Revenue Cabinet v. Ashworth Corporation, No. 2007-CA-002549-MR (Ky. App. 11/20/2009), 2007-CA-002549-MR.
| Decision Date | 20 November 2009 |
| Docket Number | No. 2008-CA-000023-MR.,No. 2007-CA-002549-MR.,2007-CA-002549-MR.,2008-CA-000023-MR. |
| Parties | REVENUE CABINET (n/k/a Finance and Administration Cabinet, Department of Revenue), Commonwealth of Kentucky, Appellant/Cross-Appellee, v. ASHWORTH CORPORATION (n/k/a Ashworth, LLC), Ht-Forum, Inc. (n/k/a HTF, LLC); and Daviation Services, Inc. (n/k/a Daviation Services, LLC Appellees/Cross-Appellants |
| Court | Court of Appeals of Kentucky |
Laura Ferguson, Frankfort, Kentucky, Briefs and Oral Argument for Appellees/Cross-Appellee.
Mark F. Sommer, Louisville, Kentucky, Jennifer S. Smart, Lexington, Kentucky, Briefs and Oral Argument for Appellant/Cross-Appellants.
Before: CLAYTON, NICKELL, and VANMETER, Judges.
The Revenue Cabinet, Commonwealth of Kentucky (n/k/a Finance and Administration Cabinet, Department of Revenue) (the Cabinet) appeals from the Franklin Circuit Court's order reversing the order of the Kentucky Board of Tax Appeals (Board). Asworth Corporation (n/k/a Asworth, LLC), D Aviation Services, Inc. (n/k/a D Aviation Services, LLC), and HT-Forum, Inc. (n/k/a HTF, LLC), (collectively the Corporations) cross-appeal from the same order. For the following reasons, we affirm the circuit court's order to the extent that it held that the Corporations have a tax nexus with Kentucky. We reverse insofar as it applied the three-factor apportionment method and ordered an immediate refund.
While this matter was pending before the Board, the parties stipulated to, inter alia, the following facts.1 The Corporations were created under the laws of either Nevada or Delaware, all with their principal places of business in Chicago, Illinois. The Corporations "manage investments in various legal entities." None of the Corporations had any property, employees, or payroll in Kentucky during the tax years at issue. Nor have the Corporations ever been domiciled in Kentucky. Their sole connection with Kentucky was their "receipt of a distributive share of partnership income received from the profits of variously named and organized partnerships doing business in Kentucky." Board Order at 2.
For the taxable periods ending on January 31 of 1993, 1994, 1995, and 1996, "Asworth filed Kentucky corporation income tax returns . . . and paid Kentucky corporate income tax calculated by using the standard three-factor apportionment formula (property, payroll, and receipts) under KRS2 141.120 to apportion its multistate income to Kentucky, and included the property, payroll and receipts of" both Asworth and Conwood Company, LP, a Delaware limited partnership of which Asworth owned a 99% limited partnership interest. Conwood is a Delaware limited partnership which has its principal place of business in Tennessee, and which also conducts business in Kentucky. "Asworth also filed Kentucky corporation license tax returns and paid the Kentucky corporate license tax of KRS 136.070 using the same methodology it utilized for corporate income tax for" these tax years.
Based on its audit of Asworth for these tax years, the Cabinet concluded that although Asworth was not required to file a corporation license tax return, it owed additional taxes, plus applicable interest and penalties. The Cabinet excluded Asworth's receipts and all of its affiliated entities in assessing the additional taxes, including "only Conwood receipts in Kentucky [presented in the formula] over Conwood receipts everywhere in the calculation(s)." That is, the Cabinet utilized a single-factor apportionment formula.
Asworth paid the taxes as assessed by the Cabinet, and then filed amended returns requesting a refund for the taxes it paid in relation to its original returns, as well as the increased amount it paid in relation to the Cabinet's audit assessment, plus the applicable interest and penalties. Asworth argued "that it had no nexus with Kentucky under KRS Chapter 141, and therefore was not subject to corporate income tax." The Cabinet denied Asworth's request for a refund, and Asworth appealed to the Board.
For the taxable periods ending January 31, 1997, and December 31 of 1997, 1998, and 1999, the Corporations each filed Kentucky corporation income tax returns and paid Kentucky corporation income tax. Through various corporate structure changes and transfers not pertinent here, at some point D Aviation Services and HT-Forum acquired ownership interests in Conwood.
Thereafter, the Corporations filed amended returns requesting refunds for the sums they paid for these taxable periods, plus interest. The Corporations argued that they did not have any tax liability in Kentucky. The Cabinet denied the requests for refunds,3 and the matters were eventually appealed to the Board.
On appeal to the Board, the Corporations' appeals were consolidated pursuant to a motion which indicated that the appeals concerned the same issues, related to the same tax, and involved related entities. Ultimately, the Board held that "KRS 141.040 did not reach the distributive share paid to [the Corporations] by partnerships doing business in the Commonwealth" since they did not own property, lease property, or have any employees receiving compensation in Kentucky. Thus, the Corporations did not have a "physical presence" in Kentucky and were not subject to Kentucky corporation income tax.
On appeal, the circuit court reversed, holding that the Corporations were "subject to tax on their distributive share income from partnerships doing business both within and without Kentucky pursuant to KRS 141.206." The circuit court calculated the amount owed based upon the ratio of sales, property, and payroll in Kentucky to total sales, property, and payroll everywhere in the United States (the three-factor method). This appeal and cross-appeal followed.
Following oral argument on the merits of the case, the Corporations moved for leave to correct a mathematical error in the circuit court's order and to allow the parties to brief issues concerning 2008 Regular Session House Bill (H.B.) 704 or to remand the case to the circuit court for review of H.B. 704. The Cabinet, in response, stated that it did not oppose the motion. Thereafter, this court granted the Corporations' motion, ordering a mathematical revision of the circuit court's order entered December 4, 2007, taking judicial notice of the enactment of 2008 Ky. Acts, c. 132 § 8 (), (collectively the Bills), and granting leave for the parties to brief issues concerning the Bills. These issues will be addressed following our discussion of the circuit court's order reversing the order of the Board.
First, the Corporations argue on cross-appeal that the circuit court erred by finding that the Corporations are subject to taxation pursuant to KRS 141.206(5). We disagree.
KRS 141.040(1) provides4 that with certain exceptions, the following shall pay for each taxable year a tax on taxable net income: "every foreign corporation owning or leasing property located in this state or having one (1) or more individuals receiving compensation as defined in KRS 141.120(8)(b) in this state[.]" The Corporations argue that since the parties stipulated that the Corporations did not own property, lease property, or have individuals receiving compensation in Kentucky, they are not subject to Kentucky corporate income tax. The Cabinet argues that the circuit court correctly held that regardless of KRS 141.040(1), the Corporations are subject to taxation pursuant to KRS 141.206(5), which provides:
Nonresident individuals and corporations which are partners in a partnership or shareholders in an S corporation which does business within and without Kentucky are taxable on their proportionate share of the distribute income passed through the partnership or S corporation attributable to business done in Kentucky.
Simply put, we agree with the Cabinet and the circuit court that the plain language of KRS 141.206(5) subjects the Corporations to taxation. A different result is not compelled, as the Corporations suggest, by the fact that KRS 141.206(5) does not contain the words "shall pay." We hold that the words "are taxable" are sufficient to impose tax liability in this situation. Further, a different result is not compelled by any subsequent amendments to these statutes.
The Corporations assert that KRS 141.206 is void for vagueness. In Bd. of Trs. of the Judicial Form Ret. Sys. v. Attorney Gen., 132 S.W.3d 770 (Ky. 2003), the Kentucky Supreme Court held that unintelligible legislation was a nullity. Specifically, the court stated:
The void-for-vagueness doctrine is most often applied in the context of the First Amendment, the criminal law, and punitive civil laws. See, e.g. Martin v. Commonwealth, Ky., 96 S.W.3d 38, 59-60 (2003) (First Amendment); Jones v. Commonwealth, Ky., 830 S.W.2d 877, 880 (1992) (criminal law); Vill. of Hoffman Estates v. Flipside, 455 U.S. 489, 499-500, 102 S.Ct. 1186, 1193-94, 71 L.Ed.2d 362 (1982) (civil penalties). However, while statutes affecting those areas should receive the most rigorous review and are most commonly held void for vagueness, non-punitive civil, regulatory, or spending statutes are also invalid if they are so unintelligible as to be incapable of judicial interpretation. In that circumstance, the statute often is declared void for "unintelligibility" or "uncertainty" as opposed to "vagueness."
The most oft-cited expression of this doctrine in Kentucky is Folks v. Barren County, 313 Ky. 515, 232 S.W.2d 1010 (1950), in which our predecessor court was asked to interpret a statute allowing boards of education to finance new school buildings through direct appeals to voters. The Court noted the following proposition of law:
It is not for u...
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