sequence of the various steps set forth in the statute, but they do diverge from this common beginning when determining the time the 'equalization factor' should be applied. Since the subject of equalization is not even mentioned in the statute it requires some discussion.

Section 172 of the Constitution provides:

'All property, not exempted from taxation by this Constitution, shall be assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale. * * *'

Nevertheless, the well-established custom in this state is to assess property (excluding intangible personal property) at less than its fair cash value. This usage has been recognized by this court and accepted by the other branches of government. Authority for such a rule may have originated in Section 174 of the Constitution which reads:

'All property, whether owned by natural persons or corporations, shall be taxed in proportion to its value, unless exempted by this Constitution; and all corporate property shall pay the same rate of taxation paid by individual property. Nothing in this Constitution shall be construed to prevent the General Assembly from providing for taxation based on income, licenses or franchises,'

but however obscure its genesis, the fact remains that tax rates are never applied to the 'fair cash value' of the tangible property, except perhaps by chance.

The acceptance of the practice of 'equalization' was justified in City of Louisville v. Martin, Com'r of Revenue, 284 Ky. 490, 144 S.W.2d 1034, 1037, where it was reasoned:

'While the constitution, section 172, and various statutes, like the section referred to, require that all property subject to taxation shall be assessed at its fair cash value estimated at the price it would bring at a fair voluntary sale, assessing authorities have, since the adoption of the constitution and enactment of such statutes, consistently disregarded their strict letter, and treated them as only requiring uniformity; and have attempted to adopt a general level of proportionate values in assessing various classes of property. This court has held in such circumstances that all taxpayers should be treated alike and that there should be no discrimination between different classes of property.'

It is difficult to understand why 'equality' should not be reached at the top, i. e. 'fair cash value' rather than at a percentage of that value, and why a flat deduction to all persons in a class gives equality. Between classes, yes! But in practical application, the 'equalization factor' has been blanketed over an entire class. If the original assessment as to the fair cash value was initially wrong as to any person or persons the same blemish remains after a uniform deduction to all persons in the class, in the interest of equalization, has been made.

Nevertheless, the well-established custom has been approved on many occasions. In McCracken Fiscal Court v. McFadden, 275 Ky. 819, 122 S.W.2d 761, 764, it was said:

'Whenever the tax assessing authorities have systematically disregarded the imperious demands of the Constitution and statutes, that all property shall be assessed at its fair cash value, by adopting a general level of proportionate values, everybody must have been treated alike. When it was shown that the property involved in a case had not been assessed at that uniform level, this court has required an adjustment.'

In this connection, the cases of City of Lexington v. Cooke, 309 Ky. 518, 218 S.W.2d 58, and Reeves v. Jefferson County, Ky., 245 S.W.2d 606, are interesting.

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