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Kentucky Court of Appeals Applies Non-mutual Collateral Estoppel to Department of Revenue


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In Department of Revenue v. Armstrong Utilities, Inc., No. 2013-CA-000987-MR, the Kentucky Court of Appeals held that a cable company was entitled to a refund with interest for certain taxes assessed unconstitutionally. However, the cable company could not recover refunds for amounts it paid during years in which it had a settlement agreement with the Department of Revenue (“Department”).   

The Department appealed a judgment of the Franklin Circuit Court that awarded Armstrong Utilities, Inc. (“Taxpayer”) refunds of ad valorem taxes, with interest. In its appeal, the Department argued that Taxpayer was not entitled to a refund of taxes assessed under a statute that was not facially unconstitutional but rather unconstitutional as applied; that the circuit court erred by applying non-mutual collateral estoppel in favor of Taxpayer; that Taxpayer was not taxed in violation of Section 171 of the Kentucky Constitution; that refunds from 2002 and 2003 were barred by a settlement agreement between Taxpayer and the Department; and that Taxpayer was not entitled to interest on any of its refunds. The Court addressed each issue in turn.

Taxpayer was assessed property taxes pursuant to KRS 136.120, which governs taxation of public service corporations. During the periods at issue, the statute included language that mandated that cable television companies had to pay the tax. Taxpayer paid those taxes throughout the period; however, it sent letters to the Department arguing that it was being taxed in violation of Section 171’s uniformity clause, which provides that taxes must be uniform upon all property of the same class.  Taxpayer argued that because direct broadcast satellite companies were not taxed in the same way, the tax was unconstitutional as applied.  When the Department denied its refunds, Taxpayer appealed to the Kentucky Board of Tax Appeals.  However, the case was held in abeyance until another similar case, Insight Kentucky Partners II, L.P. v. Commonwealth of Kentucky Revenue Cabinet, et al. 01-CI-01528, was decided in Franklin Circuit Court.

During the time Taxpayer’s case was in abeyance, Taxpayer entered into settlement agreements with the Department for several years.  For some of the years, the agreements provided that the Department would provide refunds only if KRS 136.120 was found unconstitutional by the Court of Appeals or the Supreme Court.  However, the 2002 and 2003 agreements did not contain this language and instead provided that Taxpayer was to pay all taxes and could not seek a refund in the future.

In Insight, the Franklin Circuit Court eventually held that KRS 136.120 was unconstitutional as applied to cable companies.  Taxpayer filed an action for declaratory judgment with the Franklin Circuit Court, which held that Taxpayer was entitled to refund.  The Department appealed.

The Department argued that KRS 134.590 only provided for a refund if the statute itself was held unconstitutional, not if it was applied unconstitutionally.  However, the Court of Appeals held that KRS 134.590 did provide Taxpayer with a right to refund, noting that rules of statutory construction would make it “incomprehensible” for the General Assembly to provide only prospective relief for taxpayers.

The Court next addressed the Department’s non-mutual collateral estoppel argument.  Although the Court noted that some prior decisions had denied relief on the basis of non-mutual collateral estoppel, those decisions were very fact-specific. The Court noted that there were many similar characteristics between Insight and Taxpayer’s situations and cases, including the fact that they were both cable companies and both dealt with the same substantive issues relating to the constitutionality of assessing a cable company ad valorem taxes.  Furthermore, the Court noted that Taxpayer could not have joined the Insight case because its own cases were held in abeyance, and the Department had indicated a belief that it would be bound by an adverse decision in the Insight case by signing the settlement agreements with Taxpayer.  As such, the application of the doctrine of non-mutual estoppel was appropriate.

As to the settlement agreements from 2002 and 2003, the Court held that under the tenets of contract law, they were binding agreements that precluded Taxpayer from seeking refunds for those years.

Finally, the Court addressed whether Taxpayer was entitled to interest on its refund claims.  The Department claimed it had sovereign immunity because the General Assembly had not authorized interest on a refund claim. However, the Court noted that under KRS 131.183(2)(b)(1), the General Assembly provided for interest on overpayment of taxes assessed under Chapter 136, the chapter at issue, and thus distinguished other cases that disallowed interest on refunds.  The Court therefore affirmed the ruling of the Franklin Circuit Court with respect to all years except 2002 and 2003.

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