Tax Appeals to the Kentucky Claims Commission
So, your company or your client got audited by the Kentucky Department of Revenue, and you could not resolve it at the audit level. The Department issued a Notice of Tax Due, and you filed a protest, but you were not able to resolve it with the Department. Most audits are settled by agreement with the Department. But, not this one, and the Department has told you that they are going to issue a final ruling. Will the tax assessment really be final? Is it really the end? No. The Department’s final ruling can be appealed to the Kentucky Claims Commission.
A Final Ruling: the End? Not Necessarily…Kentucky Claims Commission Appeal.
Like final rulings on tax assessments, a final ruling of the Department denying a refund claim can be appealed to the Kentucky Claims Commission. KRS 49.220. And, a decision of a county board of assessment appeals concerning a real property tax matter may also be appealed to the Kentucky Claims Commission. Id. If a taxpayer does not appeal a final ruling, the assessment, refund denial, decision, etc. becomes final, due and owing. KRS 131.500. And, if an assessment that has become final is not paid, the Department can be expected to initiate collection action, which may include liens, levies, and seizures and sales. KRS 131.500, et seq. This is obviously a scenario that every taxpayer wants to avoid – or end.
A taxpayer may also request a final ruling, and the Department must issue it within 30 days. KRS 131.110(4). Asking for a final ruling can accelerate the protest process, but it will not necessarily get a taxpayer the answer that they want. A taxpayer may also request a final ruling when they have, for example, reached an impasse with the Department, to move their matter along. Sometimes, moving the matter to the Kentucky Claims Commission can facilitate a resolution that was not resolvable, for one reason or another, during the protest stage. Perhaps, the Department overvalued its position and was unwilling to give the taxpayer a fair settlement based on the Department’s hazards of litigation? An appeal to the Kentucky Claims Commission can enlighten the Department (and the taxpayer as well) as to hazards of litigation. So, as disputes often settle during the protest process, so do they often settle during the Kentucky Claims Commission process. Litigation can be, and often is, another path to resolution via settlement.
The Administrative Adjudicative Body…the Kentucky Claims Commission.
The Kentucky Claims Commission is a three-person quasi-adjudicative body, appointed by the Governor, with an attorney, someone with a tax background, and a victim advocate or someone who is or is related to a victim. KRS 49.010. In addition to tax appeals, the Commission administratively adjudicates claims against the Commonwealth and claims of crime victims. According to its website:
The Kentucky Claims Commission (formerly the Board of Tax Appeals) provides an independent, impartial and neutral forum for hearing and resolving disputes on tax issues in a timely, cost-effective alternative to the court system.
In order to ensure impartial decision making, the Claims Commission is organized under the Public Protection Cabinet and is completely independent of any of the taxing authorities that may appear before the board.
Note that the Commission replaced the Board of Tax Appeals, which along with the Board of Claims and the Crime Victims Compensation Board, was restructured into the Commission, consolidating three boards.
Since the restructuring, a hearing officer hears many, if not all, tax appeals. Previously, the full three-member Board of Tax Appeals heard most tax appeals, except for smaller real property appeals. This new process relying primarily on a hearing officer appears to be working well.
A Taxpayer’s Petition of Appeal…the Appeal Begins.
An attorney may file a written petition of appeal for a taxpayer to the Kentucky Claims Commission to appeal a final ruling, within 30 days of the date of mailing of the final ruling, order, or determination being appealed. KRS 131.340. If someone other than an attorney or an individual person representing themself files a petition, which constitutes the unauthorized practice of law, the Commission’s practice has been to dismiss a taxpayer’s appeal filed by a non-attorney. 802 KAR 1:010; see, e.g., JDOT, LLC v. Jefferson County PVA, File Nos. K17-S-270, K17-S-271 and K17-S-272, Final Order No. K-25440 (KCC Feb. 27, 2018).
The Commission’s regulation, 802 KAR 1:010, imposes certain requirements for a petition of appeal. It must be in writing and legible, and it must include: a statement of all relevant issues of fact and law; a statement certifying that the information contained in the petition of appeal is true and correct to the best of the petitioner’s knowledge; the petitioner’s signature; the petitioner’s mailing address, telephone number, and email address; and, the petitioner’s attorney’s name, mailing address, telephone number, and email address. A copy of the final ruling, order, or determination must be attached. The Commission will send a notice to the petitioner that the petition has been received and to the appellee, e.g., the Department of Revenue, of the filing. Untimely appeals are dismissed. The Commission must provide 15 days to amend a timely but deficient appeal to cure the deficiency.
While all of these requirements must be met, the heart of the appeal is the statement of relevant issues of fact and law; so, petitions of appeal look somewhat like complaints filed in a court of law. Ideally, a petition of appeal should provide a narrative of the relevant facts, identify the issues, and communicate the taxpayer’s positions.
Discovery, Summary Disposition, and the Prehearing Summary…Prosecuting the Appeal.
The Board’s rules provide for discovery without a prior order pursuant to the Rules of Civil Procedure. 802 KAR 1:010. The process of discovery allows the parties to “discover” facts and other information relevant to the tax issues before the Commission.
Prior to a taxpayer’s appeal to the Commission from a final ruling issued by the Department, the Department has quite often audited the taxpayer, which entails the Department’s auditors asking questions and requesting documents. Likewise, during the protest process, the Department’s protest review officers often ask questions and request documents; to a taxpayer, this often seems like a second audit. During discovery, the Department will, as a matter of course, issue interrogatories (written questions), requests for production of documents. To a taxpayer, this can seem like a third audit. This is why it is very important, and a best practice, for taxpayers to keep copies of all documents during an audit and during protest; this can streamline this part of the discovery process.
Taxpayers often propound interrogatories and requests for production of documents to counsel representing the Department (or PVA in a real property tax appeal). Parties may also propound requests for admissions. Depositions (asking questions of a person under oath) may be taken as well. These can be very helpful in narrowing down what, if any, issues of fact are in dispute. If there are no disputed material facts, the appeal may potentially be resolved without a hearing through one or both parties filing motions of summary disposition. 802 KAR 1:010. Summary disposition can be a more efficient means of resolving an appeal.
Prior to the hearing, the parties each submit a prehearing summary. 802 KAR 1:010. The prehearing summary should include a statement of facts to which the party agrees and any facts that a party does not dispute as well as summarize any issue of fact in dispute and the party’s position on any issue of law raised by the appeal. It should also list the witnesses expected to testify and provide a copy of all exhibits. The prehearing summary is essentially a preview to the hearing.
The Hearing Creating the “Record” to Support the Commission’s Findings…the Commission’s Final Order.
A hearing before the Commission is de novo. KRS 49.220. This means that the Commission hears the case as though it were the first time. The burden of proof is generally on the taxpayer; however, the agency has the burden to show the propriety of a penalty imposed or the removal of a benefit previously granted. KRS 13B.090(7). The taxpayer and the Department (or the PVA) may “present evidence and argument, conduct cross-examination, and submit rebuttal evidence….” KRS 13B.080(4). The evidence submitted in the form of documents and testimony that is accepted by the hearing officer becomes part of the record. KRS Chapter 13B.
Often, the hearing officer (or the Commission) orders the parties to file briefs after the hearing. If heard by the Commission’s hearing officer, he will issue a recommended order to which exceptions may be taken. KRS 13B.110. Ultimately, the Commission will issue a final order. See KRS 13B.120.
A Final Order: the End? Not Necessarily…Judicial Appeals.
An aggrieved party (which could be the taxpayer, the Department, or both, whoever loses in some way) may appeal a final order to Franklin Circuit Court or to the Circuit Court of the county in which the appealing party resides or operates a business, by filing a petition for judicial review. See KRS 13B.140; KRS 49.250. Like any other Circuit Court case, a party aggrieved by a Circuit Court’s Opinion in a tax matter may appeal that decision to the state-level Court of Appeals, as a matter of right. But, an appeal from the Court of Appeals is available to the Kentucky Supreme Court, only if the Court grants an aggrieved party’s motion for discretionary review. Otherwise, it’s game over – with one exception. A taxpayer could ask the United States Supreme Court to grant certiorari and hear a Kentucky case, if it involves a federal question – such as a claim that a statute violates the Commerce Clause of the U.S. Constitution.
It would seem that the process could be improved by allowing a taxpayer the option to make or request a direct appeal from the Commission to the Court of Appeals.
Taxpayers have options. A final ruling is not the end of the road. Anywhere along the way, a taxpayer and the Department (or a PVA) may resolve a dispute via a settlement agreement, whether at protest, while at the Kentucky Claims Commission, or on appeal. But, sometimes, for a taxpayer to get the Department to agree to what the taxpayer believes is a fair settlement, it is necessary to have the intestinal fortitude to move forward…to the Commission or beyond…. And, sometimes, only the Commission or the courts can resolve certain matters.
This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “Kentucky Claims Commission: Tax Appeals” which appeared in Issue 2, 2019 of the Kentucky CPA Journal.