St. Ledger v. Com., Revenue Cabinet

• Citation: 942 S.W.2d 893
• Decision Date: 30 January 1997
• Docket Number: Nos. 94-SC-468-D,94-SC-875-DG,s. 94-SC-468-D
• Parties: Herschel ST. LEDGER, et al., Appellants/Cross-Appellees, v. COMMONWEALTH of Kentucky, REVENUE CABINET, et al., Appellees/Cross-Appellants.
• Court: United States State Supreme Court (Kentucky)

Page 893

942 S.W.2d 893

Herschel ST. LEDGER, et al., Appellants/Cross-Appellees, v. COMMONWEALTH of Kentucky, REVENUE CABINET, et al Appellees/Cross-Appellants.

Nos. 94-SC-468-DG, 94-SC-875-DG.

Supreme Court of Kentucky.

Jan. 30, 1997.

As Amended Jan. 31, 1997.

As Modified on Denial of Rehearing April 24, 1997.

D. Randall Gibson, Kenneth S. Handmaker, Augustus S. Herbert, Middleton & Reutlinger, Louisville, for Appellants/Cross-Appellees.

Charles S. Cassis, Stephen R. Schmidt, Brown, Todd & Heyburn, Louisville, Jennifer

Sartor Smart, Revenue Cabinet, Division of Legal Services, Frankfort, for Appellees/Cross-Appellants.

Jeffrey J. Yost, Stanton L. Cave, Jackson & Kelly, Lexington, for Amicus Curiae Greater Lexington Chamber of Commerce.

Thomas A. Brown, Mark F. Sommer, Greenebaum, Doll & McDonald, Louisville, for Amicus Curiae Kentucky Chamber of Commerce.

STEPHENS, Chief Justice.

I. BACKGROUND

This case comes before our Court for a second time, the United States Supreme Court having vacated our judgment in St. Ledger v. Commonwealth, Ky., 912 S.W.2d 34 (1995) [hereinafter St. Ledger], and remanded the case to this Court for further consideration in light of Fulton Corp. v. Faulkner, 516 U.S. ----, 116 S.Ct. 848, 133 L.Ed.2d 796 (1996), a case decided subsequent to our opinion. While we believe that our original decision was correct under the law as it stood at that time, we now recognize that Fulton Corp.'s abandonment of Darnell v. Indiana, 226 U.S. 390, 33 S.Ct. 120, 57 L.Ed. 267 (1912), brings about an entirely different result in this case with regard to KRS 136.030(1) [hereinafter Exemption Statute].

Our original decision in St. Ledger addressed the constitutionality of Kentucky's ad valorem tax provisions. 912 S.W.2d at 34. Specifically, we examined KRS 132.020 [hereinafter Corporate Shares Tax], the alleged disparate taxation of in-state and out-of-state bank deposits under KRS 132.030 [hereinafter Bank Deposits Tax], and the Exemption Statute, a tax exemption for shareholders of stock in corporations which paid taxes to this State on at least 75% of their total property. Id. at 37.

En route to this Court, the Jefferson Circuit Court determined that the Exemption Statute was "unenforceable as written," and, as a result, did not reach the constitutionality of that statute. Id. As to the Bank Deposits Tax, the court concluded that it violated the Commerce Clause and was unconstitutional. Id. The Court of Appeals subsequently reversed, finding the Exemption Statute enforceable and the Corporate Shares Tax and the Bank Deposits Tax constitutionally valid: the Corporate Shares Tax under a "compensatory tax" theory and the Bank Deposits Tax under the rationale that the bank did not fall within the parameters of interstate commerce. Id. Moreover, the Court of Appeals held that the entire intangibles tax scheme did not violate either the Equal Protection Clause of the United States Constitution or Section 3 of Kentucky's Constitution. Id.

On appeal in this Court, we held that: (1) KRS 132.030's taxation of out-of-state bank deposits at a greater rate than in-state deposits violated the Commerce Clause and was unconstitutional, and (2) according to Darnell v. Indiana, supra, the Exemption Statute, KRS 136.030(1), did not violate the Commerce Clause. Subsequent to our decision, appellants petitioned for, and were granted, a Writ of Certiorari from the United States Supreme Court [hereinafter Supreme Court]. As previously mentioned, the Supreme Court vacated our judgment and remanded the case for a decision in light of Fulton Corp., supra.

Fulton Corp. involved North Carolina's levy of an intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the corporation's exposure to the State's income tax. 516 U.S. at ----, 116 S.Ct. at 852. Fulton Corporation, a North Carolina Company, filed a state-court action seeking a declaratory judgment that the tax violated the Commerce Clause of the United States Constitution and that it was entitled to a refund of the 1990 tax it had paid on stock it owned in out-of-state corporations that did only part or none of their business within the State. Id. at ---- - ----, 116 S.Ct. at 852-53. The North Carolina Supreme Court held that under Darnell, supra, the tax scheme imposed a valid compensatory tax. Id. Furthermore, the court found the intangibles tax imposed less of a burden on interstate commerce than the corporate income tax placed on intrastate commerce. Id.

Reversing the North Carolina Supreme Court, a unanimous Supreme Court held that the intangibles tax levied in North Carolina discriminated against interstate commerce, thus violating the Commerce Clause. Id. at ----, 116 S.Ct. at 848. Relying on Associated Industries of Missouri v. Lohman, 511 U.S. 641, 114 S.Ct. 1815, 128 L.Ed.2d 639 (1994), the Court asserted that a racially discriminatory tax may survive Commerce Clause scrutiny if it is a truly " 'compensatory tax' designed simply to make interstate commerce bear a burden already borne by intrastate commerce." Id. at ----, 116 S.Ct. at 853. The Supreme Court went on to state that laws that discriminate against interstate commerce on their face are "virtually per se invalid." Id. at ----, 116 S.Ct. at 854 (citing Oregon Waste Systems, Inc. v. Department of Environmental Quality of Oregon, 511 U.S. 93, 114 S.Ct. 1345, 128 L.Ed.2d 13 (1994)).

In its examination of North Carolina's tax, the Supreme Court determined that the tax was clearly facially discriminatory and, therefore, must be analyzed under the three prongs of Oregon Waste, supra, to determine if it passed constitutional muster. Id. at ----, 116 S.Ct. at 854. Ultimately, the Supreme Court found the tax unconstitutional as it failed to meet any of the Oregon Waste requirements. Id. at ---- - ----, 116 S.Ct. at 855-60.

Finally, and of critical importance to the case at bar, the Supreme Court in Fulton Corp. asserted that Darnell, "should be viewed primarily as one of equal protection, despite the fact that Indiana's shareholder tax was challenged under both the Equal Protection and Commerce Clauses." Id. In that respect, the Supreme Court held that Darnell had been bypassed by later Commerce Clause decisions, namely, Oregon Waste, which require "justifications for discriminatory restrictions on commerce [to] pass the strictest scrutiny." Id.

II. ISSUES

The Revenue Cabinet has suggested in prior pleadings that because this Court's decision in St. Ledger was vacated in its entirety by the Supreme Court, the Bank Deposits Tax is "fair game," once again. This Court notes, however, that we reaffirmed our holding concerning the Bank Deposits Tax when we denied the Revenue Cabinet's Petition for Rehearing. Because the Revenue Cabinet failed to file a Cross-Petition for Writ of Certiorari with the United States Supreme Court concerning the Bank Deposits Tax and because the Revenue Cabinet effectively waived this issue by failing to address it in the action before this Court, we will not concern ourselves with the invalidity of the Bank Deposits Tax.

Furthermore, because both parties concede that Fulton Corp., supra, is controlling in this case and, consequently, the Exemption Statute created by KRS 136.030(1) cannot now pass Commerce Clause muster, this Court will not proceed to address that issue. Thus, the only issues left to be decided by this Court include: (1) whether this Court may properly sever the Corporate Shares Tax from the Exemption Statute; (2) if this Court cannot sever the two statutes, for what length of time are refunds available to taxpayers; and (3) whether taxpayers are entitled to their costs and attorney's fees.

III. ARE THE CORPORATE SHARES TAX AND EXEMPTION STATUTE SEVERABLE?

The Revenue Cabinet argues that prospectively, all shares of corporate stock owned by Kentucky residents must be taxed at the rate of $.25 per $100 of value under KRS 132.020. They assert that there is nothing discriminatory about this method of taxation and that without KRS 136.030(1)'s exemption, Kentucky's ad valorem taxation of shares would be nondiscriminatory. Moreover, the Revenue Cabinet maintains that a judicial declaration of total exemption is prohibited by the explicit directives of Ky. Const. §§ 3, 170, 172, and 174, which require all property to be taxed unless exempted in our Constitution. Specifically, the Revenue Cabinet argues that in both Gillis v. Yount, Ky., 748 S.W.2d 357 (1988), and Yount v. Calvert, Ky.App., 826 S.W.2d 833 (1991), dis. rev. denied (1992), Kentucky appellate courts, in voiding unconstitutional ad valorem tax rates, left undisturbed the general classifications of KRS 132.020. We disagree.

The Corporate Shares Tax under KRS 132.020 and the companion Exemption Statute under KRS 136.030(1) fit together as hand and glove. In interpreting this tax scheme, this Court has consistently recognized the Legislature's intention to avoid the double taxation of both a corporation and its shareholders. We addressed the dangers of double taxation in Commonwealth v. Walsh's Trustee, 133 Ky. 103, 117 S.W. 398, 399 (1909), a case involving an attempt to tax certain corporate stock, where we maintained:

Throughout the whole scheme of taxation adopted by this state there is an evident purpose to avoid double taxation, not alone in not taxing the same property twice in the same year for the same purpose, but as well in not taxing the same thing, whatever its form, twice in the same year for the same purpose. Double taxation is recognized as oppressive, and, where it is imposed upon some classes of property and not upon others, works an inequity that is fundamentally vicious. While the Constitution requires that all property shall be taxed (Const. § 171) and the General Assembly is prohibited from exempting any property by section 170 of the Constitution, it is not required that every phase of property shall be taxed. Nor...