Opposition Brief — Johnson Controls, Inc. v. Miller

Supreme Court, US

FILEO

APR 23 2010 |

No. 09-981 OFFICE OF THE CLERK }

IN THE

Supreme Court of the Gnited States

* =

JOHNSON CONTROLS, INC.; ET AL.,

Petitioners,

v.

JONATHAN MILLER, SECRETARY OF THE FINANCE AND

ADMINISTRATION CABINET OF THE COMMONWEALTH OF

KENTUCKY; COMMONWEALTH OF KENTUCKY, DEPART-

MENT OF REVENUE,

Respondents.

— eee siete

ON PETITION FOR A WRIT OF CERTIORARI

To THE SUPREME COURT OF KENTUCKY

chs aa tencesindaeeetcooabass

BRIEF IN OPPOSITION

=e ee ae Saiceeaenemaas

Laura M. Ferguson C. Christopher Trower

Kentucky Department Counsel of Record

of Revenue, Finance and electriclaw.com

Administration Cabinet 3159 Ruman Rd., N.W.

P.O. Box 423 Atlanta, GA 30327-1503

Frankfort, KY 40602 (404) 816-5066

ctrowcr@electriclaw.com

APRIL 23, 2010 Counsel for Respondents

QUESTIONS PRESENTED

The questions presented are:

;. Does the Due Process Clause, as inter-

preted by McKesson Corp. v. Div. of Alcoholic Beve-

rages, 496 U.S. 18 (1990), and Reich v. Collins, 513

U.S. 104 (1994), require a State to consent to suits in

its own courts brought to recover mere tax overpay-

ments made under a state tax statute that is neither

unconstitutional under the Constitution of the Unit-

ed States nor unlawful under some overriding feder-

al statute via the Supremacy Clause?

7 Does the Due Process Clause, as inter-

preted in United States v. Carlton, 512 U.S. 26

(1994), require that retroactive tax legislation be

enacted no later than “the first possible legislative

session” following the legislature’s identification of

the “legitimate legislative purpose” sought to be

achieved by the retroactive legislation?

3. Does the Equal Protection Clause re-

quire that tax statutes apply in the same way to all

members of a “similarly situated” group of taxpayers,

or to none?

TABLE OF CONTENTS

Page

QUESTIONS PREY EOD) ccccccccsscssvercencsevevecvssvessisves i

TABLE OF CONTENTS ..................00000 Liseuaweseihede deca li

py SF a ge aye) gy) + per en i erem emai lil

eet | og eR fed SNE ERE AER Fst Binet peers Ae meee e 1

A. - TAMTAGGEEY TR FOTUAS OE FAVE ies io ciidiccccstsesescescvs 3

B. Separate Returns by Separate

2 SE EA Et Ot Sh ya pines 6

ORM ee ef Ee eee 7

D. Department of Revenue Positions.................. 8

E. 1994 GTE Case and 1996 Legislation............ 9

Fish ce ene dere cicusnmemeennns 11

G. 2000 Enactment of KRS 141.200 (17) and

hh ot aces tewene ren: 14

H. Retroactive Unitary Returns and Mere

Tax “Overpayment” Claims...................20060+- 16

REASONS FOR DENYING THE PETITION.......... 19

Zz PETITIONERS’ TAX OVERPAYMENT CLAIMS ARE

BARRED BY WELL SETFLED PRINCIPLES OF

STATE SOVEREIGN IMMUNITY WHICH DO NOT

NEED TOC BE REHASHED ON CERTIORARI.............. 19

Il. THE COURT HAS ALREADY PROVIDED AMPLE

“GUIDANCE” ON “THE DUE PROCESS LIMITS OF

RETROACTIVE LEGISLATION nvsevcccserivencscsosarseresns 28

Ill. THE EQUAL PROTECTION CLAUSE DOES NOT

REQUIRE ALL-OR-NOTHING ECONOMIC

REE 3 foc coda cnn eesscnedudeusencecyehunaeeld iueiseciacaaee

Se eee EI lic dipeddvnsdntecnconevwnncnvencanicavincenpereeceenkente a

TABLE OF AUTHORITIES

Page

Cases

Allied Stores of Ohio, Inc. v. Bowers, 358 U.S.

eee, aE CII sot, pare p ce gavoenesedecs cones pee iN Stes ten DOG 21

Anolok v. United States, 873 F.2d 369, 374 (Fed.

Rs EE do ehacmisic ee nueeu ccocreemeseces Rodda teae ta eedaeaaenancades 24

Armstrong v. Collins, 709 S.W.2d 437 (Ky. 1986).....13

Automobile Club of Michigan v. Comm ’r, 353

SB Bot Oe! 03s RRR IE eS Se Le enn eee )

Bacchus Imports, Ltd. V. Dias, 468 U.S. 263

Ds |) SARA eee One epulisi ddd acids ceaetitasainiia cudemuatompaneraaa nee

Beers v. Arkansas, 61 U.S. 527, 529-530 (1857)........22

California v. Arizona, 440 U.S. 59, 65 (1979)............ 34

Carpenter v. Shaw, 280 U.S. 363, 369 (1930) ............ 26

City of New Orleans v. Dukes, 427 U.S. 297

tg. AANRGSIDEC RD RoR ertn gene AA Oren e aac aN my ae. 35

Clinton County Comms v. EPA, 116 F.3d 1018,

i Be Ee Ly | ee re 24

College Savings Bank v. Florida Prepaid

Postsecondary Educ. Expense Bd., 527 U.S. 666

RSUNNNUNTN ssh. t.c ca ant cechc sersbasiitesannacecieoduschasaredenuerceueneus idavennendodes 23

Davis v. Michigan Dep't of Treasury, 489 U.S.

ca a cu ekbeseuentirs 5

Delia Aur Lines, Inc. v. Commonwealth, 689

Be a eg ee Os IE case cmeiges. pencorccee desevecesdvecnnesbsven. S)

Dep't of Conservation v. Co-De Coal Co., 388

Sg a doa co isa ventainesve. vekrenseeaceasones 20

Department of Revenue v. Jack Cole Co., 474

Re Fe aise tveverecserverrvenosessorssnne: 20

Duke Power Co. v. Carolina Envir. Study Group,

inc., 438 U.S. 59, 88 n.32 (1978)......................... .....3]

Edwards v. U.S. Dept. of Energy, 200 Fed. Appx.

382, 389 (6% Cir. 2006), cert. den. 127 S.Ct.

BOLD CI AD vcccsvevercnscccovece 3 Ag ELE eRe een 12 D4

Fife v. CIR, 82 T.C. 1 (1984)...

Fletcher v. Stumbo, 163 S.W.3d 852 (Ky. 2005)........13

Harper v. Virginia Dep't of Taxation, 509 U.S. 86,

Bad ees ARSENE SRT TNE aD ee a oe 3]

Heller v. United States, 776 F.2d 92, 98 (3d Cir.

1985) 24

Hurry Up Broadway Co. v. Shannon, 102 S.W.2d

30, 31 (Ky. 1937).... EE RNa

Juda v. United States, 13 Cl. Ct. 667, 689 (Cl. Ct.

(8 REALISE SIORIE Pees Sn Ih ae ON Et aE

Koch v. Alexander, 561 F.2d 1115 (4% Cir. 1977)........ 5

Laycock v. United States, 230 F.2d 848, 850 (9th

Cir. 1956)... ...0:cociesealen yi cuscas+-.-<~ 24

Lynch v. United States, 292 U.S. 571 (1934)........ 23, 24

Maricopa County v. Valley Natl Bank, 318 U.S.

B57 (1943)..........cc0sccnee een EEEEEE TE Nats sooeseee<eee 24

McKesson Corp. v. Div. of Alcoholic Beverages,

496 U.S. 18 (9980). ee, .... passim

Millikin v. United States, 283 U.S. 15 (1931)............30

New York Central Railroad Co. v. Sarah White,

243 U.S. 188, 195 (ieee, ............. 31

Plaut v. Spendthrift Farm, Inc., 514 U.S. 211

Pension Benefit Guaranty Corp. v. R.A. Gray &

Co., 467 U.S. 717, 729-730 (1984)........200. eee 29

Ravygor v. Regents of University of Minnesota, 534

U.S. 533, 543 (Ge 23

Reich v. Collins, 513 U.S. 104 (1994)................ passim

Revenue Cabinet v. Gossum, 887 S.W.2d 329.

3354-335 (Ay. 1OGae ee... 4, 20

Revenue Cabinet v. Lazarus, Inc., 49 S.W.3d 172.

175 (Ky. 2001) .....cceerrrs. ............. 9

U.S. v. Carolene Products Co., 304 U.S. 144, 151

SD PEIIED ecocpséncndeanorontemcaddevodsdderanmal ania ee eee 35

United States R.R. Retirement Bd. v. Fritz, 449

os eo Be eh. | eer oe 35

United States v. Carlton, 512 U.S. 26 (1994) ... passim

United States v. Dalm, 494 U.S. 596. 609 n.6

CR EPUED scicsvacecrcceranmmepaceaarvaseaietceaindndpanmbametahiasaaeaatae: 20

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1

ERED ciccocciusessesuiecoanychtetoooaneeaceeaema aaa 29, 30

Welch v. Henry, 305 U.S. 134 (1938)...................200000000- 34

Wheeling Steel Corp. v. Glander, 337 U.S. 562,

mC eee 21

Wilgard Realty Co., 127 F.2d 514 (2d Cir.) cert.

den. 317 U.S. 665 (1942).........:.:. sat abe dana teem 30

Constitutional Provisions, Statutes, and Regulations

Dee SA secbiid sanses cious vaasounerdeensoaoemnoneamecntacsenie passim

KRS 134.580(6) .occceccccccccssccscecseoccssssorscesceeesoneeoceo Penns 17

ee 41.1 eee

PAE RE SE cs sscecscce cence 6, 8, 10

Pama SAE ventas idee eens passim

v1

KRS 141.200(18) . Neat ...PAaSsim

KRS 446.080(3) 00000200... | _—

Other Authorities

Rev. Rul. 57-601, 1957-2 CB 614.... a :

STATEMENT

To avoid a massive loss of public revenues

threatened by the use of retroactive “unitary” (rather

than “separate”) corporate income tax returns for

pre-1995 years, the Kentucky General Assembly in

2000 enacted two retroactive tax statutes.

One statute, KRS 141.200(18), prohibits the

use of unitary returns, and requires separate corpo-

rate entities to file separate tax returns for pre-1995

years.

The other statute, KRS 141.200(17), revokes

the Commonwealth’s consent to unitary return re-

fund suits brought to recover alleged tax overpay-

ments for pre-1995 years.

Both statutes were made retroactively effec-

tive for tax returns filed or refund claims made after

December 22, 1994, for “all taxable years ending be-

fore December 31, 1995,” 1.e., pre-1995 tax years.

Both statutes were enacted as new subsections

of KRS 141.200, a statute which since 1942 has pre-

scribed the types of tax returns that must be filed by

corporations in Kentucky.! The opinions of the Ken-

tucky courts sometimes use the term “H.B. 541,”

which refers to the House Bill enacted by the Ken-

' See 2000 Ky. Acts ch. 543,§ 1. [Pet App 122-123].

tucky General Assembly in 2000, as shorthand for

the statutes.

The two new subsections are currently codified

as KRS 141.200(17) and KRS 141.200(18).2 KRS

141.200(17) is the retroactive revocation of the

Commonwealth’s consent to suit. KRS 141.200(18) is

the retroactive prohibition on the use of unitary re-

turns to compute taxable income and tax liability.4

A casual observer might wonder why the 2000

Kentucky General Assembly made the amendments

retroactively effective for all pre-1995 years, but not

for 1995 or any subsequent year. The answer is that

the 1996 Kentucky General Assembly had already

prohibited the use of unitary returns for 1995 and all

subsequent vears. 4

2 See 2000 Ky. Acts ch. 548, § 1 (nitial codification); 2005 Ky

Acts ch. 168, § 15 (subsequent re-codification)

3 The Petition refers to the statutes as KRS 141.200(9) and KRS

141.200(10), as they were initially codified. The opimon of the

Kentucky Supreme Court consistently refers to the statutes as

they are currently codified, as does this Bnief in Opposition.

4 See 1996 Ky Acts ch 239, §§ 1 3, unitrally codified as KRS

141.120(11), subsequently codified as KRS 141 200(7), see 2000

Ky. Acts ch 543, §1, und subsequently re-codified as KRS

141 200(15), see 2005 Ky. Acts ch. 168,§ 15 The constitutional-

ity of the 1996 legislation. which was made retroactive “for tax-

able years ending on or after December 31, 1995,” and is

currently codified at KRS 141.200(15), has never been chal-

lenged.

bo

A. Kentucky Tax Terms of Art

Consideration of the Petition requires a work-

ing understanding of (i) the difference between a

“separate” corporate income tax return and a “unita-

ry’ corporate income tax return, and (11) the differ-

ence between a tax “overpayment” and a “refund

claim.”

In a “separate” corporate income tax return, a

single corporation reports its own (and only its own)

revenues, expenses, and apportionment factors, and

computes its own (and only its own) taxable income

(or loss) and tax liability. See KRS 141.200(2)(c)

(statutory definition of “separate return”).

In a “unitary” corporate income tax return, a

group of corporations organized as separate legal

entities (typically a common parent corporation and

some or all of its subsidiaries) which allegedly con-

duct a “unitary” business, combine their separate

revenues, expenses, and apportionment factors, and

compute a “unitary” taxable income (or loss) and tax

liability. Unitary returns are therefore sometimes

> A third and completely different type of return is the federal

“consolidated” corporate return. The members of the “consoli-

dated” group are determined solely by mathematical stock own-

ership, regardless of the business conducted by each

corporation, and include the common parent and each subsidi

ary which 1s at least 80% owned by the common parent. There

is no requirement that the parent and any of its subsidiaries

conduct a “unitary” business’ A “unitary” or “combined” return

is strictly a state tax law concept. The Internal Revenue Code

permits qualifying corporations to elect to file a consolidated

3

called “combined” returns by tax cases, tax treatises,

and the Petition.

A tax “overpayment” is defined under Ken-

tucky law as “the excess of the tax payments made

over the correct tax liability determined under the

terms of the applicable statute without reference to

the constitutionality of the _ statute.” KRS

134.580(1)(b).

The importance of the term “tax overpayment”

is that Kentucky’s general tax refund statute, KRS

134.580(2), under which all of Petitioners’ refund

claims have been made, only authorizes a refund or

credit of an “overpayment of tax.” A separate Ken-

tucky statute, KRS 134.590(1), provides for refunds

of taxes “paid under a statute held unconstitutional.”

The Kentucky Supreme Court has construed these

two statutes to be mutually exclusive. Revenue Cab-

inet v. Gossum, 887 S.W.2d 329, 334-335 (Ky. 1994).

(KRS 134.580 “is limited” to “tax overpayments” as

defined and does not “apply to situations where the

constitutionality of a statute is at issue”).

This point is crucial: under Kentucky law, a

suit to recover a tax “overpayment” under KRS

134.580, such as the refund claims asserted by Peti-

tioners, by definition does not and cannot involve a

tax paid under a statute held to be unconstitutional.

return, but the federal tax law has never permitted separate

corporations to combine their income in a “unitary” return

hased on the conduct of a “unitary” business.

The Gossum case itself held that refund claims

for state taxes paid under a Kentucky statute which

exempted state employee retirement payments from

the Kentucky income tax, but not federal employee

retirement payments (and which therefore violated

“the federal constitutional doctrine of intergovern-

mental tax immunity,” see Davis v. Michigan Dep't of

Treasury, 489 U.S. 803 (1989)), could not be brought

under KRS 134.580 (which provides a four year sta-

tute of limitations) but had to be brought under KRS

134.590 (which provides a shorter two year statute of

limitations). 887 S.W.2d at 334-335.

A “refund claim,” like a complaint in a civil ac-

tion, merely states the taxpayer's contention that a

tax “overpayment” has been made. ‘T'axpayers often

make refund claims by filing an “amended return”

for the tax year. But an amended return filed after

the due date for the original return (e.g., April 15,

2010 for 2009 tax returns) does not replace or super-

sede the original return. Koch v. Alexander, 561 F.2d

1115 (4% Cir. 1977) (amended returns “showing a

smaller liability than initially reported are generally

treated as claims for refunds’); Rev. Rul. 57-601,

1957-2 CB 614 (amended return filed after due date

is merely refund claim).

Using a “unitary” return to compute taxable

income and tax lability, does not automatically in-

crease or decrease taxable income or tax liability, or

generate a tax “overpayment” or a tax “underpay-

ment,” versus the aggregate results of using “sepa-

rate” returns for each member of the alleged unitary

group. The type of tax return, like any tax account-

ing method, merely affects the computation of taxa-

ble income and tax liability. Whether an “overpay-

“overpayment” or “underpayment” exists depends on

whether (i) the actual tax payments made by the

taxpayer for the year, exceed (or are less than)

(1) the taxpayer’s correctly computed tax hability de-

termined under the applicable substantive law.

B. Separate Returns by Separate Cor-

porations

KRS 141.200(17) and KRS 141.200(18) were

not written on a clean legislative slate.

Kentucky’s first income tax law, enacted in

1936, required separate corporations, whether or not

affiliated, to file separate income tax returns. Ky.

Stat. § 4281b-18, 1936 Ky. Acts 3™¢ Ex. Sess. ch. 7,

§ 18, provided that “every corporation doing busi-

ness” in Kentucky “shall make a return,” and man-

dated that “corporations which are affiliated shall

each make separate returns.”

When the Kentucky Revised Statutes were

enacted in 1942, the fundamental requirement of

separate returns by separate corporate entities was

carried over in KRS 141.200(1), which provided:

“corporations that are affiliated must each make a

separate return.” See Ky. Rev. Stat. § 141.200(1) (15

ed. 1942).

6

C. 1966 UDITPA Changes

Prior to 1966, Kentucky’s corporate income tax

law sought to tax a corporation on its income from

“sources” in Kentucky, because the basic federal con-

stitutional rule is that a State cannot tax income

that is not in some way connected to property or

transactions or business conducted in the taxing

State.

This focus on the geographic “source” of in-

come invited metaphysical disputes about “where”

income was earned, and was ill-suited to an economy

dominated by large corporations with nationwide

businesses. In 1966, the Kentucky General Assem-

bly adopted a more modern and practical approach,

recommended by the Multistate Tax Commission

and the National Conference of Commissioners on

State Laws, of dividing corporate income into “busi-

ness” and “non-business” income. “Business income”

was defined, generally, as income “from transactions

and activity in the regular course of a trade or busi-

ness” of the corporation, and “non-business income”

was defined as “all income other than business in-

come.”

Under this approach, “business income” is

“apportioned” or divided among the States according

to a three factor property, payroll, and sales formula

used to compute an “apportionment factor,” and

items of “non-business income” are “allocated” to spe-

cific States using a set of mechanical rules. The gen-

eral effect is that if a corporation’s “apportionment

factor” for State X is 15% (roughly indicating that

15% of its “business income” is attributable to opera-

tions in State X, as measured by its relative proper-

ty, payroll, and sales in Stute X versus all States),

then 15% of its income is “apportioned” to State X

and subject to taxation under State X’s laws. The

other 85% of its “business inceme” is “apportioned” to

other States.

The 1966 legislation, patterned after the Uni-

form Division of Income for Tax Purposes Act, was

incorporated into Chapter 141 (the income tax sta-

tute) of the Kentucky Revised Statutes by 1966 Ky.

Acts ch. 176.

But — and this is a very significant “but” —

the i966 legislation made no change whatsoever to

the provisions of KRS 141.200(1) — the statutory re-

quirement of a “separate return” from “each” corpo-

ration. The “apportionment” provisions of the 1966

legislation were separately codified as KRS 141.120,

generally referred to as the “apportionment statute.”

D. Department of Revenue Positions

From 1972 until 1988, the Kentucky Depart-

ment of Revenue interpreted KRS 141.120 — the

new apportionment statute — as authorizing the use

of unitary returns to compute the combined tax lia-

bility of the members of a group of corporations con-

ducting a “unitary” business.

8 6)

In 1988, the Department of Revenue deter-

mined that its prior interpretation of KRS 141.120

had been erroneous, and announced in Revenue Poli-

cy 41P225 (the state equivalent of an IRS revenue

ruling) that separate returns should be filed by a

parent and each of its subsidiaries, unless a subsidi-

ary was a mere “paper corporation with limited via-

ble activities.”

The Department’s correction of what it consi-

dered to be an erroneous interpretation of the appor-

tionment statute was entirely proper. Automobile

Club of Michigan v. Comm’r, 353 U.S. 180, 183

(1957) (RS not precluded in 1945 from revoking er-

roneous 1934 and 1938 revenue rulings; doctrine of

equitable estoppel “is not a bar to the correction by

the Commissioner of a mistake of law’); Delta Air

Lines, Inc. v. Commonwealth, 689 S.W.2d 14, 20 (Ky.

1985) (“erroneous interpretation of the law [by an ad-

administrative agency] will not be perpetuated”:

Revenue Department has “affirmative responsibility”

to “abandon” an “erroneous policy when it discover[s]

its error’); Revenue Cabinet v. Lazarus, Inc., 49

S.W.3d 172, 175 (Ky. 2001) (Revenue Cabinet cannot

“change the [statutory] law by mistake”).

KE. 1994 GTE Case and 1996 Legislation

Revenue Policy 41P225 sparked a number of

lower court lawsuits in which taxpavers challenged

the Department’s position, and contended under var-

ious theories that unitary returns were permitted or

required under Kentucky law.

)

The fundamental statutory construction dis-

pute was not settled until 1994 when the Kentucky

Supreme Court, in GTE v. Revenue Cabinet, 889

S.W.2d 788 (Ky. 1994), construed KRS 141.120 (the

apportionment statute) to require a group of corpora-

tions that conduct a “unitary” business to file a “uni-

tary” return in Kentucky. The GTE decision finessed

the conflict between KRS 141.200(1), the statute

which requires separate returns by “each” corpora-

tion, and its construction of KRS 141.120, by reading

the former statute’s use of the term “corporation” to

mean what the G7E Court called a “unitary corpora-

tion” comprised of the parent and its unitary subsid-

laries

The GTE case was decided on December 22,

1994. The Kentucky General Assembly was not then

in session, and did not meet again until 1996, be-

cause at the time the Kentucky Constitution only al-

lowed the General Assembly to meet in “regular

session” for 60 days in even numbered years. ®

At the first available opportunity after GTE

was decided, the Kentucky General Assembly in its

1996 regular session abrogated GTE by amending

KRS 141.120 (the statute construed in GTE) to pro-

vide that “nothing in this section shall be construed

as allowing or requiring the filing of a combined re-

turn under the unitary business concept,” and by

6 The Kentucky Constitution was amended in 2000 to allow 30

day sessions in odd numbered years, the first of which was con-

vened in 2001.

10

making the amendment retroactively effective for

1995 and all future taxable years.’

After the 1996 General Assembly adjourned, it

became apparent that the Commonwealth still faced

substantial exposure for unitary return refund

claims. A number of parent-subsidiary groups, in-

cluding Petitioners, contended that they had con-

ducted a “unitary” business during pre-1995 years,

and were therefore permitted under G7'E to make

unitary return refund claims for those pre-1995

years for which refund claims were not otherwise

barred by the statute of limitations.* These unitary

return refund claims for pre-1995 were not affected

by the 1996 legislation, which only applied to 1995

and subsequent years.

F. 1998 Budget Bill

None of the decisions of the Kentucky courts

below turned on the precise amount of the refund

claims made by Petitioners and others, or on the

dates the refund claims were made, or on the specific

years for which tax overpayments were alleged to

have been made. The opinion of the Franklin Circuit

Court, a trial court of general jurisdiction, states that

by the end of 1995, the Kentucky Department of

Revenue “estimated” the total exposure at “about

$50,000,000.” As additional claims were filed, the

’ See KRS 141.200(11), added by 1996 Ky. Acts Ch 239 § 1, § 3.

= KRS 134 580, Kentucky’s general] tax refund statute, requires

that refund claims be made within four years after the due date

of the return, including extensions.

fund

pot

Department of Revenue increased its estimate of the

exposure to $160,000,000 in October 1996 and “al-

most $200,000,000 at the end of June 1998.” Pet.

App. 196.

Exactly when or how this estimated exposure

was communicated by the Department of Revenue to

the leadership of the Kentucky General Assembly is

not revealed by the opinions of the Kentucky courts.

This comes as no surprise: the Kentucky General

Assembly was not in session from April 1996 until

January 1998.

What we do know, however, is that “in re-

sponse [to these estimates], to avoid a huge loss to

the general fund, at the next legislative session,

1998, the General Assembly included in the 1998-

2000 budget bill, a measure which prohibited the

Revenue Cabinet from paying any post-G7E refund

claims,” t.e., unitary return refund claims filed after

December 22, 1994. Pet. App. 29 (concurring opinion

of Schroeder, JJ.).

In Kentucky parlance, the “budget bill” is the

appropriations bill enacted by the General Assembly

in its biennial “regular session” to authorize expendi-

tures of public monies during the two fiscal years

(July 1 through June 30) following the “regular ses

sion.” Under the Kentucky Constitution, monies

held in the State Treasury may not be legally ex-

pended unless “appropriated” by the General Assem-

bly. See Ky. Const. § 230; Fletcher v. Stumbo, 163

S.W.3d 852 (Ky. 2005).

AJthough the biennial “budget bill” is mostly a

soporific listing of authorized line item expenditures

for highways, schools, social services, government

operations, and public works, the General Assembly

is constitutionally permitted to include within the

“budget bill” substantive provisions which temporari-

ly suspend or change the effect of a specified provi-

sion of the permanent Kentucky Revised Statutes for

two years. See Armstrong v. Collins, 709 S.W.2d 437

(Ky. 1986).

In reviewing the tortured path of KRS

141.200(17) and KRS 141.200(18), the Kentucky Su-

preme Court concluded that “the General Assembly

was not apprised of, or at least was not able to ad-

dress, these problems [the $200,000,000 refund claim

exposure] until late in the 1998 regular session,

when it was well into the budgeting process.” Pet.

App. 7. Since the General Assembly met only “every

other year then, the first chance to deal with the

problem with direct legislation would come two years

later,” u.e., in 2000. Jd. “[T}jo at least temporarily

patch the problem,” the General Assembly “inserted

a provision in the 1998 Budget Bill barring the state

treasury from paying out any refunds” under “the

theory announced in GT'E.” Pet. App. 7-8. But be-

cause “the Budget Bill would only be in effect for two

years,” the “problem would have to be addressed ful-

ly in 2000.” Pet. App. 8.

The temporary legislative fix in the 1998

budget bill, enacted as 1998 H.B. 321 § 33, provided

13

that “notwithstanding KRS 134.580 [the general tax

refund statute], no taxpayer shall be refunded” any

tax overpayment “attributable to the filing” of a uni-

tary return for a pre-1995 year “after December 22,

1994.” This prohibition on the payment of unitary

return refunds was probably an excess of virtue, be-

cause the 1998 budget bill had not appropriated any

funds for the payment of such claims. But before the

constitutionality of this stopgap measure could be

determined by an appellate court, the prohibition

“expired on its own terms in 2000,” Pet. App. 104

(Circuit Court Opinion), when the two year 1998

budget bill expired.

G. 2000 Enactment of KRS 141.200 (17)

and KRS 141.200(18)

We now come to 2000, when “the General As-

sembly finally had a chance to deal directly with the

emerging problem,” according to the Kentucky Su-

preme Court, which had no difficulty concluding that

“there can be no question that the legislature acted

to correct what it viewed as a mistake in GT7'EF’s in-

terpretation of the law, that it had a legitimate go-

vernmental purpose (raising and_ controlling

revenue), and that the statute rationally furthers

this purpose.” Pet. App. 20.

Justice Schroeder’s concurring opinion, which

says the statute was enacted “to prevent a massive

loss to the state treasury as a result of the G7'E deci-

sion,” Pet. App. 31, quotes the principal sponsor of

the 2000 legislation, who emphasized that the re-

14

troactive amendments were necessary to avoid hav-

ing to slash funding for education and social services.

“If we don’t do this [pass H.B. 541], it

could cost us up to $190,000,000.

These corporations that are involved did

not plan their business based on filing

the way that they are now attempting

to come back and get refunds .... But

now they want to come back and raid

the state treasury . . . to the tune of

$190,000,000. And that’s what this bill

is all about... [I]f we don't do it, then

we better figure out how to cut the

budget $190,000,000.” ‘Transcript of

Hearing on H.B. 541, House Appropria-

tions and Revenue Committee, Febru-

ary 22, 2000, (remarks of Chairman

Moberly), quoted at Pet. App. 31 n.2.

The 2000 General Assembly responded by

enacting KRS 141.200(17) and KRS 141.200(18) ° the

statutes challenged here.

Both statutes were expressly made retroactive

to 1994 and prior years.!° The retroactive reach of

the statutes was essential: the unitary method re-

9 See 2000 Ky Acts. ch 543, § 1, initially codified as KRS

141 200(9) and KRS 141.200(10), and subsequently re-codified

as KRS 141.200(17) and KRS 141.200(18), see 2005 Ky. Acts ch

168, § 15.

10 See KRS 446.080(3) (General Assembly may make statute

retroactive if “expressly so declared’).

—

15

fund claims that jeopardized the Commonwealth’s

treasury were all made by filing retroactive unitary

returns after the 1994 GTE decision, for 1994 and

prior years.

Both statutes only apply to retroactive unitary

returns. That is, the statutes only apply if the group

members initially filed separate returns, and then

switched to a retroactive unitary return. If a corpo-

rate group filed a unitary return or made a unitary

return refund claim, on or before December 22, 1994.

neither statute applies.

H. Retroactive Unitary Returns and

Mere Tax “Overpayment” Claims

We refer to the unitary returns filed by Peti-

tioners and other parent-subsidiary groups after the

GTE decision as “retroactive” unitary returns rather

than as “amended” returns, because none of the Peti-

tioners filed a timely unitary return by the due date

for 1994 or any prior year.!!1 These retroactive unita-

ry returns were labeled as “amended” returns, but

you can’t amend a tax return that has never been

filed. As the Kentucky Supreme Court observed, Pe-

titioners “sought to amend their returns by substi-

tuting” unitary returns for previously filed separate

returns. Pet. App. 4.

None of the Petitioners claims to have made a

tax overpayment under a Kentucky tax statute that

it Fach of Petitioners’ unitary returns was, however, filed with-

in the four year statute of limitations for refund claims.

16

violates the Constitution of the United States or that

is otherwise unlawful under some federal statute.

Each refund claim is based exclusively on the use of

a retroactive unitary return under KRS 141.120 as

construed by the GTE case, frozen in time and unaf-

fected by the 1996, 1998, and 2000 legislation.

All the refund claims in question were brought

exclusively under KRS 134.580, Kentucky’s general

tax refund statute, which expressly does not apply to

claims for refund of taxes “in any case in which the

statute may be held unconstitutional,” see KRS

134.580(6).

Petitioners’ refund claims are therefore mere

tax overpayment refund claims, based on using one

type of tax return rather than another type of tax re-

turn, to compute tax liability. The tax overpayments

allegedly made by Petitioners, can no more be said to

have been made under an unconstitutional or unlaw-

ful tax statute, than a taxpayer who mistakenly uses

straight line rather than accelerated depreciation, or

who incorrectly computes the amount of a deduction,

or who erroneously interprets the substantive tax

law, can be said to have paid taxes under an uncons-

titutional or unlawful tax statute.

Stated another way, the tax overpayments al-

legedly made by Petitioners are in no way caused by

or attributable to any feature of the Kentucky corpo-

rate tax law alleged to be unconstitutional or other-

wise unlawful under federal law. All of the tax

overpayments alleged to have been made by Peti-

oe

~]

tioners are attributable solely to Petitioners’ using

separate returns, rather than unitary returns, to

compute the taxable income and tax liability initially

paid for the years in question. !*

The Kentucky Department of Revenue disal-

lowed each of the Petitioners’ refund claims on the

merits, l.e., because the alleged unitary group failed

to establish that it conducted a unitary business un-

der the facts of its particular case and applicable law.

Pet. App. 106 n.3 (Franklin Circuit Court Opinion).

\2 The federal tax refund statutes do not distinguish between

refund suits brought to recover taxes paid under an unconstitu-

tional statute, and refund suits brought to recover taxes erro-

neously or incorrectly paid under a constitutional statute. 28

U.S.C. § 1346(a)(1), the Congressional waiver of the United

States’ sovereign immunity, gives the federal district courts ju-

risdiction to entertain suits against the United States for “the

recovery of any internal-revenue tax alleged to have been erro-

neously or illegally assessed or collected, or any penalty claimed

to have been collected without authority or any sum alleged to

have been excessive or 1n any manner wrongfully collected un-

der the internal-revenue laws.” Using the federa] statutory

terminology, “a tax 1s overpaid when a taxpayer pays more than

1s owed, for whatever reason or no reason at all,” United States

v. Dalm, 494 U.S. 596, 609 n 6 (1990). The term “overpayment”

under the federal statutes thus covers more conceptual territory

than it does under Kentucky law, and “encompasses ‘erroneous-

ly, ‘illegally,’ or ‘wrongfully’ collected taxes, as those terms are

used in 28 U.SC. § 1346(a)(1),” id., and would include taxes

paid under an unconstitutional statute. The taxpayer in United

States v. Carlton, for example, claimed to have overpaid estate

tax habilitvy because a deduction otherwise allowable to the es-

tate had been retroactively repealed in violation of the Due

Process Clause, and sued under § 1346(a)(1) to recover the tax.

18

REASONS FOR DENYING THE PETITION

The Kentucky Supreme Court’s decision is a

comprehensive and well reasoned application of cor-

rectly stated principles of rational basis review of re-

troactive tax statutes under the Due Process Clause

and of statutory classifications in economic legisla-

tion under the Equal Protection Clause.

I. Petitioners’ tax overpayment claims are

barred by well settled principles of state

sovereign immunity which do not need to

be rehashed on certiorari.

The Petition’s first reason for granting the

writ is the startling assertion that “Petitioners pos-

sessed a due process right to pursue refund claims

for overpaid taxes,” and that KRS 141.200(17) “de-

prive[s} Petitioners of this due process right by prec-

luding the Petitioners from pursuing their refund

claims,” Pet. 13. The “refund claims for overpaid

taxes” to which the Petition refers means the refund

claims made by the Petitioners under KRS 134.580,

and necessarily refers to mere tax “overpayments”

computed under a constitutional tax statute.

In other words, the Petition contends that the

Due Process Clause requires a State to consent to

suits in its own courts brought to recover mere tax

overpayments made under a state tax statute that is

neither “unconstitutional” under the federal Consti-

tution nor “unlawful” under some overriding federal

statute via the Supremacy Clause.

It may be helpful to clear away the conceptual

underbrush.

Under Kentucky law, a taxpayer has no

“right” to sue the Commonwealth to recover an al-

leged tax overpayment, unless the General Assembly

has consented to the suit. #.g., Department of Reve-

nue v. Jack Cole Ca., 474 S.W.2d 70, 72 (Ky. 1971)

(refund suit “cannot be sustained because [taxpay-

ers] cannot sue the Commonwealth without legisla-

tive consent”). “[T]he right to a refund of illegally or

improperly collected taxes does not derive from the

common law, but is a matter of legislative grace.”

Revenue Cabinet v. Gossum, 887 S.W.2d 329, 334

(Ky. 1994), quoting Dep't vf Conservation v. Co-De

Coal Co., 388 S.W.2d 614 (Ky. 1964). Accord, Hurry

Up Broadway Co. v. Shannon, 102 S.W.2d 30, 31

(Ky. 1937) (absent consent to refund suit, taxpayer

“would be without any right whatsoever to collect

such taxes from the Commonwealth ... such right

being a purely statutory one’).

The federal rule is the same. United States v.

Dalm, 494 U.S. 596 (1990), holds that “under settled

principles of sovereign immunity” a taxpayer cannot

sue the National Government to recover tax over-

payments without consent, id. at 608, and that even

the Supreme Court cannot “go beyond the authority

Congress has given us in permitting |tax refund]

suits against the Government,” because “if any prin-

20

ciple is central to our understanding of sovereign

immunity, it is that the power to consent to such

suits 1s reserved to Congress,” id. at 610

So much for the notion that a taxpayer has a

“due process right” to sue a State to recover a tax

overpayment without consent.

KRS 141.200(17) retroactively revokes the

Commonwealth’s consent to unitary return refund

suits, such as those brought by Petitioners, by pro-

viding that “no claim for refund” made for a pre-1995

year by a retroactive unitary return filed after De-

cember 22, 1994, “shall be effective or recognized for

any purpose.” The Kentucky Supreme Court has

construed this language and held that “the plain

meaning” of KRS 141.200(17) is that “the legislature

withdrew its consent, specifically, to be sued for a re-

fund under a combined return based on the unitary

business plan.” Pet. App. 11.1%

‘8 The construction of KRS 141 200(17) by the Kentucky Su-

preme Court “become[s] a part of the statute” for purposes of

review by this Court. Wheeling Steel Corp. v Glander, 337 US

562, 566 (1949); Allied Stores of Ohio, Inc v Bowers, 358 US.

522, 526 (1950). The 2007 Kentucky General Assembly made

its intention pluperfectly clear by retroactively amending the

general tax refund statute to provide that “notwithstanding any

provision of the Kentucky Revised Statutes to the contrary, the

Commonwealth hereby revokes and withdraws its consent to

suit in any forum whatsoever on any claim for recovery” of “any

tax overpayment” for a pre-1995 year based on a retroactive

unitary return filed after December 22, 1994. The 2007 legisla-

tion apphes to “all claims for such taxable years pending in any

judicial or administrative forum.” See KRS 134 580(9). The

2007 legislation 1s a virtual carbon copy of the federal legisla

Perhaps the Petition means that KRS

141.200(17), which retroactively revoked the Com-

monwealth’s consent to unitary method refund suits,

unconstitutionally snatched from Petitioners some

“due process right” they had in the Commonwealth’s

prior consent to suit.

There is very little gas in this conceptual tank.

It has been settled constitutional law for over

150 years that a State may retroactively revoke its

consent to suit, even after the cause of action has

arisen and even after suit has been filed. Beers v.

Arkansas, 61 U.S. 527, 529-530 (1857) (retroactive

revocation of consent to suit on bonds issued by the

State unless certain procedural requirements satis-

fied; keld, because consent to suit “is altogether vo-

luntary on the part of the sovereignty, it follows that

it may prescribe the terms and conditions on which it

consents to be sued... and may withdraw its con-

sent whenever it may suppose that justice to the

public requires it;” State legislature “might have re-

pealed the prior law {granting consent] altogether,

and put an end to the jurisdiction of their courts in

suits against the state, if they had thought proper to

do so”).

Beers v. Arkansas is no hoary precedent fallen

into desuetude. Its holding has been repeatedly re-

confirmed and relied upon by the Court in many

tion upheld in Edwards v. U.S Dept of Energy, 200 Fed Appx.

382, 389 (6th Cir. 2006), cert. den. 127 S Ct. 1913 (2007)

» ) gy

modern cases, including Raygor vu. Regents of Univuer-

sity of Minnesota, 534 U.S. 533, 543 (2002), and AI-

den v. Maine, 527 U.S. 706. 746 (1999). within the

last 15 years. College Savings Bank v. Florida Prepa-

id Postsecondary Educ. Expense Bd., 527 U.S. 666

(1999), quoted Beers’ key holding that a State’s “deci-

sion to waive [sovereign] 1mmunity, however, ‘is al-

together voluntary on the part of the sovereignty,”

and reaffirmed that “a State may, absent any con-

tractual commitment to the contrary, alter the condi-

tions of its waiver and apply those changes to a

pending suit.” 527 U.S. at 675-676.

The sovereign’s consent to suit is not a proper-

ty might protected by the Due Process Clause; ergo,

revocation of consent to suit invades no constitution-

ally protected interest.

Justice Brandeis’ opinion for a unanimous

Court in Lynch v. United States, 292 U.S. 571 (1934),

confirms that the Petitioners had no constitutionally

protected interest in the Commonwealth’s prior con-

sent to suits to recover alleged tax overpayments,

and therefore have no tenable argument that the re-

troactive revocation ot consent to suit in KRS

141.200(17) violated any rights vouchsafed by the

Due Process Clause. Lynch upheld retroactive revo-

cation of Congress’ consent to sue the United States

on war risk insurance policies, with an unlimited pe-

riod of retroactivity. “Although consent to sue was...

given when the policy issued Congress retained

power to withdraw the consent to sue at any time.

[(C]onsent to sue the United States is a privilege ac-

23

corded, not the grant of a property right protected by

the Fifth Amendment.” 292 U.S. at 581.

Justice Douglas’ opinion for a unanimous

Court in Maricopa County v. Valley Nat’ Bank, 318

U.S. 357 (1943), upheld retroactive revocation of con-

sent to suit against a federal agency, with an unli-

mited period of retroactivity. “Such consent, though

previously granted, has now been withdrawn. And

the power to withdraw the privilege of suing the

United States knows no limitations.” 318 U.S. at

362.

Subsequent decisions of the federal Courts of

Appeals have unflinchingly followed Lynch and Ma-

ricopa County. E.g., United States v. Lindsey, 202

F.2d 239, 240 (ist Cir. 1953) (“consent to sue the

United States is a privilege which 1s revocable at any

time”); Laycock v. United States, 230 F.2d 848, 850

(9th Cir. 1956) (“well settled that the power to with-

draw” consent “knows no limitations”); Juda v. Unit-

ed States, 13 Cl. Ct. 667, 689 (Cl. Ct. 1987)

(“unbroken line” of decisions); Heller v. United

States, 776 F.2d 92, 98 (3d Cir. 1985) (“Congress’

power to remove a right to sue the government 1s ab-

solute.”); Clinton County Comm'rs v. EPA, 116 F.3d

1018, 1026 (3d Cir. 1997) (egislature’s power to

withdraw the privilege of suing the sovereign “knows

no limitations’); Edwards v. U.S. Dept. of Energy,

200 Fed. Appx. 382, 389 (6 Cir. 2006), cert. den. 127

S.Ct. 1913 (2007) (power to withdraw consent “knows

no limitations”); Anolok v. United States, 873 F.2d

369, 374 (Fed. Cir. 1989) (‘no indication in any later

24

[Supreme Court] decision that Lynch is any other

than an accurate statement of the law”).

Petitioners contend that this “due process

right to pursue their refund claims,” t.e., to sue the

Commonwealth in its own courts, was established by

McKesson Corp. v. Div. of Alcoholic Beverages & To-

bacco, 496 U.S. 18 (1990), and Reich v. Collins, 513

U.S. 422 (1998).” Pet. 15.

Neither McKesson nor Reich may properly be

freighted with the “due process right” claimed by the

Petition, and the decision of the Kentucky Supreme

Court in no way conflicts with either McKesson or

Reich. Both McKesson and Reich differ from this

case in three fundamental respects.

First, both McKesson and Reich involved state

tax statutes which violated the federal Constitution.

Neither involved a mere tax overpayment claim,

such as a claim that a taxpayer has overpaid tax lia

bility by computing a depreciation deduction using

straight line rather than accelerated depreciation, or

(as here) a claim that the taxpayer has overpaid tax

hability by computing taxable income using a sepa-

rate return rather than a unitary return.

In McKesson, the Florida Supreme Court had

already determined that a Florida state tax statute

(which imposed a discriminatory tax on out-of-state

beverages but not on in-state citrus beverages) vi-

olated the dormant Commerce Clause, under Bac-

chus Imports, Ltd. v. Dias, 468 U.S. 263 (1984). See

29

496 U.S. at 22. In Reich, a Georgia state tax statute

taxed pension income received by federal retirees but

exempted pension income received by state govern-

ment employees. It was uncontested that the Geor-

gia statute and similar statutes of “numerous States”

violated the “constitutional intergovernmental tax

immunity doctrine,” under Davis v. Michigan Dept of

Treasury, 489 U.S. 803 (1989)). See 513 U.S. at 108.

Thus both McKesson and Reich are statements

of the constitutional common law of remedies, 1.e.,

what remedies are constitutionally required or per-

mitted choices when a state court with subject mat-

ter jurisdiction considers what remedies may or must

be fashioned when a taxpayer has paid taxes under a

state statute determined to be unconstitutional.

This inquiry starts with the basic constitutional

principle, quoted by both McKesson and Reich, that

“a denial by a state court of a recovery of taxes ex-

acted in violation of the laws or Constitution of the

United States by compulsion is itself in contraven-

tion of the Fourteenth Amendment,” McKesson, 496

U.S. at 34; Reich, 513 U.S. at 109 (both quoting Car-

penter v. Shaw, 280 U.S. 363, 369 (1930)). But

where, as here, no claim is made that any taxes have

been “exacted in violation of the laws or Constitution

of the United States,” neither McKesson nor Reich

gains any conceptual traction.

Second, in both McKesson and Reich, the de-

fendant States had consented to the refund suits in

their own courts by the plaintiff taxpayers, thereby

waiving state sovereign immunity. As the Court

26

pointedly observed in McKesson, “the Florida courts

accepted jurisdiction over this suit which sought

monetary relief’ from the State, 496 U.S. at 26, and

Florida “concedels] that the State waived any sove-

reign immunity from suit through {the state sta-

tute’s] authorization of a state-court refund action,”

496 U.S. at 49 n.34. Georgia in Rerch had similarly

waived its state sovereign immunity by statutorily

authorizing refund suits to recover “illegally as-

sessed” taxes, which the Court found to be an “ob-

vious’ consent to suits to recover “state taxes

assessed in violation of federal law.” 513 U.S. at 111.

The state courts in McKesson and Heich had

subject matter jurisdiction to entertain the claims

asserted against Florida and Georgia. Both States

had waived state sovereign immunity. But neither

McKesson nor Reich says anything about the scope of

state sovereign immunity when it has not been

waived, or about the constitutional power of a State

to retroactively revoke a prior waiver.

Third, both McKesson and Reich base their

analyses on the proposition that exaction of a tax isa

deprivation of property within the meaning of the

Due Process Clause, and at the most hold that a

State must provide “meaningful backward-looking

relief to rectify any unconstitutional deprivation,”

McKesson, 496 U.S. at 32, or “a clear and certain

remedy for taxes collected in violation of federal law,”

Reich, 513 U.S. 108. Assuming arguendo that these

holdings have any vitality beyond cases like McKes-

son and Aeich where state sovereign immunity has

ae

been waived, they do not have any staying power

here: the Kentucky corporate income tax law has not

been held to be unconstitutional or to otherwise vi-

olate federal law.

A mistake by a taxpayer in determining his

tax liability does not transmogrify a constitutionally

valid state tax statute into an “unconstitutional de-

privation” of property or an exaction of a tax “in vi-

olation of federal law.”

IT. The Court has already provided ample

“guidance” on “the due process limits of

retroactive legislation.”

The Petition’s second reason for granting cer-

tiorari starts by asking the Court to “offer guidance

to States and taxpayers on the due process limits of

retroactive legislation” Pet. 19, but ends by asking

the Court “to establish that retroactive legislation

violates due process when a state legislature fails t:o’

enact the legislation at the first possible legislative

session,” Pet. 24. Presumably this Due Process

Clause requirement would shackle Congress as well.

The Court has already provided all the “guid-

ance” needed on the permissible reach of retroactive

legislation in three prior decisions. United States v.

Carlton, 512 U.S. 26, 30-31 (1994) (“test of due

process’ for “retroactive economic legislation” is “met

simply by showing that the retroactive application of

the legislation is itself justified by a rational legisla-

tive purpose.” Accord, Pension Benefit Guaranty

Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-730

(1984); Usery v. Turner Elkhorn Mining Co., 428 U.S.

1, 16-17 (1976).

The Petition fails to make any showing that

the Carlton test has bemused the lower courts, or

has led to decisions by different courts that cannot

easily be reconciled as slightly different applications

of a properly stated rule of law. Indeed, the Petition

admits that “lower courts have followed” Cariton al-

beit “in different ways,” Pet. 21, the operative word

being “followed.” +4

The Petition then abruptly veers into cold and

deep water by advancing the propositions that “due

process should limit state legislatures to enacting re-

troactive legislation only at the first opportunity to

do so,” and that “it is fundamentally irrational” for a

state legislature “to understand that a revenue or tax

problem exists that can only be remedied through

retroactive legislation, and fail to enact the legisla-

tion at the first possible legislative session.” Pet. 24.

These propositions are much too extravagant

to be seriously maintained, or to warrant the Court’s

consideration on certiorari. What property interest

i¢ The Petition at 23 n.3 quarrels with the Kentucky Supreme

Court’s factual determination that the Kentucky General As-

sembly enacted KRS 141.200(17) and KRS 141.200(18) “at the

furst available opportunity, as 1t became aware of the issues,”

296 S W 3d at 401, asserts that “the undisputed evidence” be-

fore the trial court was to the contrary This argumentative

reference to the record is neither correct nor a good reason for

granting certiorar})

bo

CO

protected by the Due Process Clause requires re-

troactive economic legislation to be enacted “at the

first possible legislative session,” or not at all?

Any such use-it-or-lose-it limitation on a legis-

lature’s constitutional power cannot be squared with

Carlton’s express holding that “a taxpayer has no

vested right in the Internal Revenue Code” protected

by the Due Process Clause, 512 U.S. at 33, or recon-

ciled with the precedents on which Carlton relied.

See, e.g., Millikin v. United States, 283 U.S. 15 (1931)

{sustaining statute increasing federal estate tax on

gifts made in contemplation of death, applicable with

an unlimited period of retroactivity to all gifts made

prior to enactment); Usery v. Turner Elkhorn Mining

Co., 428 U.S. 1 (1976) (sustaining federal statute im-

posing lability on employers for black lung benefits,

applicable with an unlimited period of retroactivity

for all prior employees). Decisions of three Courts of

Appeals would also have to be disapproved. !®

We cannot imagine that the Due Process

Clause does not constrain the unlimited retroactive

effect of the Court’s decisions,!® yet cabins the consti-

16 fg, Montana Rail Link, Inc v United States, 76 F.3d 991

(9% Cir. 1996) (four to six year period of retroactivity), Honey-

well, Inc. v United States, 973 F.2d 638 (8 Cir 1992) (ten

vears); Wilgard Realty Co., 127 F.2d 514 (2d Cir.) cert den. 317

U.S. 655 (1942) (15 years); accord, Fife v. CIR, 82 TC 1 (1984)

{unlimited penod of retroactivity)

16 Al] the Court’s decisions are “the controlling interpretation of

federal law and must be given full retroactive effect in all cases

still open on direct review and as to all events, regardless of

whether such events predate or postdate our announcement of

30

tutional lawmaking power of Congress and the

States within a retroactive period no greater than

“the first possible legislative session” following the

legislature’s identification of the “legitimate legisla-

tive purpose” sought to be achieved by retroactive

economic legislation.

The GTE case was a statutory construction

case. Like any statutory construction decision, its

result (except with respect to the parties to the final

judgment, see Plaut v. Spendthrift Farm, Inc., 514

U.S. 211 (1995)) and precedential effect could be

changed or nullified by a subsequent amendment of

the statute construed. The Petitioners never had

any interest in the GTE decision protected by the

Due Process Clause. “No person has a vested inter-

est in any rule of law, entitling him to insist that it

shall remain unchanged for his benefit.” New York

Central Railroad Co. v. Sarah White, 243 U.S. 188,

198 (1917). “Our cases have clearly established that

a person has no property, no vested interest, in any

rule of the common law.” Duke Power Co. v. Carolina

Envir. Study Group, Inc., 438 U.S. 59, 88 n.32 (1978)

(citing many cases).

The Petition fails to explain why any of these

bedrock precedents needs to be reconsidered.

the rule.” Harper v. Virginia Dep't of Taxation, 509 U.S. 86. 97

(1993)

lil. The Equal Protection Clause does not re-

quire all-or-nothing economic legislation.

The Petition’s third reason for granting the

writ is that the Court “should establish” that the

Equal Protection Clause “precludes a State from

treating similarly situated taxpayers differently

based solely on the date” their income tax refund

claims are filed “and the order in which “those claims

[are] processed by a state agency.” Pet. 25.

In discussing this third reason, the Petition

lumps KRS 141.200(17) and KRS 141.200(18) into

one undifferentiated statute the Petition calls “the

2000 Amendments.” This conflation of two indepen-

dently operative statutes discombobulates the analy-

sis. If either statute is sustained, Petitioners’ refund

claims will be precluded, either by the substantive

tax law or by state sovereign immunity.

If the retroactive prohibition of unitary re-

turns under KRS 141.200(18) is upheld, then no Pe-

titioner has overpaid its correct tax hability,

determined using separate returns. If no tax over-

payment has been made, no refund must be paid.

If the retroactive revocation of consent to uni-

tary return refund suits under KRS 141.200(17) is

upheld, then no Petitioner may sue the Common-

wealth in a Kentucky court to recover an alleged tax

overpayment computed using unitary returns. If

state sovereign immunity bars the suit, the merits of

the claim are immaterial.

We cannot agree with the Petition’s assertion

that “this case involves similarly situated taxpayers

being treated differently as a result of the 2000

Amendments.” Pet. 26. This assertion mischaracte-

rizes both statutes, which apply equally to all corpo-

rate taxpayers.

The “different treatment” of “similarly si-

tuated taxpayers’ decried by the Petition is a func-

tion of the effective date of the two statutes, not of

any legislative classification among taxpayers.

All tax legislation must have an effective date.

The Tax Reform Act of 1986 did not violate the Equal

Protection Clause by disallowing depreciation deduc-

tions generated in years after 1986 as “passive

losses,” while permitting depreciation deductions

generated in 1986 and prior years to fully shelter or-

dinary income, even though the deductions were

generated by exactly the same depreciable property

on either side of the effective date of the law.

If the different treatment of “similarly si-

tuated taxpayers’ caused by the effective date of tax

legislation violates the Equal Protection Clause, no

tax legislation could ever withstand an Equal Protec-

tion Clause challenge.

The Petition mistakes an effective date for a

legislative classification, and a tautology for a consti-

tutional issue. The Court long ago determined that a

tax statute with a retroactive effective date no more

33

offends the Equal Protection Clause than a tax sta-

tute with a prospective effective date. Weich v. Hen-

ry, 305 U.S. 134 (1938), held that a 1935 state tax

law retroactively taxing dividends received in 1933,

was not “a denial of equal protection because retroac-

tive. If the 1933 dividends differed sufficiently from

other classes of income to admit of the taxation, in

that year, lapse of time did not remove that differ-

ence so as to compel equality of treatment when the

income was taxed at a later date,” 305 U.S. at 144.

In other words, if tax legislation would not vi-

olate the Equal Protection Clause if made effective

prospectively, it does not violate the Equa] Protection

Clause if made effective retroactively. There is no

Equal Protection issue lurking here.

If we focus on KRS 141.200(17) — the retroac-

tive revocation of consent to unitary return refund

suits — then it appears that Petitioners want the

Court to “establish” that the Equal Protection Clause

requires a sovereign State to consent to all types of

tax refund suits, or to none. But “to the extent [a

State] has chosen to consent to certain classes cf

suits while maintaining its immunity from others, it

has done no more than exercise a privilege of sove-

reignty concomitant to its constitutional immunity

from suit.” Alden v. Maine, 527 U.S. 706, 758 (1999).

Cf. California v. Arizona, 440 U.S. 59, 65 (1979) (“It

is clear, of course, that Congress could refuse to

waive the Nation's sovereign immunity in all cases or

only in some cases.”).

If we focus on KRS 141.200(18) — the retroac-

tive prohibition on the use of unitary returns then

it appears that Petitioners want the Court to “estab-

lish” that the Equal Protection Clause requires a re-

troactive tax statute to apply to all prior transactions

or years, or to none. But the Equal Protection

Clause “does not compe! [state] legislatures to prohi-

bit all like evils, or none,” U.S. v. Carolene Products

Co., 304 U.S. 144, 151 (1938). Grandfather clauses

have been routinely upheld against Equal! Protection

Clause attacks. E.g., City of New Orleans v. Dukes,

427 U.S. 297 (1976) (upholding prohibition of French

Quarter pushcart vendors which exempted vendors

in operation for eight years: “rather than proceeding

by the immediate and absolute abolition of all push-

cart food vendors, the city could rationally choose in-

itially to eliminate vendors of more recent vintage.

This gradual approach to the problem is not constitu-

tionally impermissible.”); United States R.R. Retire-

ment Bd. v. Fritz, 449 U.S. 166, 177 (1980)

(upholding abolition of double retirement benefits for

railroad employees which exempted persons hired

prior to specified dute: "because Congress could have

eliminated windfall benefits for all classes of em-

ployees, it is not constitutionally impermissible for

Congress to have drawn lines between groups of em-

ployees for the purpose of phasing out those bene-

fits’). The Petition offers no reason why these

precedents need to be revisited.

The Petition fails to make any showing, or

even to suggest, that it was unreasonable or irra-

tional for the Kentucky General Assembly to have

a

concluded that the lhon’s share of a_ predicted

200,000,000 revenue loss was attributable to re-

troactive unitary returns filed after the date of the

GTE decision, and therefore to have made the prohi-

bition effective with respect to such returns. That

failure is fatal to the Petition’s contention that KRS

141.200(18) suffers some Equal Protection Clause

infirmity that needs doctoring on certiorari.

CONCLUSION

The Petition for a Writ of Certiorari should be

denied.

Respectfully submitted,

Laura M. Ferguson C. Christopher Trower

Office of Legal Services Counsel of Record

for Revenue 3159 Rilman Rd., N.W.

P.O. Box 423 Atlanta, GA 30327-1503

Frankfort, KY 40602 (404) 816-5066

ctrower@electriclaw.com

APRIL 23, 2010 Counsel for Respondents