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Tax: Department of Revenue v. Hines

In a decision “not to be published,” Department of Revenue v. Hines, No. 2006-SC-0113-MR (Ky. Aug. 24, 2006), the Kentucky Supreme Court upheld the Court of Appeals’ denial of the Department of Revenue’s (Revenue) Petition for Writ of Prohibition requesting reversal of the McCracken Circuit Court’s decision to deny a Motion to Dismiss for lack of subject matter jurisdiction sought by Revenue. The court held that Revenue failed to demonstrate that it lacked an adequate remedy on appeal. 

The issues in the case involved the application of Kentucky corporation income taxes, and the financial impact of KRS 141.120(8)(b) [the payroll factor statute] on the taxes to be paid by Marquette Transportation Company, Inc. (Marquette), the real party in interest. 

Marquette filed a Petition of Appeal with the Kentucky Board of Tax Appeals (KBTA) in response to Revenue’s Final Ruling Letter, which stated that the primary issue presented in its appeal involved the computation of its payroll factor. Marquette also requested, inter alia, that the KBTA set aside Revenue’s Final Ruling Letter; state that Marquette was not subject to the tax assessments alleged by Revenue; and, direct Revenue to issue refunds to Marquette for 1995, 1996 and 2001 tax years. 

The KBTA issued a Final Order which Revenue interpreted as being in Marquette’s favor, and which did not address all of the issues. Marquette then filed a Motion for Clarification with the KBTA; however, rather than issuing an order, the KBTA declined to act. Marquette filed a Petition for Judicial Review in McCracken Circuit Court. In response, Revenue filed a Motion to Dismiss, which the McCracken Circuit Court ultimately denied. Following the denial, Revenue filed a Petition for a Writ of Prohibition with the Court of Appeals. The Court of Appeals denied Revenue’s Petition, and Revenue appealed to the Kentucky Supreme Court. 

The Supreme Court noted the special circumstances which must be met before an appellate court should issue a writ of prohibition against a trial court. The Court then determined that extraordinary relief was not appropriate because Revenue could appeal any adverse judgment by the McCracken Circuit Court on the merits to the Court of Appeals and that prohibition or mandamus may not be used as a substitute for appeal. The Court held that “[a] challenge to the interlocutory denial of a motion is appropriately addressed by appeal once the case has been concluded on the merits, and not be a petition for an extraordinary writ of prohibition or mandamus. Revenue will suffer neither a great injustice nor irreparable harm if this matter proceeds forward on the merits. 

The Court’s Opinion is significant because it recognizes that Revenue may not make an “end-run” around the normal appeals process. Jennifer S. Smart, Member in our Lexington and Frankfort offices, and Mark A. Loyd, Jr., Associate in our Louisville office, represented Marquette in this matter.

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