TAXATION – Corporations, physical presence: Revenue Cabinet v. Ashworth Corporation (COA 11/20/2009)

Revenue Cabinet v. Ashworth Corporation
2007-CA-002549 11/20/09 2009 WL 3877518

Opinion by Judge VanMeter; Judges Clayton and Nickell concurred.

The Court affirmed in part and reversed in part and remanded an order of the circuit court reversing an order of the Kentucky Board of Tax Appeals holding that KRS 141.040 did not reach the distributive shares paid to the appellee/cross-appellant corporations by partnerships doing business in Kentucky because the corporations did not have a physical presence in Kentucky.

The Court first held that the circuit court did not err by finding that the corporations were subject to taxation pursuant to KRS 141.206(5). The plain language of the statute subjected the corporations to taxation and the words “are taxable,” instead of “shall pay,” were sufficient to impose tax liability.

The Court next held that KRS 141.206 was not void for vagueness as the legislative will expressed in the statute intelligibly expressed the policy that nonresident corporations, which are partners in a partnership doing business within and without Kentucky, are taxable on their proportionate share of distributive income passed through the partnership attributable to business done in Kentucky.

The Court next held that subjecting the corporations to tax under KRS 141.206(5) did not violate the Commerce Clause. The corporations owned up to a 99% limited and/or general partnership interest in, and received distributive shares of partnership income from the profits of, the partnership doing business in Kentucky, the partnership received protection and benefits from Kentucky, thereby enabling distribution of income to the corporations. This connection gave rise to a substantial nexus with, and/or physical presence within, Kentucky. For the same reason, the Court held that subjecting the corporations to tax under the statute did not violate the Due Process Clause of the Fourteenth Amendment.

The Court next held that the circuit court erred in applying the three-factor formula found in KRS 141.120(8) to calculate the amount owed because KRS 141.206(5) contained the proper formula. The Court further held that the application of the formula in KRS 141.206(5) was constitutional and did not result in the taxation of extraterritorial values.
The Court next held that the circuit court erred by granting the corporations’ motion seeking immediate payment of their refunds. Under KRS 131.340 a refund payment is not due until the matter is finally adjudged by either the Board or a court.

The Court next held that the amendment of a number of Bills did not render them unconstitutional. The Court held that since the Bills rationally furthered the legitimate governmental purpose of raising revenue, they satisfied the rational basis test and the retroactive period extending to outstanding claims as of the Bills’ effective dates did not violate the due process clause. For the same reason, the Court held that the corporations’ equal protection claim was without merit. Further, the application of the Bills did not constitute an unconstitutional taking because the adjustment of the interest rate on tax refunds was not such an exertion of the legislative taxing power so as to constitute a taking. The Court also held that the Bills did not contain more than one subject or insufficiently express the subject matter contained therein in violation of Ky. Const. § 51.

The Court next held that the Bills were not impermissible special legislation in violation of Ky. Const. § 59.

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