Sheehy v. State

No. 90-450

IN THE SUPREME COURT OF THE STATE OF MONTANA

1991

EDMUND F. SHEEHY, MARGARET FLEMING,

GEORGE McGOVERN, DONALD ZACK,

RICHARD G. BRANCH, CHARLES W.

VanDIEST, AND ARNOLD S. WIRTALA,

on behalf of themselves and all other

similarly situated federal employees,

both civil service employees and

military employees, residing in the

State of Montana, who have been

subjected to paying state income tax

on their pensions,

Plaintiffs and Appellants,

v.

STATE OF MONTANA, THE DEPARTMENT OF

REVENUE, a State Agency within the

Executive Branch of State Government,

of the State of Montana,

Defendants and Respondents.

APPEAL FROM: District Court of the First Judicial District,

In and for the County of Lewis and Clark,

The Honorable Jeffrey M. Sherlock, Judge presiding.

COUNSEL OF RECORD:

For Appellant:

Edmund F. Sheehy, Jr. (argued), Cannon & Sheehy ;

Helena, Montana

For Respondent:

R. Bruce McGinnis (argued), Department of Revenue,

Helena, Montana

Submitted: August 15, 1991

DeciBed: November 14, 1991

Filed:

. I

Justice Fred J. Weber delivered the Opinion of the Court.

In this case, we affirm a decision of the District Court for

the First Judicial District, Lewis and Clark County, that the

plaintiffs are not entitled to refunds for state taxes paid for the

years 1983 through 1988 on their retirement benefits received under

the Federal Employeest Retirement Act.

The issue is whether the opinion of the United States Supreme

Court in Davis v. Michigan Department of the Treasury (1989), 489

U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be retroactively

applied, entitling the plaintiffs to refunds for taxes paid in

previous years.

Plaintiffs are retired federal employees who filed a petition

for declaratory relief seeking to have 5 15-30-111(2) (c)(i), MCA

(1989), declared unconstitutional. That statute provided that

Montana state income tax would be assessed on benefits received

under the Federal Employees1 Retirement Act in excess of $3,600.

In contrast, under 3 19-3-105, MCA (1989), all retirement benefits

received under Montana's Public Employeest Retirement System were

exempt from state and local taxes.

Following the decision of the United States Supreme Court in

Davis in March 1989, the District Court adopted the parties1

stipulation to the effect that 5 15-30-111 (2)(c)(i), MCA (1989),

is invalid for tax years commencing after December 31, 1988. The

plaintiffs then moved for summary judgment that Davis should be

applied retroactively and that they are entitled to refunds for

previous tax years, subject to the statute of limitations. (In

2

I I

Davis, the state had conceded that refunds for previous years would

be proper if the court found for plaintiffs.)

Using the factors set forth in LaRoque v. State (1978), 178

Mont. 315, 583 P.2d 1059, the District Court determined that Davis

should not be applied retroactively. The court ruled that the

Davis decision was neither predictable nor clearly foreshadowed.

It decided that retroactive application of Davis would not promote

the doctrine of intergovernmental tax immunity because it had

already required that, in the future, federal and state retirees

must be treated the same. Finally, it stated that adding the cost

of refunds to Montana's budget deficit would be inequitable to the

citizens of Montana. Plaintiffs appeal.

Should the United States Supreme Court's opinion in Davis be

applied retroactively, entitling the plaintiffs to refunds for

taxes paid in previous years?

We will first review the major elements of the opinion of the

United States Supreme Court in Davis. In that case, the plaintiffs

challenged a Michigan tax scheme which exempted from state taxation

all retirement benefits paid by the state to its retired employees

but taxed retirement benefits paid by other employers, including

the federal government. The Michigan Court of Appeals upheld the

tax scheme, ruling that 4 U.S.C. 6 111 did not apply to retirees

and that, under a rational basis test, the taxing scheme was not

unconstitutional because it furthered the state's interest in

attracting and retaining qualified employees. The Michigan Supreme

Court denied leave to appeal. The United States Supreme Court

granted certiorari and reversed, holding that the Michigan tax

scheme violated the concept of intergovernmental tax immunity.

In delivering the Court's opinion, Justice Kennedy first

disposed of the State's argument that 4 U.S.C. 5 111 applies only

to current employees of the federal government. In relevant part,

that statute provides:

The United States consents to the taxation of pay or

compensation for personal service as an officer or

employee of the United States ... by a duly constituted

taxing authority having jurisdiction, if the taxation

does not discriminate against the officer or employee

because of the source of the pay or compensation.

The Court stated that:

We have no difficulty concluding that civil service

retirement benefits are deferred compensation for past

years of service rendered to the Government. [Citations

omitted.] And because these benefits accrue to employees

on account of their service to the Government, they fall

squarely within the category of compensation for services

rendered "as an officer or employee of the United

States.

Davis, 489 U.S. at 808. The Court then went on to conclude that

the nondiscrimination clause applies to retirement benefits because

retirement benefits are included in "pay or c~mpensation.'~

Davis,

489 U.S. at 809.

The Court next discussed 4 U.S.C. 5 111 as a codification of

the rule that the doctrine of intergovernmental tax immunity does

not prohibit nondiscriminatory state taxation of federal employees.

Davis, 489 U.S. at 810-14. The Court stated that although

intergovernmental tax immunity is based on the need to protect each

sovereign's governmental operations from undue influence by the

other, private entities or individuals who are subjected to

discriminatory taxation on account of their dealings with a

sovereign can also receive the protection of the constitutional

doctrine. Davis, 489 U.S. at 814-15.

The Court then stated that the mode of analysis developed in

equal protection cases was "inappropriate" in Davis. Instead, the

test is whether the inconsistent tax treatment is related to and

justified by significant differences between the two classes.

Davis, 489 U.S. at 816.

The Court concluded that significant differences were not

present and that therefore the tax act in question violated

principles of intergovernmental tax immunity. Davis, 489 U.S. at

817. The Court remanded the case for further proceedings.

Plaintiffs also direct the Court's attention to the United

States Supreme Court's opinion in James B. Beam Distilling Co. v.

Georgia (1991), 501 U.S. , 111 S.Ct. 2439, 115 L.Ed. 2d 481. The

opinion in Jim Beam was issued on June 20, 1991, after oral

argument in the present case. In Jim Beam, the Court held that it

is error to refuse to apply a rule of federal law retroactively

after the case announcing the rule has already done so. Plaintiffs

argue that rule is dispositive and the decision in Davis must be

applied retroactively here because it was applied retroactively

in that case. Both parties submitted supplemental briefs

discussing the application of Jim Beam to this case.

When Jim Beam was decided, pending before the Court on

applications for certiorari were two cases in which retired federal

I

employees in South Carolina and Virginia seek refunds of state

income taxes under theories similar to those argued here. After

Jim Beam was decided, the Court granted certiorari in both of those

cases, vacated the state court decisions denying refunds, and

remanded the cases to the state courts for I1further consid-

eration" in light of Jim Beam. Bass v. State of South Carolina

(1991)t - U.S. , 111 S.Ct. 2881, 115 L.Ed.2d 1047; Harper v.

Virginia (1991), - U.S. , 111 S.Ct. 2883, 115 L.Ed.2d 1049.

The fact that the Supreme Court remanded Bass and Harper

rather than simply reversing them indicates the Court's uncertainty

as to whether Jim Beam applies to the issue of Davisvsretroactiv-

ity. We conclude that it does not apply. In Davis, the State had

conceded that a refund was appropriate if the Court ruled for the

appellants. Davis, 489 U.S. at 817. Because of that concession,

the Court did not consider the issue of whether retroactive

application should be granted. We therefore conclude that Davis

is not authority for application of its rule retroactively. The

underpinnings of the decision in Jim Beam are the doctrine of stare

decisis and the principle of equality to all similarly situated

litigants. Jim Beam, 111 S.Ct. at 2446. Because Davis did not

rule upon the issue of retroactivity, we conclude that the doctrine

of stare decisis does not apply. We conclude that the principle

of equality or equal treatment to similarly situated litigants does

not require that all future litigants, including the litigants in

the present case, are bound by the stipulation of the State of

Michigan in Davis.

We now consider whether retroactive application of the law set

forth in Davis is appropriate in this case. In Chevron Oil v.

Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296, the United

States Supreme Court recognized three factors to be considered

before a rule of nonretroactive application of a judicial decision

is adopted. Those factors are 1) whether the decision establishes

a new principle of law either by overruling established precedent

on which litigants have relied, or by deciding an issue of first

impression whose resolution was not foreshadowed, thereby leading

to the conclusion that the decision should not be applied

retroactively; 2) whether retroactive application will further or

retard operation of the rule in question; and 3) whether

substantial inequity will result from retroactive application.

Chevron, 404 U.S. at 106-07. Use of these three factors was

adopted by this Court in LaRoaue, 583 P.2d at 1061.

Plaintiffs argue that the result in Davis was clearly fore-

shadowed under the longstanding principle of intergovernmental tax

immunity and as a logical extension of the Court's decisions in a

series of cases. However, as the State points out, the holding in

Davis required three extensions of prior law. We will examine all

three extensions of prior law to determine if each extension was

clearly foreshadowed by previous cases.

In its first extension, the Davis Court pointed out that while

retirement pay is not actually disbursed during the time an

individual is working for the government, the amount of benefits

to be received in retirement are based and computed upon the

individualls salary and years of service. The Court Inhad no

difficultyl1 concluding that civil service retirement benefits are

deferred compensation for past years of service and therefore fall

within the category of compensation for services rendered as an

officer or employee of the United States. As authority for that

conclusion, three federal circuit cases were cited. Davis, 489

U.S. at 808.

In its Davis holding, the Michigan Court of Appeals rejected

the contention that 4 U.S.C. 9 11

1 invalidated the Michigan tax,

noting that the statute applied only to federal ttemployees.ll

Then

the Michigan court determined that the appellants1 status under

federal law in Davis was that of an "annuitantl1 rather than as an

employee and that as a result 4 U.S.C. 5 1 1 had no application.

1

The logical determination by the Michigan court together with the

action of other states which used tax schemes like Michigan's and

Montanats,suggest there is a significant question of foreshadowing

the application of 4 U.S.C. 5 1 1

1 .

The second extension of prior law took place when the Court

established the connection between the doctrine of

intergovernmental tax immunity and the protection against

discriminatory taxation of individuals under 4 U.S.C. 5 111.

Plaintiffs argue that the doctrine of intergovernmental tax

immunity had been extended to protect individuals at least since

the decision in Phillips Chemical Co. v. Dumas Independent School

Dist. (1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. But the

Davis language addressing the relationship between

intergovernmental tax immunity and 4 U.S.C. 5 111 clearly breaks

new ground:

[I]t is reasonable to conclude that Congress drew upon

the constitutional doctrine [of intergovernmental tax

immunity] in defining the scope of the immunity retained

in 5 111. . .. Hence, we conclude that the retention of

immunity in 5 111 is coextensive with the prohibition

against discriminatory taxes embodied in the modern

constitutional doctrine of intergovernmental tax

immunity.

Davis, 489 U.S. at 813. The conclusion that the protection against

discriminatory taxation retained under 4 U.S.C. 5 111 is

coextensive with the protection under the doctrine of inter-

governmental tax immunity represented an extension of prior law.

The third extension of prior law made in Davis follows from

the first two extensions. In determining whether the state tax

discriminated against federal employees, the Court decided that a

I1significantdifference" standard should be used rather than one

of the standards typically applied in equal protection cases. As

plaintiffs point out, a "significant difference" standard had been

used in matters involving intergovernmental tax immunity. See

Philli~s,361 U.S. at 387. However, in taxation cases in which

equal protection is at issue, the Court had used as a standard the

reasonableness of the classification. See Lehnhausen v. Lake Shore

Auto Parts Co. (1973), 410 U.S. 356, 359-60, 93 S.Ct. 1001, 1003-

04, 35 L.Ed.2d 351, 355. Until the Court determined in Davis that

retirement benefits are protected under 4 U.S.C. 5 111 and that the

protections under that statute are coextensive with those provided

under the doctrine of intergovernmental tax immunity, the standard

of analysis was not clear.

The majority opinion in Davis clearly describes the ~ichigan

view which rejected the contention that the doctrine of

intergovernmental tax immunity rendered the Michigan tax

unconstitutional as follows:

The Michigan Court of Appeals next rejected

appellant's contention that the doctrine of

intergovernmental tax immunity rendered the state's tax

treatment of federal retirement benefits

unconstitutional. Conceding that "a tax may be held

invalid ... if it operates to discriminate against the

federal government and those with whom it deals,''

.the court examined the State's justifications for the

. .

discrimination under a rational-basis test. Ibid. The

Court determined that the State's interest in "attracting

and retaining . . . qualified employees" was a

"legitimate state objective which is rationally achieved

by a retirement plan offering economic inducements," and

it upheld the statute.

Davis, 489 U.S. at 807. Using an equal protection analysis, the

Michigan court concluded that the legitimate Michigan objective was

a rational reason for the discrimination. That of course is

directly contradictory to the conclusion reached in Davis, where

the Supreme Court concluded that an equal protection analysis was

not applicable and used a different standard. The critical

significance of the standard of analysis is plain from the

following passage from the Court's opinion:

The State points to two allegedly significant differences

between federal and state retirees. ~irst,the State

suggests that its interest in hiring and retaining

qualified civil servants through the inducement of a tax

exemption for retirement benefits is sufficient to

justify the preferential treatment of its retired

employees. This argument is wholly beside the point,

however, for it does nothing to demonstrate that there

are "significant differences between the two classesw

themselves; rather, it merely demonstrates that the State

has a rational reason for discriminatins between two

similar sroups of retirees. The State's interest in

adoptins the discriminatory tax. no matter how

substantial, is simply irrelevant to an inquiry into the

nature of the two classes receivins inconsistent

treatment. (Emphasis supplied.)

Davis, 489 U.S. at 816. Thus, while it appears that the State of

Michigan's tax statutes would have been constitutional under an

equal protection analysis, the tax statutes could not pass the

"significant differenceuttest which the Court concluded must be

applied.

In his dissent in Davis, Justice Stevens distinguished

Phillips, upon which the majority relied as precedent for use of

the "significant difference1' standard. In Phillips, the tax was

imposed only on lessees of federal property. Justice Stevens

stated that:

The States can tax federal employees or private

parties who do business with the United States so long

as the tax does not discriminate against the United

States . . .

The Court today strikes down a state tax

that applies equally to the vast majority of Michigan

residents, including federal employees, because it treats

retired state employees differently from retired federal

employees. The Court's holding is not supported by the

rationale forthe intergovernmental immunity doctrine and

is not compelled by our previous decisions. I cannot

join the unjustified, court-imposed restriction on a

State's power to administer its own affairs.

. . .

When the tax burden is shared equally by

federal agents and the vast majority of a State's

citizens, however, the nondiscrimination principle is not

applicable and constitutional protection is not

necessary.

... The Michigan tax here applies to approximately

4% million individual taxpayers in the State, including

the 24,000 retired federal employees. It exempts only

the 130,000 retired state employees. Once one

understands the underlying reason for the McCulloch

holding, it is plain that this tax does not

unconstitutionally discriminate against federal

employees.

I

Davis, 489 U.S. at 818-21. In Justice Stevens' view the Court's

holding is not supported by the rationale for the intergovernmental

tax immunity doctrine and is not compelled by the Supreme Court's

previous decisions. Under the established equal protection

analysis, the Michigan tax scheme appeared constitutional, but it

failed the "significant difference1'test which the Court applied.

Applying the first factor under Chevron to this aspect, it appears

that Davis did establish a new principle of law.

Plaintiffs further argue that the issue of whether the Davis

decision was foreshadowed is controlled by this Court's opinion in

Jenson v. State Dept. of Labor and Industry (1984), 213 Mont. 84,

689 P.2d 1231, aff'd after remand, 221 Mont. 42, 718 P.2d 1335.

In Jenson, the issue was whether this Court's opinion in Crabtree

v. Montana State Library (1983), 204 Mont. 398, 665 P.2d 231, was

foreshadowed. This Court held that Crabtree did not create any

new law because it simply was stating the plain language of the

Veteran's Preference Act. Jenson, 689 P.2d at 1233. Plaintiffs

argue that in Davis, the Court simply was stating the plain

language of 4 U.S.C. 5 111.

However, in Davis, as the State has pointed out, there was an

additional step. 4 U.S.C. 5 111 prohibits discriminatory taxation

of "pay or compensationttreceived from the federal government.

The Court held that federal retirement benefits were included in

Itpay or compensation1'so that 4 U.S.C. 5 111 applied. Davis, 489

U.S. at 808. In Crabtree, the Court was not faced with a compar-

able preliminary issue of whether the statute was applicable to the

case at hand.

We conclude that this Court's opinion in Jenson does not

control as to whether Davis was foreshadowed. Further, because

the Davis opinion required at least three extensions of previous

law as discussed above, we hold that the result was not clearly

foreshadowed.

The second element of the Chevron test is whether retroactive

application will further or retard operation of the rule in

question. The District Court stated that it could not #'see how a

retroactive application of the Davis decision would in any way

promotegv

the concept of intergovernmental tax immunity. Plaintiffs

argue that "the state's.total disregard for 4 U.S.C. 1 111 would

be condoned if Davis is not applied retroactively."

Because we have concluded that the decision in Davis was not

foreshadowed, the plaintiffs' assertion that the tax imposed was

illegal is an overstatement. The taxation scheme was not ''illegal#'

until the Davis decision was issued, and the tax has not been

imposed since that time. We conclude that refunds as a result of

retroactive application of Davis would not promote the concept of

intergovernmental tax immunity.

In considering the third factor under Chevron the District

Court concluded that equity directed that refunds not be made due

to the financial burden on the citizens of the State of Montana.

Plaintiffs argue that equity favors making refunds because it is

Montana's public policy to provide refunds of illegally collected

taxes. But as we have discussed above, taxes collected before the

opinion in Davis were not illegally collected taxes.

4 U.S.C. 5 111 was enacted in 1939. Between that time and the

date of the Davis decision, twenty-two other states enacted and

used tax plans much like Montana's, giving tax advantages to state

retirees over other retirees. We conclude that, in view of the

acceptance and usage of similar tax plans for approximately 50

years, it would be inequitable to provide refunds to federal

retirees when those refunds would of necessity be made at the

expense of all Montana taxpayers.

After considering the three factors set out in Chevron we

conclude that the District Court did not err in concluding that

Davis should not be applied retroactively. We therefore hold that

the court did not err in ruling that the plaintiffs are not

entitled to tax refunds for the years 1983 through 1988.

T

We Concur: (

u

e

i

ce

sitting for Justice John C. ~arrison

District Judge C.B. McNeil

sitting for Justice Wm. E. Hunt.

Justice Karla M. Gray, concurring in part and dissenting in part.

I concur with that part of the majority's opinion which holds

that James B. Beam Distilling Co. v. Georgia (1991), 501U.S. -,

111 S.Ct. 2439, 115 L.Ed.2d 481, is not applicable to the issue of

the retroactivity of Davis v. Michigan Department of Treasury

(1989), 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. However,

I respectfully dissent from that part of the majority's opinion

which holds that Davis should not be applied retroactively.

I agree with the majority that the determination of whether

the United States Supreme Court's decision in Davis is to be

applied retroactively or only prospectively is governed by the

three-pronged test enunciated in Chevron Oil Co. v. Huson (1971),

404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 and utilized by this

Court in LaRoque v. State (1978), 178 Mont. 315, 583 P.2d 1059.

However, I disagree with the conclusions reached by the majority

under each prong of the test as applied to the Supreme Court's

decision in Davis. Furthermore, I believe that the weakness of the

majority s opinion is clearly demonstrated by its heavy reliance

on the overturned decision of the Michigan Court of Appeals and the

lone dissent of Justice Stevens in Davis. Such reliance by the

majority largely ignores the Davis Court majority's rationale in

reaching its decision.

For a decision to be applied only prospectively, the first

prong of the Chevron test requires that the decision "establish a

new principle of law, either by overruling clear past precedent on

which litigants may have relied ... or by deciding an issue of

first impression whose resolution was not clearly foreshadowed."

Chevron, 404 U.S. at 106. Because Davis did not overrule clear

past precedent, this Court's analysis is properly limited to the

consideration of whether the decision in Davis was clearly

foreshadowed.

The majority states that the Davis decision was not clearly

foreshadowed on the bases that in order to reach its decision in

Davis, the Supreme Court had to (1) extend 4 U.S.C. 5 111 to

federal retirees receiving pension benefits; (2) extend the

doctrine of intergovernmental tax immunity to employees of the

governmental entity as well as the entity itself; and (3) decide

that the proper standard for determining the validity of a state

statute where intergovernmental tax immunity is involved is a

Ivsignificant differenceu1standard rather than a rational basis

standard. The majority also states that the fact that twenty-

three states, including Montana, had tax schemes similar to that

of Michigan which the Supreme Court invalidated in Davis, lends

support to its conclusion that the holding in Davis was not clearly

foreshadowed.

It is my view that a plain reading of the ~ a v i sdecision

itself, together with previous United States Supreme Court

decisions, leads to the irrefutable conclusion that the Davis

decision was clearly foreshadowed. Contrary to the majority's

84, 689 P.2d 1231. As the majority opinion notes, this Court in

Jensen held that Crabtree v. Montana State Library (1983), 204

Mont. 398, 665 P.2d 231, did not create any new law because it

simply was stating the plain language of the Veteran's Preference

Act. In Davis, the Supreme Court did not create any new law

because, as the Supreme Court itself stated, the plain languaqe of

5 111 dictated its holding that the statute applies to both current

and past employees and to the pension benefits. Davis, 489 U.S.

The majority would have the reader believe that the Supreme

Court's decision in Davis constituted an unforeshadowed, abrupt and

fundamental change in the doctrine of intergovernmental tax

immunity through its holding that employees of the governmental

entity, as well as the governmental entity itself, come within the

protection of the doctrine. The majority states that "[tlhe Davis

language addressing the relationship between intergovernmental tax

immunity and 4 U.S.C. 5 111 clearly breaks new ground." Slip op.

at p. 8-9. This is simply not the case as evidenced by the Supreme

Court's own observations in Davis.

On its face, 5 111 purports to be nothing more than

a partial congressional consent to nondiscriminatory

state taxation of federal employees. It can be argued,

however, that by negative implication 5 111 also

constitutes an affirmative statutory grant of immunity

from discriminatory state taxation in addition to, and

coextensive with, the pre-existing protection afforded

by the constitutional doctrine. Resardless of whether

3 111 provides an independent basis for findins immunitv

or merely wreserves the traditional constitutional

prohibition asainst discriminatory taxes, however, the

insuirv is the same. In either case, the scope of the

conclusion, the Supreme Court in Davis did not Itextend" 4 U.S. C.

5 111 to federal retirees receiving pension benefits. The Supreme

Court made it very clear that 5 111 applies to both current and

past employees and to pension benefits based upon the plain

lansuase of the statute:

As a threshold matter, the State argues that 5 111

applies only to current employees of the Federal

Government, not to retirees such as appellant. In our

view, however, the plain language of the statute dictates

the opposite conclusion. Section 111 by its terms

applies to "the taxation of pay or compensation for

personal services as an officer or employee of the United

States.

We have no difficulty concluding that civil service

retirement benefits are deferred compensation for past

years of service rendered to the Government. [Emphasis

in original.]

Davis, 489 U.S. at 808.

Any other interpretation of the nondiscrimination

clause would be implausible at best. It is difficult to

imagine that Congress consented to discriminatory

taxation of the pensions of retired federal civil

servants while refusing to permit such taxation of

current employees, and nothing in the statutory language

or even in the legislative history suggests this result.

~avis,489 U.S. at 810. ~ssuming that the majority of eight

Justices of the United States Supreme Court intended the plain

meaning of its words, there is no room for doubt that the Supreme

Courtls holding that federal retirees fall within the protection

of 5 111 was clearly predictable or foreshadowed.

Furthermore, I believe that Davis is directly on point with

Jensen v. State Department of Labor and Industry (1984), 213 Mont.

immunity granted or retained by the nondiscrimination

clause is to be determined by reference to the

constitutional doctrine. Thus, the dispositive question

in this case is whether the tax imposed on appellant is

barred by the doctrine of intergovernmental tax immunity.

[Emphasis added.]

Davis, 489 U.S. at 813-14.

It is true that intergovernmental tax immunity is

based on the need to protect each sovereign's

governmental operations from undue interference by the

other. Graves, 306 U.S., at 481; McCulloch v. Maryland,

4 Wheat., at 435-436. But it does not follow that

private entities or individuals who are subjected to

discriminatory taxation on account of their dealings with

a sovereign cannot themselves receive the protection of

the constitutional doctrine. Indeed all precedent is to

the contrary. In Phillips Chemical Co., supra, for

example, we considered a private corporationlsclaim that

a state tax discriminated against private lessees of

federal land. We concluded that the tax l'discriminate[d]

unconstitutionally against the United States and its

lessee," and accordingly held that the tax could not be

exacted. 361 U.S., at 387. ... [Emphasis in original. ]

The State offers no reasons for departing from this

settled rule, and we decline to do so. [Emphasis added.]

Davis, 489 U.S. at 814-15. Again, assuming the Davis Court

intended the plain meaning of its words, there can be no question

that it was clearly predictable or foreshadowed that federal

retirees fall within the protection of the doctrine of

intergovernmental tax immunity.

I also disagree with the majority's conclusion that Davis was

not clearly foreshadowed because the Supreme Court had to decide

that the proper standard for determining the validity of the state

tax scheme is a "significant difference" standard rather than a

rational basis standard. The Supreme Court in Davis made it clear

that the proper standard to be applied when intergovernmental tax

immunity is involved was settled under existins authority.

Under our precedents, It[t]he imposition of a heavier

tax burden on [those who deal with one sovereign] than

is imposed on [those who deal with the other] must be

justified by significant differences between the two

classes.I1 Phillips Chemical Co. v. Dumas Independent

School Dist., 361 U.S., at 383. In determining whether

this standard of justification has been met, it is

inappropriate to rely solely on the mode of analysis

developed in our equal protection cases. We have

previously observed that "our decisions in [the equal

protection] field are not necessarily controlling where

problems of intergovernmental tax immunity are involved,^

because Ifthe Governmentfs interests must be weighed in

the balance." -.

Id I at 385. Instead, the relevant

inquiry is whether the inconsistent tax treatment is

directly related to, and justified by, "significant

differences between the two classe~.~l- at 383-385.

Id.,

[Emphasis added.]

Davis, 489 U.S. at 815-16. The Supreme Court was citing its

decision in Phillips Chemical Co. v. Dumas Independent School Dist.

(1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384, decided nearly

thirty years before Davis. Thus, the Supreme Court's application

of the "significant difference" standard in Davis was clearly

foreshadowed in light of this existing precedent.

The majority places great weight on the State's (and other

states1) reliance on the previously uncontested nature of 4 U.S.C.

§ 111 with respect to its application to federal retirees. In my

view, the fact that twenty-three states, including Montana, had tax

schemes similar to the one invalidated in Davis is conclusive of

nothing more than that Davis decided an issue of first impression.

It does not follow, as the majority opinion implies, that the Davis

decision was not foreshadowed. Where the plain language of the

statute involved, together with existing precedent, mandates a

particular holding, as was clearly shown in Davis, the prevalence

of the wrong is irrelevant to the determination of whether that

holding was clearly foreshadowed.

In applying the second prong of the Chevron test, the majority

concludes that retroactive application of Davis would not promote

the concept of intergovernmental tax immunity. I disagree. In my

view, the doctrine of intergovernmental tax immunity can only be

furthered by the retroactive application of Davis. Refusing to

apply Davis retroactively means that this Court has condoned the

State's total disregard for the plain language of 4 U.S.C. 5 111

and is akin to a continuation of past discrimination. Such a

result does not further and, indeed, retards the doctrine of

intergovernmental tax immunity in that it does not tend to deter

future State violations of the doctrine.

With respect to the third prong of the Chevron test, I

disagree with the majority's conclusion that the equities in this

case favor a nonretroactive application of Davis. In considering

the equities of retroactive application of a judicial decision, I

am fully aware that great weight must be given to the State's

reliance upon a presumptively valid statute, enacted in good faith

and by no means ~lainlyunlawful. See Lemon v. Kurtzman (1973),

411 U.S. 192, 93 S.Ct. 1463, 36 L.Ed.2d 151. However, where the

statute in question is plainly violative of federal statutory and

case law, as was Montana's tax scheme in light of the Supreme

Court's rationale in Davis, the State's reliance interests are of

little or no import. McKesson Corp. v. Div. of Alcoholic Beverages

and Tobacco (1990), 495 U.S. -, -, 110 S.Ct. 2238, 2257, 110

L.Ed.2d 17, 44.

It is true, as the majority states, that refunds to the

federal retirees would result in a financial burden on the other

taxpayers of the State; it also is true, however, that those

taxpayers have benefited greatly from the federal retirees1

overpayment of taxes over many years. In any event, the State's

and taxpayers' exposure to the disruptive impact of the tax

scheme's invalidation is limited because of the five-year statute

of limitations.

Furthermore, the State would not necessarily have to refund

the unconstitutionally collected taxes. The federal retirees have

indicated their willingness to accept a tax credit mechanism in

lieu of actual refunds as a possible remedy which, in my view, has

the potential of softening the impact on the State's financial

stability even more.

Finally, it must be recognized that, notwithstanding the

financial impact to the State, substantial inequities have been

wrought upon the federal retirees over a period of many years.

Retirees who paid the discriminatory tax and have since left

Montana or died would receive no remedy even under a proper

resolution of this case. Others would receive back only a small

portion of the discriminatory taxes they paid, no matter what

remedy might be fashioned, because of the applicable statute of

limitations. How the majority can conclude that the Chevron

"equitiesw prong favors the State, as opposed to the federal

retirees who were wrongfully discriminated against by the State,

is simply beyond my understanding.

I would reverse the judgment of the District Court and hold

that under the Chevron test, the Davis decision is to be applied

retroactively. Having so held, I would remand this case to the

District Court for a determination of the proper remedy to be

provided to the federal retirees.

Justice Terry N. Trieweiler dissenting.

I dissent from the majority opinion in its entirety.

I concur with that part of Justice Gray's opinion which

concludes that the case of Davis v. Michigan Department of Treasury (1989),

489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be applied

retroactively based upon the three-prong test set forth in Chevron

Oil Companyv. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296.

Contrary to the majority1 argument, the result in Davis was

s

clearly foreshadowed by the plain language of 4 U.S .C. 5 111 and by

the Supreme Court s prior decisions in Phillips Chemical Company v. D ~ ~ m a s

4 L.Ed. 2d 384, 391-92, and Memphis Bank and Trust Company v. Gamer ( 1983) ,

459 U.S. 392, 397 n. 7, 103 S.Ct. 692, 696 n. 7, 74 L.Ed.2d 562,

567 n.7.

As pointed out by the Supreme Court in Davis:

When the first part of 5 111 is read together with the

nondiscrimination clause, the operative words of the

statute are as follows: "the United States consents to

the taxation of pay or compensation . .

. if the taxation

does not discriminate ..

. because of the source of the

pay or compensation.

Davis, 489 U . S . at 809, 109 S.Ct. at 1504, 103 L.Ed.2d at 901.

Retirement benefits are clearly deferred compensation.

Therefore, I cannot comprehend how 4 U. S.C. 5 111 could be

construed any way other than the manner in which it was construed

in Dnvis. As pointed out in Justice Gray's dissent, we have

previously held in Jensen v. S a e Department o Labor and I d s r ( 1984) , 2 1 3

tt f nuty

Mont. 84, 689 P.2d 1231, that the plain language of a statute is

sufficient to foreshadow a judicial decision which applies that

statute. I cannot think of a clearer example of that being the

case than the United States Supreme Court s application of 4 U.S .C.

g 111 in Davis.

The majority opinion is a nearly verbatim adoption of the

Department of Revenue's strained rationale that Davis was not

foreshadowed because it resulted in three extensions of prior law.

However, that same argument was made by the State of Michigan in

Davis and in each respect was refuted by the eight out of nine

Supreme Court Justices who subscribed to the majority opinion in

Dnvis. The fact that this Court would then ignore the majority

opinion and subscribe to the Department of Revenue's argument on

the basis of the lone dissent, is at best a peculiar way to apply

controlling United States Supreme Court precedent.

Having pointed out that I agree with Justice Gray's thorough

analysis of the Chevrontest for retroactivity, and concluding that

that test requires retroactive application of Davis, I do not feel

that it is necessary to apply the Chevron analysis.

The United States Supreme Court has recently gone even further

to make clear that the result arrived at by the majority in this

case is incorrect.

In James B. Beam Distilling Company v. Georgia ( 1991) , U.S. I 111

S.Ct. 2439, 115 L.Ed.2d 481, the United States Supreme Court dealt

with a similar issue regarding retroactivity.

In the Benm case, the Court was asked to decide whether its

decision in BacchusImports, Ltd. v. Dins (1984), 468 U.S. 263, 104 S.Ct.

3049, 82 L.Ed.2d 200, should apply retroactively to claims based on

facts which preceded that decision. The effect of the Bncchzis

decision was to hold that state laws which imposed an excise tax on

imported alcoholic beverages at a rate greater than those imposed

on alcoholic beverages manufactured within that state violated the

Commerce Clause of the United States Constitution. Following the

B N C C ~ decision, the petitioner in Benm claimed that Georgia's law

ZLS

amounted to the same violation, and on that basis sought a refund

of the taxes it had previously paid in the years 1982, 1983, and

1984. The state courts in Georgia, however, refused to apply

Bncch~is

for the years in question based upon their analysis of Chevrorl

Oil Company v. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed. 2d 296.

In other words, the Supreme Court in Georgia applied the same

rationale in Beam to deny a refund that the majority relies on in

this case to deny a refund to the plaintiffs.

Beam sought a writ of certiorari. The United States Supreme

Court granted Beam's petition and reversed the Supreme Court of

Georgia on June 20, 1991.'

In arriving at its decision, the Supreme Court concluded that

unless it specifies that its decisions are prospective only, they

are to be applied retroactively. It furthermore stated that where

its decisions are applied retroactively to one set of litigants

they must be applied retroactively to similarly situated persons

who are not barred procedurally from asserting their rights.

Particularly relevant to this case was the Court's holding that its

decision limits the possible applications of the Chevroiz Oil analysis.

The Supreme Court stated in part as follows:

Questions of remedy aside, Bacchusis fairly read to hold

as a choice of law that its rule should apply

retroactively to the litigants then before the Court.

Because the Bacchus opinion did not reserve the question

whether its holding should be applied to the parties

before it . . . it is properly understood to have

followed the normal rule of retroactive application in

civil cases. . . . Because the court in Bncchus remanded

the case solely for consideration of the pass-through

defense, it thus should be read as having retroactively

applied the rule there decided. See also Williams v .

Vermont, 472 U.S. 14, 28, 105 S.Ct. 2465, 2474, 86 L.Ed.2d

11 (1985); Enon Corp. v. Engertorz, 462 U.S. 176, 196-197, 103

S.Ct. 2296, 2308-2309, 76 L.Ed.2d 497 (1983); cf. Dnvisv.

Miclzipiz Departmeizt o Treasury, 489 U .S . 803 , 817 , 109 S .ct .

f

1500, 1508, 103 L.Ed.2d 891 (1989).

his case was argued to the Montana Supreme Court on May 7,

1991. At the time of oral argument, both parties advised this

Court of the pending Beam case and agreed that the United States

Supreme Court's decision in that case could be dispositive of the

issue in this case.

Beam, - U.S. at , 111 S.Ct. at 2445-46, 115 L.Ed.2d at 490-91.

It is significant that the Supreme Court actually cited Davis

for the principle of retroactivity. The Court then went on to add:

Bacchus thus applied its own rule, just as if it had

reversed and remanded without further ado, and yet of

course the Georgia courts refused to apply that rule with

respect to the litigants in this case. Thus, the

question is whether it is error to refuse to apply a rule

of federal law retroactively after the case announcing

the rule has already done so. We hold that it is,

principles of equality and staredecisis here prevailing over

any claim based on a Chevron Oil analysis.

... To this extent, our decision here does limit

the possible applications of the Chevroiz Oil analysis,

however irrelevant Chevroiz Oil may otherwise be to this

case. Because the rejection of modified prospectivity

precludes retroactive application of a new rule to some

litigants when it is not applied to others, the Chevron Oil

test cannot determine the choice of law by relying on the

equities of the particular case. Once retroactive

application is chosen for any assertedly new rule, it is

chosen for all others who might seek its prospective

application.

.. . [Wlhen the Court has applied a rule of law to

the litigants in one case it must do so with respect to

all others not barred by procedural requirements or res

judicata. [Citations omitted.]

Beam, - U . S . at I , 111 S.Ct. at 2446, 2447-48, 115 L.Ed.2d

The majority concludes that Beam is not applicable to this

case because the Supreme Court did not apply Davis retroactively.

It was applied retroactively, based on the stipulation of the

parties to that case. However, that reasoning ignores ~ustice

Scalia's concurring opinion which was joined in by Justice Marshall

and Justice Blackmun to the effect that both llselective

prospectivityl'and "pure prospectivityl'are beyond the power of the

Court. The implication, as far as those Justices were concerned,

is that Daviscould not have been applied prospectively even if the

parties had not agreed to apply it retroactively. Beam, U.S.

at , 111 S.Ct. at 2450-51, 115 L.Ed.2d at 496-97 (Scalia, J.,

concurring). The majority's conclusion ignores Justice OIConnorls

dissenting opinion wherein she states that the Beam decision

curtails the Chevron Ol inquiry.l1 Beam, - U.S. at

llseriously i I

111 S.Ct. at 2452, 115 L.Ed.2d at 499 (OIConnor,J., dissenting).

Finally, the majority's reasoning ignores the fact that eight days

after Beam was decided, the United States Supreme Court granted

petitions for certiorari to retired federal employees in South

Carolina and Virginia who sought retroactive application of the

Davis decision under circumstances identical to the circumstances in

this case. In those cases, the Supreme Courts of South Carolina

and Virginia rendered decisions similar to the holding of the

majority in this case. See Bass v. S a e (S.C. 1990), 395 S.E.2d 171;

tt

Harperv. Hrginia Dept. o Taxation (1991), 241 Va. 232, 401 S.E.2d 868.

f

Both of those decisions were vacated by the United States Supreme

Court, and both were remanded to the state courts for "further

consideration in light of JamesB.BenmDistilling Company v. Georgirz." Bass

v. Sozlth Carolina ( 1991) , U.S., 111 S.Ct. 2881, 115 L.Ed.2d 1047

.

(mem ) ; Harper v. yirgznia Dept. of Taxation ( 1991) , U.S. , 111 S.Ct.

2883, 115 L.Ed.2d 1049 (mem.) .

It does not seem to me that the intent of the Supreme Court to

apply Davis retroactively could be any clearer. The majority s

opinion merely postpones the inevitable and unnecessarily prolongs

the delusion of state government that it can continue to spend

money which was illegally collected and which it will ultimately

have to repay.

As far as I am concerned, the issue involved in this case is

a simple one. The State took the petitioners' money illegally.

That fact is obvious from the plain language of 4 U.S.C. 5 111. If

a private citizen took someone's money illegally, he or she would

be forced to give it back. The State ought to do the same.

The majority talks about equity. What is equitable about

allowing the State, with all its power, to illegally seize

someone's property, and then after being told what it did was

illegal, allowing the State to keep it?

The majority's strained rationale regarding the foreseeability

of Davis is transparent. When the State of Montana establishes a

policy of arbitrarily treating one group of taxpayers differently

than another group that is similarly situated, it is certainly

foreseeable that what the State is doing is illegal.

The majority's conclusion about how to best effectuate the

purpose of the Dnvisdecision is similarly illogical. The purpose

of the Davis decision was to assure that federal employees are

treated the same as state employees. How can that purpose possibly

be furthered by allowing the State to keep the money that was

illegally taken from federal employees and spend it for the benefit

of citizens who were not similarly taxed?

The majority s decision is clearly a result-oriented decision

arrived at for the purpose of protecting the State's coffers.

However, the State's coffers are not the responsibility of this

Court. The rights of this State's citizens are.

For the reasons set forth above, the State of Montana can take

little comfort in the temporary reprieve granted by this decision.