Monumental Life v. Dept. of Revenue

Decision Date27 June 2008
Docket NumberNo. 2005-CA-002148-MR.,2005-CA-002148-MR.
Citation294 S.W.3d 10
PartiesMONUMENTAL LIFE INSURANCE COMPANY, Successor in Interest to Commonwealth Life Insurance Company, Appellant, v. The DEPARTMENT OF REVENUE, formerly known as the Revenue Cabinet, Finance and Administration Cabinet, Commonwealth of Kentucky; Louisville/Jefferson County Metro Government, formerly known as City of Louisville, Kentucky and Jefferson County, Kentucky; and Kentucky Board of Tax, Appellees.
CourtKentucky Court of Appeals

Mark F. Sommer, Mark A. Lloyd, Louisville, KY, William A. Chittenden III, Chicago, IL, for appellant.

Stephen G. Dickerson, Laura M. Ferguson, Frankfort, KY, for appellee, the Department of Revenue.

Gary E. Siemens, Robert P. Benson, Jr., John M. Shardein, Asst. Jefferson County Attorney, Louisville, KY, for appellee, Louisville/Jefferson County Metro Government.

Before THOMPSON, Judge; BUCKINGHAM and HENRY, Senior Judges.1


HENRY, Senior Judge.

Monumental Life Insurance Company (Monumental) appeals from an opinion and order of the Franklin Circuit Court affirming an order of the Kentucky Board of Tax Appeals (Board) that denied Monumental's tax refund claims for the tax years 1990 through 1996. Monumental also appeals from the Board's denial of its request for relief from additional tax assessments issued by the Revenue Cabinet (Cabinet), the City of Louisville, and Jefferson County for the tax years 1995 through 1998.2 The primary issues raised are (1) whether the Cabinet erroneously treated the value of investment corporate stock held by Monumental when computing its tax liability pursuant to Kentucky Revised Statutes (KRS) 136.320 for the years 1990 through 1996 (referred to by the parties as the "capital stock tax"), and (2) whether the Cabinet properly subjected assets booked as "separate accounts" to taxation during the years 1995 through 1998.

Monumental is a domestic life insurance company which conducts business within the Commonwealth of Kentucky and is, therefore, subject to KRS 136.320, which requires that it pay a property tax on its "taxable capital" and "taxable reserves."3 Taxable capital is taxed at a rate of 0.7%, while taxable reserves are taxed at the significantly lower rate of 0.001%. KRS 136.320(3). Taxable capital includes the fair cash value of the company's intangible property, including shares of stock, less taxable reserves and exempt intangible property. KRS 136.320(2)(a). Taxable reserves consists of reserves on all outstanding insurance policies and contracts multiplied "... by the percentage determined by dividing capital, less exempt intangible personal property, by capital including exempt intangible personal property." KRS 136.320(2)(b). During the period at issue Monumental also paid local option ad valorem taxes levied by the City of Louisville and Jefferson County that were determined on the basis of its taxable capital as certified by the Cabinet.

In anticipation of the resolution of St. Ledger v. Revenue Cabinet, 912 S.W.2d 34 (Ky.1995), vacated by remand, St Ledger v. Kentucky Revenue Cabinet, 517 U.S. 1206, 116 S.Ct. 1821, 134 L.Ed.2d 927 (1996), on remand, St. Ledger v. Revenue Cabinet, 942 S.W.2d 893 (Ky.1997), cert. dismissed, St. Ledger v. Kentucky Revenue Cabinet, 521 U.S. 1146, 118 S.Ct. 27, 138 L.Ed.2d 1057 (1997), Monumental began filing annual protective refund claims with the Cabinet, the City of Louisville and Jefferson County. St. Ledger4 dealt with the constitutionality of KRS 136.020 (which, among other things, imposed a corporate ad valorem tax on various property, including stock) and KRS 136.030(1) (which exempted from ad valorem taxes the stock held by individual shareholders of corporations which paid Kentucky taxes on at least 75% of its total property).5 As further discussed below, the St. Ledger decision expressly held KRS 136.020 and KRS 136.030(1) to be unconstitutional.

Following the finality of St. Ledger, Monumental adopted the position that all stock assets should be excluded from the ad valorem tax calculations imposed under KRS 136.320. It accordingly filed its 1997 and 1998 tax returns reflecting this position. The Cabinet initially accepted the Monumental method, though the Cabinet states that this was a result of auditor error.

Following the Kentucky Supreme Court's decision in St. Ledger, the Cabinet began processing the many refund claims owed taxpayers as a result of the decision, including Monumental's protective refund claims filed between 1991 and 1996. In calculating the tax due, rather than excluding stock altogether pursuant to Monumental's proposed method, the Cabinet treated Monumental's stock assets as exempt intangible personal property in the KRS 136.320 calculations resulting in a total refund due of $1,470,357.49. Monumental protested the Cabinet's refund amount on the basis that St. Ledger required that stock holdings be altogether excluded from the formula. Using this method, Monumental calculated a total refund due of $8,107,668.00 plus additional interest.

During the protest process, the Cabinet again audited Monumental's 1998 return. As a result of the audit the Cabinet determined that Monumental had failed to include in its ad valorem report holdings booked to an account titled "separate accounts," which consists primarily of pension and retirement assets held in Monumental's name for future payout to retirees. The Cabinet thereafter recomputed Monumental's 1998 tax liability to include these assets, with the result that Monumental's liability increased from $48,672 to $3,061,280. The Cabinet also recomputed Monumental's tax liability for the years 1995 through 1998 to take into account separate account assets, and assessed an additional $2,895,878.42 for those years.6

The matter was brought before the Board which, after an evidentiary hearing, upheld the Cabinet's ruling. The Franklin Circuit Court affirmed the Board's ruling. This appeal followed.


KRS 131.370 sets out the appeals procedure from an order of the Board, and provides that such appeals are to be "in accordance with KRS Chapter 13B." According to KRS 13B.150(2), we may not substitute our judgment for that of the agency as to the weight of the evidence on questions of fact. KRS 13B.150(2) further provides that we may reverse the KBTA's final order, in whole or in part, only if we find that the order is:

(a) In violation of constitutional or statutory provisions;

(b) In excess of the statutory authority of the agency;

(c) Without support of substantial evidence on the whole record;

(d) Arbitrary, capricious, or characterized by abuse of discretion;

(e) Based on an ex parte communication which substantially prejudiced the rights of any party and likely affected the outcome of the hearing;

(f) Prejudiced by a failure of the person conducting a proceeding to be disqualified pursuant to KRS 13B.040(2); or

(g) Deficient as otherwise provided by law.

Consistent with the general standard applicable to appeals from administrative agencies, courts are limited to reviewing findings of fact based on the substantial evidence rule. Where the administrative agency's findings of fact are supported by substantial evidence, those findings are binding on the reviewing court; this is true even though there may be conflicting evidence in the record. Urella v. Kentucky Bd. of Medical Licensure, 939 S.W.2d 869 (Ky.1997); H & S Hardware v. Cecil and Kentucky Unemployment Insurance Commission, 655 S.W.2d 38, 40 (Ky.App.1983). Substantial evidence is evidence taken by itself or as a whole that "has sufficient probative value to induce conviction in the minds of reasonable men." Commonwealth of Kentucky, Cabinet for Human Resources v. Bridewell, 62 S.W.3d 370, 373 (Ky.2001). Issues of law, however, as always, are reviewed de novo. Gosney v. Glenn, 163 S.W.3d 894, 898 (Ky.App.2005); Reis v. Campbell County Bd. of Educ., 938 S.W.2d 880 (Ky.1996) (Legal errors of administrative body may always be corrected by reviewing court).


Monumental alleges that as a result of the Kentucky Supreme Court's decision in St. Ledger, its stock holdings are not subject to ad valorem taxes, and must be excluded from any part of the tax computation under KRS 136.320. Monumental asserts that St. Ledger did not merely alter how the capital stock tax was to be calculated, but instead mandated that all stock be excluded from the tax calculation. Under its interpretation, the Kentucky Supreme Court's opinion was sufficiently broad so as to sever from KRS 136.320 as unconstitutional the statute's reference in Section (1)(a) to "shares of stock." Thus, Monumental contends that all stock must be excluded from the calculations under KRS 136.320. Under Monumental's calculation, stock is factored completely out of the tax calculation (this method is referred to in the record as the "exclusion method"), whereas the Cabinet uses stock holdings in its calculations to first include stock in the calculation of capital under Section (1)(a), and then to deduct the value of the stock as "exempt intangible personal property" in the calculations in Sections (2)(a) and (2)(b) (this method is referred to in the record as the "exemption method"). Pursuant to the resulting mathematics, the exclusion method results in a lower tax liability than the exemption method.

Because this argument involves the interpretation of St. Ledger and KRS 136.020 — issues of law — our standard of review is de novo. Gosney v. Glenn, supra.

The issues in St. Ledger concerned the corporate shares tax contained in KRS 132.020(1), which imposed an ad valorem tax on stock shares, and the exemption statute contained in KRS 136.030(1).7 KRS 132.020(1) levied an ad valorem tax of twenty-five cents upon each one hundred dollars of value of, among other things, shares of stock. Pursuant to...

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