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Pass-Through Entity Files Declaratory Judgment Action Seeking Class Action Certification for Wrongful Imposition of Penalties and Interest


In Eagles Roost Apartments, LLC v. Finance and Administration Cabinet, Civil Action No. 09-CI-890 (Franklin Cir., Div. I, May 28, 2009), Eagles Roost Apartments, LLC (“Eagles Roost”), filed a declaratory judgment action on behalf of itself and all members of a class, defined as limited liability companies, S corporations and all other pass-through entities doing business in Kentucky required to pay penalties and interest on the amount of estimated taxes paid to the Department of Revenue (“Department”) for taxable years beginning prior to January 1, 2007. Eagles Roost sought a refund of penalties and interest paid on the estimated taxes, attorney fees and costs incurred, and sought to have a class action certified by the Court.

The Complaint alleged that House Bill 1 (“H.B. 1”) was passed during the 2006 First Extraordinary Session of the General Assembly and signed into law by the Governor on June 28, 2006. H.B. 1 revised KRS 141.042(1) to state:

For all taxable years beginning on or after July 1, 1966, every corporation and limited liability pass-trough entity subject to taxation under KRS 141.040 and Section 4 of this Act shall make a declaration of estimated tax if the tax imposed by KRS 141.040 and Section 4 of this Act for the taxable year can reasonably be expected to exceed five thousand dollars ($5000.00).

(Italics added to reflect legislative amendments).

Additionally, Section 73 of H.B. 1 provided that “[u]nless a provision of this Act specifically applies to an earlier tax year, the provisions of this Act shall apply to taxable years beginning on or after January 1, 2007.”

Eagles Roost alleged in its Complaint that on February 22, 2009, the Department issued a Notice of Tax Due to it assessing penalties in the amount of $5,176.23 for failing to pay estimated taxes for the period January 1, 2005 through December 31, 2005. Eagles Roost filed a timely Protest of same, claiming that the clear language of Section 73 of H.B. 1 provides that it was not required to make estimated tax payments for tax periods prior to January 1, 2007, and that the penalties and interest should be abated. Eagles Roost also noted that the Department waived the penalties and interest in a Notice issued on May 8, 2009.

Finally, Eagle Roost alleged that the Department’s assessments were arbitrary and capricious and in violation of Sections 2 and 3 of the Kentucky Constitution and the Due Process Clause of the United States Constitution.

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