Opposition Brief — Monumental Life Insurance Co. v. Kentucky Department of Revenue
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3n The FEB 22 2010
Supreme Court of the Gn x
MONUMENTAL LIFE INSURANCE COMPANY
(SUCCESSOR IN INTEREST TO
COMMONWEALTH LIFE INSURANCE COMPANY),
Petitioner,
vV.
DEPARTMENT OF REVENUE, FINANCE AND
ADMINISTRATION CABINET, COMMONWEALTH
OF KENTUCKY (f/k/a Revenue Cabinet);
LOUISVILLE/JEFFERSON COUNTY METRO
GOVERNMENT (f/k/a Jefferson County, Kentucky
and the City of Louisville, Kentucky); and
KENTUCKY BOARD OF TAX APPEALS,
Respondents.
+
v
On Petition For A Writ Of Certiorari
To The Kentucky Court Of Appeals
BRIEF IN OPPOSITION
+
GARY E. SIEMENS
ROBERT P. BENSON, JR.
BENSON, BYRNE, SIEMENS
STEPHEN G. DICKERSON
Counsel of Record
LAURA M. FERGUSON
DEPARTMENT OF REVENUE,
COMMONWEALTH OF KENTUCKY
501 High Street, 10th Floor
P.O. Box 423
Frankfort, Kentucky 40602
(502) 564-9561
Stephen.Dickerson@ky.gov
& LANG LLP
One Riverfront Plaza
A401 West Main Street,
Suite 2150
Louisville, Kentucky 40202
(502) 583-8373
JOHN SCHARDELN
Assistant Jefferson
County Attorney
531 Court Place, Suite 900
Louisville, Kentucky 40202
(502) 573-6336
COCKLE LAW BRIEF PRINTING CO (800) 2725-6964
OR CALL COLLECT (402) 342.2831
QUESTIONS PRESENTED
1. Whether petitioner has properly preserved
the issue of whether Section 514 of the Employee
Retirement Income Security Act of 1974, as amended
(“ERISA”), 29 U.S.C. § 1144, “bars” the tax imposed
by KRS 136.320, when the Kentucky Court of
Appeals, Franklin Circuit Court and Kentucky Board
of Tax Appeals (“KBTA”) have all held that this issue
has not been preserved for review?
2. If the answer to the first question is yes,
whether ERISA “bars” the tax imposed by KRS
136.320, when the KBTA, as the finder of fact, held
that even if the ERISA issue had been preserved, the
petitioner made no showing that KRS 136.320 has
any connection or reference to any benefit plan?
3. Whether the Kentucky Court of Appeals’
decision that treating shares of stock (“Stock”) as
exempt intangible property with respect to the calcu-
lation of capital stock tax pursuant to KRS 136.320,
when the exemption results in none of the tax
liability being attributable, either directly or in-
directly, to Stock, conflicts with St. Ledger uv.
Kentucky Revenue Cabinet, 517 U.S. 1206, 116 S.Ct.
1821, 134 L.Ed.2d 927 (1996), and Fulton Corp. v.
Faulkner, 516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d
796 (1996), which held that remedies are an issue of
state law, and other opinions of this Court, including
American Bank and Trust Co. v. Dallas County, 463
U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 (1983),
which addressed indirect taxation?
ll
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED ........................020000002 i
pr OF fe get | gy: 5 See Ee NEE il
TABLE OF AUTHORITIES .................cssccssscseceeees lil
BRIEF IN OPPOSITION TO WRIT FOR CERTI-
SIP TIITTEE ss6actsespsanhiasautenttienitveumnbnieerinigmensiananeie 1
COUNTERSTATEMENT OF THE CASE.............
REASONS FOR DENYING THE WRIT ............... 7
A. THE PETITIONER HAS FAILED TO
PRESERVE THE ERISA ISSUE FOR
REVIEW BY THIS COURT ........................ 7
B. ERISA DOES NOT PRE-EMPT KRS
PETITE snachnieanstunncencenaadsnienecieuseneainninnmenanan: 16
C. ST’ LEDGER DID NOT INVOLVE THE
eg st bh Gy} NEE 24
1. Background Concerning Calculation of
CN HIE SHINEE sconnccsecnecnessecconscesbedseens 24
2. The Petition Fails to Demonstrate Any
Conflict Between The Kentucky Court
of Appeals’ Holding on Stock and This
Court’s Precedents in St. Ledger and
Pal icisidenactstencenmapeuccnmnaeneeaiamnaiiianinas 34
a. The Court of Appeals’ Decision to
Treat Stock as Exempt Intangible
Assets is Consistent with this
ee 38
Sa EET cicntnisnanidndaddsusinndectcennisentuedcrusinbeedare 40
iii
TABLE OF AUTHORITIES
Page
CASES
Adams v. Robertson, 520 U.S. 83, 117 S.Ct.
as Cae I EE SID SID D voncnaccccaesocenstsccsadsencsisens 7
American Bank & Trust Co. v. Dallas Co., 463
U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072
Scutsudscuubuannabsasadbanniaurnbedndscsetupionucdsnakesenune 39, 40
Associated Builders & Contractors v. Perry, 115
F.3d S86 (Gth Cir. 1907) ..........cccccrccccccccccccscceccescccees 22
Atari, Inc. v. State Board of Equalization, -170
Cal.App.3d 665, 216 Cal.Rptr. 267 (1985).............. 12
Babcack and Wilcox Company v. Revenue
Cabinet, 203 S.W.3d 149 (Ky. 2006)........................ 16
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263,
104 S.Ct. 3049, 82 L.Ed.2d 200 (1984)................... 35
Campbell v. Louisiana, 523 U.S. 392, 118 S.Ct.
BERD, TOO TB GOL CRBGG) ccccccscccvccccessesessccssecsscess 7
Cousins v. Wigoda, 419 U.S. 477, 955 S.Ct. 541,
Se ee ST IIIS so scccneudissontanseuvatedensstaeusnecnses 13
De Buono v. NYSA-ILA Medical and Clinical
Services Fund, 520 U.S. 806, 117 S.Ct. 1747,
138 L.Ed.2d 21 (1997)..............0c-00s. 17, 19, 21, 22, 23
Egelhoff v. Egelhoff, 532 U.S. 141, 121 S.Ct.
Be, BOD Eats Be COE) cecccccccccccsccnscveccevccessens 22
Firestone Tire & Rubber Co. v. Neusser, 810
F.2d 650 (Gth Cir. 1987) ...........ccccccccccccccccccccccees 22, 24
iv
TABLE OF AUTHORITIES — Continued
Page
Fulton Corp. v. Faulkner, 516 U.S. 325, 116
S.Ct. 848, 133 L.Ed.2d 796 (1996).............. 34, 35, 36
Fitzpatrick v. Patrick, 410 S.W.2d 143 (Ky.
MINI i Acts os ace heath cadina ie Gutetedue Raat thawed auieik ane eaaeraaanie 33
Hunt-Wesson, Inc. v. Franchise Tax Bd. of
California, 528 U.S. 458, 120 S.Ct. 1022, 145
Ici OE UP I a a Mee 39, 40
Jackson v. State Auto. Mutual Insurance Com-
pany, 837 S.W.2d 496 (Ky. 1992) ............ccccesccssceeees 14
Jimmy Swaggart Ministries v. Board of
Equalization of California, 493 U.S. 378, 110
S.Ct. 688, 107 L.Ed.2d 796 (1990).................. S, 7, in
Kentucky Ass’n of Health Plans, Inc. v. Miller,
538 U.S. 329, 123 S.Ct. 1471, 155 L.Ed.2d
REE cee ene eae ROR OO Ae ae 19, 21
Kentucky Assoc. of Health Plans, Inc. ov.
Nichols, 227 F.3d 352 (6th Cir. 2000)...............0..... 23
Louisville & N.R. Co. v. Woodford, 234 U.S. 46,
345 S.Ct. 739, 58 L.Ed. 1202 (1914)....................... 13
McKesson Corp. v. Division of Alcoholic Bev-
erages and Tobacco, Fla. Dept. of Business
Regulation, 496 U.S. 18, 110 S.Ct. 2238, 110
Be te RI ics coxeraashachnewasensunsstrcinisedeaeetouaeweroas 34
Michigan v. Long, 463 U.S. 1032, 103 S.Ct.
eg FE EAM BAER CRUD oceccscncseevcnsssnonsnecinnsvexten 2
Miller v. PPG Indus., Inc., 237 F. Supp. 2d 756
Pe SE SID iivess cnusdidsncessenpeavceasissarsammomeutiin passim
Vv
TABLE OF AUTHORITIES — Continued
Page
Monumental Life Ins. Co. v. Department of
Revenue, 294 S.W.3d 10 (2008).................... eee 8, 34
National Life Ins. Co. v. United States, 277 |
U.S. 508, 48 S.Ct. 591, 72 L.Ed. 968 (1928).....30, 38
New York State Conference of Blue Cross &
Blue Shield Plans v. Travelers Ins. Co., 514
U.S. 645, 115 S.Ct. 1671, 131 L.Ed.2d 695
§ SANA RE ae Ferree he Res GOIN A alhreN 8 Aetna LA 16, Zi
Personnel Board v. Heck, 725 S.W.2d 13 (Ky.
PN RO piece taka estuarine Rage an pasen sea 14
Shelton v. Commonwealth, 992 S.W.2d 849 (Ky.
NE, INE secicitnacosavins oasnseniaveinensss kana saneaers 8
St. Ledger v. Revenue Cabinet, 912 S.W.2d 34
(Ky. 1995), cert. granted, judgment 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 Reve-
nue Cabinet, 521 U.S. 1146, 118 S.Ct. 27, 138
CINE GET © ROUT Biosnksccnccectcnsucsccsnccavasiaccesnsee passim
Stoner Creek Stud v. Revenue Cabinet, 746
es EOP CU FARO, ROU S Pao svcacscacesnanxaccaccoccorsenccsersss 14
Thiokol Corp. v. Roberts, 76 F.3d 751 (6th Cir.
I aa ata tees cae ov sadnanodisadakeehaanan dias ei meneesxiadend 22, 24
Tyler Pipe Industries v. Dept. of Revenue, 483
U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199
Ss crane co cas crac ce cases Coienanclunidlsuieg Aaccarcaanss 35
TABLE OF AUTHORITIES — Continued
Page
Urella v. Kentucky Bd. of Med. Licensure, 939
Be ee BE io rensanccecentesuasavcsscesascccerncs 13, 16
Western Live Stock v. Bureau of Revenue, 303
U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823 (1938)........... 36
Williams v. Vermont, 472 U.S. 14, 105 S.Ct.
By i A I BE CRIED cop evesnincteasircacsdedeccsicnsenava 35
STATUTES
15 U.S.C. § 1012 (McCarran-Ferguson Act).............. 20
Ee re sieiviss cnensinsapeotesisensaaminrinsessociens 1
er ai cocannceencssieussacskavexssoskaveveuens 7
(Employee Retirement Income Security Act of
NG each cece suck Lédbincbicbanaiueucuesinencnakukandnses 7
Bee ea EO I PE ovenicinersacsananvesocscsnconnsoscess 19, 20
Be I OF BO vas revs ciescereces ck eateccescdesesssweveesnes 27
pe ee E>. |. ee 9,10
ee aa. ccesdees ncdseivsaswhoeusesevessoeics 10
Rs Ss I FD onesdeeeccevescncatcccsseecsovscnnse 9,10
Sh SS Oe ng cc cor socnanevasstacncanesssosveasessnsens 8
RN Me Oe rsa acncvacncasncnnecdaccsccvecssussescs 9
Be Ms Ov cnsrestccccesensccescevessusessenseensceuss 9
ee Br cca svsnssmensscvencnessassnecosboscovsneess 9
Bs PE Ponscncccscccscnscnsascescacenancscccsnsecces 9
Ky. ev. Stat. § 191.970...............-<.<.-.cs0ss.o.esesssecesseeses. 10
TABLE OF AUTHORITIES — Continued
Page
Ky. Rev. Stat. § US LF a iietistseocesc se cccccsss 10
Ky. Rev. Start. § ULSGe ceccereed cee ibernastsansascscosceees 3,4
Ky. Rev. Stent. § LER cccare tea caeeeceecececcocscese 3
Ky. Rev. Stat. § Die Gi caceaeeeeeiitatsaasertereraccccss se: 3
Ky. Rev. Stat. § [SG Brier i restecwsesecesess passim
Ky. Rev. Stent. § [iG Ceara av cenciccce sss... 25
Ky. Rev. Start. § 2SG Gia prt rk sce ssccnccesesece 25
Ky. Rev. Stat. $ 1SG Bae erareeseeeessavaeses<ses00-ss........ 25
Ky. Rev. Stat. $ 136 GROG ie sicaasseistacsxcecrnseccsesscceceses 25
Ky. Rev. Stat. § SOG. Rijqtiemee ea pareeeestattesstassasccesescsces. 20
OTHER AUTHORITIES
Ky. Administrative Regulations 802
KAR 1:010(2)e)...:.cccsnatasseeeeeen a ieteisscnnsccsse 9,15
Ky. Administrative Regulations 802
KAR 1:01006 ea Ri) occosccusaseeiie ettitceteecexe sss 10, 15
Ky. Rules of Civil Procedure (CR) 76.12(4)(c).............- 8
United States Supreme Court Rule 14.1(g)i)............. 1
United States Supreme Court Rule 24(1)(e) ............... 1
1
BRIEF IN OPPOSITION
TO WRIT FOR CERTIORARI
COUNTERSTATEMENT OF THE CASE
Revenue (also “Department” or “Department of
Revenue”) disagrees with the Petitioner’s Statement
of the Case as well as with the Petitioner’s repre-
sentation of the questions presented for review. First,
pursuant to Supreme Court Rule 14.1(g)(i), if review
of a state-court judgment is sought, as in this case,
the Petitioner is required to indicate in its Petition:
specification of the stage in the proceedings,
both in the court of first instance and in
the appellate courts, when the federal
questions sought to be reviewed were raised;
the method or manner of raising them and
the way in which they were passed on by
those courts; and the pertinent quotations of
specific portions of the record or summary
thereof, with specific reference to the places
in the record where the matter appears... ,
so as to show that the federal question was
timely and properly raised and that this
Court has jurisdiction to review the judg-
ment on a writ of certiorari.
(Emphasis added.) See also Supreme Court Rule
24(1\e); 28 U.S.C. § 1257(a).
Although Petitioner attempts compliance with
this rule in its petition under the heading “Statement
ot the Case” (subheadings E and F), a simple review
of the initiating documents involved in this matter
and the record as a whole, clearly indicates that the
2
Kentucky Board of Tax Appeals (KBTA), the Franklin
Circuit Court, and the Kentucky Court of Appeals
were entirely correct when they determined that the
Petitioner had failed to preserve any federal issue.
This Court therefore lacks jurisdiction in this case
since the question of whether or not the Petitioner
failed to preserve an issue for review is a matter of
state law rather than federal law, and the “unam-
biguous application of state procedural law makes it
unnecessary for [this Court] to review the asserted
claim.” Jimmy Swaggart Ministries v. Board of
Equalization of California, 493 U.S. 378, 110 S.Ct.
688, 107 L.Ed.2d 796 (1990), citing Michigan v. Long,
463 U.S. 1032, 1041-1042, 103 S.Ct. 3469, 3476-3477,
77 L.Ed.2d 1201 (1983).
Second, the Petitioner’s recitation of the histor-
ical background of this case implores clarification.
The Petitioner filed refund claims with the Depart-
ment for the tax years 1990 through 1996, based on a
lawsuit brought by other taxpayers challenging the
constitutionality of certain statutes.’ These were
“protective refund claims” filed for the purpose of
tolling the statute of limitations on refunds of state
taxes. The reasoning was that if the taxpayers in the
' St. Ledger v. Revenue Cabinet, 912 S.W.2d 34 (Ky. 1995),
cert. granted, judgment vacated by remand, St. Ledger uv.
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 uv.
Kentucky Revenue Cabinet, 521 U.S. 1146, 118 S.Ct. 27, 138
L.Ed.2d 1057 (1997).
3
St. Ledger case were successful in their challenge, the
Petitioner would also be due tax refunds.
The statutes at issue in St. Ledger were
Kentucky Revised Statutes (KRS) 132.020, which
imposed the tax on specific property, including shares
of stock; KRS 132.030, which lowered the tax rate on
Kentucky, but not on out-of-state, bank deposits;’ and
KRS_ 136.030, which exempted individual stock-
holders of corporations who paid Kentucky tax on at
least 75% of its total property from listing their stock
for ad valorem tax purposes (the “Exemption Stat-
ute”). The Kentucky Supreme Court held that the
Exemption Statute and the corporate shares tax
portion of KRS 132.020 (the “Corporate Shares Tax”)
were unconstitutional, striking down both provisions.
St. Ledger, 942 S.W.2d at 898.
But the Petitioner was taxed under KRS 136.320
— the Capital Stock Tax — not under KRS 132.020:°
The Capital Stock Tax was a property tax based on
the value of “capital,” including Stock. Importantiy,
KRS 136.320 was not struck down by St. Ledger.
* The bank deposits tax, KRS 132.030, is not an issue in
this matter.
* « |. and forty-five cents ($0.45) upon each one hundred
dollars ($100) of value of all other property directed to be
assessed for taxation shall be paid by the owner or person
assessed except as provided in subsection (2) of this section and
KRS ... 136.320, and other sections providing a different
tax rate for particular property.” See KRS 132.020(1), eff.
July 13, 1990. (Emphasis supplied.)
4
However, since certain stocks taxed under the Cor-
porate Shares Tax were exempted from intangible
property tax, Revenue likewise treated the Peti-
tioner’s Stock as exempt intangible personal property
for Capital Stock Tax purposes (the “Exemption
Method”).
The Petitioner was refunded $1,470,357.49 in
Capital Stock Tax based on KRS 136.320, as applied
in light of St. Ledger.‘ However, the Petitioner then
claimed another $6,751,758.46 in refunds based upon
its position that Stock must be excluded from the
statutory taxing formula entirely, rather than ex-
empted, when calculating Capital Stock Tax (Monu-
mental’s Exclusion Theory or “MET”).
Revenue used information supplied by the Peti-
tioner itself to calculate its Capital Stock Tax liability,
as the tax was _ self-reporting.” The Kentucky
Department of Insurance requires that insurance
companies file a “Blue Book” with it each year. The
“Blue Book” reports all of an insurance company’s
(including the Petitioner’s) assets, except those found
in any Separate Account. The Department of Revenue
also required that the “Blue Book” be provided to it in
order to verify the Petitioner’s Capital Stock Tax
returns. Importantly, Revenue did not know if the
* KRS 136.320 was amended by act of the 1998 legislature,
but this amendment does not affect this case.
* The Petitioner is no longer located in Kentucky and no
longer files tax returns with Revenue.
5
Petitioner had Separate Accounts or not, unless it
reported the value of those accounts to the Depart-
ment on its property tax returns. Monumental Life
Insurance never reported its Separate Accounts to
Revenue and never included them on its tax returns.
Monumental employee Colleen Lyons testified
that she usually filed the Petitioner’s Capital Stock
Tax returns with Revenue each year. (Record, Box 5,
Vol. 30, Tab 151. This is the “Transcript of Evidence,”
hereinafter “TE,” pp. 33-40.) Ms. Lyons testified that
she always supplied Revenue the “Blue Book” with
the returns, but never supplied Revenue a “Green
Book” which set forth the assets held in Separate
Accounts. (TE, pp. 97-99.) (“Green Book” found at
Record, Box 4, Vol. 27, Tab 30.) In 1998, however, Ms.
Lyons testified that she did not prepare or file the
tax returns with Revenue. (TE, p. 51, 99, 215.) But in
that same year, Revenue employee Edna Driskell did
receive a “Green Book” for the first time ever from the
Petitioner and questioned the Petitioner’s failure to
list its Separate Accounts on its property tax returns.
(Record, Box 1, Vol. 3, Tab 49, pp. 51, 52.) An assess-
ment was then made based upon the omitted prop-
erty contained in the Separate Accounts for the years
1995 through 1998. (Record, Box 1, Vol. 5, Tab 67, pp.
90-93.)
This testimony is relevant to the Petitioner’s
continued and unfounded assertions that Revenue
billed the Petitioner in response to its request for
refunds, and that the Petitioner had never been taxed
on its Separate Accounts before. Despite the single
6
dissenting opinion at the Kentucky Court of Appeals
to the contrary, every witness deposed by the
Petitioner disproved such a theory. It is more likely
that the “Green Book” was sent to Revenue by
mistake by an employee acting in Ms. Lyon’s stead,
which began the assessment inquiry. And the only
reason that the Petitioner had not been taxed on its
Separate Accounts previously is because it had never,
in its entire history with the Commonwealth of
Kentucky, provided the Department of Revenue with
information showing it owned property in Separate
Accounts. So while the Petitioner states that assets of
this nature have not been subject to this tax “for
decades,” the truth is that the assets were always
subject to the tax but the Petitioner did not report the
assets as required by law. (See petition for writ, p. 7.)
This matter was heard by the Kentucky Board of
Tax Appeals (“KBTA”) on July 16, 2002. The KBTA
upheld Revenue’s Final Ruling Letter in its December
4, 2003 Order. The Franklin Circuit Court’s Opinion
affirmed the KBTA on September 22, 2005. The
Kentucky Court of Appeals issued its Opinion
Affirming the Franklin Circuit Court on June 27,
2008. The Kentucky Supreme Court denied Discre-
tionary Review on October 21, 2009. The Petition to
this Court for a Writ of Certiorari to the Kentucky
Court of Appeals followed.
7
REASONS FOR DENYING THE WRIT
A. THE PETITIONER HAS FAILED TO PRE-
SERVE THE ERISA ISSUE FOR REVIEW
BY THIS COURT.
In a transparent attempt to manufacture a
circuit conflict warranting this Court’s attention,
Petitioner ignores the only real question presented:
whether or not the Petitioner preserved the ERISA®
issue for review. This is a question of state law, rather
than federal law. Jimmy Swaggart Ministries v.
Board of Equalization of California, 493 U.S. at 397.
This Court has clearly stated that “[wlith ‘very
rare exceptions,’ we will not consider a petitioner’s
federal claim unless it was either addressed by or
properly presented to the state court that rendered
the decision we have been asked to review.” Campbell
v. Louisiana, 523 U.S. 392, 118 S.Ct. 1419, 140
L.Ed.2d 551 (1998), citing Adams v. Robertson, 520
U.S. 83, 86, 117 S.Ct. 1028, 1029, 137 L.Ed.2d 203
(1997).
The Kentucky Court of Appeals, in support of its
finding that it would not consider the issue of ERISA,
cited the KBTA’s Order that “|Monumental] failed to
raise the issue of ERISA in its Petition of Appeal,
or in any other pleading except its brief, including
the pre-hearing compliance statement and_ the
* Employee Retirement Income Security Act of 1974, 29
U.S.C. § 1001, et seq.
8
supplemental pre-hearing compliance statement.”
But the Court also concluded that “Monumental does
not cite us to its preservation of this issue as required
by CR 76.12(4\Xc)." Shelton v. Commonwealth, 992
S.W.2d 849, 852 (Ky. App. 1998).” Monumental Life
Ins. Co. v. Department of Revenue, 294 S.W.3d 10, 22
(2008). Hence, the Petitioner has failed to preserve
the federal ERISA issue at both the court of first
instance — the KBTA, and at the Kentucky Court of
Appeals. The Petitioner has therefore failed to
preserve the ERISA question for review not once, but
twice and in two separate forums.
Further, the Petitioner’s argument to the con-
trary, it is the KBTA — not the Franklin Circuit Court
that was, and is, the court of first instance and the
finder of fact in this case. While the Petitioner argues
that the appeal to the Franklin Circuit Court was an
original action, and that the federal issue was
preserved at that level, the United States Supreme
Court, the Kentucky Court of Appeals, the law in
Kentucky and common sense disagree. (See petition
for writ, p. 18.)
Pursuant to KRS 131.110, a taxpayer is required
to protest any assessment or denial of a refund
request directly to the Department of Revenue. The
" The Kentucky Rules of Civil Procedure 76.12(4XcXv) re-
quires that the Petitioner’s Court of Appeals brief “ .... shall
contain at the beginning of the argument a statement with
reference to the record showing whether the issue was properly
preserved for review and, if so, in what manner.”
9
protest must be in writing and accompanied by a
supporting statement “setting forth the grounds upon
which the protest is made.” KRS 131.110(1). After
consideration of the written protest and the support-
ing statement, the Department is required to issue a
final ruling to the taxpayer. In this case, the Peti-
tioner’s protest and its supporting statement never
mentioned any federal ERISA issue, and no argument
was ever presented that the ERISA issue should be
considered by the Department.
If the taxpayer disagrees with the Department’s
final ruling, it may file a petition of appeal with the
KBTA pursuant to the terms of KRS 131.340. KRS
131.110(5). KRS 131.340(1) states that “(t]he Ken-
tucky Board of Tax Appeals. is hereby vested with
exclusive jurisdiction to hear and determine appeals
from final rulings... .” It further states that hearings
before the KBTA “shall be de novo and conducted in
accordance with KRS Chapter 13B.” In turn, Chapter
13B sets forth the KBTA’s authority to issue admin-
istrative regulations governing the conduct of hear-
ings. “An agency shall have authority to promulgate
administrative regulations that are necessary to
carry out the provisions of this chapter.” KRS
13B.170(1). The KBTA’s administrative regulations
specifically require the petition of appeal to “contain
a statement of all relevant issues of fact and
law.” 802 KAR 1:010(2)(e). (Emphasis added.) In this
case, the Petitioner’s petition of appeal to the KBTA,
although well over 60 pages in length and containing
a multitude of issues and arguments, never once
10
mentioned an ERISA issue. Likewise, pursuant to the
KBTA’s Order and its administrative regulations, the
parties are required to file pre-hearing statements
with the Board. The Order and the administrative
regulations required the parties to plead “the party’s
position on any issue of fact in dispute” and “the
party’s position of any issue of law raised by the
appeal.” 802 KAR 1:010(6)(a) and (b). The Petitioner
did file its prehearing statement as well as a
supplemental prehearing statement, but nowhere did
the Petitioner raise a federal ERISA issue. Indeed the
first mention of the ERISA issue, over objection, was
presented at the KBTA hearing.
From the KBTA, an appeal can be taken by an
aggrieved party to the Circuit Court. KRS 131.370.
This appeal must comply with “KRS 13B.” KRS
131.370(1). In turn, KRS Chapter 13B sets forth the
legal perimeters within which the Circuit Court can
consider the appeal. That statute states as follows:
13B.150 Conduct of judicial review.
(1) Review of a final order shall be
conducted by the court without a jury and
shall be confined to the record, unless
there is fraud or misconduct involving a
party engaged in administration of this
chapter. The court, upon request, may hear
oral argument and receive written briefs.
(2) The court shall not substitute its
judgment for that of the agency as to
the weight of the evidence on questions
of fact. The court may affirm the final order
11
or it may reverse the final order, in whole or
in part, and remand the case for further
proceedings if it finds the agency’s final order
is:
(a) In violation of constitutional or stat-
utory 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.
(Emphasis added.)
This statute and the other laws and adminis-
trative regulations governing the appeal of tax cases
defines the role of the Circuit Court as being one of a
reviewing and appellate Court, rather than an initial
trier of fact. The law ensures that the aggrieved party
has a right of appeal to both the Circuit Court and
the Kentucky Court of Appeals by making the initial
appeal to the Circuit Court an original action. The
12
law does not confer upon the aggrieved party the
right to raise new issues and arguments at the
Circuit Court level. Hence, this case is directly on
point with this Court’s decision rendered in Jimmy
Swaggart Ministries v. Board of Equalization of
California, 493 U.S. at 397, 398, in which this Court
stated:
We decline to reach the merits of this claim,
however, because the courts below ruled that
the claim was procedurally barred.
Thus, under state law, “[t]he claim for refund
delineates and restricts the issues to be
considered in a taxpayer’s refund action. The
trial court and [appellate] court are without
jurisdiction to consider grounds not set forth
in the claim.” Atari, Inc. v. State Board of
Equalization, 170 Cal.App.3d 665, 672, 216
Cal.Rptr. 267, 271 (1985) (citations omitted).
This rule serves a legitimate state interest in
requiring parties to exhaust administrative
remedies before proceeding to court, for
“[sluch a rule prevents having an overworked
court consider issues and remedies available
through administrative channels.” I/d., at
673, 216 Cal.Rptr., at 272.
The record in this case makes clear that
appellant, in its refund claim before the
Board, failed even to cite the Commerce
Clause or the Due Process Clause, much less
‘articulate legal arguments contesting the
nexus issue.
13
In another case considered by this Court, the
Petitioner sought to raise a res judicata defense. This
Court declined to address that issue, holding that the
Illinois Appellate Court’s ruling that the Petitioner
neither formally pled nor attempted to prove its claim
at the circuit court level“... constitutes an adequate
state ground that forecloses any jurisdiction that we
might possess to review the merits of the res judicata
defense.” Cousins v. Wigoda, 419 U.S. 477, 955 S.Ct.
541, 42 L.Ed.2d 595 (1975), citing Louisville & N.R.
Co. v. Woodford, 234 U.S. 46, 345 S.Ct. 739, 58 L.Ed.
1202 (1914).
Such is the situation here. Petitioner’s failure to
preserve the ERISA issue constitutes an adequate
state ground warranting denial of the petition. Ken-
tucky law is very clear that a litigant must raise an
issue before the administrative tribunal. Urella v.
Kentucky Bd. of Med. Licensure, 939 S.W.2d 896 (Ky.
1997). In Urella, the Kentucky Supreme Court agreed
with the administrative agency’s decision that the Peti-
tioner’s argument was not preserved for review, stating:
. having reviewed the record, we agree
with the Board that this argument is not
preserved for review. It was not presented to
the ALJ, nor to the Board until 10 days after
oral arguments. Neither was the issue ad-
dressed by the trial court or Court of Ap-
peals. It is well established that failure to
raise an issue before an administrative body
precludes the assertion of that issue in an
action for judicial review, or as an initial
matter on discretionary review to this court.
14
Jackson v. State Auto. Mutual Insurance
Company, Ky., 837 S.W.2d 496, 498 (1992);
Personnel Board v. Heck, Ky.App., 725
S.W.2d 13, 17 (1987).
Id. at 873. See also, Stoner Creek Stud v. Revenue
Cabinet, 746 S.W.2d 73 (Ky. App. 1987); (Emphasis
supplied. )
In the this case, the Court of Appeals upheld the
KBTA’s decision not to review issues which were not
raised in the initial protest and supporting state-
ments to the Department of Revenue, the Petition of
Appeal to the KBTA, the prehearing compliance
statement or the supplemental prehearing compli-
ance statement. Stoner Creek Stud, 746 S.W.2d 73.
The administrative tribunal and state courts properly
applied state law to hold that procedurally, Petitioner
failed to preserve the ERISA issue for review. While
Petitioner disagrees with this conclusion, ultimately,
the issue of whether the ERISA issue was preserved
for review is purely a state procedural issue, and
there simply is no federal issue for this Court to
consider.
The Kentucky Court of Appeals’ Opinion, from
which the petition herein is taken, declined to ad-
dress the ERISA issue at all. Even so, the Petitioner
continues to concentrate on the substantive merits of
the ERISA issue, while mendaciously glossing over its
neglect in raising the ERISA question prior to the
hearing. Its argument of course, begs response.
15
Says the Petitioner:
[iJn its Petition of Appeal to the Board, Mon-
umental raised the Separate Accounts issue
and, through discovery and at the hearing,
introduced evidence supporting its argument
that ERISA preempted Kentucky’s taxation
of Separate Account assets.
(See petition for writ, p. 16; emphasis added.)
As with the lower Courts, the Petitioner uses this
distortion of the facts in a thinly veiled attempt to
convince this Court that the federal ERISA issue was
actually raised before the Department of Revenue
and the KBTA. Such was not the case.
The truth of the matter is simply this: the
Petitioner’s petition of appeal to the KBTA did not
include ERISA in its “statement of all relevant
issues of fact and law.” 802 KAR 1:010(2)(e). (Em-
phasis added.) Importantly, the Petitioner has not
and cannot counter this fact. Nor did the Petitioner
plead ERISA in its “position on any issue of fact
in dispute” or in its “position on any issue of law
raised by the appeal.” 802 KAR 1:010(6)(a) and (b).
(Emphasis added.) And despite its feeble attempt, the
Petitioner cannot now logically argue that a question
it asked during one of a multitude of depositions (the
Petitioner’s “discovery”) somehow preserved the
ERISA issue for review. With absolutely no mention
of the ERISA issue in any pleading prior to the post
hearing brief, whatsoever, it simply cannot logically
be argued (as the Petitioner attempts to do) that the
16
issues in this case were so closely related that the
phrasing of the protest and appeal to Revenue and
KBTA sufficiently included the federal pre-emption
issue. Babcock and Wilcox Company v. Revenue
Cabinet, 203 S.W.3d 149 (Ky. 2006). For example, the
Petitioner argued a multitude of reasons why its
property was not subject to tax: the doctrine of
contemporaneous construction; the property had no
value; the tax was not a property tax but an “in lieu
of” tax; accord and satisfaction, etc. Not once is there
mention of ERISA.
B. ERISA DOES NOT PRE-EMPT KRS 136.320.
The Urella Court also held, just as the KBTA did
here, that even if the issue before it was preserved for
review, the result would not have been different: “Nor
would the result be different had the issue been
properly preserved.” Urella, 939 S.W.2d at 873.
The KBTA in this case found that KRS 136.320
has not been shown to have any connection or
reference to any benefit plan; that it does not burden
any ERISA plan that may exist; that it does not
infiltrate the relationship between employees and
their employers or their plan and is a neutral tax of
general application. (KBTA Order, pp. 9, 10.) The
Petitioner argues that the KBTA’s reliance on Miller
v. PPG Indus., Inc., 237 F. Supp. 2d 756 (W.D. Ky.
2002) is inapplicable and misplaced because the “ad
valorem tax at issue in this case has much more than
a remote or peripheral connection; it is, as discussed
17
supra, intimately connected.” (See petition for writ, p.
30.) The Petitioner then fails to explain exactly how it
is “intimately connected,” and cites no authority for
its position.
The Petitioner has also argued that there is a
“growing split across the nation” with circuit courts of
appeals and state courts concerning the ERISA issue.
(See petition for writ, p. 31.) But it has not pointed to
any genuine conflict with prior decisions of this Court
or with any other circuit. Rather, it simply ad-
monishes this Court for failing to “give proper weight
to the clear text of ERISA” and for “mov[ing] away”
from the intent of Congress in its rendition of the
Opinion in De Buono v. NYSA-ILA Medical and
Clinical Services Fund, 520 U.S. 806, 814-15, 117
S.Ct. 1747, 138 L.Ed.2d 21 (1997). (See petition for
writ, pp. 25, 26.) Merely calling attention to this
Court’s decision in De Buono and expressing dis-
satisfaction with that decision does not satisfy this
Court’s requirement that a writ of certiorari will be
granted only for compelling reasons.
Of course, De Buono v. NYSA-ILA Med. & Clin-
ical Serv. Fund, 520 U.S. 806, is right on point in this
matter. The issue in that case was whether a tax
imposed upon gross receipts from patients using diag-
nostic services was a tax of general application
having only an incidental impact on benefit plans, or
a tax that “relates to” an ERISA fund by reducing the
amount of fund assets, and therefore pre-empted.
These fund assets, if not paid in taxes, would
otherwise be available to provide plan members with
18
benefits, and a reduction in assets could cause the
plan to limit its benefits or to charge plan members
higher fees. The Second Circuit Court of Appeals held
that ERISA pre-empted the tax statute because the
tax reduced the fund’s assets. But this Court re-
manded the case to the Second Circuit to reconsider
the matter in light of its recently issued decision in
New York State Conference of Blue Cross & Blue
Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 115
S.Ct. 1671, 131 L.Ed.2d 695 (1995), in which no pre-
emption was found.
However, the Second Circuit reinstated its judg-
ment, distinguishing Travelers on the ground that the
statute at issue there had only an indirect economic
influence on the assets and the decisions of ERISA
plan administrators, whereas the tax it was con-
sidering depleted the fund’s assets directly, and thus
had an immediate impact on an ERISA plan’s assets
and operations. The United States Supreme Court
overturned the Second Circuit decision and held that
Section 514(a) does not preclude New York from
imposing a gross receipts tax on ERISA funded
medical centers. It found that the Second Circuit re-
lied substantially on an expansive and literal inter-
pretation of.the words “relate to” in §514(a) of
ERISA, and failed to give proper weight to Travelers’
rejection of such a strictly literal reading.
In Travelers, the Court had unequivocally
concluded that the “relates to” language was not
intended to modify “the starting presumption that
Congress does not intend to supplant state law.” 514
19
U.S. at 654, 115 S.Ct. at 1676. This Court in De
Buono held that the supposed difference between
direct and indirect impact on the fund’s assets — upon
which the Second Circuit relied in distinguishing this
case from Travelers — could not withstand scrutiny.
The Supreme Court concluded that just because a tax
may impact a fund’s assets, that does not mean that
pre-emption has occurred. Indeed, this decision un-
dermines the Petitioner’s entire argument that KRS
136.320 is “intimately connected” to the Separate
Accounts and therefore pre-empted.
Importantly, the United States Supreme Court,
the Sixth Circuit Court of Appeals and the U.S.
District Court for the Western District of Kentucky,
have all upheld a taxing authority’s historical and
fundamental right to tax without federal interference
via ERISA. These opinions are consistent with the
basic principles of federalism and comity between the
federal and state governments, and between federal
courts and state governments. In Kentucky Ass’n of
Health Plans, Inc. v. Miller, 538 U.S. 329, 123 S.Ct.
1471, 155 L.Ed.2d 468 (2003), the Supreme Court was
confronted with whether Kentucky had the right to
impose a law on insurance companies requiring them
to use any “willing provider,” rather than a “closed
network” of doctors, as an approved provider in their
health plans. Following a decision by Sixth Circuit
Court of Appeals affirming the District Court, the
United States Supreme Court noted that ERISA
explicitly preserves the validity of state “law[s] .. .
which regulate insurance” under § 1144(b)(2)A). Id.
20
at 1475. The Supreme Court also noted that the
McCarran-Ferguson Act, 15 U.S.C. § 1012 requires
that “No Act of Congress shall be construed to
invalidate, impair or supersede any law enacted
by any State for the purpose of regulating
the business of insurance or which imposes a
fee or tax upon such business ...” Id. at 1476,
fn. 2. (Emphasis supplied). See also 29 U-S.C.
§ 1144(b)(2)(A). In this case, KRS 136.320 was titled
“Tax on taxable capital of domestic life insurance
companies in lieu of other taxes.” Clearly, this statute
is intended to tax insurance companies. Moreover,
Kentucky law is clear that “Amounts allocated by
domestic life insurers to separate accounts in the
exercise of the power granted by this section shall be
owned by the insurer and the insurer shall not be,
or hold itself to be, a trustee, in respect to such
amounts.” KRS 304.15-390(6). (Emphasis supplied.)
The Western District of Kentucky reached a
similar decision when concluding that a Louisville/
Jefferson County municipal occupational tax was not
pre-empted by ERISA. Miller, 237 F. Supp. 2d at 756.
In that matter, Miller sued his employer, PPG, in
Jefferson Circuit Court, alleging that PPG failed to
make proper contractual payments owed to Miller
once he became disabled. PPG removed the case to
federal court arguing that ERISA pre-empted all
three of Miller’s claims. Jd. at 757-58. Miller then
filed a motion to remand the case back to state court.
PPG argued that ERISA pre-empted the occu-
pational license tax provisions, so as to give the
21
federal court jurisdiction over the matter. In terms of
pre-emption, then, the question before the court was
whether ERISA pre-empted the “insurance payments”
exception to the municipal occupational license tax.
However, the court held:
... the Supreme Court has also more recently
sought to preserve the principle that “the
preemption provision ... ts not without
limits,” Kentucky Assoc. of Health Plans, Inc.
v. Nichols, 227 F.3d 352, 358 (6th Cir. 2000),
and has critiqued the emphasis on the
ERISA text as an “uncritical literalism” that
makes ERISA preemption turn on “infinite
connections.” New York State Conference of
Blue Cross & Blue Shield Plans v. Travelers
Ins. Co., 514 U.S. 645, 656, 115 S.Ct. 1671,
131 L.Ed.2d 695 (1995). Thus, in Travelers,
the Supreme Court held that ERISA’s “relate
to” language was not intended to modify “the
starting presumption that Congress does not
intend to supplant state law.” Id. at 705, 115
S.Ct. 1671. The preemption analysis therefore
begins by first analyzing “whether the normal
presumption against preemption has been
overcome in a particular case.” Id.; see also
De Buono v. NYSA-ILA Medical & Clinical
Services Fund, 520 U.S. 806, 814-15, 117
S.Ct. 1747, 138 L.Ed.2d 21 (1997).
To determine if this presumption has been
overcome, the Supreme Court’s approach re-
quires courts to “go beyond the unhelpful
text and the frustrating difficulty of defin-
ing its key term, and look instead to the
22
objectives of the ERISA statute as a guide to
the scope of the state law that Congress
understood would survive.” De Buono, 520
U.S. at 813-14, 117 S.Ct. 1747; see. also
Egelhoff v. Egelhoff, 532 U.S. 141, 147, 121
S.Ct. 1322, 149 L.Ed.2d 264 (2001); Asso-
ciated Builders & Contractors v. Perry, 115
F.3d 386, 392 (6th Cir. 1997) (noting that the
“most recent Supreme Court approach” re-
quires courts to look instead at the purpose
of ERISA rather than the overly expansive
“relate to” test).
Id. at 760-761. (Emphasis supplied.)
Miller specifically relied on two Sixth Circuit
cases, both dealing with issues of state and local tax-
ation in the ERISA context, which support Revenue’s
position herein. The Miller court discussed the cases
of Firestone Tire & Rubber Co. v. Neusser, 810 F.2d
550 (6th Cir. 1987) (“tax has no connection or
reference to the benefit plans. The tax commissioner
has not directed any action at the plan contribution
or payments,” and the tax is a “neutral tax of general
application.” Id. at 554); and Thiokol Corp. v. Roberts,
76 F.3d 751 (6th Cir. 1996) (municipal occupational
tax in no way infiltrates the relationship between
employers or plans and their employees, but rather
affects the relationship between the state and a
taxpayer — an area where “ERISA has nothing to say”
(Emphasis supplied. )
As a result, the court held that PPG failed to
overcome the starting presumption that “Congress
23
did not intend to supplant state law,” and declined to
find ERISA pre-emption of the Louisville/Jefferson
County insurance exemption. /d. at 762.
The rule of law set down by the United States
Supreme Court, the United States Court of Appeals
for the Sixth Circuit and the United States District
Court for the Western District of Kentucky must be
followed in this case. “[T]he preemption provision .. .
is not without limits.” Miller at 760; quoting Kentucky
Assoc. of Health Plans, Inc. v. Nichols, 227 F.3d 352,
358 (6th Cir. 2000). The pre-emption analysis there-
fore begins by first analyzing “whether the normal
presumption against pre-emption has been overcome
in a particular case.” Id. See also De Buono, 520 U.S.
at 814-15.
A cursory review of the transcript of evidence in
this case shows not only has the presumption against
pre-emption not been overcome by the Petitioner, but
also that no attempt to overcome the presumption
was even made. Aside from general testimony that
Separate Accounts might be retirement accounts,
absolutely no evidence was offered to show that
Separate Accounts were ERISA qualified accounts, or
more importantly, that ERISA somehow pre-empts
KRS 136.320. Nowhere is there proof, testimony or
otherwise, that KRS 136.320 has any connection or
reference to the “retirement plans” that Separate
Accounts are claimed to be. No proof was offered that
indicates that KRS 136.320 takes any action directed
at the plan contributions or payments. There was no
24
proof, obviously, because the Petitioner had just
raised the ERISA issue on the day of the hearing.
KRS 136.320 is simply a neutral property tax of
general application, and does not burden Separate
Accounts or affect their operation. It does not in-
filtrate the relationship between employers or plans
and their employees. Rather it affects the relation-
ship between the state and the Petitioner — the
taxpayer — an area where “ERISA has nothing to say.”
Miller, 237 F. Supp. 2d 756; Firestone, 810 F.2d 550;
Thiokol, 76 F.3d 751. Clearly, the Court of Appeals
properly concluded that the Petitioner’s argument
concerning ERISA’s pre-emption of KRS 136.320 was
not preserved for review, and the KBTA properly
determined that even if the issue was preserved, it
was baseless.
C. ST. LEDGER DID NOT INVOLVE THE
CAPITAL STOCK TAX.
1. Background Concerning Calculation of
Capital Stock Tax.
Capital Stock Tax liability is calculated pursuant
to KRS 136.320. As illustrated by the chart below,"
the “Total Taxable Value of Capital” (“T'TVC”), is
based on the fair cash value of certain intangible
° Items #1-3 for each Chart come from Appellant’s Annual
Report of Domestic Life Insurance Companies as of the
beginning of business Jan. 1, 1996 (“1996 Annual Report”). (Box
4, Vol. 28, Tab 49).
25
personal property, or capital (“Total Capital”), less
exempt intangible personal property (“Exempt Prop-
erty”). A statutory formula allocates TTVC between
reserves (“Reserves”) and nonreserves, also referred
to as capital (“Capital/Nonreserves”). KRS 136.320(2).
A company ascertains and reports its “Net Reserves”
(Reserves less due and deferred premiums). KRS
136.320(i){c). Next, a ratio is determined, which
equals TT'VC divided by Total Capital (the “Ratio”).
KRS 136.320(2)(b). Net Reserves are multiplied by
the Ratio to compute taxable Reserves. Id. Taxable
Reserves are deducted from TIVC to calculate Tax-
able Capital/Nonreserves. KRS 136.320(2)(a). Again,
taxable Reserves are taxed at a significantly lower
rate:
Capital Stock All Assets Non-Stock Stock
Tax Return (Stock & Assets
Calculations Non-Stock)
1. Net Reserves}?,782,888,351 2,569,123,9851213,764,366
2. FairCash ([8,051,556,416 [22,817,154,622234,401,794
Value of Capital
. TTVC (#2 ~=[2,903,501,478 [2,669,099,6941234,401,794
nus
$148,054,938
in Exempt In-
tangible Prop-
erty (other
than Assets))
26
4. Ratio: TTVC (0.9515 0.9474 1.0000
to Fair Cash
Value (#3 di-
vided by #2)
5. Taxable Re- ?2,647,868,608 2,4:34,104,242 213,764,366
serves (#1 mul-
ttiplied by #4)
6. Taxable 255,632,870 [234,995,442 (23,167,455
(Capital/
INonreserves
(#3 minus #5) |
7. Taxon 26,479 24,341 2,138
Reserves (#5
multiplied by
Tax Rate of
$.001/$100)
8. Tax on 1,789,430 1,644,968 144 462
(Capital/
INonreserves
(#6 multiplied
by Tax Rate of
'$0.70/$100)
9. Total Tax 11,815,909 _—‘(|1,669,309 _—‘{146,600
(#8 + #9)
10. % of TTVC 0.911957038 0.911957038 (0.911957038
Allocated to
Taxable
Reserves
When Stock is taxed, 91% of all taxable assets,
including Stock, are attributed to taxable Reserves.
27
Stock, as listed in the Petitioner’s 1996 Annual Re-
port, equaled $234,401,794. Therefore, the tax lia-
bility attributable to Stock is $146,600 ($2,318 in
tax on Reserves plus $144,462 in tax on Capital/
Nonreserves). If Stock is not taxed, the tax liability is
$146,600 less, assuming non-Stock taxable assets
(“Taxable Assets”) remain the same. This is because
similar property must be taxed similarly. Ky. Const.
§ 174.
The Ratio is critical, as it allocates a propor-
tionate share of Exempt Property to Net Reserves.
Without the Ratio, all Exempt Property is attributed
to taxable Capital/Nonreserves, and taxable Reserves
are artificially inflated. Notably, the Petitioner /tself
exempts Exempt Property on its returns.” Appellant
has never objected to Exempt Property being ex-
empted, although presumably the same taxation con-
cerns would apply.
It is clear that, if it were not for the fact that two
(2) tax rates are applied, one for Reserves and one for
Capital/Nonreserves, there would be no dispute. That
is, if the $0.70 per $100 value tax rate applied to all
taxable assets, it would not matter whether Stock
was “excluded” or “exempted”; the tax liability would
be the same. However, the ultimate tax liability dif-
fers by more than $1.4 million, which is traced to the
° The 1996 Annual Report lists $148,054,938 in non-Stock
Exempt Property. (Box 4, Vol. 28, Tab 49)
28
application of the Ratio to Net Reserves to calculate
taxable Reserves.
Net Reserves are part of TTVC, and a certain
percentage of TTVC is allocated to taxable Reserves.
Just as both the Statement Value of Capital and Fair
Cash Value of Capital are less under MET (because
Stock is excluded from those amounts), Net Reserves
should also be less. However, as shown by the chart
below, this does not occur:
Capital Stock
Tax Return
Calculations
Stock Taxed
as Capital
MET
1. Fair Cash
Value of Capital
Difference
3,05 1,556,41612,817,154,622
234,401,794
2. TIVC (#1
minus
$148,054,938
in Exempt
Property (other
than Stock))
'2,903,501,478
2,669 ,099,694
234,401,794
3. Ratio: TTVC
to Fair Cash
Value (#2
divided by #1)
0.9515
0.9474
4. Taxable
Reserves
($2,782,888,351
in Net Reserves
multiplied
by #3)
2,647 868,608
2,636,634,269
11,234,339
29
255,632,870
32,465,415
223,167,455
multiplied by
Tax Rate of
$.001/$100)
26,479
26,366
113
7. Taxon
pital/
onreserves
#5 multiplied
y Tax Rate of
$0.70/$ 100)
1,789,430
227,258
1,562,172
8. Total Tax
(#6 + #7)
1,815,909
253,624
1,563,285
. Yot TTVC
Allocated to
taxable Re-
serves
0.911957038
10. % of TTVC
‘Allocated to
taxabie Capital/
INonreserves
0.088042962
0.987836567
0.012163433
0.0479277G0
0.952072300
The second column of this table includes Stock in
Capital, while the third column excludes Stock pur-
suant to MET. The final column shows the difference
between the two methods, which should equal the tax
liability attributable to Stock, or $146,600.
30
However, under MET, the tax liability decreased
by $1,562,285, an amount ten times greater than
expected! Disturbingly, by virtue of excluding Stock,
the Petitioner pays $1.4 million less tax than another
taxpayer who owns an identical amount of Taxable
Assets, but has no Stock to exclude. While the Peti-
tioner alleges that the Exemption Method is unconsti-
tutional, MET unconstitutionally taxes _ identical
assets differently. This $1.4 million difference results
from the failure of MET to exclude any Stock from
Net Reserves. As shown above, while more than 90%
of total Capital is allocated to Net Reserves, less than
5% of Stock is allocated to Net Reserves under MET.
This also affects taxable Reserves, as the tax lia-
bility decreases by only $113 and not the full amount
attributable to Stock: $2,138. Under the MET, a
company pays $2,125 more in tax on taxable Reserves
than a company who owns the same amount of
Taxable Assets, but has no Stock to exclude. This is
hidden by (i) the low tax rate on taxable Reserves,
and (ii) the tremendous decrease in taxable Capital/
Nonreserves, which combine for a decrease in the
overall tax liability. If there is any taxation of Stock,
it is through the MET, which effectively increases
taxation of taxable Reserves. National Life Ins. Co. v.
United States, 277 U.S. 508, 579, 48 S.Ct. 591, 72
L.Ed. 968 (1928). This result is also at odds with
Petitioner’s insistence that Stock must be excluded
from the formula.
However, if a proportionate share of Stock, 91% is
excluded from Net Reserves (the “Irue Exclusion
31
Method”), as shown below, it is interesting to note the
result:
| Capital Stock
Tax Return
Calculations
True
Exclusion
Method
1. Net Reserves
2,782,888,351
2,569,123,985
13,764,366
2. Fair Cash
Value of Capital
3,051,556,416
2,,817,154,622
234,401,794
3. TIVC (#2
inus
148,054,938
Exempt Intan-
ible Property
other than
tock ))
2,903,501,478
2. 669,099,694
234,401,794
. Ratio: TTVC
Fair Cash
Value (#3 divided
by #2)
0.9515
0.9474
IN/A
5. Taxable
Reserves (#1
multiplied by #4)
2,647,868,608
2,434,104,242
213,764,366
6. Taxable
apital/
onreserves
#3 minus #5)
259,632,870
234,995 442
23,167,455
. Tax on Re-
rves (#5 multi-
lied by Tax Rate
f $.001/$100)
26,479
24,341
2,138
32
EEE Eee
1,789,430 1,644,968 ‘(|144,462
. Taxon
apital/
INonreserves
(#6 multiplied
by Tax Rate of
'$0.70/$100)
9. Total Tax {1,815,909 ‘11,669,309 _—«*{146,600 _
(#8 + #9)
10. %of TTVC (0.911957038 10.911957038 10.911957038
Allocated to
Taxable Reserves
a ae eee eeene es
When the True Exclusion Method is used, the
inconsistencies resulting ‘from MET disappear. The
reduction in tax liability is the expected amount,
$146,600, and the taxation of Reserves vanishes, as
tax liability is again reduced by $2,138. All TTVC is
allocated between taxable Reserves and Capital/
Nonreserves, so taxpayers owning the same amount
of Taxable Assets have the same tax liability, re-
gardless of whether they also own Stock. If the Peti-
tioner wishes to exclude Stock from the calculation of
Capital Stock Tax liability, a proportionate share of
Stock must also be excluded from Net Reserves,
because of the nature of the formula, and this it has
failed to do.
In addition to the fundamental errors already
identified, there are other problems related to MET
that demonstrate its flawed nature. For example, as
shown in the 1995 tax return, under MET, taxable
Reserves exceed TTVC. As a result, 105% of TTVC is
33
taxed as taxable Reserves, while taxable Capital/
Nonreserves is approximately negative $140 million.
Neither figure makes any sense. Taxing taxable
Reserves at 105% of TTVC essentially taxes these
assets above fair cash value, violating the Kentucky
Constitution. Fitzpatrick v. Patrick, 410 S.W.2d 143,
145-146 (Ky. 1966). The creation of a negative amount
of taxable Capital/Nonreserves is the only way Peti-
tioner can avoid paying tax on more than 100% of its
TTVC.
Judge Thompson, in his dissent, which Petitioner
cites on page 13 of its petition, addresses none of this,
holding only that because the Exemption Method
results in a higher tax assessment, it must tax Stock.
As the majority correctly noted:
Monumental’s method, however, results in
what we believe to be a manifestly illogical
result. For example, under the method pro-
posed by Monumental, its 1995 tax return
would report total capital equal to negative
$145 million. Such a result cannot be re-
conciled with the sort of logic one normally
expects to find in tax statutes.
Moreover, if the situation is considered
whereby two hypothetical domestic life
insurance companies with the same dollar
amount of “taxable capital,” one with
substantial stock holdings and the other with
little or no stock in its investment portfolio,
the former would pay much less tax. Such
disparate treatment would violate Section
171 of the Kentucky Constitution, which
34
requires uniform taxation of all property
within the same class. This difficulty is
avoided entirely if the stock is exempted
rather than excluded in calculating the tax.
Monumental Life, 294 S.W.3d at 20.
2. The Petition Fails to Demonstrate Any
Conflict Between The Kentucky Court
of Appeals’ Holding on Stock and This
Court’s Precedents in St. Ledger and
Fulton.
Petitioner makes a bold and unsupported as-
sertion that the Court of Appeals’ holding in this case
is in direct conflict with this Court’s holdings in St.
Ledger and in Fulton Corp. v. Faulkner, 516 U.S. 325,
116 S.Ct. 848, 133 L.Ed.2d 796 (1996). However, the
sole basis for Petitioner concluding that such a direct
conflict exists is that Petitioner believes it should be
entitled to an even greater refund than it received
even though the facts, the statute and the law all fail
to support Petitioner on this point.
In St. Ledger, this Court held only that the case
should be remanded to the Kentucky Supreme Court
in light of Fulton. What this Court held in Fulton was
that “a State found to have imposed an impermissibly
discriminatory tax retains flexibility in responding to
this determination.” Fulton, 516 U.S. at 346, quoting
McKesson Corp. v. Division of Alcoholic Beverages
and Tobacco, Fla. Dept. of Business Regulation, 496
35
U.S. 18, 39-40, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990).
Moreover:
... a State might refund the additional taxes
imposed upon the victims of its discrim-
ination or, to the extent consistent with other
constitutional provisions (notably due process),
retroactively impose equal burdens on the
tax’s former beneficiaries. A State may also
combine these two approaches. Ibid. These
options are available because the Constitu-
tion requires only that “the resultant tax
actually assessed during the contested tax
period reflec[t] a scheme that does not dis-
criminate against interstate commerce.” Id.
at 41.
Fulton, 516 U.S. at 346-47. This Court finally con-
cluded:
Where “the federal constitutional issues in-
volved [in the remedial determination] may
well be intertwined with, or their con-
sideration obviated by, issues of state law,”
our practice is to leave the remedy for the
state supreme court to fashion on remand.
Id. at 347, quoting Bacchus Imports, Ltd. v. Dias, 468
U.S. 263, 277 104 S.Ct. 3049, 3058, 82 L.Ed.2d 200
(1984), and Tyler Pipe Industries v. Dept. of Revenue,
483 U.S. at 252, 107 S.Ct. at 2822. See also Williams
v. Vermont, 472 U.S. 14, 28, 105 S.Ct. 2465, 2474, 86
L.Ed.2d 11 (1985).
Notably, the Petitioner received a $1,470,357.49
refund as a result of the Department exempting stock.
36
As a result, Petitioner received a refund of the
additional ad valorem taxes imposed on its shares of
stock, which is consistent with this Court’s directives
in both St. Ledger and in Fulton.
However, Petitioner insisted it was entitled to an
additional refund in the amount of $6,751,758 in
refunds, based on its erroneous belief that Stock must
be treated a different way. The Commerce Clause was
not intended to grant interstate commerce a tax
windfall. Western Live Stock v. Bureau of Revenue,
303 U.S. 250, 254, 58 S.Ct. 546, 82 L.Ed. 823 (1938).
Simply because Petitioner could be entitled to a
larger refund under some other method does not
mean that Stock is being taxed, and the facts of this
case shows that this is indeed the case — Stock is not
taxed under the Exemption Theory.
Notably, whether the Exemption Method is used,
the True Exclusion Method is used, or the tax liability
attributable to Stock is subtracted from the total tax
liability, the result is the same. This makes sense as
exempting Stock from tax and excluding Stock from
tax should have the same result. As the chart clearly
shows, Stock is not taxed, as the difference in total
tax liability under the Exemption Method is due
solely to Stock’s exempt status, no more, no less.
This result is consistent with the examples
presented to Petitioner’s own expert, Richard Pomp.
(TE, pp. 130-132) In the first example, A and B each
owned $100 of stock (A and B’s other assets and tax
liability were assumed to be the same). A’s stock was
37
taxed at 6%, so A paid an additional $6 in tax, while
B’s stock was treated as exempt, and B paid no
additional tax. When asked if B was taxed on the
stock in this example, Richard Pomp testified that “if
there is no tax at all, I would say he is not being
directly taxed.” (TE, pp. 131-132) The second example
taxed half of A’s stock at 2% and half of A’s stock at
6%, while B’s stock was again exempted. /d. Again, if
A paid $4 in tax on $100 in stock, and B paid no tax
on $100 of stock, Pomp testified that B would not be
taxed on the stock (TE, p. 132) Again, no tax is paid
on Stock under the Exemption Method, therefore,
even the Petitioner’s expert agreed Stock is not taxed.
Obviously, if Stock is not being taxed in the first
place, double taxation of Stock is an impossibility.
The Court of Appeals’ interpretation of the Bank
Shares Tax is completely consistent with the holding
in St. Ledger. This interpretation gets to the same
place as St. Ledger, where Stock is not taxed, either
directly or indirectly, while under the Petitioner’s
theory, the taxation of taxable Reserves is increased.
It is only because of the much lower rate associated
with taxable Reserves that’ the total tax liability
appears to be less.
As clearly and consistently shown, the amount
the Petitioner was refunded was equal to the amount
of Bank Shares Tax attributable to the Stock, no
more, no less. Nothing in this Court’s opinions man-
dates a different result, and there is no conflict
between these opinions and the Court of Appeals’
decision.
38
a. The Court of Appeals’ Decision to
Treat Stock as Exempt Intangible
Assets is Consistent with this Court’s
Opinions.
Tellingly, Petitioner has pointed to no conflict
with prior decisions of this Court. To be sure,
Petitioner has strung together various snippets,
including dissenting opinions, in an effort to support
such a claim. Pet. pp. 37-39. But one searches the
petition in vain for a summary of the facts, an
explanation of the holding, or any attempt to put the
decisions in context, and Petitioner makes no serious
effort to show that they conflict with the ruling below.
For example, Petitioner insists it was entitled to
an additional refund in the amount of $6,751,758,
based on its erroneous belief that Stock must be
treated a different way. The test advocated by Peti-
tioner “still less tax under another theory,” is not the
correct test. The test used by this Court in National
Life was whether the taxpayer derived any tax
benefit from federally exempt securities. National
Life, 277 U.S. at 519. This Court compared the tax
liability for a company with tax-exempt securities
against what the tax liability would be if the
securities were not exempt, and concluded the tax
liability was the same in both scenarios. As a result,
the tax exemption was effectively, and impermissibly,
disregarded. Id. However, as shown above, the
Exemption Method satisfies the National Life test,
and there is no conflict.
39
For example, Petitioner mischaracterizes the
holding in American Bank & Trust Co. v. Dallas Co.,
463 U.S. 855, 103 S.Ct. 3369, 77 L.Ed.2d 1072 (1983).
Petitioner states that this Court held the tax [on
federal obligations] is barred regardless of its form if
federal obligations must be considered, either directly
or indirectly, in computing the tax.” Jd. at 862.
Specifically, Rev. Stat. § 3701 exempted certain fed-
eral obligations from taxation by the states, and ex-
pressly provided that “[t]his exemption extends to
every form of taxation that would require that either
the obligations or the interest thereon, or both, be
considered, directly or indirectly, in the computation
of the tax....” Jd. at 859. Texas had a bank shares
tax, which determined the taxable value of the bank
shares by including the value of these federal obli-
gations. As a result, a portion of the tax was
attributable to the exempted federal obligations. The
plaintiff in this case argued that § 3701 mandated
that the taxable value of the bank shares be reduced
by the value of the federal obligations held by the
bank. In this case, there is no statute similar to Rev.
Stat. § 3701, and more importantly, under the Exemp-
tion Theory, none of the tax is attributable to Stock.
Petitioner also mischaracterizes the holding in
Hunt-Wesson, Inc. v. Franchise Tax Bd. of California,
528 U.S. 458, 463-64, 120 S.Ct. 1022, 145 L.Ed.2d 974
(2000). In Hunt-Wesson, California eliminated a
deduction, thereby increasing the tax owed, to the
extent the taxpayer had nonunitary income. Cali-
fornia was not entitled to directly tax nonunitary
income, and this Court held that California could not
40
indirectly tax such income, through the disallowance
of a deduction; either. This Court did note, however,
that if California could show a reasonable effort to
allocate the deduction between taxable and tax-
exempt income, such a disallowance could be upheld,
“even though such denials mean that the taxpayer
owes more than he would without the denial.” Id. at
466. However, California was unable to meet that
burden. Once again, the problem was that the
amount of tax owed included tax attributable to
income that should otherwise be exempt. The amount
of Capital Stock Tax owed by Petitioner, unlike Hunt-
Wesson does not include tax on any of the Stock that
Petitioner owes. As the numbers clearly show, the
only items reflected in the amount of Capital Stock
Tax owed are taxable property.
The Exemption Method clearly reduces the tax
liability by the exact amount of tax attributable to
Stock if it were subject to the Capital Stock Tax and
taxpayers owning the same Taxable Assets have the
same tax liability, regardless of whether or not they
also own Stock. As a result, the exemption was given
full force and effect, and there is no inconsistency
with this Court’s holdings in Hunt-Wesson and Amer-
tcan Bank.
CONCLUSION
The cases the Petitioner cites in support of its
position involve wholly dissimilar facts and legisla-
tion, and do nothing to challenge the holding of the
41
decision below. In addition, the challenged state
statutory provisions were subsequently amended by
the Kentucky General Assembly, making a decision
on the merits of littie help in resolving other cases.
The petition is full of factual distortions and
misrepresentations of the statutes and law, including
the omission of the preservation of the ERISA issue
from the questions presented. Petitioner raises no
serious doctrinal disagreement with the Kentucky
Court of Appeals, but merely disputes whether that
court properly applied settled precedents to the par-
ticular statutes under review.
As this Court has said “[w]e decline to reach the
merits of this claim, however, because the courts
below ruled that the claim was procedurally barred.”
Jimmy Swaggart Ministries v. Board of Equalization
of California, 493 U.S. at 398. The petition for a writ
of certiorari should be denied.
Respectfully submitted,
STEPHEN G. DICKERSON GARY E. SIEMENS
Counsel of Record ROBERT P. BENSON, JR.
LAURA M. FERGUSON BENSON, BYRNE, SIEMENS
DEPARTMENT OF REVENUE, & LANG LLP
COMMONWEALTH OF KENTUCKY One Riverfront Plaza
501 High Street, 10th Floor 401 West Main Street,
P.O. Box 423 Suite 2150
Frankfort, Kentucky 40602 Louisville, Kentucky 40202
(502) 564-9561 (502) 583-8373
Stephen.Dickerson@ky.gov —s _—
Assistant Jefferson
County Attorney
531 Court Place, Suite 900
Louisville, Kentucky 40202
(502) 573-6336
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.