Request By:
Mr. Phil Angelucci
Sheriff of Fayette County
Lexington, Kentucky 40507
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Elizabeth E. Blackford, Assistant Attorney General
You have deposited all property taxes collected by your office in a savings account which has generated interest in the amount of $75,000. You have reported and paid over to the respective political subdivisions those taxes collected on their behalf in accord with the duties placed upon you by KRS Chapter 134. You wish to know whether the sheriff's office may add the $75,000 interest to its fee account. The answer is no.
Originally, Kentucky adopted the theory that public officers were entitled to keep any interest earned on public funds in their possession if they were not required to keep those funds in interest bearing accounts, and if retention of the interest did not violate some other statute or constitutional provision.
Commonwealth v. Goodshaw, 17 S.W. 739 (1891). However, this rule seemed to have been in derogation of Kentucky Constitution § 173 which says that no public officer may receive directly or indirectly any interest or profit arising from the use of public funds which he is authorized to hold or collect on behalf of any public agency.
Later, Kentucky adopted the majority rule, pursuant to which tax collections held by the sheriff are a trust fund.
Breathitt v. Cockrell, 250 Ky. 743, 63 S.W.2d 320 (1933);
Fidelity & Casualty Company v. Breathitt, 276 Ky. 173, 123 S.W.2d 251 (1938). Since the taxes are a trust fund, any proceeds or interest earned thereon belongs to the one who owns the principal fund; the political subdivision on whose behalf the funds were collected.
Fidelity & Casualty Company v. Breathitt, supra.
According to the law of other jurisdictions which have adopted the trust fund or bailment theory of liability for public officers with reference to keeping interest earned on public funds in their possession, the fact that the office has no duty to hold the money in an interest bearing account will have the impact upon the conclusion that all proceeds earned with the trust belong to the one who owns or is entitled to the principal. Liability of the Public Officer for interest or other earnings received on public money is in his possession. 5 A.L.R.2d 257, 267-270. The officer must account for the interest in the same manner as the principal as the interest earned is simply an increment of the principal fund and is, therefore, the property of the owner of the fund.
University of South Carolina v. Elliot, 248 S.C. 218, 149 S.E.2d 433.
Furthermore, were your office to keep this amount, you would, in effect, be increasing the fee earned for your performance as tax collector. This would be in violation of KRS 134.290 which says you are to receive a commission of a certain percentage of the taxes collected (not taxes plus interest earned during the holding period).
And, with reference to that portion of the interest which was generated by the principal which belongs to the state, use of those funds by any subdivision or agency which is not a state agency would be in violation of Kentucky Constitution § 181, which prohibits the General Assembly from levying taxes for the purposes of any political subdivision. As to the interest generated by the principal amount which was collected on behalf of the school district, the use of that interest for purposes other than educational purposes violates Kentucky Constitution § 184, which says that funds generated by taxation for the purpose of common school education may not be used for any other purpose.
For these reasons, this office is of the opinion that you may not add the $75,000.00 interest generated by depositing property tax collections in a savings account to your fee account. The proper procedure for dispensation of this interest is to turn it over to the state, county and school district on a pro rata basis, giving each subdivision that share of the interest which was generated by the principal tax fund you collected and held on its behalf.