FROM FRANKLIN CIRCUIT COURT HON. JUDGE PHILLIP J. SHEPHERD
ACTION NO. 18-CI-00719
FOR APPELLANTS: Keith Hoskins Louisville, Kentucky
FOR APPELLEE: Clinton S. Combs Office of Legal Services for
Revenue Frankfort, Kentucky
BEFORE: GOODWINE, SPALDING, AND L. THOMPSON, JUDGES.
2005 until 2015, Stephen Ridge, a resident of Tennessee,
maintained employment with Fruit of the Loom in Bowling
Green, Kentucky. Ridge ended his employment with Fruit of the
Loom, effective December 31, 2015. On his last day of
employment, Ridge and Fruit of the Loom entered into a
written agreement under which Ridge was to receive various
benefits in exchange for, among other things, his agreement
to be bound by a non-compete and non-solicitation clause.
Among these benefits was payment by Fruit of the Loom to
Ridge in "an amount equal to twenty-six (26) weeks of
[Ridge's] regular salary less applicable payroll
deductions" - i.e., $84, 919.00. The following
year, in 2016, Ridge received the aforementioned amount in
twenty-six (26) bi-weekly installments. Fruit of the Loom
withheld Kentucky state income taxes from these installments.
filing his 2016 Kentucky Individual Income Tax Return, Ridge
sought a refund of the withheld amount since "same were
paid post-retirement and were not the result of any
'activity' in the Commonwealth during taxable year
(2016)." Ridge's request for a refund was denied by
the Kentucky Department of Revenue (the
"Department"). A lengthy administrative process
first filed a written protest with the Department's
Division of Protest and Resolution. In August of 2017, Ridge
received a "Final Ruling" which denied his protest.
Ridge then filed an "Appeal Petition of Non
Resident" in September of 2017 with the Kentucky Claims
Commission (the "Commission"). On February 15,
2018, Ridge filed a motion for summary judgment with the
Commission, and on June 27, 2018, the Commission issued its
"Final Order," denying the Ridge's appeal.
subsequently petitioned the Franklin Circuit Court, seeking
review of the Commission's Final Order. The circuit court
found the argument of the Commission persuasive, finding
"severance pay" to qualify as "taxable
wages" under applicable statutory and case law, holding
ultimately that Ridge "did business" in Kentucky
during Tax Year 2016. This appeal followed.
Court may overturn an administrative decision only if the
agency that made the decision acted arbitrarily and outside
the scope of its statutory authority, either because the
agency applied an incorrect rule of law or made a decision
that was not supported by substantial evidence on the record.
Kentucky State Racing Commission v. Fuller, 481
S.W.2d 298, 301 (Ky. 1972). If it is determined that an
agency's findings are supported by substantial evidence,
it will be affirmed if it correctly applied the law with the
facts as found. Kentucky Unemployment Insurance
Commission v. Landmark Community Newspapers of Kentucky,
Inc., 91 S.W.3d 575, 578 (Ky. 2002) (citing Southern
Bell Tel. & Tel. Co. v. Kentucky Unemployment Ins.
Comm'n, 437 S.W.2d 775, 778 (Ky. 1969)). Questions
of law arising out of administrative proceedings are fully
reviewable de novo by the courts. Aubrey v.
Office of Attorney General, 994 S.W.2d 516, 519 (Ky.
App. 1998). As no factual dispute was presented to the
circuit court below, this Court shall review this matter
begin by noting that the circuit court applied an incorrect
standard in disposing of the issues presented in this case.
In reliance upon Delta Air Lines, Inc. v. Commonwealth of
Kentucky, Revenue Cabinet, 689 S.W.2d 14 (Ky. 1985), the
lower court held that, where tax disputes are concerned,
"the burden is on the party claiming an exemption to
demonstrate its entitlement to the exemption and that they
have met all statutory requirements; exemptions from taxation
are generally disfavored and all doubts are resolved against
an exemption." However, the primary issue on appeal does
not concern whether an "exemption" from taxation
applied to appellant. Rather, the question is whether the
monies at issue constitute income under applicable statutory
and constitutional law. Because the interpretation of revenue
laws drives the analysis in this matter - contrary to the
circuit court's conclusion - all doubts are to be
resolved in favor of the taxpayer. See,
e.g., Appalachian Racing, LLC v. Family Tr.
Found. of Kentucky, Inc., 423 S.W.3d 726, 741 (Ky. 2014)
(quoting City of Erlanger v. KSL Realty Corp., 819
S.W.2d 707, 709 (Ky. 1991) ("Kentucky requires that all
such laws must be strictly construed with doubts concerning
irregularity of the ordinance resolved in favor of the
taxpayer.")). Thus, it is upon this basis that the
claims at issue must be analyzed.
first argument on appeal concerns the application of Kentucky
Revised Statutes ("KRS") 141.020(4). That statute
provides, in pertinent part, as follows:
An annual tax shall be paid for each taxable year as
specified in this section upon the entire net income except
as herein provided, from . . . business, trade, profession,
occupation, or other activities carried on in this state, by
natural persons not residents of this state. A nonresident
individual shall be taxable only upon the amount of income
received by the individual from labor performed, business
done, or other activities in this state[.]
argues that the language contained in this statute limits its
application in regard to nonresident taxation to instances in
which income was received as a result of "activity"
within the Commonwealth during the taxable year. In other
words, Ridge maintains that, in order to levy a tax on a
nonresident's income, "activity" must ...