Revenue, Taxation, Relation Back Pleadings: REVENUE CABINET V. VERIZON SOUTH, INC. (SC 8/23/2007)

REVENUE AND TAXATION: Assessments and notice of excess tax
CIVIL PROCEDURE:  Amended pleadings and relation back
DATE RENDERED: 08/23/2007

Dept of Revenue appeals COA decision barring Dept from collecting unpaid sales taxes from Appellee due to inadequate notification of tax deficiency within the applicable 4-year statute of limitation. SC granted review to consider 2 main issues: 1) whether Dept’s initial notice of tax deficiency was timely sent; and 2) whether notice was sufficient.

Relevant facts are that Dept determined that Appellee owed more than $370,000 in sales taxes for 2-year period ending in late 2003. Dept and Appellee both agreed that the notice of deficiency deadline under KRS 139.620(1) was October 20, 1997. Appellee argued that neither the assessment letter nor notice of tax due was mailed before this deadline. Dept had to agree with respect to the notice of tax due, but argued that the assessment letter was timely. KY Bd of Tax Appeals sided with Appellee on this issue (based solely on testimony of Appellee’s auditor that the letter did not land in his hands until October 27th) while TC found a lack of substantial evidence to support this conclusion and reversed the Bd’s decision, which was affirmed by the COA.

SC affirmed TC and COA, noting there was no question Appellee received the assessment letter dated October 16, 2007. SC ruled that the burden is then on Appellee to offer evidence indicating the letter was not postmarked until after the deadline. SC put great weight on the fact that Appellee had been able to produce the original postmarked envelope for the notice of tax due as well as the two notification letters sent by the Dept concerning additional back taxes for an earlier time period (that Dept was barred from collecting due to untimeliness of the notices), but somehow could not produce the original envelope for the assessment letter. SC offered the following rule of law: "Where correspondence bearing a date has been received, a party who disputes the timely mailing of the correspondence bears the burden of proof with respect to the issue."

Second issue was whether the assessment letter contained the required information as set forth in KRS 131.081(8), with Appellee making a strict construction argument that the tax deficiency notice must specifically contain all 5 items of information as referenced therein AND that the notice containing all this information must be given within the limitation period. It was undisputed that the only piece of information missing from the initial assessment letter was the Dept’s notice of interest and penalties (which was provided shortly thereafter in the notice of tax due). The COA agreed with Appellee and barred the Dept from collecting any of the unpaid taxes for the subject period.

SC found that this result was not compelled by the relevant statutes, particularly KRS 139.620(1) containing the 4-year SOL that only requires the Dept to provide Appellee with the amount of excess tax being sought within the limitation period. SC notes that within the context of lawsuits while a party is entitled to formal notice of the claim within the limitations period, that party is not entitled to all of the theories or proof supporting that claim prior to the deadline. SC saw no reason the same logic should not compel a similar result where a taxpayer has been given timely notice that the Dept is making a claim for tax deficiencies. Thus, SC reversed the COA on this issue and ultimately held that the Dept was entitled to seek recovery for the $370,000+ in unpaid taxes.

By Chad Kessinger
Shiller, Osbourn, Barnes & Maloney

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