Main Menu
Tax LAW InsightsPDF

Court of Appeals Includes Stock Holdings in Capital Despite St. Ledger Decision

10.22.2008

In Monumental Life Insurance Company v. Department of Revenue, No. 2005-CA-002148-MR (Ky. App. Sept. 8, 2008), the Court of Appeals (“Court”) held in a two-to-one split-decision opinion that assets in the form of shares of corporate stock of Monumental Life Insurance Company (“Monumental”), a subsidiary of Aegon USA, Inc., were exempted, rather than excluded, when calculating capital for purposes of determining Monumental’s St. Ledger ad valorem capital stock tax refunds and assessments and that assets booked as domestic life insurance company “separate accounts” were subject to retroactive ad valorem taxation as “omitted” property.

In so holding, the Court affirmed the decisions of the Kentucky Board of Tax Appeals and the Franklin Circuit Court which had approved the Department of Revenue’s (“Revenue”) denial of Monumental’s tax refund claims and its request for relief from additional retroactive tax assessments made by Revenue.

Monumental is a domestic life insurance company which conducted business within Kentucky and was subject to the ad valorem property tax of KRS 136.320 on its taxable capital and taxable reserves. In addition, Monumental paid the local option ad valorem taxes levied by the City of Louisville, Kentucky and Jefferson County, Kentucky that were determined on the basis of Monumental’s taxable capital as certified by Revenue.

In anticipation of the resolution of St. Ledger v. Revenue Cabinet, 942 S.W.2d 893 (Ky. 1997), on remand from, 517 U.S. 1206 (1996), vacating, 912 S.W.2d 34 (Ky. 1995), Monumental began filing annual protective refund claims with Revenue, the City of Louisville and Jefferson County. At issue in St. Ledger was the constitutionality of KRS 136.030(1) which provided an exemption from ad valorem property tax on shares of stock of corporations that paid Kentucky property tax on at least 75% of their property.

Following St. Ledger, Revenue initially excluded all stock assets from the KRS 136.320 tax calculations for the 1997 and 1998 tax years. Later, Revenue processed Monumental’s protective refund claims for the years 1991 through 1996 and treated Monumental’s stock assets as exempt (not excluded) intangible property in the KRS 136.320 tax calculations which substantially reduced Monumental’s St. Ledger.

Revenue then re-audited Monumental’s 1998 return and determined that Monumental failed to include “separate accounts” assets, which primarily consisted of pension and retirement assets held for payout to future retirees. This substantially increased Monumental’s 1998 liability. Later on, Revenue also increased its assessments for the 1995 through 1997 tax years.

In reviewing, the Court stated that the primary issues raised were “whether [Revenue] erroneously treated the value of investment corporate stock held by Monumental when computing its tax liability pursuant to [KRS 136.320] for the years 1990 through 1996 [. . .] and whether [Revenue] properly subjected ‘separate accounts’ assets to taxation during the years 1995 through 1998.”

Monumental asserted that as a result of the St. Ledger decision, its stock holdings were not subject to ad valorem taxes and were to be excluded from the tax computation of KRS 136.320. In so calculating, Revenue, however, included the stock holdings in Monumental’s capital and then subsequently deducted the value of the stock as exempt intangibles.

The Court discussed St. Ledger’s effect on the taxability of stock. It observed that theSt. Ledger Court held that the involved exemption statute [KRS 136.030(1)] violated that Commerce Clause as discriminatory against out-of-state corporations and was therefore, unconstitutional. Having held the exemption statute under KRS 136.030(1) unconstitutional, the St. Ledger Court then considered whether the corporate shares of ad valorem tax under 132.020 could remain in effect. The St. Ledger Court concluded that the shares of stock could not be taxed pursuant to KRS 132.020, and relying on the Commonwealth’s long-standing policy of prohibiting double taxation, the St. Ledger Court struck the exemption statute and the tax on shares of stock in KRS 132.020, reasoning that the latter intact would result in taxation of not only corporation, but also their shareholders. But, the Court observed that “we find nothing in the St. Ledger opinion which purported to affect [KRS 136.320’s] use of stock in its formulas.” And, thus the Court Panel concluded that Monumental misinterpreted St. Ledger.

The Court then held that because the clear text of KRS 136.320 taxed shares of stock, same could not be excluded. It then stated that it believed that exclusion of stock produced an illogical result and that it believed that Revenue’s interpretation of KRS 136.320 was reasonable.

The Court also rejected the applicability of the doctrine of contemporaneous construction, which holds that where an administrative agency has the responsibility of interpreting an ambiguous statute, the agency must use any longstanding construction of the provisions of the statute it previously made. Monumental had argued that Revenue’s acceptance of the exclusion method in its audits of Monumental’s 1997 and 1998 returns and Revenue’s prior years long employment of such method in relation to partnership interests and mutual funds supported the applicability of the doctrine; however, the Court rejected this argument because it found that the two-year period during which Revenue accepted Monumental’s method could not satisfy the “longstanding” period of time, a requirement of the contemporaneous construction doctrine.

Another issue was whether Monumental’s separate accounts were subject to taxation. Monumental argued that Revenue erred by assessing tax against the separate accounts assets for years 1995 through 1998. Once again, the Court employed the plain meaning doctrine and found that KRS 136.320 defined “capital” as consisting of all money in hand, shares of stock, notes, bonds, accounts, and other credits, exclusive of due and deferred premiums, whether secured by mortgage, pledge, or otherwise, or unsecured—which included separate account holdings.

Monumental argued that if the accounts were subject to taxation, back assessments were improper under retroactivity provisions of KRS 132.290 because the statute permits only “omitted property” to be assessed retroactively. The Court, however, found that although Monumental reported the grand total of the separate accounts in its Revenue filings, it failed to file supporting sub-accounts which would have disclosed to Revenue, it concluded that items booked to the account were taxable. This, in the Court’s opinion, made such accounts “omitted” and therefore, Revenue properly applied the retroactivity provisions of the statute.

In contrast, the ten page Dissenting Opinion included a strong dissent that would have held for Monumental on virtually all points of law. The Dissent acknowledged that the intent behind the St. Ledger Court’s holding “was to declare all ad valorem taxes on the ownership of corporate shares forbidden unless the legislature clearly states to the contrary” and recognized that “[b]ecause of the difference in the tax rates under the statute (KRS 136.320), the exemption method results in a substantially higher tax,” leading to improper double taxation under long-standing law. The Dissent also found the taxation of the separate accounts to be improper because Monumental possessed only legal title. It observed that “when legal and equitable title are separated the legal interest is virtually worthless because of itself it owns nothing and can exercise no control over the property.”

The author’s firm represents Monumental in this case. Monumental has filed a Motion for Discretionary Review with the Kentucky Supreme Court where it remains pending.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

Back to Page