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Ridge v. Commonwealth, Finance and Administration Cabinet

Court of Appeals of Kentucky

August 16, 2019



          BRIEF FOR APPELLANTS: Keith Hoskins Louisville, Kentucky

          BRIEF FOR APPELLEE: Clinton S. Combs Office of Legal Services for Revenue Frankfort, Kentucky



          SPALDING, JUDGE.

         From 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.

         In 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 followed.

         Ridge 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.

         Ridge 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.

         This 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 de novo.

         We 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.

         Ridge's first argument on appeal concerns the application of Kentucky Revised Statutes ("KRS") 141.020(4).[1] 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[.]

         Ridge 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 ...

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