Opposition Brief — Asworth, LLC v. Kentucky Department of Revenue, Finance & Administration Cabinet

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Supreme Court, U.S.

FILED

DEC 20 2010

OFFICE OF THE CLERK

No. 10-662

Su The

Supreme Court of the Anited States

a € a

ASWORTH, LLC (f/k/a Asworth Corporation);

HTF, LLC (f/k/a HT-Forum, Inc.); and D AVIATION

SERVICES, LLC (f/k/a D Aviation Services, Inc.),

Petitioners,

DEPARTMENT OF REVENUE, FINANCE

AND ADMINISTRATION CABINET,

COMMONWEALTH OF KENTUCKY (f/k/a

Revenue Cabinet, Commonwealth of Kentucky),

Respondent

——

On Petition For A Writ Of Certiorari

To The Kentucky Court Of Appeals

BRIEF IN OPPOSITION

LAURA M. FERGUSON

Counsel of Record

DEPARTMENT OF REVENUE

COMMONWEALTH OF KENTUCKY

501 High Street, 10th Floor

P.O. Box 423

Frankfort, Kentucky 40602-0423

(502) 564-956]

lauram fergusor@ky.gov

Counsel for Respondent

COCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED

1. Whether a State violates the Commerce

Clause of the U.S. Constitution by enacting a taxing

statute on a partner’s share of Kentucky distributive

share income from a partnership doing business both

within and without Kentucky and deriving income

from the partnership’s activities in Kentucky when

the statute has a doing business nexus standard

rather than a physical presence nexus standard?

2. Whether a State violates the Due Process

Clause of the U.S. Constitution by passing legislation

that changes the calculation of when interest may

begin to accrue on a tax refund claim, and such

change applies “effective for refunds issued after

April 24, 2008”?

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ...........00.00..00000ceee. 1

TABLE OF CONTENTS .....0......00 cece cece eee eee es 11

TABLE OF AUTHORITIES .............00.0.000 ee. Vv

BRIEF IN OPPOSITION TO WRIT FOR CER-

CE PPR CP AM hives eunsecucichenyceapnrcessassiasansvieeesseenbinvanaeaieh

Physical Presence And Quill .....................

Clarification Of House Bills 704 And 216

And Some Historical Context....................

Clarification Of The Factual Background ..

REASONS FOR DENYING THE WRIT..............

II.

RATHER THAN CREATING A CON-

FLICT AMONG STATE COURTS, THE

DECISION ENLARGES A GROWING

CONSENSUS OF THE STATES’ HIGH-

EST COURTS REJECTING THE CLAIM

THAT THE COMMERCE CLAUSE RE-

QUIRES “PHYSICAL PRESENCE” TO

ESTABLISH “SUBSTANTIAL NEXUS.”....

THE DECISION IS CONSISTENT WITH

QUILL, WHICH EXPLICITLY HOLDS

THAT THE COURT’S PRECEDENTS

DO NOT ESTABLISH A PHYSICAL

PRESENCE REQUIREMENT BEYOND

SALES AND USE TAXHES.......0.000 ee.

IIT.

TABLE OF CONTENTS —- Continued

Page

THE DECISION NEITHER EVISCER

ATES CARLTON NOR FURTHERS A

SPLIT ON THE CONSTITUTIONAL

STANDARDS GOVERNING RETRO

ACTIVE TAX LEGISLATION ....... 26

A. This Issue Is Moot, As Petitioners Are

Not, And Cannot Be, Entitled to Any

IntereSt........... nas 26

B. The Court Has Previously Held That

The Retroactive Denial Of Interest

Does Not Violate Due Process Or Any

Other Constitutional Provision 27

C. The Court Has Previously Upheld

Retroactive Statutes That Make A

Reasonable Change In The Remedy,

And Did Not Require A “Modesty Re

quirement’ As Part Of The Analysi:

D. The Court Has Previously Uphel

Unlimited Periods Of Retroactivity,

Which Holdings Were Not Reversed

By Carlton

KE. Carlton Did Not Mandate A “Modesty

Requirement” As A Prerequisite To

Any Due Process Analysi:

TABLE OF CONTENTS — Continued

Page

F. There Is No Split Regarding Carlton,

As The Decisions Can Be Easily Rec

onciled As Slightly Different Appl

cations Based Upon The Individual

Facts And Circumstances Of The

Decisions 35

CONCLUSION

TABLE OF APPENDICES

APPENDIX A COMMONWEALTH OF

KENTUCKY STATE FISCAL NOTE

STATEMENT TO HOUSE BILL 568 HSC

DATED FEBRUARY 26, 2008 App. ]

APPENDIX B STIPULATIONS DATED

SEPTEMBER 5. 2005 AND FILED WITH

THE KENTUCKY BOARD OF TAX AP

PEALS App

TABLE OF AUTHORITIES

A & F Trademark, Inc. ' lolson, 605 S.E.2d

187 (N.C. App. 2004), cert. denied, 546 U.S

821 (2005) ll. 14

Acme Royalty v. Dir. of I nue, 96 S.W.3d 72

(Mo. 2002)

America Online, Inc. v. Johnsor 2002 WI]

1751434 (Tenn App. 2002)

American Trucking As: In Smith. 496

U.S. 167 (1990) ()

Arco Building Systems, Inc. v. Chumley, 209

S.W.3d 63 (Tenn. App. 2006

Rarclays Bank PLC i ranch ( [3 (

fornia, 512 U.S. 298 (1994

Beazell v. Ohio, 269 U.S. 167 (192: rg

BIS LP [ne ( Dir. Dit of Tax tlion. 2b N.J

Tax 88 (N.J. Tax 2009). appeal docketed, No

A1172-09 (N.J. Super. Ct App. D1 Nov. 9

2009)

Borden ( WaT Frili als a Pla: Lili / Pp 44 f

726 N.E.2d 73 (Ill. App. 2000)

Bradley Si hool Bd O7 Ru Amu na 116 |

696 (1974)

. _ ry _ «

Bridges l Creoj] Tey, inc., 9384 So.Zd 115

App. 2008), writ denied, 978 So.2d 370 (2008

TABLE OF AUTHORITIES — Continued

Capital One Bank v. Com’r of Revenue, 899

N.E.2d

S.Ct. 28:

Chase Mar

(Conn.

(1999)...

( Ly of So

App. 2005) . Q 1

Coleman v. Reamer’s Ex’r. 237 Ky. 603. 36

S.W.2d 22 (193]

Complete Auto Transit v. Brady, 430 U.S. 274

\ i977) pa

Department of Revenue v. Jack Cole Co., 474

S.W.2d 7

( reo} frey, i

87 (Mas

76 (Mass. 2009). cert. denied, 129

7(U.S. 2009)

thattan Bank v. Gavin. 733 A.2d 782

1999), cert. denied, 528 U.S. 965

merset v. Bell. 156 S.W.3d 321 (Ky

0 (Ky. 1971

rie Com r of feet ClLUE, SYY N Ky 2d

2OO9). cert. dented. 129 S.Ct. 2853

(US. 2009)

Ceoffre y, [ree { Oklahoma [aa Comn is LO?

132 P3d 632 (Okla App 9005). cert. dented

510 U.S. 992 (1998)

(Gsuardian

N.W.2d

Sui b Prov?

Harper t

Indus. ¢ orp. | Dept oO} lrea ur 199

349 (Mich. App. 1993), app. denied

512 N.W.2d 846 (Mich. 1994 L2

Virginia DD Di OT Ta 1710) AYO [

86 (1993)

J.C. Penne

yy Natl Bank v. Johnson. 19 S.W.3d

831 (Tenn. Ct. App 1999). cert. denied. 53]

U.S. 927

(2000) 9 179.13. 7

Page

TABLE OF AUTHORITIES — Continued

Page

Lanco, Inc. v. Dir, Div. of Taxation, 908 A.2d

176 (N.J. 2006). cert. dented, 551 U.S. 1131

(2007) 14,17

Landgraf v. UST Film Products, 511 U.S. 244

fe... } Rene ie anes — 28, 29, 36

Lanzi v. Alabama Dep't of Revenue, 968 So.2d

18 (Ala. App. 2006). 15, 16

Midland Cent. Appraisal Dist. v. BP America

Prod. Co 282 S.W.3d 215 (Tex. App. 2009) 1 |

Millkin v. United States, 283 U.S. 15

RE carats uencwtniatcaiackhersapenrieisenci sites Keseseeg ae g ag. ee

Missourt & Arkansas Lumber & Mining Co. 1

Greenwood Dist. of Sebastian County, 249

U.S. 170 (1919)... 7A

Morley v. Lake Shore & M.S. Ry. Co., 146 U.S

162 (1892).... 27

National Bellas Hess, Inc. v Department of

Revenue, 386 U.S. 753 (1967) .....................18, 19, 20

Orvis Co., Inc. v. Tax Appeals Tribunal, 654

N.E..2d 954 (N_Y.), cert. dented sub nom., 516

Ly SS. SS (EGO) ....<< 5-02-0000 20)

Pension Benefit Guaranty Corporation v. R.A

Gray & Co., 467 U.S. 717 (1984) .......... 3]

Peoples Gas, Light and Coke Co. v. Harrison

Cent. Appraisal Dist., 270 S.W.3d 2008 (Tex.

App. 2008) ..... L]

Vill

TABLE OF AUTHORITIES ~ Continued

Page

Prince v. State Dept of Revenue, 2010 WH,

1837773 (Ala. App. 2010).. RI

Quill Corp. v. North Dakota, 504 U.S. 298

oO). - 4] ee eichiskelcuiuabiakaseeies A fe oeaaet Le...s PASSLMN

Rice v. Stoux City Cemetery, 349 U.S. 70 (1992)

Ridge v. Ridge, 572 S.W.2d 859 (Ky. 1978)...... 28

Rylander v. Bandag Licensing Corp., 18 S.W.3d

296 (Tex. App. 2000)........ Avsusesaepna a ae

Sommerville v. United States, 376 U.S. 909

Pape re ee ee 26

Tax Com of State v. MBNA America Bank,

N.A., 640 S.E.2d 226 (W.Va. 2006), cert. de

nied. 551 U.S. 1141 (2007).................... ; 13

The Monrosa v. Carbon Black Export, Ine., 359

per ee ee cacuen are 20

XO Production Corp. vD Alliance Resources

Corp., 509 U.S. 443 (1998). ee eee aa me X

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

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

(1976) OU, O1, 08, GO

Waddell v. Waddell. 904 So.2d 1275 (Ala. Civ.

App. 2004) ..... easusccnaysacaeeans

White v. New Hampshire Dept. of employment

Security, 455 U.S. 445 (1982) .............. eaten: 20

TABLE OF AUTHORITIES — Continued

Page

CONSTITUTIONAL PROVISION

U.S. Const. amend. XIV & (“Due Proce

Clause”) passim

U.S. Const. art. I, $8 (“Commerce Clause”) passim

STATUT!

Ky. Rev. Stat 131.183 .

Ky. Rev. Stat. $134.580 y BY

Ky. Rev. Stat. §134.590 » &

Ky. Rev. Stat. $141.04 6

Ky. Rev. Stat. §141.206 6, 7, 8, 21

MCL 208.1200(1) 13

OTHER AUTHORITII

1938 Ky. Acts, ch. 4 86 Y,

1970 Ky. Acts, ch. 216 §2 3

[976 Ky. Acts, ch. 155 §1 3

1982 Ky. Acts, ch. 452 §3 3

1990 Ky. Acts, ch. 423 §5 3

L990 Ky. Acts, ch. 423 87 3

2008 Ky. Acts, ch. 182 §8 2, 4,21

Hi.B. 216, 2009 Gen. Assem., Rey. Sess. (Ky

2009) 9

TABLE OF AUTHORITIES — Continued

Internal Revenue Act of 1921. Pub. L. No. 6%

98, $1324, 42 Stat. 227

Tax Reform Act of 1986, Pub. L. No. 99-514

81511(a), 100 Stat. 2085 (1986)

COUNTERSTATEMENT OF THE CASE

A. Physical Presence And Quill.

Contrary to Petitioners’ assertion, there is no

conflict warranting review by this Court, nor is it of

pressing significance to American business. As Peti-

tioners themselves admit, 35 states have passed

legislation holding that physical presence is not

required in order to impose tax outside the context of

sales and use taxes. Further, while Petitioners at

tempt to manufacture a conflict, none exists. Of the

three states that Petitioners point to as ruling that

Quill Corp. v. North Dakota, 504 U.S. 298 (1992)

extends to taxes outside of Kentucky, one decision

specifically did not. rule on this issue and was later

called into question by the same court in a later case,

the tax in another decision was subsequently elimi-

nated by that State’s legislature and replaced by

another tax that did not require physical presence,

and the third is easily distinguishable based upon the

unique facts 1n that case. Other cases cited by Pet

tioners never addressed the Commerce Clause, or are

merely administrative decisions or advisory opinions,

rather than a holding by the State court of last resort.

One of the cases relied upon by Petitioners is on

appeal and not final. As a result, there is simply no

conflict with respect to the Commerce Clause. Simi-

larly, there is no conflict with Quill itself, which

expressly declined to extend the physical presence

standard beyond sales and use taxes.

Finally, the parade of horribles that will purport

edly result if the Court does not take this case is

simply speculative at best. The statute in dispute was

limited to distributive share income from _ pass-

through entities, and in no way extended to all tax

payers or to dividend income. In fact, despite Peti-

tioners’ claims to the contrary, American businesses

have continued to operate, even in an environment

where the majority of states have limited the physical

presence standard to sales and use taxes. As the

Court noted in Quill, resolution of this issue is best

left to Congress.

B. Clarification Of House Bills 704 And

216 And Some Historical Context.

Petitioners briefly discuss how 2008 Ky. Acts, ch.

132, $8 (“House Bill 704”) and H.B. 216, 2009 Gen.

Assem., Reg. Sess. (Ky. 2009) (“House Bill 216,” and

collectively with House Rill 704, the “Bills”),’

mechanically in the Petition, but there are some

work

misstatements that need clarification. Pet. 15, fn. 7.

Some historical context is also appropriate in under-

standing how interest rates have applied to refund

claims. When Kentucky first enacted a refund stat-

ute, back in 1938, interest was only authorized on

overpayments resulting from error of Revenue or its

agents. 1938 Ky. Acts, ch. 4, §6. In 1970, this statute

' House Bill 216 repealed and reenacted House Bill 704 in

response to a potential procedural issue

was amended to limit the authorization of the accrual

of interest to overpayments resulting from a clerical

error of Revenue or its agents. 1970 Ky. Acts, ch. 216,

§2. In 1976, the law was again changed to increase

the applicable interest rate on such refund claims

from six percent to eight percent. 1976 Ky. Acts, ch.

155, $1. It was not until 1990 that this statute was

amended to expand the authorization of the accrual of

interest to refund claims other than constitutional or

ad valorem taxes. 1990 Ky. Acts, ch. 423, §7. Notably,

interest has never been allowed to accrue on refund

claims resulting from constitutional claims or ad

valorem taxes. City of Somerset v. Beli, 156 S.W.3d

321, 330 (Ky. App. 2005); KRS 134.590. The Constitu-

tion simply does not mandate interest on refund

payments.

In 1982, KRS 131.183 was enacted to provide

that the interest rate on assessments assessed on or

after July 1, 1982, shall be 16%, and that the interest

rate on certain overpayments would be at a rate

equal to 75% of the interest rate on assessments.

1982 Ky. Acts, ch. 452, §3. In 1990, this statute was

amended to provide that the interest rate on assess

ments and overpayments would be the same rate.

1990 Ky. Acts, ch. 423, §5. Notably, the federal gov-

ernment has established different interest rates for

underpayments and overpayments since 1987.° In

Tax Reform Act of 1986, Pub. L. No. 99-514, §1511(a), 100

Stat. 2085, 2744 (19° 6). Originally, the federal government only

charged interest on underpayments of tax; only in 1921 was the

(Continued on following page)

1999, the rates were equalized except for corporate

taxpayers, who have a difference of one percent and,

in some cases, four and one-half percent, between the

interest rate for underpayments and overpayments.

This is consistent with financial markets and other

institutions, where the interest rate paid on savings

accounts, for example, is not the same as the interest

rate charged on loans. Without such a difference, one

of the interest rates is out of synch with the general

economy, encouraging either a delay in (i) the pay-

ment of taxes, to take advantage of a higher market

rate, or (11) requesting a refund of taxes, to take

advantage of the higher interest rate on overpay-

ments. The difference removes such incentive.

Petitioners’ claim that such legislation was

arbitrary and unfounded is baseless. Notably, 1s part

of this legislation, a fiscal note was attached to House

Bill 704, when it was amended to include the disput-

ed provision, which discussed the fiscal impact of the

pill and the millions in savings to Kentucky as

a result of enacting this legislation. A copy of this

fiscal note is reprinted in Respondent’s Appendix

(“Resp. App.”) at 1. As Petitioners note, the Bills also

law changed to provide for interest on overpayments of federal

tax. Internal Revenue Act of 1921, Pub. L. No. 67-98, §1324, 42

Stat. 227, 316.

Similarly, the legislative change with respect to what date

interest begins to accrue on an overpayment, encourages the

prompt filing of refund claims, and can potentially reduce the

amount of interest due at a time when the Commonwealth is

experiencing revenue shortfalls and significant budget cuts.

changed the interest rate on refunds from “prime

rate” to “prime less 2%,” but that provision was

prospective only in nature, and therefore not an issue

before this Court. Pet. 15, fn. 7.

While Petitioners allege that two Orders grant

ing their refund claims, in whole or in part, were

summarily affected by the Bills,” pursuant to the

Kentucky Court of Appeals’ decision, they are not

entitled to any refund. Obviously, there can be no

interest on a nonexistent refund. Significantly, Peti-

tioners seek a grant of certiorari on whether the

denial of the refund claim is unconstitutional. Even

assuming arguendo that they could prevail on that

issue, their refund claim would then be grounded in

Ky. Rev. Stat. §134.590. Interest has never been

allowed to accrue on refund claims arising pursuant

to that statute. City of Somerset, 156 8.W.3d at 330.

As a result, regardless of whether the Court grants

certiorari on the first issue, the interest issue Is moot.

Under Kentucky law, however, a refund is not due until

the matter is “finally adjudged” by either the Kentucky Board of

Tax Appeals or a Court. Ky. Rev. Stat. §134.580(2). Therefore,

Petitioners were not entitled to a refund until there was a final

order. The two Orders referred to by Petitioners were not final

orders

C. Clarification Of The Factual Back-

ground.

While the material facts were largely stipulated

to, there are a few misrepresentations by Petitioners

in their Factual Background that need clarification.

Petitioners assert that the parties stipulated that

they had no intangible property in Kentucky; howev-

er, that is incorrect. A copy of the stipulations is

reprinted in its entirety at Resp. App. 4. The parties

only stipulated that “[nlone of the |Petitioners| had

any property, real or tangible personal, owned or

leased, located in Kentucky during the involved tax

years.” Resp. App. 6. Similarly, the parties stipuiated

that “[nJone of the [Petitioners] had any employees or

payroll in Kentucky during the involved tax years.”

Id. This was because Ky. Rev. Stat. §141.040 applied

only to corporations who had either payroll or owned

or leased either real property or tangible personal

property in Kentucky. Revenue has never asserted

that Petitioners were subject to tax pursuant to that

statute.

Instead, the issue was (i) whether Ky. Rev. Stat.

§141.206 was an imposition statute, and (1) if so,

whether Petitioners were constitutionally subject to

tax under that statute. Ky. Rev. Stat. §141.206(5)

specifically provides that nonresident corporations,

such as Petitioners, “are taxable on their proportion-

ate share of income passed through the partnership

. attributable to business done in Kentucky” if they

are partners in a partnership “which does business

within and without Kentucky|.]” The Kentucky Court

of Appeals held that Petitioners’ distributive share

income (over $50 million during the years in ques-

tion), which was derived from Petitioners’ ownership

interests in partnerships that earned income by doing

business both within and without Kentucky’ estab-

lished either substantial nexus with and/or a physical

presence within Kentucky.

Finally, Petitioners also assert that their hold

ings in partnerships doing business in Kentucky,

Conwood Company, LP (“Conwood”) and Conwood

Sales Co. LP (““Conwood Sales”) were passive invest-

ments. The parties never stipulated to that fact

either. In fact, during at least part of the tax years in

question, the parties stipulated that one of the Peti

tioners, Asworth Corporation (n/k/a Asworth, LLC,

“Asworth”), held a general partnership interest in

both Conwood and Conwood Sales. Resp. App. 10-11.

The parties also stipulated that “[t]he |Petitioners'’|

business is managing investments in various legal

entities.” Jd. at 6.

REASONS FOR DENYING THE PETITION

With respect to the questions presented in the

petition, Petitioners have pointed to no genuine

' This distributive share income was apportioned to Ken

tucky pursuant to the apportionment method provided in Ky

Rev. Stat. §141.206(5).

conflict with prior decisions of either this Court or

with State courts of last resort. The cases cited in the

Petition with respect to the Commerce Clause issue

show not conflict, but rather, a growing uniformity

among the States which is consistent with the plain

language of the Court’s decision in Quill Corp. v.

North Dakota, 504 U.S. 298 (1992). As a result, a

decision on the merits would appear to be of little

help in resolving other cases.

With respect to the second issue, even if assum-

ing arguendo a conflict existed, as an initial matter,

resolution of this issue cannot provide relief to Peti-

tioners. If they are not entitled to a refund, the issue

of how interest should be calculated on a nonexistent

refund is moot. Even if they are entitled to a refund

because Ky. Rev. Stat. §141.206 violates the Com-

merce Clause because it has a doing business stand-

ard, rather than a physical presence standard,

pursuant to Ky. Rev. Stat. §134.590, no interest

accrues on a refund claim based upon a tax being

held unconstitutional, so again, the issue of how

interest should be calculated on that refund is moot.

Additionally, there is simply no conflict with

respect to United States v. Carlton, 512 U.S. 26, 30

(1994) or other decisions by the Court, nor are there

any conflicts with other States that cannot easily be

reconciled as slightly different applications of a

properly stated rule of law. For all of these reasons,

the Petition should be denied.

I. Rather Than Creating A Conflict Among

State Courts, The Decision Enlarges A

Growing Consensus Of The States’ High-

est Courts Rejecting The Claim That The

Commerce Clause Requires “Physical

Presence” Te Establish “Substantial Nex-

us.”

In determining whether to grant certiorari, the

Court requires that a conflict of decisions be a “real

and embarrassing conflict of opinion and authority.”

Rice v. Sioux City Cemetery, 349 U.S. 70, 79 (1955)

(quotations omitted). Here, no such conflict exists.

Since Quill was decided in 1992, the overwhelming

majority of state courts have held that physical

presence is not required in order for a State to impose

a fairly apportioned, non-discriminatory net income

tax on corporations dcing business in the taxing

State. No State supreme court has held otherwise.

While Petitioners do their best to manufacture a

conflict, a closer reading of the cases involved show

that, if anything, there is a growing consensus, rather

than a split, and there is no “real and embarrassing

conflict of opinion and authority” warranting the

granting of certiorari.

In attempting to establish their claim that a

conflict exists, Petitioners rely primarily on J.C.

Penney Nat'l Bank v. Johnson, 19 S.W.3d 831 (Tenn.

Ct. App. 1999), cert. denied, 531 U.S. 927 (2000).

While on its face, this case appears to represent a

wooden application of the Quill physical presence test

with no meaningful discussion or analysis of the

differences between the taxes in J.C. Penney and

Quill, it actually declined to rule on this issue. Jd. at

839 (“Any constitutional distinctions between the

franchise and excise taxes presented here and the use

taxes contemplated in Bella Hess and Quill are not

within the purview of this court to discern.”) This

conclusion was largely based on the fact that no

evidence had been presented as to why the Commerce

Clause should be different for franchise and excise

taxes. Id. The J.C. Penney court also held that it was

not its role to determine whether physical presence is

required under the Commerce Clause. Jd. at 842. As

one court noted, “ ... because the court in J.C. Pen-

ney specifically declined to address the precise issue

before this court [whether Quill’s physical presence

requirement applied to taxes other than sales and

use], we find its holding to have little value to our

determination of the instant case.” Bridges v. Geof:

frey, Inc., 984 So.2d 115, (La. App. 2008), writ denied

978 So.2d 370 (2008). Significantly, the continued

validity of the J.C. Penney opinion has been called

into doubt in a subsequent unpublished decision by

that court. See e.g., American Online, Inc. v. Johnson,

2002 WL 1751434 (Tenn. Ct. App. 2002) (rejecting a

reading of J.C. Penney that “would simply substitute

‘ . 5 . ‘ 99 €

physical presence’ for ‘nexus.’”).. Another court, in

Although unpublished, America Online has been relied

upon in a published decision of the Tennessee intermediate

appellate court. Arco Building Systems, Inc. v. Chumley, 209

S.W.3d 63. 74 (Tenn App. 2006)

analyzing the two cases, concluded there was

considerable doubt on whether [the Tennessee Court]

adopted ‘a bright-line test of requiring an out-of-state

company to have a ‘physical presence’ in [Tennessee]

in order to have substantial nexus with it’” A & F

Trademark, Inc. v. Tolson, 605 S.E.2d 187, 196 (N.C.

App. 2004), cert. denied, 546 U.S. 821 (2005) (citation

omitted ).

Another case cited by Petitioners, Rylander v

Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.

2000), likewise does not create a conflict. In Rylander,

Texas sought to tax an out-of-State corporation mere

ly because it had a license to do business in Texas. /d.

at 299. The court held that possession of a license to

do business, without any other economic activity, did

not satisfy the substantial nexus requirement of

Complete Auto Transit.’ In addition, as recognized by

Geoffrey, Inc. v. Oklahoma Tax Commission, 132 P.3d

632 (Okla. App. 2005), cert. denied, 510 U.S. 992

(1993), the language from Allied-Signal relied upon

by the Rylander court was taken from the Court's

discussion concerning Due Process, not the Commerce

Clause, and is preceded by a citation to the Due

Process portion of the Quill opinion CGeoffre vy is2

Petitioners cited two other Texas decisions: Midland Cent

Appraisal Dist. v. BP America Prod. Co., 282 S.W.3d 215, 224

(Tex. App. 2009) and Peoples Gas, Light, and Coke Co. v. Harri

son Cent. Appraisal Dist., 270 S.W.3d 208 (Tex. App. 2008),

which do little to establish that a conflict exists. Both involved

ad valorem tax on the ownership of oil that was in transit in

interstate commerce 1n a common carrier pipeline

P.3d at 638. As a result, there is no conflict with

’ 5 .

respect to the Commerce Clause. Whether there is a

conflict with respect to the Due Process Clause is not

an issue raised in the Petition.

Similarly, Guardian Indus. Corp. v. Dept of

Treasury, 499 N.W.2d 349 (Mich. App. 1993), app.

denied sub nom., 512 N.W.2d 846 (Mich. 1994) does

not create a conflict. In this case, the taxpayer’s

principal place of business was in Michigan. The

Guardian court was faced with the rather unique

question of whether “sales” in other States were

subject to tax in those States, and therefore excluded

from Michigan income. Specifically, the question was

whether Guardian had a physical presence in those

other States, and if so, whether the activities con

ducted on Guardian’s behalf exceeded that of mere

solicitation. If it did not, then Michigan’s single

business tax would apply to those sales. /d. at 358.

Here, the taxpayers argued that their nexus in other

States was sufficient for taxation by those States;

Michigan argued that nexus was insufficient in

those States; and the taxing authorities in the other

States were not involved in the case. Finally, Guard-

ian has little remaining force even in Michigan: the

Michigan legislature has eliminated the tax at issue

Similarly, Petitioners assert that this decision conflict

with Acme Royalty v. Dir. of Revenue, 96 S.W.3d 72 (Mo. 2002);

however the Commerce Clause was not an issue in that case,

either. As a result, there can be no conflict with respect to the

Commerce Clause

in Guardian and enacted a new tax that does not

require a physical presence. MCL 208.1200(1). As a

result, this decision does not present a “real” conflict.

Petitioners cite various opinions on page 22 of

their Petition as acknowledging an “ever-growing”

split; however, that is simply not the case. In fact, the

MBNA court merely acknowledged that the Supreme

Court had left the question open regarding the ap-

plicability of Quill to income and franchise taxes,

which is not the same as acknowledging an “ever-

growing” split between the states. Tax Com’r of State

v. MBNA America Bank, N.A., 640 S.E.2d 226, 231

(W.Va. 2006), cert. dented, 551 U.S. 1141 (2007). In

Massachusetts, the Geoffrey decision merely refer-

ences the following in its analysis:

Contrast Rylander v. Bandag’ Licensing

Corp., 18 S.W.3d 296, 299, 301 (Tex. Ct. App.

2000) (concluding that franchise tax based

solely on taxpayer’s mere possession of |1-

cense to do business in ‘Texas was invalid,

but not addressing whether royalty pay-

ments from lcensing of intangibles were suf-

ficient to satisfy substantial nexus).

Geoffrey, Inc. v. Com’r of Revenue, 899 N.E.2d 87, 93

(Mass. 2009), cert. denied, 129 S.Ct. 2853 (U.S.

2009). Similarly, the Capital One case cited in the

Petition contrasts the J.C. Penney decision in a

footnote, and also acknowledges that this decision

was subsequently questioned by America Online.

Capital One Bank v. Com’r of Revenue, 899 N.E.2d

76, 85, fn. 16 (Mass. 2009), cert. denied, 129 S.Ct.

2827 (U.S. 2009).” Again, such references do not rise

to the level of acknowledging an “ever-growing” split

between the states. In fact, if anything, over time, the

split has grown less, not more, as New Jersey has

reversed itself on this issue,’ Tennessee has ques-

tioned its earlier decision in J.C. Penney, and the

Michigan legislature has eliminated the tax at issue

in Guardian and enacted a new tax that does not

require a physical presence. Page 18 of the Petition

also notes that “[fljurther, at least 35 states have

enacted legislation, regulations or policies specifically

rejecting the physical presence test in income tax

settings and stating that partnership interests alone

create tax nexus....” These statutory developments

reduce the significance of the issue raised by Peti

tioners, provide consistency in the treatment of

taxpayers, and further negate the need for review by

this Court. Rather than a conflict existing between

In footnote 12 on page 22 of the Petition, while it ts true

that Chase Manhattan Bank v. Gavin, 733 A.2d 782 (Conn

1999), cert. denied, 528 U.S. 965 (1999) noted that Quill] was not

limited to sales and use tax related disputes, that comment was

in the context of Quill’s Due Process analysis, not. the Commerce

Clause.

" Part of the split recognized by the court in A & F Trade

mark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. App. 2004), cert

denied, 546 U.S. 821 (2005), was the New Jersey Tax Court’s

decision in Lanco that the physical presence requirement

applied; however, that Tax Court decision was ultimately

reversed, with the Supreme Court of New Jersey holding in

Lanco, Inc. v. Dir... Div. of Taxation, 908 A.2d 176 (N.J. 2006),

cert. dented, 551 U.S. 1131 (2007), that the physical presence

requirement did not extend to income tax

the States on this issue, there is increasing uniformi-

ty and consensus.

With respect to Commerce Clause decisions

involving pass-through entities, Petitioners attempt

to rely on BIS LP, Inc. v. Dir., Div. of Taxation, 25 N.J.

Tax 88 (N.J. Tax 2009), appeal docketed, No. A1172-

09 (N.J. Super. Ct. App. Div. Nov. 9, 2009);"" however,

that decision is a Tax Court decision, not a decision of

the State’s court of last resort, and critically, that

decision is not final as it 1s on appeal to the New

Jersey Superior Court. Similarly, several other cases

cited in footnote 10 on page 18 of the Petition are

administrative decisions and advisory opinions, not

decisions of a State court of last resort. Supreme

Court Rule 10 is clear that in considering whether to

grant certiorari based on an alleged conflict, the

conflict must be real and between state courts of last

resort

Petitioners cite another case involving pass-

through entities in an attempt to establish a conflict,

Lanztv. Alabama Dep't of Revenue, 968 So.2d 18 (Ala.

App. 2006), but even the plain language of the Peti-

tion shows that no conflict can exist with respect to

the Commerce Clause, as the “Commerce Clause

argument |was] not reached by the court.” Pet. 18, fn

1O. The Lanzi court decided the case on Due Process

Moreover, the issue in BJS was whether the corporate

partner was unitary with the partnership, not whether Quzil/

applied, which is not an tssue in this case

grounds, however, Due Process is not an issue raised

in the Petition. More importantly, Alabama has since

moved away from the Lanzi decision. As held by the

same court in a subsequent case, Prince v. State Dep't

of Revenue, 2010 WL 1837773 (Ala. App. 2010) (not

yet released for publication):

We agree with Prince that the facts in Lanzi

are not easily distinguishable from the facts

in the present case with regard to due-

process analysis. However, because Lanzi 1s

a plurality opinion, it does not constitute

binding authority. See Waddell v. Waddell,

904 So.2d 1275, 1285 (Ala. Civ. App. 2004).

To the extent that the plurality opinion in

Lanzi suggests that the imposition of a tax

on the income Prince derived from the sale of

Zebra.net’s assets violates the Due Process

Clause, we reject that view as inconsistent

with our understanding of the Due Process

Clause as requiring only “‘some definite link,

some minimum connection, between a state

and the person, property or transaction it

seeks to tax.’” Allted-Signal, 504 U.S. at 777.

Id. at *i0. Ultimately, the Prince court held that a

nonresident shareholder in a resident S corporation

was subject to income tax based on income received

through the sale of the resident corporation’s Ala-

bama assets, even though the nonresident sharehold-

er did not engage in the operation or management of

the S corporation. Jd. at *9, 10.

Finally, Appendix J and K of the Petition fail to

bear out Petitioners’ assertion that a conflict exists.

With respect to the three states where courts have

purportedly held that Quill applies to non-sales tax

cases, none of these decisions were by their State’s

highest court and all are at least 10 years old. Fur-

ther, Rylander was based on the Due Process Clause,

rather than the Commerce Clause, J.C. Penney

specifically held it was not deciding this issue and it

has been subsequently called into question, and

Guardian is no longer of effect, as the legislature

eliminated the tax at issue and enacted a new tax

that does not require a physical presence. The Ap-

pendix also lists other states as “likely to rule” in a

certain way, but conflict warranting certiorari is to be

real, not speculative. The Appendix also mysteriously

lists New Jersey as “likely to apply Quill only to sales

tax cases” when the New Jersey Supreme Court has

expressly ruled on this issue; there is no “likely to

apply” about it. Lanco, Inc. v. Dir. Div. of Taxation,

908 A.2d 176, 177 (N.J. 2006), cert. denied, 551 U.S.

1131 (2007) (“We believe that the better interpreta-

tion of Qui// is the one adopted by those states that

limit the Supreme Court’s holding to sales and use

taxes.”). There simply is no “ever-growing conflict,”

let alone the “real and embarrassing” conflict neces

sary to warrant the granting of certiorari. If any-

thing, there is growing consensus, both by recent

decisions and State legislatures, on this issue. As a

result. the Petition should be denied

Il. The Decision Is Consistent With Quill,

Which Explicitly Holds That The Court’s

Precedents Do Not Establish A Physical

Presence Requirement Beyond Sales And

Use Taxes.

Although Petitioners assert otherwise, no prece-

dent of this Court imposes a “physical presence”

requirement for state franchise or income taxes as a

precondition for “substantial nexus” under the Com-

merce Clause. Such a requirement exists only when

collection of sales and use taxes is at issue. The test

set forth in Complete Auto Transit v. Brady, 430 U.S.

274 (1977), does not require a physical presence

standard and should not now be altered to impose

such a requirement for the income tax at issue here.

The Court in Quill re-examined the physical

presence requirement set forth in National Bellas

Hess v. Department of Revenue with respect to sales

and use tax. In this examination, the Court noted

that formal requirements such as physical presence

had, in the interim, more generally been rejected in

the Court’s Commerce Clause cases, culminating in

Complete Auto. Quill Corp. v. North Dakota, 504 U.S.

298, 309-11 (1992). The Court concluded however,

that there was no sufficient reason to overturn the

Bella Hess requirement in the sales and use tax area,

citing stare decisis and Congress’s own ability to

change the result reached in that decision. /d. at 314

L8.

Income tax is simply outside the scope of the

precedents of this Court in Bella Hess and Quill.

Quill itself specifically notes that such a requirement

has not been imposed outside the sales and use tax

context. Thus, not only is there no language in Quill

supporting the extension of a physical presence

requirement to any tax other than sales and use

taxes, but the Court specifically states that in review-

ing “other types of taxes |it had not] articulated the

same physical-presence requirement.” Quill, 504 U.S.

at 314; see also id. at 317 (“in our cases subsequent t«

Bellas Hess and concerning other types of taxes we

have not adopted a similar bright-line”). Simply put,

there is no need to look beyond the plain language

in Quill to disprove Petitioners’ assertion that the

Kentucky decision will “obliterate” the physical

presence test set forth in Quill. Since Quill was

decided 18 years ago, the Court has not expanded the

physical presence requirement to any tax other than

a use tax.

Significantly, the Court in Qurld not only relied

on stare decisis tied specifically to the sales and use

tax setting, but also acknowledged that, but for Bellas

Hess, “contemporary Commerce Ciause jurisprudence

might not dictate the same result were the issue to

arise for the first time today,” thus confirming that,

contrary to Petitioners’ assertion, the Complete Auto

standard does not generally contain such a physical

presence requirement. Quill, 504 U.S. at 311; see id

at 314 (Commerce Clause law generally “now favors

more flexible balancing analyses”). Justice Scalia,

whose concurring opinion was joined by Justices

Kennedy and Thomas, relied even more heavily on

stare decisis in Quill (id. at 320):

I also agree that the Commerce Clause hold-

ing of Bellas Hess should not be overruled.

Unlike the Court, however, I would not revis-

it the merits of that holding, but would ad-

here to it on the basis of stare decisis.

American Trucking Assns., Inc. v. Smith, 496

U.S. 167, 204 (1990) (SCALIA, J., concurring

in judgment). Congress has the final say over

regulation of interstate commerce and it can

change the rule of Bellas Hess simply by say-

ing so.

As New York’s highest court described the result: “the

Quill decision cannot be substantively construed as

other than a somewhat begrudging retention of the

Bellas Hess physical presence requirement” for impo-

sition of a seles tax collection obligation. Orvis Co.,

Inc. v. Tax Appeals Tribunal, 654 N.E.2d 954, 960

(N.Y.), cert. denied sub nom., 516 U.S. 989 (1995).

Petitioners incorrectly argue that “substantial

nexus” can only be established through a physical

presence standard. However, this assertion is rebut-

ted by the plain language in Qui/l. Such a result also

conflicts with the substantive analysis required by

Complete Auto, which generally requires that inter-

state commerce pay its own way. Complete Auto, at

288-89, fn. 15. Petitioners also assert that the Ken-

tucky Court of Appeals incorrectly juxtaposed the

Commerce Clause and Due Process standards. Again,

this is not the case. The fourth prong of the Complete

Auto test is that the tax must be “fairly related to

services provided by the state.” Jd. at 287 (1977). The

decision is fully consistent with Complete Auto and

does not warrant further review by this Court. Signif-

icantly, Petitioners misstate the facts when they

claim that they “have absolutely no physical presence

in Kentucky, as stipulated to by Respondent — no real,

tangible or intangible property, no office and no

employees located in Kentucky.” Pet. 27. What Reve-

nue stipulated to was that (i) Petitioners did not have

payroll in Kentucky during the relevant tax years,

and (ii) Petitioners did not own or lease either real

property or tangible personal property in Kentucky

during the relevant tax years. Resp. App. 6.

Throughout this case, the Revenue has consistently

stated that Petitioners were not subject to corpora-

tion income tax pursuant to KRS 141.040 (which

required that Petitioners either have payroll in

Kentucky, or own or lease either real property or

tangible personal property in Kentucky before tax

could be imposed under that statute). Revenue has

also consistently argued, and the Kentucky Court of

Appeals agreed, that Petitioners were subject to tax

on their distributive share income from partnerships

doing business both within and without Kentucky

pursuant to KRS 141.206. The statement that Reve-

nue stipulated that Petitioners had no intangible

property in Kentucky is simply untrue.

It is also a stretch to claim that under the Ken-

tucky Court of Appeals’ reasoning, a// companies will

now be subject to state taxation as long as they

receive income from an in-state company receiving

“protection and benefits” from that state.'” The stat

ute in question only applied to shareholders or mem-

bers of limited liability pass-through entities and S

corporations with respect to their distributive share

income; not shareholders of C corporations or any

dividends they might receive. The Kentucky Court of

Appeals held that Petitioners had either a substantial

nexus with Kentucky or physical presence in Ken

tucky because of its partnership activities, citing

Borden Chemicals & Plastics, L.P. v. Zehnder, 726

N.E.2d 73, 79-82 (Ill. App. 2000) (Commerce Clause

does not prohibit Illinois from assessing replacement

tax on a limited partner which has no connection with

[Ilinois other than investing in a partnership). In

discussing Quill, the Borden court held that “|wle

conclude that the requirement of a physical presence

does not apply to the present case and, even if it did,

plaintiff has a physical presence in the form of the

Operating Partnership.” Borden, 726 N.E.2d at 80. In

fact, Petitioners must now accept that they have no

complaint that the Kentucky taxes at issue are any-

thing but fairly apportioned, non-discriminatory, and

fairly related to the services (“protections and bene-

fits”) it receives from Kentucky, as these issues are

Again, the parties stipulated that Petitioners were in the

business of managing investments in other entities, and that

one of the Petitioners held a general partnership interest for

part of the tax years in question. Resp. App. 5, 8-9

not part of the Petition. Issues regarding apportion-

ment, discrimination and fairly related are separate

and distinct from nexus.

With respect to the income taxes at issue here,

Petitioners cannot legitimately claim any surprise or

violation of settled or reasonable expectations in

being subjected to taxation that is fairly apportioned,

non-discriminatory, and fairly related to the services

provided by Kentucky. In fact, Petitioners initially

paid the taxes in question and only later filed refund

claims. Moreover, the lack of a bright-line physical

presence standard in the context of income tax is

consistent with unitary cases, where a corporation

with no physical presence in a state may be taxed by

that state if that corporation is considered to be so

closely intertwined with other related entities as to be

treated under the legal fiction of being part of a single

unitary group. Barclays Bank PLC v. Franchise Bd. of

Calif., 512 U.S. 298 (1994). In Barclays, the United

Kingdom cited Quill in support of its argument that

Barclays Group members operating exclusively

outside the United States did not have sufficient

contacts with California under the Commerce

Clause. /d. at 312. The Court rejected this argument,

stating there were “certain intangible ‘flows of value’

within the unitary group serve to link the various

members together as if they were essentially a single

entity.” Jd. While the companies themselves did not

have an actual physical presence in California, the

unitary relationship with companies who did have a

California presence was held to satisfy the Commerce

Clause. /d.

Petitioners claim that failure to impose a physi-

cal presence requirement would create “unconscion-

able results”; however, this assertion is clearly

incorrect for several reasons. First, Petitioners them

selves initially paid the tax before later filing refund

claims. Second, even the “physical presence” standard

is not the bright line test that Professor Pomp asserts

it to be. As Justice White pointed out in Quill, “rea-

sonable minds surely can, and will, differ over what

showing is required to make out a ‘physical presence’

adequate to justify imposing responsibilities for use

tax collection.” Quill, 504 U.S. at 330, 331 (concurring

in part and dissenting in part). Third, interstate

commerce has continued to flourish under modern

Commerce Clause jurisprudence, even in the absence

of an overarching “physical presence” requirement,

and more importantly, even though “... at least 35

states have enacted legislation, regulations or policies

specifically rejecting the physical presence test in

income tax settings and stating that partnership

interests alone create tax nexus....” Pet. 18. Pet

tioners have pointed to no litigation or practical

problems arising from these statutes, regulations

and policies. Mere speculation does not establish

clear proof that this case is of such “gravity and

importance” as to warrant review by this Court. In

fact, the lack of litigation resulting from these stat

utes and regulations tends to indicate that the

legislation is workable and not unduly burdensome,

and certainly undermining any contrary contention

by Petitioners. Even if this should change, Congress

can readily intervene to protect the national economic

interest, as it has done in other occasions. As this

Court said in Quill, Congress has the power under

the Commerce Clause to “evaluate the burdens that

taxes impose on interstate commerce.” Quill, 504 U.S.

at 36. Whatever ruling this Court might make on the

merits of the issue here, “Congress remains free to

disagree with |the Court’s] conclusions.” Jd.

Finally, under Petitioners’ theory, a business

owning and leasing to another company a store in

Kentucky, and generating $100,000 of revenue from

the lease, would have physical presence in Kentucky

and be subject to taxation. However, companies such

as Petitioners, receiving tens of millions of dollars

of distributive share income from its partnerships

which do business within and without Kentucky,

would be immune from a fairly apportioned, non-

discriminatory income tax on partners. Similarly, a

company receiving millions of dollars in revenue from

royalty payments from firms licensed to use its in-

tangible property in Kentucky would also be im-

mune.” Such a test would only measure how a

taxpayer does business, not the substance or signifi-

cance of the contacts between a taxpayer and the

taxing State. This result would clearly conflict with

* This point also is raised by Justice White in a separate

opinion, concurring in part, and dissenting in part, from the

majority. Quill, 504 U.S. at 327-29.

Complete Auto and its substantive analysis standard.

The Petition should be denied.

Ill. The Decision Neither Eviscerates Carlton

Nor Furthers A Split On The Constitu-

tional Standards Governing Retroactive

Tax Legislation.

A. This Issue Is Moot, As Petitioners Are

Not, And Cannot Be, Entitled To Any

Interest.

As an initial matter, unless this Court takes the

physical presence issue up on certiorari, Petitioners

are presently not entitled to any refund of tax, much

less interest, and therefore, the issue regarding the

retroactive calculation of statutory interest on a

nonexistent refund is moot. Even if this Court takes

the physical presence issue up on certiorari, and

reverses the decision by holding that KRS 141.206

unconstitutionally had a doing business standard,

rather than a physical presence standard, the appli-

cable refund statute would be KRS 134.590, which

applies to refunds of taxes held unconstitutional.

Pursuant to that statute, Petitioners would not be

entitled to any interest on their refund claim, and so

again, this issue is moot. Even assuming arguendo

that a conflict existed with respect to Carlton, resolu-

tion of this issue could not change the result below,

since Petitioners still would not be entitled to inter-

est. Sommerville v. United States, 376 U.S. 909 (1964)

(certiorari denied where resolution of the conflict

could not change the result reached below). As the

Court has previously stated:

While this Court decides questions of public

importance, it decides them in the context of

meaningful litigation. Its function in resolv-

ing conflicts among the Court of Appeals is

judicial, not simply administrative or mana-

gerial. Resolution here of the [issue in con-

flict among the circuits] can await a day

when the issue is posed less abstractly.

The Monrosa v. Carbon Black Export, Inc., 359 U.S.

180, 184 (1959). The Petition should be denied.

B. The Court Has Previously Held That

The Retroactive Denial Of Interest

Does Not Violate Due Process Or Any

Other Constitutional Provision.

The Court has held that the retroactive denial of

interest does not violate Due Process or any other

constitutional provision. Morley v. Lake Shore & M.S.

Ry. Co., 146 U.S. 162, 170, 171 (1892) daw reducing

rate of interest upon judgments upheld even when

retroactively applied to a judgment obtained prior to

the law’s enactment, because interest is in the nature

of damages, and does not arise out of contract); Mis-

sourt & Arkansas Lumber & Mining Co. v. Greenwood

Dist. of Sebastian County, 249 U.S. 170 (1919). Both

of these decisions are still good law, and were not

overruled by Carlton.

Kentucky has held “... that the rate of interest

on judgments is a statutory rather than a contractual

matter.” Ridge v. Ridge, 572 S.W.2d 859, 861 (Ky.

1978). Moreover, “As a general rule, unless interest is

expressly authorized by statute, it is not awardable

against the sovereign.” Department of Revenue ov.

Jack Cole Co., 474 S.W.2d 70, 74 (Ky. 1971), citing

Coleman v. Reamer’s Ex’r, 237 Ky. 603, 36 S.W.2d 22

(1931) (denying interest as the statute authorized

interest only when the refund was a result of a cleri-

cal error). See also, City of Somerset, 156 S.W.3d at

330. The Bills, which address how interest is to be

calculated on a refund claim, do not violate either

Due Process or prior holdings of the Court.

C. The Court Has Previously Upheld Ret-

roactive Statutes That Make A Rea-

sonable Change In The Remedy, And

Did Not Require A “Modesty Require-

ment” As Part Of The Analysis.

The Court has previously noted that the constitu-

tional impediments to retroactive legislation are now

“modest.” Landgraf v. USI Film Products, 511 U.S.

244, 272 (1994). Similarly, in Bradley v. School Bd. Of

Richmond, 416 U.S. 696 (1974), while a case was

pending before the Court of Appeals, Congress enact-

ed a law which authorized federal courts to award a

reasonable attorney’s fee to prevailing parties in

school desegregation cases. The Court held that the

award of fees for services performed prior to the

effective date of enactment was permissible, as “the

principle that a court is to apply the law in effect at

the time it renders its decision, unless doing so would

result in a manifest injustice or there is statutory

direction or legislative history to the contrary.” Brad-

ley, 416 U.S., at 711. As the Landgraf court noted in

discussing Bradley, attorney’s fees are “collateral to

the main cause of action” and “uniquely separable

from the cause of action to be proved at trial.”

Landgraf, 511 U.S., at 278, quoting White v. New

Hampshire Dept. of Employment Security, 455 U.S.

445, 451-52 (1982). The Court has also held that the

Ex Post Facto Clause, does not limit “legislative

control of remedies and modes of procedure which do

not affect matters of substance.” Beazell v. Ohio, 269

U.S. 167, 171 (1925). None of these cases imposed a

“modesty” requirement as part of their analysis.

Similarly, the issue of how much interest accrues on a

refund claim is a remedial measure which is collat-

eral to the main cause of action, namely, Petitioners’

right to a refund.

Petitioners have no vested right in a refund

claim, much less the interest accruing on a refund

claim, nor is interest on a refund claim a contractual

obligation. No new rights, duties or obligations are

created by the Bills. The Bills neither deprived Peti-

tioners of their right to a refund, assuming they

ultimately prevailed on those claims, nor did it com-

pletely deprive them of interest. Instead, the Bills

merely changed how interest was to be calculated on

a refund claim pursuant to Ky. Rev. Stat. §134.580

from interest beginning to accrue after the later of

two (2) different events, to the later of five (5) differ-

ent events, a procedural measure that did not affect

any substantive rights. As a result, the Bills do not

violate the Due Process Clause or prior holdings of

the Court.

D. The Court Has Previously Upheld An

Unlimited Period Of Retroactivity,

Which Holdings Were Not Reversed By

Carlton.

The Bills in question are remedial, rather than

tax or economic legislation. However, even with

respect to tax and economic statutes, the Court has

previously upheld unlimited periods of retroactivity,

concluding that in each case, the Due Process Clause

was not violated. Usery v. Turner Elkhorn Mining Co.,

428 U.S. 1 (1976); Millikin v. United States, 283 U.S.

15 (1931). Notably, the Court in Carlton quoted both

decisions in its discussion of the standard to be ap-

plied under the Due Process Clause applied to tax

statutes or other retroactive economic legislation:

Provided that the retroactive application of a

statute is supported by a legitimate legisla-

tive purpose furthered by rational means,

judgments about the wisdom of such legisla-

tion remain within the exclusive province of

the legislative and executive branches. . . .

To be sure, ... retroactive legislation does

have to meet a burden not faced by legisla-

tion that has only future effects. .. . “The ret-

roactive aspects of legislation, as well as the

prospective aspects, must meet the test of

due process, and the justifications for the lat-

ter may not suffice for the former’... But

that burden is met simply by showing that

the retroactive application of the legislation

is itself justified by a rational legislative

purpose.” Pension Benefit Guaranty Corpora

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

730 (1984), quoting Usery v. Turner Elkhorn

Mining Co., 428 U.S. 1, 16-17 (1976).

Carlton, 512 U.S., at 30-31. In rejecting the taxpay-

er’s claim regarding lack of notice, the Court held

that “ ... in Millikin v. United States, the Court

rejected a similar notice argument, declaring that a

taxpayer ‘should be regarded as taking his chances of

any increase in the tax burden which might result

from carrying out the established policy of taxation.’

283 U.S., at 23[.]” Carlton, 512 U'S., at 34.

Even if the amount of the tax, rather than the

amount of interest accruing on a tax refund, had been

involved, the Court in Carlton held that avoiding a

“significant” loss of public revenues is a constitution-

ally legitimate purpose. /d. at 32. The fiscal note for

House Bill 704 specifically noted the millions in

savings to Kentucky that would result from changing

how the interest on a refund claim is calculated.

Resp. App. 1. Carlton also held, “[tjax legislation is

not a promise and a taxpayer has no vested right in

the Internal Revenue Code.” Jd. at 33. Therefore,

there are no substantive Due Process rights involved

in this case.

Notably, Carlton did not reverse the holdings in

either Usery or Millikin, even though both cases were

quoted in its decision.” The decision is consistent

with the holdings in Usery and Millikin, as the Bills

were supported by a legitimate legislative purpose

furthered by rational means.

E. Carlton Did Not Mandate A “Modesty

Requirement” As A Prerequisite To

Any Due Process Analysis.

Despite Petitioners’ claims to the contrary, Carl-

ton never imposed a “modesty” requirement as a

prerequisite to any Due Process analysis. Instead, tlie

Court in Carlton held that, “|[blecause we conclude

that retroactive application of the 1987 Amendment

to Section 2057 is rationally related to a legitimate

legislative purpose, we conclude that the amendment

as applied to Carlton’s 1986 transactions is consistent

with the Due Process Clause.” /d. at 35. The “modes-

ty” requirement is not contained in the ultimate

holding, but instead, is discussed as a factor, but not

the controlling factor, to be considered in determining

whether the retroactive application is rationally

related to a legitimate legislative purpose.

Notably, Carlton did specifically discuss several other

cases, and held that “[t]o the extent their authority survives,

they do not control here.” Carlton, 512 U.S., at 34. Clearly, if

Carlton intended to reverse or otherwise limit Millikin and

Usery, it could have done so.

While it is true that Justice O’Connor, in a con-

curring opinion, implied that “modesty” was a due

process guarantee, her separate opinion carried no

other votes.

Justices Scalia and Thomas, in a separate con-

curring opinion, took the view that the timing of the

legislation is not even relevant to the analysis, stat-

ing:

the critical event is the taxpayer’s reli-

ance on the incentive and the key timing is-

sue 1s whether the change occurs after the

reliance; that it occurs immediately after ra-

ther than long after renders it no less harsh.

The reasoning the Court applies to uphold

the statute in this case guarantees that all

retroactive tax laws will henceforth be valid.

To pass constitutional muster the retroactive

aspects of the statute need only be “rational-

ly related to a legitimate legislative pur-

pose.” Ante, at 2024. Revenue raising is

certainly a legitimate legislative purpose, see

U.S. Const., Art. I, §8, cl. 1, and any law that

retroactively adds a tax, removes a deduction

or increases a rate rationally furthers that

goal. I welcome this recognition that the Due

Process Clause does not prevent retroactive

taxes, since I believe that the Due Process

Clause guarantees no substantive rights, but

only (as it says) process, see TXO Production

Corp. v. Alliance Resources Corp., 509 U.S.

443, 470-471, 113 S.Ct. 2711, 2726-2727, 125

L.Ed.2d 366 (1993) (SCALIA, J., concurring

in judgment).

Carlton, 512 U.S., at 40 (Scalia & Thomas, JJ., con-

curring). Contrary to Petitioners’ allegations, Justices

Scalia and Thomas did not view this result to be a

problem, but rather, a welcome result.

Further, Petitioners misrepresent the holding by

the Kentucky Court of Appeals with respect to the

“modesty requirement.” The full text of the decision is

as follows:

The Corporations also contend that the four-

year period of retroactivity in this case fails

to meet the “modesty requirement” of retro-

active tax legislation under Carlton. Howev-

er, contrary to the Corporations’ assertion,

the holding in Carlton did not establish such

a “modesty requirement;” rather, the majori-

ty simply noted with favor that “Congress

acted properly and established only a modest

period of retroactivity.” Id. at 32, 114 S.Ct. at

2023. This suggests to us that the period of

retroactivity is to be considered in determin-

ing whether the legislation rationally fur-

thers a legitimate governmental purpose.

Here the Bills retroactively applied to all

outstanding refund claims for taxable years

ending prior to the Bills’ effective dates, and

to all claims for those taxable years pending

in any judicial or administrative forum. We

hold that the retroactive period extending to

outstanding claims as of the Bills’ effective

dates does not violate the due process clause.

Pet. App. 20a. Rather than ignoring the “modesty

requirement,” the Kentucky Court of Appeals applied

it in a manner consistent with Carilton, both as ex-

pressed by the majority and the concurring opinion by

Justices Thomas and Scalia, which is that the test is

whether the legislation rationally furthers a legiti-

mate governmental purpose, and as part of that test,

the period of retroactivity may be considered. The

decision is consistent with Carlton.

F. There Is No Split Regarding Carlton,

As The Decisions Can Be Easily Rec-

onciled As Slightly Different Applica-

tions Based Upon The Individual Facts

And Circumstances Of The Decisions.

Petitioners cite a variety of cases in an attempt

to manufacture a conflict; however, the Petition fails

to make any showing that the Carlton test has be-

mused 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. This is not surprising, since the underly-

ing test is whether the retroactive legislation is

“rationally related to a legitimate legislative pur-

pose,” which by its very nature is highly dependent

upon the individual facts and circumstances of a

particular case, and is not a one size fits all analysis.

Significantly, none of the cases cited by Petitioners

involve facts similar to those in this case, namely the

calculation of interest on a refund claim.

Petitioners also argue that a shorter “modesty”

period should apply to “non-curative” legislation;

however, other than a blanket assertion that the Bills

are “non-curative,” Petitioners provide no support for

this statement, and simply ignore the fiscal note

associated with the Bills. Petitioners also cite the

Landgray [sic] case; however, as previously discussed,

Landgraf supports the conclusion of the Kentucky

Court of Appeals that the Bills did not violate the Due

Process Clause.

Finally, Petitioners’ argument that a use-it-or-

lose-it limitation exists on a legislature’s constitu-

tional power cannot be squared with Cariton’s ex-

press 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 reconciled with the

precedents upon which Carlton relied. See, e.g.,

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

ing statute increasing federal estate tax on gifts made

in contemplation of death, applicable with an unlim

ited period of retroactivity to all gifts made prior to

enactment); Usery v. Turner Elkhorn Mining Co., 428

U.S. 1 (1976) (sustaining federal statute imposing

liability on employers for black lung benefits, appli-

cable with an unlimited period of retroactivity for all

prior employees). Nor can it be squared with the

unlimited retroactive effect of the Court’s decisions.

All the Court’s decisions are “the controlling interpreta-

tion 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

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

(1993).

If the retroactive legislation serves a _ legitimate

legislative purpose, it should not be invalidated

simply because Congress, or a state legislature, did

not act within a year. For all of these reasons, the

Petition should be denied.

CONCLUSION

For the reasons stated above, the petition for a

writ of certiorari should be denied.

Respectfully submitted

LAURA M. FERGUSON

Counsel of Record

DEPARTMENT OF REVENUE

COMMONWEALTH OF KENTUCKY

501 High Street, 10th Floor

P.O. Box 423

Frankfort, KY 40602-0423

(502) 564-9561

lauram.ferguson@ky.gov

App. 1

APPENDIX A

COMMONWEALTH OF KENTUCKY

STATE FISCAL NOTE STATEMENT

GENERAL ASSEMBLY LEGISLATIVE RE-

2008 REGULAR SESSION SEARCH COMMISSION

2008-2010 INTERIM

MEASURE

(X) 2008 BR No. 1721

(X) _ House Bill No. 568 HCS

( ) Resolution No.

( )Amendment No.

SUBJECT/TITLE AN ACT relating to interest.

SPONSOR Rep. D. Pasley and H. Moberly Jr.

NOTE SUMMARY

Fiscal Analysis:

X Impact No Impact [ndeterminable Impact

Level(s) of impact

X State _ Local Federal

Budget Unit(s) Impact

£ f

Fund(s) Impact:

X General X Road Federal

Restricted Agency (Type)

(Other)

FISCAL SUMMARY

Future

Fiscal 2007- 2008 2009 Annual Rate

Estimates 2008 2009 2010 of Change

Revenues +$2 000.000 +$2.000.000

(+/-)

Expendi-

tures (+/-)

Net Effect +$2 000.000 +$2.000.000

MEASURE’S PURPOSE:

The bill prevents the accrual of interest on refund

claims from beginning prior to the Department of

Revenue receiving the refund claim.

PROVISION/MECHANICS:

The bill modifies the date from which interest begins

to accrue on refunds issued by the Department of

Revenue to the latest of:

° The due date of the return:

e The date the return was filed:

° The date the tax was paid;

e The last day prescribed by law for filing the

return: or

° The date an amended return claiming a re

fund is filed

App Oo

FISCAL EXPLANATION:

The $2 million fiscal impact noted above represents

the ongoing, operational savings to be realized by the

mD?

Commonwealth.

The provisions of the bill apply retroactively to all

outstanding refund claims for taxable years ending

prior to the effective date of the Act and also apply to

all claims for those taxable years pending in any

judicial or administrative forum.

To the extent that the Commonwealth fails to prevail

on issues pending litigation, additional savings will

be realized to the extent that the date that interest

begins to accrue has been set to a later date, in most

circumstances, by this legislation.

DATA SOURCE(S) OSBD |.

NOTE NO. 115.1 PREPARER Jennifer Hays

REVIEW LBH DATE 2/26/08

LRC 2008-1721-HB568-HCS

App. 4

APPENDIX B

COMMONWEALTH OF KENTUCKY

KENTUCKY BOARD OF TAX APPEALS

FILE NOS. KOO-R-31, KO2-R-30, KO2-R-31, KO2-R-32

ASWORTH CORPORATION, APPELLANTS

HT-FORUM, INC. (N/K/A HTF, LLC)

AND D AVIATION SERVICES,

INC. (N/K/A D AVIATION

SERVICES, LLC)

v. STIPULATIONS

REVENUE CABINET (N/K/A APPELLEE

FINANCE AND ADMINISTRATION

CABINET, DEPARTMENT OF

REVENUE), COMMONWEALTH

OF KENTUCKY

*k KK Kk OK KOA

Come now the Appellants, Asworth Corporation,

HT-Forum, Inc., now known as HTF, LLC, and D

Aviation Services, Inc., now known as D Aviation

Services, LLC (collectively hereinafter referred to as

the “Appellants” or individually as [“Asworth”],

(“HTF”], and [“D Aviation”], respectively), and the

Appellee, Revenue Cabinet now known as Finance

and Administration Cabinet, Department of Revenue,

Commonwealth of Kentucky (“Revenue”), and hereby

submit their Stipulations in this matter.

In accordance with ERS 13B.080 and 802 KAR

1:010, Section 3(5), and pursuant to the Board's

Notice and Order of Pre-hearing Conference of March

App. 5

25, 2005, the Appellants and Revenue agree to these

Stipulations pursuant to the general terms of this

Preamble.

(A) Any Stipulated Joint Appendix filed with

the Board herein identifies all stipulated documents.

Except as noted herein, each document is admissible

in evidence for any relevant and material purpose.

(B) The truth and/or probative value of asser-

tions contained in any document with any Stipulated

Joint Appendix filed with the Board herein are not

stipulated and may be corroborated or rebutted by

either party unless specifically provided to the con-

trary. Each stipulated document in any Stipulated

Joint Appendix, however, shall be considered true,

genuine and authentic and a copy of any stipulated

exhibit or document shall be treated as though it

were the original of same under the Kentucky Rules

of Evidence and KRS Chapter 13B.

1. Asworth is a Nevada corporation created

under the laws of Nevada. Asworth maintains its

principal place of business in Chicago, Illinois, and it

has no commercial domicile in Kentucky. Asworth

was formerly known as Dalfort Corporation, but

changed its name to Asworth Corporation in or

around 1995.

2. HTF was a corporation created under the

laws of the State of Delaware, and its principal place

of business is also in Chicago, Illinois. It converted to

a limited liability company and changed its name to

HTF, LLC, effective January 1, 2000.

App. 6

3. D Aviation was a corporation created under

the laws of the State of Delaware, originally under

the name of Dalfort Aviation Services, Inc., and its

principal place of business is also in Chicago, Illinois,

This corporation changed its name to D Aviation on or

about December 30, 1997. It later converted to a

limited hability company and changed its name to D

Aviation Services, LLC on January 1, 2000.

4. Revenue is an administrative agency of the

Commonwealth of Kentucky authorized under Chap-

ters 141 of the Kentucky Revised Statutes to enforce

the provisions of the Kentucky corporation income tax

laws.

5. The Appellants’ business is managing in-

vestments in various legal entities.

6. None of the Appellants had any property, real

or tangible personal, owned or leased, located in

Kentucky during the involved tax years.

7. None of the Appellants had any employees or

payroll in Kentucky during the involved tax years.

8. None of the Appellants are domiciled in

Kentucky, nor have they ever been.

Tax Years 1993-1996

9. As of January 31, 1993, Asworth owned a

99% limited partnership in Conwood Company, LP

(“Conwood”), a Delaware’ lmited partnership.

Conwood has its commercial domicile and principal

App. 7

place of business in Memphis, Tennessee. Conwood

began its business operations in the 1700's, and is a

manufacturer of smokeless tobacco.

10. GP Corporation (“GP”), a corporation incor-

porated under the laws of the state of Delaware,

owned a 1% general partnership interest in Conwood

until 1996.

11. For the taxable periods ending January 31,

1993, January 3i, 1994, January 31, 1995 and Janu-

ary 31, 1996, Asworth filed Kentucky corporation

income tax returns [Forms 720] and paid Kentucky

corporate income tax calculated by using the stan-

dard three-factor apportionment formula (property,

payroll and receipts) under KRS 141.120 to apportion

its multistate income to Kentucky, and included the

property, payroll and receipts of both Asworth and

Conwood.

12. Asworth also filed Kentucky corporation

license tax returns and paid the Kentucky corporate

license tax of KRS 136.070 using the same methodol-

ogy it utilized for corporate income tax for the taxable

periods ending January 31, 1993 through January 31,

1996.

13. Revenue conducted a corporation income

and license tax examination (“audit”) of Asworth for

taxable years ending January 31, 1993 through

January 31, 1996. At the end thereof, Revenue as-

serted that Asworth had an increased corporation

income tax of $654,629, plus applicable interest and

penalties, and a decreased corporate license tax

App. 8

liability of $79,229 for taxable years ending January

31, 1993 through January 31, 1996.

14. During this audit, Revenue examined

Asworth’s ownership in the partnership(s) involved

herein. In concluding that Asworth’s partial owner-

ship of Conwood constituted Asworth’s only connec-

tion to Kentucky, Revenue also concluded that

Asworth should not have included the receipts of

Asworth and all of its affiliated entities’ receipts in

the calculation. Consequently, Revenue redetermined

Asworth’s receipts apportionment factor, and included

only Conwood receipts in Kentucky [presented in the

formula] over Conwood receipts everywhere in the

calculation(s).

15. Revenue also determined that Asworth was

not required to file a Kentucky corporation license tax

return, as was stated in the Auditor’s Narrative

Report, “{b]ecause the taxpayer’s only tie to the state

of Kentucky is investments in partnerships... .”

Agent’s Narrative Report.

16. Based on this single-factor apportionment

methodelogy, Revenue concluded that a corporation

income tax deficiency existed, but also determined

that Asworth had no corporation license tax liability

because Asworti: had no property or payroll in Ken-

tucky. Revenue has since refunded the corporate

license tax overpayment to Asworth.

17. Asworth chose not to protest the assess-

ment, and after payment of the assessed taxes, it

then filed amended returns requesting a refund of

App. 9

$1,993,207, which amount represents the corporation

income taxes paid with the original returns, as wel!

as the increased amount of tax due to Revenue’s audit

assessment. Interest, penalties and fees in the

amount of $410,804 were paid in addition to the tax

amount set forth above. Thus, Asworth’s refund claim

for tax periods ending January 31, 1993 through

January 31, 1996 totaled $2,404,011 including tax,

interest, fees and pena!ties.

18. Asworth paid the audit-related assessed tax

and interest on November 5, 1998, and paid the

assessed penalties and fees on February 5, 1999. On

November 11, 1998, Asworth filed a refund claim for

the taxable year ending 1994 and, on January 15,

1999, filed a refund claim for the remainder of the

taxable years under audit, contending that it had no

nexus with Kentucky under KRS Chapter 141, and

therefore was not subject to corporate income tax.

19. The parties are in agreement that Asworth’s

refund claims for tax years ending January 31, 1994

through January 31, 1996 were timely filed.

20. The parties are also in agreement that

Asworth’s refund claim for taxable year ending Janu-

ary 31, 1993 insofar as it pertains to the tax, interest,

penalties, and fees paid on November 5, 1998, was

timely.

21. Asworth requested a conference with Reve-

nue pursuant to KRS 131.110 and the conference was

held on April 27, 2000. Revenue denied all of

Asworth’s claims for refund on May 3, 2000, and

App. 10

Asworth filed a timely Protest in response to Reve-

nue’s denial of the refund claim on June 15, 2000.

Asworth filed a Supporting Statement on July 31,

2000.

22. On November 17, 2000, a second conference

with Revenue was held. A Final Ruling was requested

on that date pursuant to KRS 131.110. Asworth filed

a second Supplemental Supporting Statement ad-

dressing certain constitutional issues on November

29, 2000.

23. Revenue subsequently issued a Final Rul-

ing on November 29, 2000 upholding its denial of

Asworth’s corporation income tax refund claims.

24. Asworth filed a timely Petition of Appeal

with the Kentucky Board of Tax Appeals on December

28, 2000.

25. Asworth exhausted all required administra.-

tive steps prior to filing this action.

Tax Years 1997-1999

26. Asworth’s corporate structure changed in

that from November 1, 1996 through April] 30, 1997:

(1) Asworth contributed 1% of its limited partnership

interest in Conwood to D Aviation Services; (2) GP

merged with Asworth and thus acquired GP’s 1%

interest; and (3) Asworth converted 51% of its imited

partnership interest in Conwood into a_ general

partnership interest. As a_ result of Asworth’s

above changes in corporate structure, Asworth’s total

App. ll

general partnership interest equaled 52% and

Asworth’s limited partnership interest equaled 47%.

27. Asworth thereafter contributed its 47%

limited partnership interest in Conwood to HTF, and

Conwood Sales Company LP (“Conwood Sales”), a

Delaware limited partnership, with its commercial

domicile and principal place of business in Memphis,

Tennessee, was formed to conduct sales and market-

ing activities; in return for this contribution each

partner of Conwood received an identical ownership

interest in Conwood Sales.

28. Conwood and Conwood Sales are distinct

legal entities and are independent from the Appel-

lants.

29. On November 15, 1996, Asworth contributed

1% of its limited partnership interest in Conwood to

D Aviation. Asworth contributed its limited partner-

ship interests in Conwood and Conwood Sales to D

Aviation on April 30, 1997, and D Aviation changed

its tax year end to December 31, effective with the tax

year ended December 31, 1997.

30. From May 1, 1997 through December 31,

1999 the corporate structure changed as follows:

(1) Conwood LLC, Conwood-1 LLC and Conwood-2

LLC, all single member LLCs, were formed in 1997;

(2) Asworth contributed a 5% general partnership

interest in Conwood and a 5% general partnership

interest in Conwood Sales to Conwood LLC; (3) As-

worth converted the remaining 47% general partner-

ship interest in Conwood to a limited partnership

App. 12

interest and then contributed that to HTF; (4) Asworth

converted the remaining 47% general partnership

interest in Conwood Sales to a limited partnership

interest and then contributed it to HTF; and (5) Asworth

and HTF changed their tax year ends to December

31, effective with the tax year ended December 31,

1997.

31. For the years ending January 31, 1997,

December 31, 1997, December 31, 1998 and Decem-

ber 31, 1999, Asworth filed Kentucky corporation

income tax returns and paid Kentucky corporation

income tax.

32. For the years ending January 31, 1997,

December 31, 1997, December 31, 1998 and Decem-

ber 31, 1999, HTF filed Kentucky corporation income

tax returns and paid Kentucky corporation income

tax.

33. For the years ending January 31, 1997,

December 31, 1997, December 31, 1998 and Decem-

ber 31, 1999, D Aviation filed Kentucky corporation

income tax returns and paid Kentucky corporation

income tax.

34. On or about January 30, 2001, Asworth

believes it timely filed amended returns/refund

claims with Revenue, contending that it did not have

any tax liability in Kentucky and sought tax refunds

and statutory interest for all such tax paid for the

taxable years ending January 31, 1997 and December

31, 1997 (“1997 Refund Claims”).

App. 13

35. Revenue has agreed that Asworth’s coun-

sel’s letter of March 26, 2001 constituted a timely

refund claim for the 1997 Refund Claims.

36. The 1997 Refund Claims have not been

approved or denied to date by Revenue, and are not

before this Board for review.

37. On August 16, 2002, Asworth timely re-filed

an amended return/refund claim with Revenue,

contending that it did not have any tax liability to

Kentucky, and seeking refunds and statutory interest

for all such tax paid for the taxable year ending

December 31, 1997.

38. The parties agree that the 1997 Refund

Claims will be held in abeyance at the Department

pending a final and unappealable decision by the

Board or any Court. The parties further agree to be

found by a final and unappealable Board or Court

decision, such that if the Appellants prevail on the

nexus issue, refunds will be paid to Asworth, plus

statutory interest through the date of the final and

unappealable decision, and such that if the Appellee

prevails on the nexus issue, the 1997 Refunds will be

denied.

39. The parties further agree that the appor-

tionment methodology approved by the Board or a

Court in a final and unappealable decision in the

matter herein will be applied to the 1997 Refund

Claims (e.g., if single-factor apportionment is upheld,

it will also apply to the 1997 Refund Claims, and if

App. 14

three-factor apportionment is upheld, it will apply to

the 1997 Refund Claims).

40. On January 16, 2001, Asworth timely filed

amended returns refund claims with Revenue,

contending that it did not have any tax liability in

Kentucky, and sought refunds and statutory interest

for all such tax paid for the taxable years ending

December 31, 1998 and December 31, 1999 (the

“1998-1999 Refund Claims”).

41. On January 16, 2001, HTF timely filed

amended returns/refund claims with Revenue, con-

tending that it did not have any tax liability to Ken-

tucky, and seeking refunds and statutory interest for

all such tax paid for the taxable years ending Janu-

ary 31, 1997, December 31, 1997, December 31, 1998

and December 31, 1999 (the “HTF Refund Claims”).

42. On January 16, 2001, D Aviation timely

filed amended returns/refund claims with Revenue,

contending that it did not have any tax liability to

Kentucky, and seeking refunds and statutory interest

for all such tax paid for the taxable years ending

January 31, 1997, December 31, 1997, December 31,

1998 and December 31, 1999 (the “D Aviation Refund

Claims”).

43. Revenue subsequently denied the 1998-1999

Refund Claims, the HTF Refund Claims and the D

Aviation Refund Claims. which led to a Protest, and

then to this proceeding.

App. 15

44. Revenue’s refund denial letter of April 29,

2002 denied the 1998-1999 Refund Claims of $78,753,

plus applicable statutory interest. The refund denial

letter also denied the HTF Refund Claims in the

aggregate amount of $1,952,820, plus applicable

statutory interest. The refund denial letter further

denied D Aviation’s Refund Claims in the aggregate

amount of $16,887, plus applicable statutory interest

45. The Appellants timely protested the denials

of the 1998-1999 Refund Claims, the HTF Refund

Claims and the D Aviation Refund Claims

46. After various administrative proceedings,

Revenue issued final ruling letters on July 24, 2002

regarding the 1998-1999 Refund Claims, the HTF

Refund Claims and the D Aviation Refund Claims

47. The Appellants filed timely Petitions of

Appeal with the Kentucky Board of Tax Appeals on

August 15, 2002 in response to the July 24, 2002

Final Ruling letters

48. On August 22, 2002, the Appellants filed a

Motion to Consolidate all four appeals (KBTA File

Nos. KO0-R-31, KO2-R-30, K02-R-31, K02-R-32), and

on June 4, 2003, the Board granted the Motion

49. On July 11, 2003, the Appellants filed a

Petition for Writ of Mandamus contending that they

were entitled to certain documents in discovery,

which Revenue contended were privileged. The Appel-

lants also contended that they were entitled to addi

tional written and oral discovery as well. (Asworth

App. 16

Corporation et al v. Revenue Cabinet, Franklin Circuit

Court, Civil Action No. 03-CI-00856).

50. On March 16, 2004, the Franklin Circuit

Court issued an Order denying the Appellants’ Peti-

tion for Writ of Mandamus.

51. On March 26, 2004, the Appellants filed a

Motion to Alter, Amend, or Vacate Judgment regard-

ing the Court’s March 16, 2004 Order.

592. On April 22, 2004, the Court issued an

Order and Opinion denying the Appellants’ Motion to

Alter, Amend, or Vacate, and ordering that “the 766

pages of disputed discovery collected and withheld by

the Revenue Cabinet be entered into the record yet

remain sealed and confidential.” (April 23, 2004 Slip

Op. at 8.)

53. On May 20, 2004, Revenue filed in the

record at the Board of Tax Appeals a Notice of Filing

Under Seal with the disputed discovery documents

attached, and filed a Notice of Filing Under Seal with

the Franklin Circuit Court, also on May 20, 2004.

54. The parties agree that the documents in

dispute in Civil Action No. 03-CI-00856 and filed

under seal in the record in this matter will be trans-

ferred to any reviewing court in the event of an

appeal by either party of a final Board decision in this

matter.

55. Professor Richard D. Pomp is qualified as

an expert due to his knowledge, skill, experience,

training, and education pursuant to KRE 702.

App. 17

56. On August 21, 2002, the Appellants took a

CR 30.02(6) deposition of Revenue by deposing Paul

Jones (appointed by Revenue as its representative),

who was at that time a Tax Consultant with the

Division of Tax Policy, a veteran of over 30 years of

employment with Revenue.

597. During the deposition, the attending court

reporter recording and transcribing the deposition

inadvertently failed to record a portion of the testi-

mony of Mr. Jones. Upon discovery of the court re-

porter’s omission after reviewing said transcript,

counsel for the Appellants immediately contacted her

and requested the tape recording of the deposition for

review. The court reporter advised the Appellants’

counsel that she had “erased” the tapes immediately

following her transcription of the deposition.

58. The parties agree that the omitted testi-

mony of Mr. Jones was essentially as follows: if one of

the entities identified in KRS 141.040(a) through (h)

(for example S corporations, 26 USC § 501 exempt

corporations, or exempt or religious institutions,

educational institutions, etc ...) also met the re-

quirements set forth in KRS 141.206 (.e., were

corporations both resident and non-resident which

were partners in a partnership doing business

in Kentucky), Revenue would hold that no tax would

be owed pursuant to or under KRS 141.206 because

this category of corporate partners are entities specif:

ically exempted from income tax pursuant to KRS

141.040(a) through (h).

App. 18

Respectfully submitted,

Dated: September 7, 2005

Jennifer S. Smart

GREENEBAUM DOLL

& MCDONALD, PLLC

300 West Vine Street

Suite 1100

Lexington, Kentucky 40507-1665

www.gdm.com — Web

(859) 288-4672 — Phone

(859) 367-3851 — Fax

iss83@gdm.com — E-mail

Mark F. Sommer/JSS

Mark F. Sommer

GREENEBAUM DOLL &

MCDONALD, PLLC

3500 National City Tower

LO1 South Fifth Street

Louisville, Kentucky 40202-3197

www.gdm.com — Web

(502) 587-3570 — Phone

(502) 540-2165 — Fax

mfs@gdm.com — E-mail

COUNSEL FOR APPELLANTS

App. 19

Dated: September 7, 2005

/s/ Laura M. Ferguson

Laura M. Ferguson, Esq.

Kentucky Department of Revenue

Division of Legal Services

P.O. Box 423

Frankfort, Kentucky 40602-0423

COUNSEL FOR APPELLEE

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