Amicus Curiae Brief — Harper v. Virginia Dept. of Taxation

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No. 91-794

IN THE

Supreme Court of the United States

OCTOBER

TERM, 1992

HENRY H

ARPER, et al.,

Petitioners,

VIRGINIA DEPARTMENT OF TAXATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of Virginia

BRIEF AMICUS C

‘URIAE ON BEHALF

OF THE MILITARY COALITION

IN SUPPORT OF PETITIONERS

* Counsel of Record

July 16, 1992

WILSON - Eres PRINTING Co., INc.

EUGENE O. DUFFY *

GREGORY W. LYONS

O’NEIL, CANNON &

HOLLMAN, S.C.

111 E. Wisconsin Avenue

Suite 1400

Milwaukee, WI 53202

(414) 276-5000

Attorneys for Amicus

- 789-0096 - WASHINGTON, D.C. 20001

—

QUESTION PRESENTED

Whether this Court’s decision in Davis v. Michigan

Department of Treasury, 489 U.S. 803 (1989), may

under any circumstances be “applied” nonretroactively

so as to defeat federal retirees’ entitlement to refunds

of unconstitutional state taxes imposed upon their federal

‘annuities.

(i)

TABLE OF CONTENTS

Page

QUESTION PRESENTED i

TABLE OF AUTHORITIES ERS iv

INTEREST OF THE AMICUS CURIAE ................... 1

SUMMARY OF THE ARGUMENT 2

ARGUMENT............. 4

I. THE COURT BELOW MISCONCEIVED THE

PROPER ANALYTICAL TASK | 4

li. ALTERNATIVELY, ASSUMING THIS

COURT DETERMINES THAT A PROSPEC-

TIVITY ANALYSIS MAY BE APPLIED IN

THIS CASE, DAV/S SHOULD BE GIVEN

RETROACTIVE EFFECT... 7

A. Davis Did Not Establish a New Principle

of Law. Therefore, the Threshold Prong for

Prospectivity Is Not Satisfied 7

B. Retroactive Application of Davis Wil! Fur-

ther the Purposes Behind 4 U.S.C. § 111 and

the Doctrine of Intergovernmental Tax Im-

munity . eatin « Se 17

C. Welshing | the Equities Compels the Retro-

active Application of Davis 21

CONCLUSION 29

(iii)

TABLE OF AUTHORITIES

CASES Page

Adams Fruit Co. v. Barrett, 494 U.S. 638 (1990).. 5

Andras v. Department of Revenue, 154 Til. App.

3d 37, 506 N.E.2d 439 (1987), cert. denied,

RE ee 14

Armco, Ine. v. Hardesty, 467 U.S. 638 (1984)........ 7

Ashland Oil, Inc. v. Caryl, 110 8. Ct. 3202

EEE See aerate. Setar ro 7, 16,17

Barker v. Kansas, 112 S. Ct. 1619 (1992) ee CE 11, 16

Bohn v. Waddell, 164 Ariz. 74, 790 P.2d 772

(1990), aff'd on reconsideration, 167 Ariz. 344,

807 P.2d 1 (1991), appeal pending, No. 1 CA-

, EEE EE SO Sl ee 16, 19

Borg v. Department of Revenue, 308 Or. 34, 774

i. | of = 14

Brown v. Franchise Tax Bd., 197 Cal. App. 3d

300, 242 Cal. Rptr. 810 (1987) ............ 14

Cambridge State Bank v. James, 480 N.W.2d 647

(Minn. 1992), petition for cert. pending, No.

Capital Preservation Fund v. Department of Rev-

enue, 145 Wis. 2d 841, 429 N.W.2d 551 (Ct.

RESET ee. ec Ae 14

Chase Manhattan Bank, N.A. v. Finance Admin.,

es Ce I i iii nthdeniintaniasaiinitiaiiess 9

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). _passim

Columbia Gas Transmission Corp. v. Rose, 459

EI EE Ee SPS Dr 7

Commissioner of Revenue v. Plymouth Home

Nat’l Bank, 394 Mass. 66, 473 N.E.2d 1139

RASS Sere cman es TawveY Saee Ore aeeE aU 14

Commissioner v. Newman, 159 F.2d 848 (2d Cir.),

cert. denied, 331 U.S. 859 (1947) ....................... 14, 22

Cottage Sav. Ass'n v. Commissioner, 111 S. Ct.

1503 (1991) - aaiiaieeseas 28

Davis v. Michigan Dep't of Treasury, 489 U.S. 803

ES eee ee ea _.. passim

Fahey v. Mallonee, 332 US. 245 (1947)... a 24

Forbes, Inc. v. Department of Fin., 66 N.Y.2d 243,

487 N.E.2d 251 (1985), cert. denied, 475 US.

(i OE 9,14

TABLE OF AUTHORITIES—Continued

Page

Franklin v. Gwinnett, 112 S. Ct. 1028 (1992)........ 20

Freytag v. Commissioner, 111 S. Ct. 2631 (1991).. 5

George Moore Ice Cream Co. v. Rose, 289 US.

STB (1GBB) ~<.....----.-.-.-20-000-0--nerenseoeeneencennsnnsnarecsenonnees 26

Graves v. New York ex rel. O'Keefe, 306 U.S. 466

| cnr 8, 9, 13, 18

Gregory v. Asheroft, 111 8. Ct. 2395 (1991) Sieuaal 5

Hackman v. Director of Revenue, 771 S.W.2d 77

(Mo. 1989) (banc), cert. denied, 493 U.S. 1019

CRBDOD nn sncnecevsecsnnnnceoeesearcnscesnsncsenensensnssnsscesnamasnessenens 26

Hagge v. lowa State Dep't of Revenue and Fin.,

lowa District Court, Linn County, No. LA

I i cccscccnncecccunceceenannsnnncetnnenetensnenebnseeesteeesennanes 16

Hanover Shoe, Inc. v. United States Shoe Mach.

Corp., 392 U.S. 481 (1968) . 11

Hogan v. Musolf, 163 Wis.2d 1, 471 ‘N.W2a 216

(1991), cert. denied, 112 S. Ct. 867 (1992) ........ 19

Hogon v. Musolf, Wisconsin Tax Appeals Com-

mission, No. 91-1-386 _...............-.--------------s--e<e-0- 16

Hooker v. Hoey, 27 F. Supp. 489 (S.D.N.Y.), aff'd,

107 F.2d 1016 (2d Cir. 1939) 13

In re Sawyer Estate, 149 Vt. 541, 546 A.2d 784

CIID anna nnnnceccesesecnsevencnsencosesnvensesnereneomemensnasnanecnces 14

lowa-Des Moines Bank v. Bennett, 284 U.S. 239

(1931)... 29

James B. Beam “Distilling Co. v. Georgia, “111

A SS 2,6

Jones v. Liberty Glass Co., 332 U.S. 524 (1947),

reh’g denied, 333 U.S. 850 (1948) ...................... 26, 28

Kraft Gen. Foods, Inc. v. lowa Dep't of Revenue

and Fin., 60 U.S.L.W. 4582 (1992) ................... 6

Kuhn v. State, Dep't of Revenue, 817 P.2d 101

(Colo. 1991), cert. dismissed, 112 S. Ct. 1925

CRBGBD n-ne nececnee-ncencecensneceenscesnsnnsensserennsensennemnnneoecnens 26

M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316

CBBRD) .....-..nn-2nnccneenncennvennrsnvensnenensnncesesnnesensenssnncensoncess 10, 18

Marbury v. Madison, 5 US. (1 Cranch) 137

| ro onTnr ner 20

Matz v. Department of Treasury, 155 Mich. App.

778, 401 N.W.2d 62 (1986) cere 14

TABLE OF AUTHORITIES—Continued

Page

McKesson v. Division of Alcoholic Beverages &

Tobacco, 496 U.S. 18 (1990). 5, 18, 21, 24

McKnett v. St. Louis & S.F. Ry. Co., 292 U.S. 230

EEG Se wee Oe 28

—— Bank & Trust Co. v. Garner, 459 U.S.

EERE RRL eer enone NE Or 9

Meredith v. State Tax Comm'n, 163 Or. 305, 96

P.2d 1082 (1939) ...... Ee ee ee 5

Molter v. Department of Treasury, No. 125786,

1992 Mich. App. Lexis 131 (Ct. App. April 6,

Ee ee ee 12

Moses Lake Homes, Ine. v. Grant County, 365 U.S.

744, reh'g denied, 366 U.S. 947 (1961)... 9, 29

Mullaney v. Anderson, 342 U.S. 415 (1952)... 8

Northern Sec. Co. v. United States, 193 U.S. 197

RE a oe ey ae oe 4,5

Owen v. City of Independence, 445 U.S. 622, reh’g

denied, 446 U.S. 993 (1980)... 25

Patterson v, Shumate, 112 8. Ct. 2242 (1992) 4, 5, 28

Phillips Chem. Co. v. Dumas Sch. Dist., 361 U.S.

376 (1960) . 9

Planned Parenthood of Southeastern Pennsylvania

v. Casey, 60 U.S.L.W. 4795 (1992) 5, 6

Ponthier v. Louisiana Dep’t of Revenue, Louisiana

Board of Tax Appeals, No. 3396... 16

Quill Corp. v. North Dakota, 112 S. Ct. 1904

ES ee eee anne eee 24

R.H. Stearns Co. v. United States, 291 U.S. 54

RE Re eee Sw SUT a ee 25

Rinehart v. Sizemore, No. CV-89-704-M (Mont-

gomery County Ct., Ala. October 10, 1990),

aff'd, 1992 Alabama Civ. App. Lexis 183 (Ala.

Civ. App. February 7, 1992) .... 19

Sharpe v. United States, 54-2 USTC (CCH)

* 46,902 (W.D. Wash. 1954). 18, 14

Sheehy v. State, Dep't of Revenue, 820 P.2d 1257

(Mont. 1991), petition for cert. pending, No.

ee 14

vii

TABLE OF AUTHORITIES—Continued

Page

South Carolina v. Baker, 485 U.S. 505 (1988) ....... 9,17

Swanson v. Powers, No. 89-282-CIV-5H (E.D.N.C.

1990), rev’d in part, 937 F.2d 965 (4th Cir.

1991), cert. denied, 112 S. Ct. 871 (1992) ........ 16

Swanson v. State, 329 N.C. 576, 407 S.E.2d 791,

reh’g granted, 330 N.C. 445, 410 S.E.2d 498,

adhered to on reh’g, 330 N.C. 390, 410 S.E.2d

490 (1991), petition for cert. pending, No. 91-

RCRA reer eee eee Sa ee a TN 21

Trinityfarm Constr. Co. v. Grosjean, 291 U.S. 466,

reh’g denied, 292 U.S. 604 (1934) 0... 17,18

United States v. City of Manassas, 830 F.2d 530

(4th Cir. 1987), aff'd, 485 U.S. 1017 (1988)... 9, 15

United States v. City of Spokane, 918 F.2d 84

(9th Cir. 1990), cert. denied, 111 8. Ct. 2888

(1991)... PAS EE. en epee Se ee 17, 18

United States v. Dalm, 494 U.S. 596, reh’g denied,

i ccesseainmaiuabdnaninns 26

United States v. Ron Pair Enter., Inc., 489 US.

Er 4

Waldron v. Collins, 788 F.2d 736 (11th Cir.),

cert. denied, 479 U.S. 884 (1986)... 15

Ward v. Board of County Comm'rs, 253 U.S. 17

iia echleieeeataahal acta alicia ici hieadineidamadinniteagenigeanss 28

Welch v. Henry, 305 U.S. 134, reh’g denied, 305

I i laa 25

West Virginic Univ. Hosp., Inc. v. — 111

RS CRE eR eeornoom 4

~ CONSTITUTIONAL PROVISIONS

IS passim

STATUTES

cs npn icnannisininiinaiaeniide soleainlill passim

eee ers 20

26 U.S.C. § 164... ET SE CO 20

Public Salary Tax Act of 1939 aitentelailieanseieiuiveliaaal passim

ae ee ae 27

, aA 15, 27

Ts nreneremsennennenennmsienseennidemmenmanstnn 24

viii

TABLE OF AUTHORITIES—Continued

Va. Code § 58.1-848 0. siehalttinitiadilaieiiaanaiadi

TEA GRMN see isin

Wis GI IO cence cccccecccnccccsccessonvereronsctsossoccsseseos

IIT. osuisbesbieiineaneiihibaniiincedinins

es Ga ie I acces. cnccccccrscccoccrsesoceccececeeccssnsscsoes

Va. Code § 58.1-1824....... DT te ical laaee

1989 Wisconsin Act 32) 200. ccececeeeeeeeeeeees

MISCELLANEOUS

59 Cong. Rec. 6300 (April 29, 1920) . Pe tat esa

Department of Defense ATLAS/DATA ABSTRACT

FOR THE UNITED STATES AND SELECTED AREAS—

FY 1989 ........ Ee ee ee

1.T. 1607, [1-2 C.B. 71 (1923) .

1.7. 2669, XII-1 C.B. 68 (1933) . =

Individual Income Tax Returns 1987, LR. S. Pub.

Op. Ariz. Att’y Gen. No. 60-9-L (1959)

REPORT AND RECOMMENDATIONS ON TAXPAYER

COMPLIANCE, American Bar Association Com-

mission on Taxpayer Compliance, July, 1989,

41 Tax Lawyer 329 (1988) ....... Se ee

Report of the House Finance Retirement Sub-

committee to the Governor and the General As-

sembly of Virginia, December, 1982...

Rev. Rul. 56-82, 1956-1C.B.59 pet Wests 14,

Rev. Rul. 57-75, 1957-1C.B.28.

Rev. Rul. 79-315, 1979-2 C.B. 27 .

Ruling of Commissioner, P.D. 87-253, 2 Va.) ‘St.

Tax Rptr. (CCH) % 201-519

Ruling of Commissioner, P.D. 88-7, [2 Va.] St.

Tax Rptr. (CCH) © 201-546

Ruling of Commissioner, P.D. 88-30, [2 Va.] St.

Tax Rptr. (CCH) % 201-568

Ruling of Commissioner, P.D. 90-11, [2 Va.] St.

Tax Rptr. (CCH) at ‘ 201-844 _. :

Ruling of Commissioner, P.D. 90-217, [2 Va.) ‘St.

Tax Rtpr. (CCH) at * 201-930... siiasiliaiiticipiendin

S. Rep. No. 112, 76th Cong., lst Sess. (1989) ........

12, 16

TABLE OF AUTHORITIES—Continued

Section of Taxation REPORT TO HOUSE OF DELE-

GATES, August, 1000 _.................-...:cccccccscsceeenseseees

Shaviro, AN ECONOMIC AND POLITICAL Look AT

FEDERALISM IN TAXATION, 90 Michigan L. Rev.

re sitll cial lia taaiattenas

is I ID cccccccecescccsserncennnssncasescqusnssvesenseeses

The Taxation of Municipal Obligations and Sal-

aries, A Report of the Committee on Taxation

of Municipal Obligations and Salaries, Munici-

pal Law Section of the American Bar Associa-

tion (July 11, 1939) ........ I tinh LETT

Treas. Reg. 45, Art. 32 (1919) 00000

Treas. Reg. 86, Art. 22(a)-2 (1935)...

Treas. Reg. 101, Art. 22(a)-2 (1930) 0000.

Treas. Reg. § 1.61-2(a) (1) ..... ae paidiaie aoe ee a

Va. Tax Reg. Sec. 680-2-499 0c

Virginia Department of Taxation Annual Report,

bb fo

Virginia Department of Taxation Annual Report,

SS _ x=

Virginia Department of Taxation Annual Report,

SS i Te eee

Page

IN THE

Supreme Court of the United States

OCTOBER TERM, 1992

No. 91-794

HENRY HARPER, et al.,

- Petitioners,

VIRGINIA DEPARTMENT OF TAXATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of Virginia

BRIEF AMICUS CURIAE ON BEHALF

OF THE MILITARY COALITION

IN SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE

Pursuant to Rule 37.3 of the Rules of this Court, The

Military Coalition (herein “TMC”) respectfully submits

this brief as amicus curiae.' TMC isa voluntary associa-

tion of 24 military-related organizations’ which was

formed six years ago (App. A, la). Collectively its con-

stituent organizations represent the interests of over

1,500,000 members, who are retired, reserve and active

members of the Uniformed Services of the United States.

TMC is dedicated to the purpose of providing a cohesive

means for the study and advocacy of issues which impact

' Amicus has received the written consents of the parties to the

filing of this brief; those consents have been filed with the Clerk of

the Court.

upon the maintenance of a strong national defense and

the preservation of rights and benefits its varied constitu-

ents have earned through years of dedicated service to

the United States.

The State of Virginia and approximately thirteen other

States continue to refuse to give retroactive effect to this

Court’s decision in Davis v. Michigan Dep't of Treasury,

489 U.S. 803 (1989). The resolution of the question

presented in this case is vitally important to amicus. If

the decision below is permitted to stand, military retirees

and, indeed, military members on active duty through-

out the fifty states will be at risk that rights established

by Congress may be arbitrarily abridged by any state

solely on the basis of local political considerations.

Amicus has supported the enactment of several measures

by Congress which prohibit discrimination of the type

upheld by the decision below. Thus, amicus has a unique

perspective on the question presented by this case as well

as a vital interest in its proper resolution.

SUMMARY OF THE ARGUMENT

In the decision below, the Virginia Supreme Court mis-

conceived its analytical task. Under the Supremacy

Clause, its sole function was to enforce 4 U.S.C. § 111 in

accordance with its terms. Since the Virginia scheme of

taxation violated Congress’ limited consent to the taxa-

tion of federal compensation, the court below erred in

failing to find that the Virginia taxing scheme had been

pre-empted.

Upon remand from this Court in the October Term

of 1990, the court below also erred in refusing to apply

this Court’s judgment in James B. Beam Distilling Co.

v. Georgia, 111 S. Ct. 2239 (1991). Under Beam, it is

unmistakable that state courts are obligated to give this

Court’s decision in Davis retroactive effect.

Alternatively, if this Court coneludes that a prospec-

tivity analysis is appropriate in determining the effect of

unambiguous Congressional enactments, under the three-

prong test it was error for the Virginia Supreme Court

to refuse to give 4 U.S.C. § 111, as construed in Davis,

retroactive effect.

Under the first prong, there is no new principle. 4

U.S.C. § 111 merely codifies this Court’s decisions. Simi-

larly, the State’s claim of reliance on its own statute is

inadequate to satisfy this threshold prong. This is so,

in part, because Virginia ignored its own 1982 determi-

nation that its scheme was inequitable.

. Under the second and third prongs, the State has

demonstrated nothing which would justify refusing to

give effect to a lawful enactment of Congress. Indeed,

under the circumstances of this case, the failure to give

Davis retroactive effect results in a new violation of 4

U.S.C. § 111.

With respect to the equities, Virginia comes to this

Court with unclean hands. The burdens, if any, in this

case are of the State’s own making and are directly re-

lated to considered parochial choices which its legislature

has voluntarily made. Moreover, the burden, which Vir-

ginia claims in this case, is attributable in large measure

to its attempt to finance its choices by singling out the

petitioners to shoulder a tax burden that similarly situ-

ated citizens of Virginia have not and are not being

required to bear.

Finally, it is clear that the decisions of this Court

preclude the result ordered below. Virginia seeks to re-

tain the benefits of 4 U.S.C. § 111, while at the same time

it claims that, as to the petitioners, 4 U.S.C. § 111 was

not the law. A state cannot retain the benefits of legisla-

tion and at the same time attack the validity of the same

act. Similarly, as to tax year 1988, Virginia seeks relief

from a burden of its own making. Under the precedents

of this Court, such relief is foreclosed. x

Since none of the factors for prospectivity are satisfied

and since Virginia is precluded from invoking the defense

=a Se

> J

in the first instance, 4 U.S.C. $111, as construed in

Davis, should be given retroactive effect. The Virginia

legislature has waived all procedural bars to the refunds

claimed. As a matter of federal law, amicus urges this

Court in its mandate to compel Virginia to pay refunds

upon remand.

ARGUMENT

I. THE COURT BELOW MISCONCEIVED THE

PROPER ANALYTICAL TASK.

Amicus respectfully submits that the Virginia Supreme

Court “misconceived the appropriate analytical task,”

Patterson v. Shumate, 112 S. Ct. 2242, 2248 n.4 (1992),

in reaching its holding that “the Davis decision is not

to be applied retroactively.” Pet. App. at 17a. Given the

clarity of the statutory provision at issue in Davis, the

decisions of this Court establish that “the sole function”

of the court below should have been “to enforce {the

statute] according to its terms.” West Virginia Univ.

Hosp., Inc. v. Casey, 111 S. Ct. 1138, 1147 (1991) (cita-

tions omitted). See also Patterson v. Shumate, 112 S. Ct.

at 2247; United States v. Ron Pair Enter., Inc., 489 U.S.

235, 241 (1989).*

* Virginia’s defense in this case was based upon an appeal to

parochial considerations. (J.A. 32-49). However, as Justice Holmes

observed :

Great cases like hard cases make bad law. For great cases are

called great, not by reason of their real importance in shaping

the law of the future, but because of some accident of imme-

diate overwhelming interest which appeals to the feelings and

distorts the judgment. These immediate interests exercise a

kind of hydraulic pressure which makes what previously was

clear seem doubtful, and before which even well settled princi-

ples of law will bend. What we have to do in this case is to

find the meaning of some not very difficult words. We must

try, I have tried, to do it with the same freedom of natural

and spontaneous interpretation that one would be sure of if the

same question arose upon an indictment for a similar act which

excited no public attention, and was of importance only to a

In exercising its judicial function to enforce 4 U.S.C.

§ 111, the Virginia Supreme Court should have given

effect to the considered decision of Congress in establish-

ing the effective date of the Act. See Public Salary Tax

Act of 1939, Title I, §4 (App. B at 8a); Meredith

v. State Tax Comm’n, 163 Or. 305, 312-13, 96 P.2d 1082

(1939) (recognizing that the effective date of the Act

as enacted by Congress is controlling.). A state court is

“not at liberty to create an exception where Congress

has declined to do so.’” Freytag v. Commissioner, 111

S. Ct. 2631, 2636 (1991) (citation omitted). See also

Patterson, 112 S. Ct. at 2250. The pre-emption of Vir-

ginia’s discriminatory tax was “compelled”. See Adams

Fruit Co. v. Barrett, 494 U.S. 638, 642 (1990) (citation

omitted). See also Gregory v. Ashcroft, 111 S. Ct. 2395,

2409 (1991) (White, J., dissenting) (“ ‘The relative im-

portance to the State of its own law is not material when

there is a conflict with a valid federal law, for the fram-

ers of our Constitution provided that the federal law

must prevail.’”) (citations omitted).

Amicus also submits that the decision of the court

below was foreclosed by its obligations under the Supre-

macy Clause as well as principles of stare decisis. See

McKesson v. Division of Alcoholic Beverages & Tobacco,

496 U.S. 18, 29 (1990) (“State courts must interpret

and enforce faithfully the ‘supreme Law of the

Land’... .”). See also Planned Parenthood of South-

prisoner before the court. Furthermore, while at times judges

need for their work the training of economists or statesmen,

and must act in view of their foresight of consequences, yet

when their task is to interpret and apply the words of a statute,

their function is merely academic to begin with—to read Eng-

lish intelligently—and a consideration of consequences comes

into play, if at all, only when the meaning of the words used

is open to reasonable doubt.

Northern Sec. Co. v. United States, 193 U.S. 197, 400-01 (1904)

(Holmes, J., dissenting) (emphasis added) .

eastern Pennsylvania v. Casey, 60 U.S.L.W. 4795, 4817

(1992) (Stevens, J., concurring in part and dissenting in

part) (“[T]he doctrine of stare decisis has controlling

significance in a case of this kind, notwithstanding an

individual justice’s concerns about the merits.”). Al-

though there were several opinions in James B. Beam

Distilling Co. v. Georgia, 111 S. Ct. 2288 ( 1991), the

mandate of this Court’s judgment in Beam is unmis-

takable:

[A]ny consideration of remedial issues necessarily

implies that the precedential question has been set-

tled to the effect that the rule of law will apply to

the parties before the Court. ... Because the Court

in Bacchus remanded the case solely for considera-

tion of the pass-through defense, it thus should be

read as having retroactively applied the rule there

decided... . Cf. Davis v. Michigan Dep't of Treas-

ury, 489 U.S. 803, 817, 109 S. Ct. 1500, 1508, 103

L. Ed. 2d 891 (1989).

Id. at 2445-46 (footnote and citations omitted).

In Davis, Michigan’s concession as to the appropriate

retroactive remedy would have been of no moment unless

this Court first had found the scheme unlawful for the

years at issue therein (1979-1984). Davis, 489 U.S. at

806-07. Cf. Kraft Gen. Foods, Ine. v. lowa Dep't of

Revenue and Fin. 60 U.S.L.W. 4582, 4586 (1992)

(Rehnquist, C.J., dissenting) (“[A] stipulation between

parties cannot bind this Court on a question of law.”).

Amicus submits that after this Court had applied the

rule of law to the litigants in Davis, it was erorr for the

Virginia Supreme Court to use the pretext of the pros-

pectivity defense to deny the Petitioners retroactive re-

lief. Beam, 111 §. Ct. at 2448.

Il. ALTERNATIVELY, ASSUMING THIS COURT DE-

TERMINES THAT A PROSPECTIVITY ANALYSIS

MAY BE APPLIED IN THIS CASE, DAVIS SHOULD

BE GIVEN RETROACTIVE EFFECT.

Assuming this Court is persuaded that it should apply

the prospectivity test of Chevron Oil Co. v. Huson, 404

U.S. 97 (1971), amitus submits that an even-handed

Chevron analysis requires that the provisions of 4 U.S.C.

$111 as construed in Davis v. Michigan Dep’t of Treas-

ury, 489 U.S. 803 (1989), be given retroactive effect.

A. Davis Did Not Establish a New Principle of Law.

Therefore, the Threshold Prong for Prospectivity

Is Not Satistfied.

The first prong of the prospectivity test requires that

“the decision to be applied nonretroactively must estab-

lish a new principle of law, either by overruling clear past

precedent on which litigants may have relied, or by de-

ciding an issue of first impression whose resolution was

not clearly foreshadowed.” Ashland Oil, Inc. v. Caryl,

110 S. Ct. 3202, 3203 (1990) (per curiam) (citations

omitted). Decisions must be retroactively applied if this

threshold test is not met. Jd. at 3205. The test under

the first prong is a rigorous one, which is narrowly ap-

plied. Jd.° Since Davis “was not revolutionary,” it does

not meet the first prong. /d. (emphasis added).

The State contends that Davis decided an issue of first

impression whose resolution was not clearly foreshad-

owed. It supports this assertion by contending that it

5 In applying its decision in Armeo, Inc. v. Hardesty, 467 U.S. 638

(1984), retroactively to invalidate a West Virginia tax which had

been in effect for over 50 years, the Court refused to characterize

its decision in Armco as having “overrul[ed] clear past precedent

on which litigants may have relied” merely because it was incon-

sistent with a nearly identical decision in the case of Columbia Gas

Transmission Corp. v. Rose, 459 U.S. 807 (1982), which the Court

dismissed for want of a substantial federal question a year prior

to the Court’s decision in Armco. Id. at 3205 n*. ~

= §°@6 =.=." > —_

relied upon a presumptively valid taxing statute. (Pet.

App. C at 10a). However, “where the power to tax is

not unlimited, validity is not established by the mere im-

position of a tax.” Mullaney v. Anderson, 342 U.S. 415,

418 (1952).*

Contrary to the State’s assertion, since 1939 it has been

settled that the States only had the power to impose “non-

discriminatory” taxes upon the “compensation” of em-

ployees of the United States. Greaves v. New York ex rel.

O'Keefe, 306 U.S. 466, 487 (1939). In so holding, the

Court observed that it perceived “no basis for a difference

in result whether the taxed income be salary or some

other form of compensation ....” Id. at 486 (emphasis

added). This rule was codified in the Public Salary Tax

Act of 1939. See Davis, 489 U.S. at 812." Since then,

nothing in the law has changed which would permit Vir-

ginia to invoke the limited prospectivity exception.

In resolving the question of Statutory construction at

issue in Davis, this Court applied settled principles under

the doctrine of intergovernmental immunity. First, im-

plicit in the Court’s analysis in Davis was recognition

* Analytically, Virginia does not, in fact. seek the application of

the prospectivity exception. Virginia really is asking this Court

to switch off the rule of law and grant it an exemption from the

application of the unambiguous provisions of 4 U.S.C. $111 so

that it can continue to enforce its invalid scheme for all tax years

prior to the 1989 tax year.

* See also S. Rep. No. 112, 7éth Cong., Ist Sess. at 9 (1929)

(“[T)he proposal before us provides only for nondiseriminatory

taxation of the compensation of public employees and iis reciprocal

in nature. Thus, whatever burden might be passed on to one gov-

ernment because of the taxation of its employees’ compensation by

another governmental unit would. in a measure at least, be offset

by the converse application of the proposal.”): The Taration of ~

Municipal Obligations and Solaries. A Report of the Committee on

Taxation of Municipal Obligetions ond S»laries. Munic'pa!l Law

Section of the American Rar Association. at 12 (July 11, 1939)

(Greaves preserves the rule of intergovernmental tax immunity |

that the law has always been thatthe federal govern-

ment “possesses the power to enact statutes immunizing

those with who it deals from state taxation even if [the]

intergovernmental tax immunity doctrine would not

otherwise confer an immunity.” South Carolina v.

Baker, 485 U.S. 505, 519 n.11 (1988) (citing Graves v.

New York ex rel. O'Keefe, 306 U.S. 466, 478 (1939) ).

Second, a State is required to treat “those who deal with

the Government as well as it treats those with whom it

deals itself.” Phillips Chem. Co. v. Dumas Sch. Dist.,

361 U.S. 376, 385 (1960). Third, “[t]he imposition of a

heavier tax burden on [those who dea! with one sover-

eign] than is imposed on {those who deal with the other]

must be justified by significant differences between the

two classes.” /d. at 383.

These settled principles are of particular significance

because they have been consistently applied in earlier

cases involving the doctrine of intergovernmental tax im-

munity. See, e.g., United States v. City of Manassas,

830 F.2d 530 ‘4th Cir. 1987), affd, 485 U.S. 1017

(1988); Memphis Bank & Trust Co. v. Garner, 459 U.S.

392 (1983); Chase Manhattan Bank, N.A. v. Finance

Admin., 440 U.S. 447 (1979) (per curiam) ; Moses Lake

Homes, Inc. v. Grant County, 365 U.S. 744, reh’g denied,

366 U.S. 947 (1961). See also Forbes, Inc. v. Depart-

ment of Fin., 66 N.Y.2d 243, 487 N.E.2d 251 (1985),

cert. denied, 475 U.S. 1109 (1986). -

* The State contends that the rule of

here. Under Chevron, aa this

area was clearly established prior to Davis. Significantly,

Michigan unsuccessfully attempted to persuade this Court

to depart-from clearly established law. Michigan's in-

vitation was rejected: “The state offers no reason for

departing from this settled rule, and we decline to do

so.” Davis, 489 U.S. at 815 ( emphasis added). Moreover,

Davis begins with the dispositive holding that:

(T)he overall meaning of § 111 is unmistakable: it

waives whatever immunity past and present federal

employees would otherwise enjoy from state taxation

of . . . retirement benefits . . . paid on account of

their employment with the Federal Government, ex-

cept to the extent that such taxation discriminates

on account of the source of compensation.

Id. at 810 (emphasis added). Any other “hypertechnical

reading” of the statute would be “implausible at best.”

Id. at 809-10. Davis did not announce a new principle

of law. It merely affirmed; under se+tled legal principles,

that Mr. Davis, like the federal retirees here, cannot le-

gally be subjected to a discriminatory state tax.

[I] ntergovernmental tax immunity barred only those

taxes that were imposed directly on one sovereign by

the other or that discriminated against a sovereign

or those with whom it dealt.

Davis, 489 U.S. at 811 (emphahis added). The Davis

court stated that the nondiscrimination component of the

constitutional immunity doctrine has, from the time of

M’Culloch v. Maryland, barred taxes that “ ‘operat |e]

so as to discriminate against the Government or those

with whom it deals.’” Jd. at 812 (citations omitted).

The Court also observed that 4 U.S.C. § 111 was drafted

“against the backdrop” of this Court’s earlier tax deci-

sions and, as such, is “coextensive with the . . . modern

constitutional doctrine of intergovernmental tax immu-

nity.” Jd. at 813.

Rejecting Michigan’s argument that individuals should

not receive protection of the constitutional doctrine of

intergovernmental imunity, the Davis decision held that

“all precedent is to the contrary.” Jd. at 814 (emphasis

added). This statement evidences two crucial points

which amicus submits compel the conclusion that the law

applied in Davis was clearly foreshadowed. First, it

shows the existence of prior decisions directly on point.

The Davis Court listed no fewer than five of its tax deci-

sions dating back to 1842 in support of the proposition

that federal retirees may not be taxed discriminatorily.

Id. at 815. Second, it demonstrates that the law in this

area has been consistent. /d. This explains why the

Court viewed the law as “settled.” The Davis decision

was an inevitable and unmistakable conclusion based

upon existing precedent. Accordingly, Davis does not

represent “such an abrupt and fundamental shift in doc-

trine as to constitute an entirely new rule... .” Han-

over Shoe, Inc. v. United States Shoe Mach. Corp., 392

U.S. 481, 498 (1968).

In the wake of Davis, some states, similar to Mich-

igan’s argument before this Court, initially feigned sur-

prise at the Davis decision because they claimed that they

did not realize that the provisions of §111 prohibiting

T Indeed, Michigan's assertion in Devis was nothing more a

“‘cloak for discrimination’” against federal pension benefits.

Barker v. Kansas, 112 8S. Ct. 1619, 1626 (1992) (citation omitted).

Michigan, like several other states, has justified the constitution-

they did not realize that pensions were “compensation.”

However, it is clear that Virginia recognized that the

taxation of federal pensions is the taxation of compensa-

tion for personal services rendered to the United States.

See Report of the House Finance Retirement Subcommit-

tee to the Governor and the General Assembly of Vir-

ginia, December, 1982, at 8 ( “Although further differ-

ences in treatment among the different classes of retirees

can be listed, tax laws should not distinguish the com-

ponents of compensation... .”) (emphasis added), ( App.

D at 15a).

Although Virginia should be precluded from reassert-

ing here the hypertechnical argument of Michigan, it is

indisputable that the Davis Court’s holding that “re-

tirement benefits are deferred compensation” for pur-

poses of 4 U.S.C. § 111 was clearly mandated by the plain

language of the statute. Davis, 489 U.S. at 808.

The term “compensation for personal service”, as used

in the Internal Revenue Code at the time of the adoption

of the Public Salary Tax Act included pensions,* and

more specifically, the pensions of retired government em-

ployees.” In addition, based upon the doctrine of inter-

ality of its income tax of former residenta on the basis that pen-

sions are deferred compensation for services rendered at an earlier

point in time. See Molter v. Department of Treasury, No. 125786,

1992 Mich. App. Lexis 131 (Ct. App. April 6, 1992). See also, Op.

Ariz. Att'y Gen. No. 60-9-L (1959) (federal pension benefits repre-

sent deferred compensation for personal services as an officer or

employee of the federal government ) (App. C at 13a-14a).

* The Public Salary Tax Act specified that its “terms * * * shall

have the same meaning as when used in Chapter I of the Internal

Revenue Code.” IJd., Title II, § 206. (App. B at 11a).

* Pensions or retirement allowances paid by the United States

have been deemed part of the recipient's compensation for personal

services since 1919. See, e.g., Treas. Reg. 45, Art. 32 (1919);

Treas. Reg. 86, Art. 22(a)-2 (1935): Treas. Reg. 101, Art. 22(a)-2

(1930) ; see also Treas. Reg. § 1.61-2(a) (1). It has been clear from

the date of the enactment of the United States Civil Service Retire-

—— st - -

v= te. ae

governmental tax immunity, state pensions, because they

represented compensation, had consistently been excluded

from federal income taxation prior to the passage of the

Public Salary Act of 1939."°

Virginia accepted and understood that pensions were

compensation for purposes of Title II of the Act. This

title provided total immunity from the federal income

tax for employees and retirees of Virginia’s state and

local subdivisions with respect to their “compensation,”

including pensions for personal services rendered to

state and local governments for all years prior to 1939.

See Public Salary Tax Act of 1939, Ch. 59, Title II

(App. B at 9a-12a). The State also understood that pen-

sions were co1ipensation for purposes of Title I of the

Act, because before 1939, the State could not and did not

tax any “other form of |federal] compensation.” Graves,

306 U.S. at 486. It is indisputable that pensions are com-

pensation for personal services and that state and federal

pensions have always been subject to the doctrine of

intergovernmental tax immunity and §111." Against-

ment System in 1920 that the pension payments made by the federal

government to its retired employees are compensation for personal

services. See 59 Cong. Rec. 6300 (April 29, 1920) (statement of

Representative Hamil: “Pensions are not gratuities * * * they

should be looked upon as deferred wages--as payments of wages

which were not disbursed at the time they were earned.”).

“LT. 1607, 11-2 C.B. 71 (1923) (“Inasmuch as salaries and wages

received by officers and employees of a State are exempt from tax-

ation... it is held that the retirement allowance given employees

of the State of New York under the New York State Employees’

Retirement System represents compensation for past services ren-

dered and is exempt from taxation.”); LT. 2669, XII-1 C.B. 68

(1933) (pensions paid to a person who rendered services as an

officer or employee of a State or political subdivision thereof “repre-

sent compensation paid for past services rendered, and since the

compensation in such cases was exempt from Federal income tax

the pensions are also exempt from Federal income tax.”).

1! Federal tax cases have also consistently held that pensions are

compensation for personal services. Hooker v. Hoey, 27 F. Supp.

489, 490 (S.D.N.Y.), aff'd, 107 F.2d 1016 (2d Cir. 1939); Sharpe

this background the State’s assertion that Davis was a

surprise is untenable."

Virginia’s claimed reliance interest in its statute is

mere “cant.” Commissioner v. Newman, 159 F.2d 848,

851 (2d Cir.), cert. denied, 331 U.S. 859 (1947) (Hand,

J., dissenting:. Virginia’s contention ignores,the practi-

cal realities of an income tax. Unlike property, use or

transaction taxes, Virginia’s income tax is wholly subject

to the vagaries of life. Setting aside constitutional issues,

the income tax may be avoided or mitigated .by proper

planning and or the occurrence of a host of unforeseen /

unpredictable events (¢.g., catastrophic medical expenses,

casualty losses, bad investments, business losses, charibta-

ble donations and in some instances, even gambling

v. United States, 54-2 USTC (CCH) © 46,902 (W.D. Wash. 1954)

(retirement payments to taxpayer were in consideration of his

status as an employee of the State of Washington and were tax-

able) ; Simpson v. United States, 236 F. Supp. 433 (D. Conn. 1964).

See also Rev. Rul. 56-82, 1956-1 C.B. 59 (recognizing that the

Public Salary Tax Act limits the federal taxation of state pen-

sions) ; Treas. Reg. $ 1.161-2(a) (defining compensation for services

to include pensions).

'? Even without the intervention of the Davis decision, the pre-

vailing authority of the states’ highest courts and Virginia’s own

administrative rulings clearly foreshadowed the outcome of the

issue. See, e.g., Ruling of Commissioner, P.D. 88-7, [2 Va.] St. Tax

Rptr. (CCH) para. 201-546; Forbes, Inc. v. Department of Fin.,

66 N.Y.2d 243, 487 N.E.2d 251 (1985), cert. denied, 475 U.S. 1109

(1986); Brown v. Franchise Tax Bd., 197 Cal. App. 3d 300, 242

Cal. Rptr. 810 (1987); Andras v. Department of Revenue, 154 Tl.

App. 3d 37, 506 N.E.2d 439 (1987), cert. denied, 485 U.S. 960

(1988); Commissioner of Revenue v. Plymouth Home Nat'l Bank,

394 Mass. 66, 473 N.E.2d 1139 (1985) (decided under state law):

Matz v. Department of Treasury, 155 Mich. App. 778, 401 N.W.2d

62 (1986) ; In re Sawyer Estate, 149 Vt. 541, 546 A.2d 784 (1987):

Capital Preservation Fund v. Department of Revenue, 145 Wis. 2d

841, 429 N.W.2d 551 (Ct. App. 1988). See also Borg v. Department

of Revenue, 308 Or. 34, 774 P.2d 1099, 1101-02 (1989) (“The non-

discrimiantion rule of Davis v. Michigan Dep't of Treasury, supra,

requires the same result.”).

losses). See, e.g., Code § 58.1-322 D.l.a. (App. E at

17a); Ruling of Commissioner, P.D. 88-30, [2 Va.] St.

Tax Rptr. (CCH) para. 201-563 (permitting deduction

of gambling losses and related expenses). Moreover, even

when the tax is paid, the state has no settled expectation

or reliance on the revenues collected until the applicable

limitations periods for refunds and carryovers (carry-

backs or carryforwards) have expired. See e.g., Ruling

of Commissioner, P.D. 87-253, [2 Va.] St. Tax Rptr.

(CCH) para. 201-519 (permitting net operating loss

carryback from 1985 to 1982 and abating 1982 assess-

ment) ; Ruling of Commissioner, P.D. 90-217, Jd. at pare.

201-930 (permitting net operating loss carryback from

1989 to 1986); Ruling of Commissioner, P.D. 90-11, Jd.

at para. 201-844 (authorizing refund filed within three

years from the extended date of the «viginal return).

Certainly, Virginia did not presume that it would be

able to defend its scheme from substantive attack under

4 U.S.C. § 111 on the basis of the jurisdictional defense

asserted in Waldron v. Collins, 788 F.2d 736 (11th Cir.),

cert. denied, 479 U.S. 884 (1986). Similarly, by at

least October of 1986, Virginia should have been on

notice of the parameters of the relevant inquiry govern-

ing state taxing schemes which discriminate against those

who deal with the federal government. See United States

v. City of Manassas, 830 F.2d 530 (4th Cir. 1987), aff'd,

485 U.S. 1017 (1988).

Virginia’s attempt to enhance its claimed reliance in-

terest from the lack of litigation is also disingenuous.

First, there is no protest requirement in Virginia. More

significantly, however, Virginia’s argument is untrue.

Since at least 1982, there has been significant, widespread

protest by federal retirees to Virginia’s discriminatory

18 This case was argued to the Fourth Circuit on October 10, 1986

and the Virginia Attorney General appeared on brief for the de-

fendants, which included the State Tax Commissioner of the Com-

monwealth of Virginia. Jd.

income tax scheme of federal pensions. In response to

this protest, a legislative committee was appointed to

study the issue. See Report of the House Finance Re-

tirement Subcommittee to The Governor and The General

Assembly of Virginia, December, 1982, at 4 (“The sub-

committee was to examine in particular the individual

income tax treatment of military and civil service retire-

ment benefits.”). (App. D, 15a). After taxpayer hear-

ings, Jd. at 23, the committee concluded that remedial

legislation was required to cure the “inequity” of the

income tax scheme and recommended legislation that

would treat “all retirees equally.” Jd. at 24. Certainly,

petitioners cannot be faulted for having first invoked the

political process, albeit unsuccessfully. Stated another

way, the State cannot claim a reliance interest where it

has disregarded the recommendations of its own political

process."*

In addition, the fact that Virginia’s discriminatory

scheme has been in effect for many years does not give

rise to a reliance interest under Chevron. See Ashland

Ou, 110 S. Ct. at 3205 n.*. In a similar vein, it is

The futile efforts of federal retirees to obtain pre-Davis legis-

Itaive relief from discriminatory state taxation were not unique to

Virginia. See, e.g., Petitioners’ Reply Brief at 2, Barker v. Kansas,

112 S. Ct. 1619 (1992) (No. 91-375) (establishing ongoing efforts

from 1971); Index of Record 111, 121, 125, 239, Bohn v. Waddell,

164 Ariz. 74, 790 P.2d 772 (1990), aff'd on reconsideration, 167

Ariz, 344, 807 P.2d 1 (1991), appeal pending, No. 1 CA-TX 91-008

(establishing ongoing efforts from the late 70's): Exhibits 10

through 24, Hagge v. lowa State Dep't of Revenue and Fin., lowa

District Court, Linn County, No. LA 20859 (establishing ongoing

efforts from at least 1976) ; Petitioners’ Motion for Recusal, Hogan

v. Musolf, Wisconsin Tax Appeals Commission, No. 91-I-386 (estab-

lishing ongoing efforts from the mid-60’s) ; Exhibits 7 through 33,

Ponthier v. Louisiana Dep't of Revenue, Louisiana Board of Tax

Appeals, No. 3396 (establishing ongoing efforts from the late 70’s) :

Record on Appeal 349-365, Swanson v. Powers, No. 89-282-CIV-5H

(E.D.N.C. 1990), rev'd in part, 937 F.2d 965 (4th Cir. 1991), cert.

denied, 112 S. Ct. 871 (1992) (establishing ongoing efforts from

the late 70's).

clear that the sheer number of states violating a Con-

gressional mandate has never been a proper justification

for unlawful state enactments. See South Carolina v.

Baker, 485 U.S. 505, 515 (1988).

Since the State cannot satisfy the threshold test of a

“wholly new issue of first impression,” Davis must be

applied retroactively. See Ashland Oil, 110 S. Ct. at

3205. See also United States v. City of Spokane, 918 F.2d

84, 89 (9th Cir. 1990), cert. denied, 111 S. Ct. 2888

(1991) (“Our decision striking down this tax does not

meet the tests of nonretroactivity. We overrule no prece-

dent and we dé@not decide an issue of first impression.”’).

B. Retroactive Application of Davis Will Further the

Purposes Behind 4 U.S.C. § 111 and the Doctrine of

Intergovernmental Tax Immunity.

Under the second prong of Chevron, a court “ ‘must

weigh the merits and demerits in each case by looking

to the prior history of the rule in question, its purpose

and effect, and whether retrospective operation will fur-

ther or retard its operation.’ Chevron Oil Co. v. Huson,

404 U.S. 97, 106-07 (1971) (citations omitted).

The State contends, and the court below summarily

concluded, that, because the state statute at issue was

repeated prospectively, this prong had been satisfied.

(Pet. App. C at 12a). This summary observation can

hardly be deemed adequate.

Had a meaningful inquiry been undertaken in the

decision below, the Virginia Supreme Court would have

been forced to conclude that the purpose of the rule

could be furthered only by retrospective operation. The

court’s failure to apply Davis retroactively, in fact, frus-

trates the operation of the rule.

In Trinityfarm Constr. Co. v. Grosjean, 291 U.S. 466,

reh’g denied, 292 U.S. 604 (1934), the Court observed

that:

|The] application [of the intergovernmental tax im-

munity doctrine] does not depend upon the amount

of exaction, the weight of the burden or the resulting

interference with sovereign independence. Where it

applies, the principle is an absolute one wholly un-

affected by matters or distinctions of degree .... Its

right application is essential to the orderly conduct

of the national and state governments and the attain-

ment of justice between them.

Id. at 471 (emphasis added).

As recently observed by the Ninth Circuit in an analo-

gous case, the rule:of law implicated in this. case involves

a “fundamental principle,” United States v. City of

Spokane, 918 F.2d 84, 89 (9th Cir. 1990), which had its

genesis in M’Culloch v. Maryland, 17 U.S. 316 (1819).

See also Graves v. New York ex rel. O’Keefe, 306 U.S.

466 (1939). Retroactive application of the decision here

“will surely foster a proper respect for that principle,”

United States v. City of Spokane, 918 F.2d at 89, by

encouraging states to tread carefully when they impose

taxes upon those who deal with the federal government."

It appears that this principle is now observed only in the

breach. See Cambridge State Bank v. James, 480 N.W.2d

647 (Minn. 1992), petition for cert. pending, No.

91-2047,"*

1° Retroactive application here will also have the salutary effect

of reminding state courts of their obligation under the Supremacy

Clause. See McKesson, 496 U.S. at 29 (“State courts must interpret

and enforce faithfully the ‘supreme Law of the Land... ”’ <<

will serve to deter future “result-oriented decision[s} arrived at for

the [sole] purpose of protecting the state’s coffers.” Sheehy v.

State, Dep’t of Revenue, 820 P.2d 1257, 1269 (Mont. 1991), petition

for cert. pending, No. 91-1437 (Trieweiles, J., dissenting).

1° This is further illustrated by the conduct of the states in the

context of Davis-related litigation. Two months after the commence-

ment of Davis-related litigation and the confirmation of the estimate

of refunds mandated thereunder, the Wisconsin legislature enacted

1989 Wisconsin Act 31, an election year refund program, thereby

dissipating a $250 million unappropriated surplus. The State then

{

A failure to apply Davis retroactively will also serve

to eviscerate the careful balance struck under Title II of

the Public Salary Tax Act of 1939 (App. B at 9a-12a).

It is beyond question that state retirees have and con-

tinue to enjoy the benefits of this legislation. See, e.g.,

Rev. Rul. 56-82, 1956-1 C.B. 59 (recognizing the exclu-

sion for federal tax purposes of current state pension

benefits attributable to certain pre-1939 contributions).

Yet, if the decision below is permitted to stand, the prin-

ciple, which the states will extrapolate from this case,

will be that the states may freely claim the benefits of

any federal legislation, but will be free to avoid any

undesired burdens of such legislation by merely invoking

the prospective defense. |

Similarly, if the decision below is permitted to stand,

the rights granted to federal retirees under 4 U.S.C. § 111

would be extinguished. As this Court has _ recently

observed:

{O]ur government ‘has been emphatically termed a

government of laws, and not of men. It will certainly

cease to deserve this high appellation, if the laws fur-

nish no remedy for the violation of a vested legal

right.’

proceeded to defend, inter alia, on the ground that its refund obliga-

tion should be excused under Chevron because the State could not

afford to pay refunds. TR. 5, 13, 15, Hogan v. Musolf, 163 Wis. 2d

1, 471 N.W.2d 216 (1991), cert. denied, 112 S. Ct. 867 (1992). In

Alabama Davis-related litigation, the State attempted to defend on

a similar basis, notwithstanding the fact that there was a surplus

in excess of $53 million in the fund from which refunds were to be

paid. Rinehart v. Sizemore, No. CV-89-704-M, slip op. at 5-6 (Mont-

gomery County Ct., Ala. October 10, 1990), aff’d, 1992 Alabama Civ.

App. Lexis 183 (Ala. Civ. App. February 7, 1992). Arizona has

pursued a similar strategy, while the defendants there continue to

overfund their own state retirement fund, which at the commence-

ment of the Davis-related case, was and is overfunded in excess of

$1 billion See Arizona State Retirement System Annual Report

June 30, 1990 at 30, Bohn v. Waddell, 164 Ariz. 74, 790 P.2d 772

(1990), aff'd on reconsideration, 167 Ariz. 344, 807 P.2d 1 (1991),

appeal pending, No. 1 CA-TX 91-008.

Franklin v. Gwinnett, 112 S. Ct. 1028, 1033 (1992)

(quoting Marbury v. Madison, 5 U.S. (1 Cranch) 137,

163 (1803)). Here, the overriding purpose of the con-

stitutional principle and the Act—to prevent discrimi-

natory taxation—will be retarded if Davis is not given

retroactive effect. Such a result “would harm separation

of powers principles . . . by giving judges the power to

render inutile” rights conferred by Congress. See Frank-

lin v. Gwinnett, 112 S. Ct. at 1029.

In addition, if the decision below is permitted to stand,

the interests of the United States would also be compro-

mised. For over four decades, Virginia reduced its em-

ployment costs at the expense of the federal treasury.

See Davis, 489 U.S. at 815 n.4. During that same period

of time, it misappropriated substantial federal revenues

by virtue of the discriminatory tax imposed upon federal

retirees. These state exactions were deducted by numer-

ous federal retirees under 26 U.S.C. § 164, directly re-

ducing federal income tax collections for each of those

years. (App. F at 23a).'7 Refunds of these taxes now

will enable the federal government to recover part of the

federal revenues misappropriated by Virginia in past

years. Under the Tax Benefit Doctrine and section 111

of the Internal Revenue Code, any refund ordered will

be subject to federal tax in the year received. ( App. F

at 23a). See also Rev. Rul. 79-315, 1979-2 C.B. 27. As

a consequence of the Virginia Supreme Court’s refusal

to order refunds, the United States is currently being

denied these tax revenues—revenues to which the United

States is clearly entitled. The diversion of these revenues

by Virginia represents a new violation of the doctrine of

'’ Approximately 35 million households took this itemized deduc-

tion on their 1987 federal tax returns. Based on data of the Internal

Revenue Service for 1987, over 50% of households that deducted

state and local taxes had incomes under $40,000 and 68% had

incomes under $50,000. See Individual Income Tax Returns 1987,

I.R.S. Pub. 1304 (rev. 8-90).

intergovernmental tax immunity." See Davis, supra, 815

n.4,

C. Weighing the Equities Compels the Retroactive

Application of Davis.

With respect to the third prong of Chevron, a court

weighs the “inequity imposed by retroactive application”

for the purpose of determining whether a decision will

produce “substantial inequitable results if applied retro-

actively.” Chevron Oil Co, v. Huson, 404 U.S. at 107.

In the decision below, there was no weighing. The Vir-

ginia Supreme Court’s analysis under this prong is virtu-

ally nonexistent. (Pet. App. C at 12a-l4a). It consisted

solely of the alleged financial burden upon the state. How-

ever, the relevant equities are far broader in this case.

The Virginia Supreme Court appears to have been per-

suaded by the State’s contention that it is somehow in-

equitable for a state to be required to refund to its citizens

taxes which have been unlawfully collected. This conten-

tion is breathtaking. Virginia “cannot object to a refund

here just because it has other ideas about how to spend

the funds.” McKesson, 496 U.S. at 51 n.85 (1990). See

Swanson v. State, 329 N.C. 576, 588, 407 S.E.2d 791. 797,

reh’g granted, 330 N.C. 445, 410 S.E.2d 498, adhered to

on reh’g, 330 N.C, 390, 410 S.E.2d 490 (1991), petition

for cert. pending, No. 91-1436 (Mitchell, J., dissenting)

(“There simply is nothing ‘inequitable’ or wrong about

ordering that the state not pick a taxpayer’s pocket or in

requiring it to return the money when it is caught doing

so.”’).

'*In contrast to the State of Virginia, during this same period,

the Internal Revenue Service has consistently adhered to the doc-

trine of intergovernmental tax immunity and the provisions of the

Public Salary Tax Act of 1939 by recognizing that the part of

current pension payments received by state and local retirees, which

is attributable to employer contributions for years prior to 1939,

is exempt from the federal income tax in accordance with the re-

quirements of the Act. See Rev. Rul. 56-82, 1956-1 C.B. 59; Rev.

Rul, 57-75, 1957-1 C.B. 28.

Similar to its claimed reliance interests, Virginia’s

equitable claims are grossly exaggerated. The refund

right implicated here arises under the state’s general in-

dividual income tax. Under that tax, just like the federal

income tax, it is every citizen’s right to avoid the tax in

the first instance. As observed by Judge Learned Hand

in a famous dissent:

Over and over again courts have said that there is

nothing sinister in so arranging one’s affairs as to

keep taxes as low as possible. Everybody does so,

rich or poor, and all do right, for nobody owes any

public duty to pay more than the law demands:

taxes are enforced exactions, not voluntary contribu-

tions. To demand more in the name of morals is

mere cant,

Commissioner v. Newman, 159 F.2d 848 850-51 (2d Cir.),

cert. denied, 331 U.S. 859 (1947). It is a strange con-

ception of equity which would permit the State to single

out these claimants and deny them refunds on equitable

grounds for an unlawful tax, when all other individual

taxpayers of the state are free to arrange their affairs to

avoid or minimize lawful taxes in the first instance.

Virginia’s claims of fiscal burden demonstrate nothing.

The State routinely processes and awards in excess of

1.5 million refund claims annually. For example, in the

fiscal year ended July 1, 1988, the State naid 1,780,498

taxpayer refund claims, totalling $360 million. See Vir-

qinia Department of Taxation Annual Report, Fiscal

Year 1988, at 11." (App. G at 25a). The State identifies

no principle, and amicus submits that there is none, which

permits the State to single out the petitioners for the

purpose of balancing its budget, particularly, where no

other individual taxpayer has been required to do so,

1 This amount is understated since individual taxpayers may, by

adjustment of withholding and/or estimated tax payments, to a

large extent self-administer their own de facto refunds in accord-

ance with their own tax planning.

In addition, in its defense of this case, the State has

conveniently ignored the additional “general fund indi-

vidual income tax windfall” that it has realized as the

result of the unforeseen revenue enhancement provided

to the state by virtue of its piggyback adoption of the

Federal Tax Reform Act of 1986. At the time this case

was tried, this individual income tax windfall was esti-

mated to provide the state with unanticipated additional

individual income tax revenues of over $175 million be-

tween fiscal year 1988 and fiscal year 1990. See Virginia

Department of Taxation Annual Report Fiscal Year 1989

at 5. (App. G at 26a). Viewed objectively, Virginia’s

claim of inequity amounts to nothing more than the fact

that its legislature made the political choice in 1989 to

maintain its ranking as the fifth lowest tax burden in

the United States by enacting an additional tax cut of

$156.1 million (J.A. 28) and attempting to finance that

political choice by extinguishing the meritorious claims of

the petitioners. See Virginia Department of Taxation

Annual Report Fiscal Year 1991, at 12. (App. G at 26a).

The court below also did not take into account the

windfall that Virginia received during the forty-plus

years this unlawful scheme was in effect.*” Common sense

suggests that the amount of taxes exacted for years be-

fore 1985 exceeds by several times any present refund

obligation. Second, Virginia did not hesitate to accept that

part of the Public Salary Tax of 1939 which benefitted

its parochial interests. Under Title II of the Act, Vir-

ginia’s retirees, as well as its then current employees,

enjoyed total immunity from the federal income tax for all

years prior to 1939. (App. B at 9a-12a). Some of its

* The court also did not consider the fact that Virginia's economy

for years has been the beneficiary of a generous federal govern-

ment. Recent statistical data reflect that in fiscal vear 1989, the

Department of Defense, alone, spent over $15 billion in the state.

See Department of Defense ATLAS/DATA ABSTRACT FOR THE UNITED

STATES AND SELECTED AREAS—I'Y 1989. (App. H at 29a).

citizens presently continue to enjoy that benefit, See note

18, supra. Having accepted the benefits of the Act, includ-

ing its limited waiver of immunity, equity compels that

Virginia now accept its burden. Cf. Fahey v. Mallonee,

332 U.S. 245 (1947) ‘one may not retain the benefits

of an act while attacking its constitutionality ).

In addition, the court failed to analyze the equities and

reliance interests of the federal retirees, many of whom

are elderly. The taxpayers here are not sophisticated

multi-state business enterprises. They are average, law-

abiding citizens who complied with the mandates of the

Virginia law. For purposes of weighing the equities, they

should not now be penalized by Virginia for complying

With its laws and placing their trust in the political

process. Cf, Quill Corp. v. North Dakota, 112 8. Ct. 1904,

1922 (1992) (White, J., dissenting) (“{Wle should insist

that the appropriate way to challenge a tax as unconstitu-

tional is to pay it... and then sue for declaratory judg-

ment and refund.”). Nor is it appropriate to deny these

citizens their rights because they could not afford or risk

the panoply of sanctions the State imposes for a refusal

to comply with its tax laws. See McKesson, 496 U.S. at

38 n.21 (1990) (“{W]hen a tax is paid in order to avoid

financial sanctions . . . the tax is paid under ‘duress’

”y 21

Moreover, it is totally inappropriate for a court to

penalize an elderly citizen because that citizen could not

afford to challenge that which the State should have known

*"Individual income taxpayers who fail to comply with Virginia's

income tax laws are subject to both civil and criminal sanctions.

See, e.g., Code §§ 58.1-347, 58.1-348, 58.1-550, 58.1-351, 58.1-496,.

(App. E at 19a-22a). The respondent takes great pride in its ag-

gressive enforcement and audit programs. See, e.g., Virginia De-

partment of Taxation Annual Report 1989, at 15 ( noting that FY89

audit assessments were $10.7 million above the prior year). (App.

G at 26a).

was, at best, suspect.** Indeed, even if Virginia’s position

otherwise had merit, these citizens should not be denied

their federal rights. Cf. Owen v. City of Independence,

445 U.S. 622, 655, reh’g denied, 446 U.S. 993 (1980)

(Thus, even where some constitutional development could

not have been foreseen... it is fairer to allocate any

resulting financial loss to the inevitable costs of govern-

ment borne by all taxpayers, than to allow its impact to

be felt solely by those whose rights, albeit newly recog-

nized, have been violated.”’) .**

With respect to Virginia’s 1989 tax collections after

this Court’s announcement of Davis, the legislature, con-

sistent with the rule of Welch v. Henry, 305 U.S. 134,

reh’g denied, 205 U.S. 675 (1938), had the ability to

remedy the diSerimination for taxes first due and return-

able on May 1, 1989 on 1988 income. It consciously chose

to defer the equalization of treatment for a year. (J.A.

28). Having waived the right to cure this part of the

inequity, in no event should the State be permitted to

retain the taxes first due on May 1, 1989 on 1988 income.

See R.H, Stearns Co. v. United States, 291 U.S. 54, 61

(1934) (“ ‘He who prevents a thing from being done may

not avail himself of the nonperformance which he has

himself occasioned. .. .’”) (citation omitted).

*2 See Section of Taxation REPORT TO HOUSE OF DELEGATES, Au-

gust, 1990 at 2 (noting that for years taxpayers have objected to

perceived unfair and arbitrary treatment in compliance, assessment,

and appeals of state and local taxes. (App. I at 30a). Cf. Shaviro,

An Economic and Political Look at Federalism in Taxation, 90

Michigan L. Rev. 895, 924 (1992) (“[State] audits typically .. .

tend to be influenced more by political and budgetary considerations

. . Often take the form of nonspecific denials . . . requiring vol-

uminous [taxpayer] documentation in response—and are conducted

very much in light of the taxpayer’s expected unwillingness to

litigate... .”).

“8 The court below also ignored that these citizens insured that

their interests were advocated as an amicus before this Court in

Davis. See Davis, 489 U.S. at 805.

The Supreme Court of Virginia's analysis of the equities

also manifests a lack of understanding of the uniqueness

of the personal income tax. Most states have long since

adopted the federal standard of equity and conscience

which favors the taxpayer. See, e.g., Hackman v. Director

of Revenue, 771 S.W.2d 77 (Mo. 1989) (bane), cert. de-

nied, 493 U.S. 1019 (1990); Kuhn v. State, Dep't of Rev-

enue, 817 P.2d 101 (Colo. 1991), cert. dismissed, 112 S. Ct.

1925 (1992). This standard has its genesis in several of

this Court's decisions involving federal taxation. As noted

in George Moore lee Cream Co, v, Rose, 289 U.S. 373

(1933), “lal high-minded Government renounced an ad-

vantage that was felt to be ignoble, and set up a new

standard of equity and conscience.” Jd. at 379. This

standard expressly rejects such “ignoble” concepts as pay-

ment under protest, the power of the sovereign to retain

invalid exactions, and the power to qualify the refund

right by prospective decisions. Moreover, the federal re-

fund right is conditioned or limited solely by the statute

of limitations. The breadth of this right was described in

Jones v, Liberty Glass Co., 382 U.S. 524 (1947), reh'g

denied, 333 U.S. 850 (1948) :

|Wle read the word ‘overpayment’ in its usual sense,

as meaning any payment in excess of that which is

properly due. Such an excess payment may be traced

to an error in mathematics or in judgment or in in-

terpretation of facts or law. And the error may be

committed by the taxpayer or by the revenue agents.

Whatever the reason, the payment of more than is

rightfully due is what characterizes an overpayment.

Id, at 531 ‘emphasis added). It includes the right to

recover “ ‘erroneously,’ ‘illegally,’ or ‘wrongfully’ collected

taxes.” United States v. Dalm, 494 U.S, 596, 610 n.6,

reh’q denied, 495 U.S. 941 (1990). This standard is based

on sound considerations of public policy and seeks as its

end to promote compliance with the income tax system.

See, ¢.g., REPORT AND RECOMMENDATIONS ON TAXPAYER

~~ oe, Ce es ee -_——_— a a a. -

a ee ae

COMPLIANCE, American Bar Association Commission on

Taxpayer Compliance, July, 1989, 41 Tax Lawyer 329

(1988).

Virginia’s scheme of personal income taxation “piggy-

backs” on the federal scheme of taxation. Virginia has

adopted the provisions of the Internal Revenue Code as

the substantive state tax iaw, subject to limited statutory

modifications. See Code ££ 58.1-322; 58.1-301 (App. E

at 17a). In addition, the state refund right is not con-

ditioned by a payment under protest provision and merely

requires the timely filing of a refund claim. See Code

$$ 58.1-1823; 58.1-1824; Reg. Sec. 630-2-499 D, (App. E

at 18a-19a, 22a). Virginia’s scheme of personal income

taxation expressly grants its citizens the right to claim

and receive refunds of Virginia income taxes which are

attributable to intervening developments under the Inter-

nal Revenue Code. /d. Moreover, the period within which

a refund may be claimed provides for an extended period

of limitations where there is a change in the taxpayer's

underlying federal income tax liability. /d. Indeed, in this

case the State has waived all procedural bars to refunds.

See Code § 58.1-1823B. (App. E at 18a).

Contrary to the decision below, the reliance and equita-

ble interests of Virginia are meager. By virtue of its

pigevback scheme of taxation, Virginia has expressly

rendered its tax scheme subject to a host of unanticipated

events, including unforeseen and unanticipated develop-

ments in the administrative rules vf the Internal Revenue

Service, enactments of Congress and federal decisional

law. See Code § 58.1-301. (App. E at 17a). Stated an-

other way, the unforeseen is an integral and anticipated

element of the Virginia personal income tax law. Conse-

quently, the contentions of the respondent below that the

state refund right could be denied in this case because

the refund liability was unforeseen is without merit.

Moreover, the decision of the court below to qualify the

petitioners’ refund rights under state law raises an in-

dependent constitutional ground for invalidating the deci-

sion. Here, the petitioners, who are seeking to enforce a

constitutional right, are being required to satisfy and

defeat the condition of the prospectivity defense. a condi-

tion not otherwise imposed on other Virginia income

taxpayers.**

The petitioners’ refund right cannot be subject to a

defense based on the origin of the claim—the Constitu-

tion, when other Virginia income taxpayers’ refund rights

based on state law are not subject to or qualified by the

defense. See McKnett v. St. Louis & S.F. Ry. Co., 292

U.S. 230, 234 (1934) (“A state may not discriminate

against rights arising under federal laws.”). See also

Ward +. Board of County Comm'rs, 253 U.S. 17, 22

(1920) ‘holding that a taxpayer could not be denied a

tax refund on “non-federal grounds of decision that were

without any fair or substantial support.”’).

Contrary to the impassioned plea of Virginia, none of

the seven states ‘i.e., Missouri, New Mexico, West Vir-

ginia, Michigan, Louisiana, Colorado, Oregon) who have

complied with their obligations to pay refunds in the wake

of Davis has suffered the untoward results suggested by

Virginia. Equity cannot excuse Virginia’s obligation to

pay the petitioners the refunds to which they are entitled.

See Patterson v. Shumate, 112 S. Ct. at 2250.

“4 For example, another taxpayer may challenge an item of fed-

eral adjusted gross income and by final judgment or settlement

establish a new principle of law under the Internal Revenue Code.

See, ¢.g., Cottage Sav. Ass'n” y. Commissioner, 111 S. Ct. 1503

(1991). At the federal level, the taxpayer is entitled to a refund

“whatever the reason.” Jones, 332 U.S. at 531. That same taxpayer

would then automatically be entitled to a refund of the Virginia tax

attributable to that piggybacked item of income and, as a matter of

Virginia law, could not be subject to the prospectivity defense, even

if all the tests of the prospectivity defense were otherwise satisfied.

See Reg. Sec. 630-2-499 D. Indeed, such a taxpayer would receive

the benefit of an extended statute of limitations to make the claim.

Td.

eo eo

CONCLUSION

For the reasons set forth above, the court below erred

in failing to enforce 4 U.S.C. $111 in accordance with

terms. Since the taxes collected by V’rginia could “not

be exacted,” Phillips Chem. Co. v. Dumas Indep. Sch.

Dist., 361 U.S. 376, 387 (1960), in violation of the federal

retirees’ immunity and are therefore “void,’”’ Moses Lake

Homes, Inc. v. Grant County, 365 U.S. 744, 752 (1961),

and since the State has taken no steps to remedy the

unlawful tax, amicus urges that, as a matter of federal

law, “to the extent | petitioners have] paid taxes pursuant

to this invalid tax scheme, [they are] entitled to a refund.”

See Davis, 489 U.S. at 817; lowa-Des Moines Bank v.

Bennett, 284 U.S. 239, 247 (1931). Accordingly, amicus

respectfully urges that the decision below be reversed and

the case be remanded to the court below with instructions

to order refunds as authorized under Code § 58.1-1823B.

(App. E at 18a).

Respectfully submitted,

EUGENE O. DUFFY *

GREGORY W. LYONS

O’NEIL, CANNON &

HOLLMAN, S.C.

111 E. Wisconsin Avenue

Suite 1400

Milwaukee, WI 53202

(414) 276-5000

* Counsel of Record Attorneys for Amicus

July 16, 1992

APPENDICES

APPENDIX A

MEMBERS OF THE MILITARY COALITION

THE RETIRED OFFICERS ASSOCIATION (TROA)

The Retired Officers Association was founded in 1929

and has approximately 376,000 members. Membership in

the Association is open to all past and present, active, re-

serve and retired commissioned and warrant officers in any

of the seven uniformed services. The organization’s mis-

sion is to support strong national defense and to repre-

sent membership on retirement and benefit issues before

Congress.

AIR FORCE ASSOCIATION (AFA)

The Air Force Association was founded in 1946 and

has approximately 200,000 members. Membership is open

to anyone who has served in the U.S. armed forces. Other

American citizens may affiliate as patrons. The organiza-

tion’s mission is to promote public understanding of aero-

space issues and national security requirements to ensure

strong support of the nation’s defense and the men and

women who serve in the U.S. Air Force.

AIR FORCE SERGEANTS ASSOCIATION (AFSA)

The Air Force Sergeants Association was founded in

1961. It has approximately 161,000 members and is

composed of active and retired enlisted personnel in the

Air Force, Air National Guard, Air Force Reserve, Army

Air Corps and Army Air Force. Its members belong to

198 chapters throughout the world and the purpose of the

organization is to serve as the voice of Air Force en-

listed service members. .

ASSOCIATION OF MILITARY SURGEONS

OF THE UNITED STATES (AMSUS)

The Association of Military Surgeons of the United

States received its Congressional Charter in 1908. Its

membership consists of 17,000 members and is open to all

past and present commissioned officers or GS-9 and above

civilians in the medical services of the United States Air

Force, the United States Air Force Reserve, the United

States Army, the United States Army Reserve, the Air

National Guard, the Army National Guard, United States

Navy, United States Navy Reserve, United States Coast

Guard, the United States Public Health Service and the

Veterans’ Administration; officers of military medical

services of other nations; and past and present medical

consultants to the chiefs of the federal medical services.

The purpose of the Association is to improve the nation’s

federal health care system.

ASSOCIATION OF U.S. ARMY (AUSA)

The Association of U.S. Army was founded in 1950 and

has approximately 150,000 individual and 250 indus-

trial members. Membership is open to all active, reserve

and civilian personnel in the Army, and any person sub-

scribing to the association’s bylaws. The purpose of the

organization is to foster public understanding and sup-

port of the Army and the people who serve in it.

CHIEF WARRANT AND WARRANT OFFICERS

ASSOCIATION, U.S. COAST GUARD (CW & WOA)

The Chief Warrant and Warrant Officer’s Association

was founded in 1929 and has approximately 3,300 mem-

bers. Membership is open to active duty, reserve and re-

tired Coast Guard warrant and chief warrant officers.

The association’s purpose is to advance members’ pro-

fessional abilities.

COMMISSIONED OFFICERS ASSOCIATION OF THE

U.S. PUBLIC HEALTH SERVICE, INC. (COA)

The Commissioned Officers Association of the U.S.

Public Health Service was founded in 1987 and has ap-

proximately 7,000 members. Membership is open to ac-

tive duty, retired, inactive reserve and former commis-

sioned officers of the U.S. Public Health Service. The

purpose of the organization is to ensure that the inter-

~ aA

oe ee Lt abe Cee Be

re eh ne Ee

ests and welfare of commissioned officers of the USPHS

are protected.

ENLISTED ASSOCIATION OF THE

NATIONAL GUARD OF THE U.S. (EANGUS)

The Enlisted Association of the National Guard of the

U.S. was founded in 1962 and has approximately 60,000

members. Membership is open to enlisted members of the

National Guard through state associations and associate

membership is open to all individuals through state as-

sociations. The purpose of the association is to promote

and maintain adequate national security; and to foster

the status, welfare and professionalism of enlisted mem-

bers of the National Guard.

FLEET RESERVE ASSOCIATION (FRA)

The Fleet Reserve Association was founded in 1922.

It has approximately 150,000 members who are active

duty, retired enlisted personnel and commissioned offi-

cers with prior enlisted service in the Navy, Marine Corps

and Coast Guard. The Association is chartered under the

laws of Pennsylvania and its purpose is to represent its

members on military personnel legislative matters before

Congress.

MARINE CORPS LEAGUE (MCL)

The Marine Corps League was founded in 1923 and

has approximately 31,000 members. Membership is open

to those who served in the Marine Corps. The organiza-

tion’s mission is to preserve the traditions, to promote

the interests of the Marine Corps, to voluntarily aid and

render assistance to all Marines and former Marines, as

well as to their widows and orphans.

MARINE CORPS RESERVE OFFICERS ASSOCIATION

(MCROA)

The Marine Corps Reserve Officers Association was

founded in 1928 and has approximately 5,500 members.

Membership is open to all Marine officers and officers of

other U.S. services who served with Marines. The asso-

ciation’s mission is to support and strengthen the Marine

Corps, its reserve and reserve officers.

NATIONAL ASSOCIATION FOR UNIFORMED

SERVICES/SOCIETY OF MILITARY WIDOWS

(NAUS/SMW)

The National Association for Uniformed Services/

Society of Military Widows was founded in 1968 and has

approximately 72,000 members. NAUS/SMW member-

ship is open to all active, retired and former members of

the uniformed services, their families and survivors. The

association’s mission is to represent members’ interests

by supporting legislation that upholds the security of the

United States, sustains the morale of the uniformed serv-

ices and provides fair and equitable consideration for all.

NATIONAL GUARD ASSOCIATION OF THE

UNITED STATES (NGAUS)

The National Guard Association of the U.S. was

founded in 1878 and has approximately 56,000 members.

Membership is open to all present and former officers of

the Army and Air National Guard, corporate and indi-

vidual associate membership. The association’s mission

is to improve the readiness of the National Guard and to

provide personnel benefits and entitlements for the half

million members of the National Guard.

NATIONAL MILITARY FAMILY ASSOCIATION

(NMFA)

The National Military Family Association was founded

in 1969 and has approximately 6,250 members. Member-

ship is open to active duty, yetired and reserve compo-

nent members of the seven uniformed services and their

family members. The assdciation’s mission is to serve

as an advocate for uniformed service families and to

educate and inform them concerning issues affecting their

lives.

NAVAL ENLISTED RESERVE ASSOCIATION (NERA)

The Naval Enlisted Reserve Association was founded

in 1957. It has 16,000 members and its membership is open

to active, inactive, and retired enlisted reservists in the

Navy, Marine Corp and Coast Guard. The Association’s

mission is to focus on members’ interests, morale and

well-being, and readiness and training of sea service re-

serve forces.

NAVAL RESERVE ASSOCIATION (NRA)

The Naval Reserve Association was founded in 1954

and consists of 24,000 members. Membership in the

Naval Reserve Association is open to active, inactive and

retired Naval Reserve officers and its purpose is to main-

tain and strengthen the nation’s defense by ensuring a

continued strong Navy and Naval Reserve.

NAVY LEAGUE OF THE UNITED STATES (NLUS)

The Navy League of the United States was founded in

1902 and has approximately 75,000 members. Member-

ship is open to civilians, military reservists and retirees.

The league’s mission is to maintain a strong US. mari-

time posture through support of the Navy, Marine Corps,

Coast Guard and Merchant Marine.

NON COMMISSIONED OFFICERS ASSOCIATION

OF THE UNITED STATES (NCOA)

The Non Commissioned Officers Association of the

United States is a patriotic, civic and fraternal organiza-

tion operating under Texas Corporate Charter. The As-

sociation was founded in 1960 and has more than 160,000

members. Its membership consists of active, reserve, re

tired or veterans of the United States a forces in

the grades E-4 thru E-9. The purpose of Association

is to promote and protect the rights and benefits of active

duty and veteran non commissioned officers and petty

officers in all five branches of the armed forces, and pro-

vide opportunities for them to join in patriotic, fraternal,

social and benevolent activities.

RESERVE OFFICERS ASSOCIATION OF THE

UNITED STATES (ROA)

The Reserve Officers Association of the United States

was organized in 1922, and chartered by Congress in

June 1950. Originally, the Reserve Officers Association

consisted solely of Army Officers, Reserve Officers, Na-

tional Guard Officers, and Retired Officers. Following

World War II, the Reserve Officers Association expanded

its membership to all services and it now has approxi-

mately 120,000 members. The purpose of the Association

is to ensure an adequate total force of all services, in-

cluding active and reserve components, and a force that

is mobilization ready to meet any contingency.

THE JEWISH WAR VETERANS OF THE

UNITED STATES OF AMERICA (JWV)

The Jewish War Veterans of the United States was

founded in 1896 and has approximately 100,000 members.

Membership is open to veterans of war time service of

the Jewish faith. The organization’s mission is service

to veterans, Americanism, and to provide a voice on the

Hill for veterans’ legislation and benefits.

THE MILITARY CHAPLAINS ASSOCIATION (MCA)

The Military Chaplains Association was founded in

1925 and chartered by the 81st Congress in 1950. It has

approximately 1,300 members. Membership is open to all

chaplains of the Army, Navy, Air Force, VA and Civil

Air Patrol, active duty, reserve, retired and former. The

organization’s mission is to safeguard and strengthen the

forces of faith and morality of our nation; to perpetuate

and to deepen the bonds of understanding and friendship

in our military services; to preserve spiritual influence

and interest in all members and veterans of the armed

forces; to uphold the Constitution of the United States;

and to promote justice, peace and goodwill.

THE RETIRED ENLISTED ASSOCIATION (TREA)

The Retired Enlisted Association was founded in 1968

and consists of 50,000 members. Its membership is made

up of enlisted retirees from all branches of the armed

services and their surviving spouses. The mission of the

association is to represent retired enlisted personnel and

protect retiree military benefits.

U.S. ARMY WARRANT OFFICERS ASSOCIATION

(USAWOA)

The U.S. Army Warrant Officers Association was

founded in 1973 and has 4,000 members. Its members

consist of National Guard active duty, reserve and re-

tired Army warrant officers. The purpose of the associa-

tion is to recommend improvement of the Army, and

promote technical and professional information among

warrant officers.

U.S. COAST GUARD CHIEF PETTY OFFICERS

ASSOCIATION (CPOA)

The U.S. Coast Guard Chief Petty Officers Association

was founded in 1969. Its 9,000 members are active, re-

tired, and reserve Coast Guard chief petty officers. The

mission of the Association is to promote the welfare of

chief petty officers, to promote and protect the rights and

benefits of all armed forces personnel and aid in Coast

Guard recruiting.

APPENDIX B

PUBLIC SALARY TAX ACT OF 1939

AN ACT

Relating to the taxation of the compensation of public

officers and employees.

Be it enacted by the Senate and House of Representa-

tives of the United States of America in Congress assem-

bled, That this Act may be cited as the “Public Salary

Tax Act of 1939”,

TITLE I

SECTION 1. Section 22(a) of the Internal Revenue Code

(relating to the definition of “gross income”) is amended

by inserting after the words “compensation for personal

service” the following: (“including personal service as an

officer or employee of a State, or any, political subdivision

thereof, or any agency or instrumentality of any one or

more of the foregoing)”.

Sec. 2. Section 116(b) of the Internal Revenue Code

(exempting compensation of teachers in Alaska and

Hawaii from income tax) is repealed.

Sec. 3. Section 22(a) of the Internal Revenue Code

is amended by adding at the end thereof a new sentence

to read as follows: “In the case of judges of courts of

the United States who took office on or before June 6,

1932, the compensation received as such shall be included

in gross income”,

Sec. 4. The United States hereby consents to the taxa-

tion of compensation? received after December 31, 1938,

for personal service as an officer or employee of the

United States, any Territory or possession of political

subdivision thereof, the District of Columbia, or any

agency or instrumentality of any one or more of the

foregoing, by any duly constituted taxing authority hav-

ing jurisdiction to tax such compensation, if such taxa-

tion does not discriminate against such officer or employee

because of the source of such compensation.

TITLE I

Sec. 201. Any amount of income tax (including inter-

est, additions-to-tax, and additional amounts) for any

taxable year beginning prior to January 1, 1938, to the

extent attributable to compensation for personal service

as an officer or employee of a State, or any political

subdivision thereof, or any agency or instrumentality of

any one or more of the foregoing—

(a) shall not be assessed, and no proceeding in court

for the collection thereof shall be begun «wr prosecuted

(unless pursuant to an assessment made prior to Janu-

ary 1, 1939);

(b) if assessed after December 31, 1938, the assess-

ment shall be abated, and any amount collected in pur-

suance of such assessment shall be credited or refunded

in the same manner as in the case of an income tax

erroneously collectec ; and

(ce) shall, if collected on or before the date of the

enactment of this Act, be credited or refunded in the

same manner as in the case of an income tax erroneously

collected, in the following cases—

(1) Where a claim for refund of such amount

was filed before January 19, 1939, and was not dis-

allowed on or before the date of the enactment of

this Act;

(2) Where such claim wae so filed but has been

disallowed and the time for beginning suit with re-

spect thereto has not expired on the date of the en-

actment of this Act;

10a

(3) Where a suit for the recovery of such amount

is pending on the date of the enactment of this Act;

and

(4) Where a petition to the Board of Tax Appeals

has been filed with respect to such amount and the

Board’s decision has not become final before the

date of the enactment of this Act.

Sec. 202. In the case of any taxable year beginning

after December 31, 1937, and before January 1, 1939,

compensation for personal service as an officer or em-

ployee of a State, or any political subdivision thereof, or

any agency or instrumentality of any one or more of

the foregoing, shall not be included in the gross income

of any individual under Title I of the Revenue Act of

1938 and shall be exempt from taxation under such title,

if such individual either—

(a) did not include in his-return for a taxable year

beginning after December 31, 1936, and before January

1, 1938, any amount as compensation for personal service

as an officer or employee of a State, or any political

subdivision thereof, or any agency or instrumentality of

any one or more of the foregoing; or

(b) did include any such amount in such return, but

is entitled under section 201 of this Act to have the tax

attributable thereto credited or refunded.

SEC. 203. Any amount of income tax (including inter-

est, additions to tax, and additional amounts) collected

on, before, or after the date of the enactment of this

Act for any taxable year beginning prior to January 1,

1939, to the extent attributable to compensation for per-

sonal service as an officer or employee of a State, or any

political subdivision thereof, or any agency or instrwmen-

tality of any one or more of the foregoing, shall be cred-

ited or refunded in the same manner as in the case of

an income tax erroneously collected, if claim for refund

with respect thereto is filed after January 18, 1939, and

lla

the Commissioner of Internal Revenue, under regulations

prescribed by him with the approval of the Secretary

of the Treasury, finds that disallowance of such claim

would result in the application of the doctrines in the

cases of Helvering against Therrell (303 U.S. 218),

Helvering against Gerhardt (304 U.S. 405), and Graves

et al. against New York ex rel O’Keefe, decided March

27, 1939, extending the classes of officers and employees

subject to Federal taxation.

Sec. 204. Neither section 201 nor section 203 shall

apply in any case where the claim for. refund, or the in-

stitution of the suit, or the filing of the petition with the

Board was, at the time filed or begun, barred by the

statute of limitations properly applicable thereto.

Sec. 205. Compensation shall not be considered as com-

pensation within the meaning of sections 201, 202, and

203 to the extent that it is paid directly or indirectly

by the United States or any agency or instrumentality

thereof.

Sec. 206. The terms used in this Act shall have the

same meaning as when used in Chapter 1 of the Internal

Revenue Code.

Sec. 207. No collection of any tax (including interest,

additions to tax, and penalties) imposed by any State,

Territory, possession, or local taxing authority on the

compensation, received before January 1, 1939, for per-

sonal service as an officer or employee of the United

States or any agency or instrumentality thereof which is

exempt from Federal income taxation and, if a corporate

agency or instrumentality, is one (a) a majority of the

stock of which is owned by or on behalf of the United

States, or (b) the power to appoint or select a majority

of the board of directors of which is exercisable by or on

behalf of the United States, shall be made after the date

of the enactment of this Act.

12a

Sec. 208. This title shall not apply with respect to any

officer or employee of a State, or any political subdivision

thereof, or any agency or instrumentality of any one or

more of the foregoing, after the Secretary of the Treas-

ury has determined and proclaimed that it is the policy

of such State to collect from any individual any tax, in-

terest, additions to tax, or penalties, on account of com-

pensation received by such individual prior to January 1,

1939, for personal service as an officer or employee of the

United States or any agency or instrumentality thereof.

In making such determination the Secretary of the Treas-

ury shall disregard the taxation of officers and employees

of any corporate agency or instrumentality which is not

exempt from Federal income taxation, or which if so

exempt is one (a) a majority of the stock of which is not

owned by or on behalf of the United States and ‘b) the

power to appoint or select a majority of the board of

directors of which is not exercisable by or on behalf of

the United States.

Sec. 209. In the case of the judges of the Supreme

Court, and of the inferior.courts of the United States

created under article III of the Constitution, who took

office on or before June 6, 1932, the compensation re-

ceived as such shall not be subject to income tax under

the Revenue Act of 1938 or any prior revenue Act.

Sec. 210. For the purposes of this Act, the term “of-

ficer or employee” includes a member of a legislative

body and a judge or officer of a court.

Sec. 211. If either title of this Act, or the application

thereof to any person or circumstances, is held invalid,

the other title of the Act shall not be affected thereby.

Approved, April 12, 1939.

13a

APPENDIX C

OPINION OF ARIZONA ATTORNEY GENERAL

No. 60-9-L (1959) -

December 28, 1959

Honorable David S. Wine

State Senator

Arizona State Senate

Phoenix, Arizona

Dear Senator Wine:

In response to your request regarding an opinion on

the following question:

“Is retirement compensation received by Federal

Civil Service employees subject to the Arizona State

income tax?”,

it is the opinion of the Attorney General’s office that said

retirement compensation is subject to the Arizona State

income tax.

It is our belief that federal civil service retirement

income falls under that part of A.R.S. § 43-112(a),

which is:

“compensation for personal service, including personal

service as an officer or employee of this state or the

federal government, or any political division thereof

or any agency or instrumentality of any one or more

of the foregoing, * * *”

A.R.S. § 43-112(b) sets forth specifically all forms and

types of income which are excluded from Arizona State

' income tax and federal retirement compensation does not

fall thereunder.

In addition to the statutes above set forth, the Arizona

State Tax Commission, in its Income Tax Regulation,

l4a

$112 (a)-2, has specifically included such retirement

compensation as follows:

“S112 (a)-2. Compensation for Personal Services.

(a) Commissions paid salesmen, compensation for

services on the basis of a percentage of profits, com-

missions on insurance premiums, tips, pay of persons

in the military or naval forces of the United States,

retired pay of Federal and other officers, and pensions

or retiring allowances paid by the United States (un-

less expressly exempt) * * *”

Since, by federal statute, civil service employees must

contribute to their retirement compensation fund, it is

the opinion of the State -Tax Commission and this office

concurs, that the retired federal civil service employees

need not pay any Arizona State Income Tax on his retire-

ment compensation received, until he receives back from

the retirement fund a sum equal to that amount which

he has contributed. Once he has received back a sum equal

to what he had contributed, then thereafter all said income

is wholly taxable. This situation is treated much the same

as annuities are treated under our Arizona statutes.

A.R.S. § 43-112 (b) (3).

If you have any further question, please feel free to

contact this office.

Very truly yours,

WADE CHURCH

The Attorney General

STANLEY E. GOODFARB

Assistant Attorney General

SZG: bh

l5a

APPENDIX D

EXCERPTS FROM THE REPORT OF THE HOUSE

FINANCE RETIREMENT SUBCOMMITTEE

THE GOVERNOR AND THE GENERAL ASSEMBLY

OF VIRGINIA

DECEMBER, 1982

- * * *

The subcommittee was directed by Delegate Morrison

to study the issue of desirability and feasibility of any

possible changes in the treatment of retirement income

for state individual income tax purposes. The subcom-

mittee was to examine in particular the individual in-

come tax treatment of military and civil service retire-

ment benefits. The chairman also requested the subcom-

mittee to examine the current Virginia retirement income

tax credit. (pg. 4)

- * * *

Although further differences in treatment among the

different classes of retirees can be listed, tax laws should

not distinguish the components of compensation and why

a person chooses a specific benefit package from another.

The goal of the tax structure is to simply treat taxpayers

fairly based on the benefits and income that they receive

which, of course, they chose on their own. (pg. 8)

The subcommittee has thoroughly explored the present

treatment of retirement benefits in Virginia as well as

the treatment of retirement benefits in other states.

Moreover, the subcommittee has considered the concerns

of numerous groups of retirees at a hearing held during

the course of the study. (pg. 23)

l6a

The subcommittee believes that to cure this inequity all

retirees, age 62 and over, should be provided an exclusion

of the first $3,000 of retirement benefits reduced by social

security or any other non taxable retirement benefits.

(pgs. 24-25)

* . a ”

17a

APPENDIX E

EXCERPTS FROM THE VIRGINIA INCOME TAX

LAW AND REGULATIONS

Sec. 58.1-301. Conformity of terms to Internal Revenue

Code.—A. Any terms used in this chapter’ shall have the

same meaning as when used in a comparable context in

the laws of the United States relating to federal income

taxes, unless a different meaning is clearly required.

B. Any reference in this chapter to the laws of the

United States relating to federal income taxes shall mean

the provisions of the Internal Revenue Code of 1954, and

amendments thereto, and other provisions of the laws of

the United States relating to federal income taxes, as the

same may be or become effective at any time or from

time to time.

Sec. 58.1-322. Virginia taxable income of residents.—

A. The Virginia taxable income of a resident individual

means his federal adjusted gross income for the taxable

year, which excludes combat pay for certain members of

the Armed Forces of the United States as provided in § 112

of the Internal Revenue Code, as amended, and with the

modifications specified in this section.

D. In computing Virginia taxable income there shall

be deducted from federal adjusted gross income:

la. The amount allowable for itemized deductions for

federal income tax purpose where the taxpayer has elected

for the taxable year to itemize deductions on his federal

return, but reduced by the amount of income taxes imposed

by the Commonwealth or any other taxing jurisdiction and

deducted on such federal return and increased by an

amount which, when added to the amount deducted under

$ 170 of the Internal Revenue Code for mileage, results

18a

in a mileage deduction at the state level for such purposes

at a rate of eighteen cents per mile; or

Sec, 58.1-1823. Reassessment and refund upon filing of

amended return.—A. Any person filing a tax return re-

quired for any tax administered by the Department of

Taxation may, within three years from the last day pre-

scribed by law for the timely filing of the return, or

within sixty days from the final determination of any

change or correction in the liability of the taxpayer for

any federal tax upon which the state tax is based, which-

ever is later, file an amended return with the Department.

If the Department is satisfied, by evidence submitted to

it or otherwise, that the tax assessed and paid upon the

original return exceeds the proper amount, the Depart-

ment may reassess the taxpayer and order that any

amount excessively paid be refunded to him. The Depart-

ment may reduce such refund by the amount of any taxes,

penalties and interest which are due for the period covered

by the amended return, or any past-due taxes, penalties

and interest which have been assessed within the appro-

priate period of limitations. Any order of the Department

denying such reassessment and refund, or the failure of

the Department to act thereon within three months shall,

as to matters first raised by the amended return, be

deemed as assessment for the purpose of enabling the tax-

payer to pursue the remedies allowed under this chapter.

Sec. 58.1-1823B.*—-Notwithstanding the time limitation

contained in subsection A, an amended individual income

tax return claiming a refund for taxes paid with respect

to retirement or pension benefits received from a federal

retirement system created by the federal government for

any officer or employee of the United States, including the

United States Civil Service, the United States Armed

Forces, or any agency or subdivision thereof for any tax-

able year beginning on or after January 1, 1985, may be

filed within one year from the entry of a final judicial

19a

order of a court of competent jurisdiction not subject to

further appeal resolving the issue of the application to

Virginia income tax law of the United States Supreme

Court decision in the case of Davis v. Michigan Depart-

ment of the Treasury, 57 U.S.L.W. 4389 (U.S. March 28,

, 1989).

*As enacted by Senate Bill 2 (Chapter 1—1989

Special Session No. 2) and House Bill 2 (Chapter

2—.1989 Special Session No. 2).

Sec, 58.1-1824. Protective claim for refund.—Any per-

son who has paid an assessment of taxes administered by

the Department of Taxation may preserve his judicial

remedies by filing a claim for refund with the Tax Com-

missioner on forms prescribed by the Department within

three years of the date such tax was assessed. Such tax-

payer may, at any time before the end of one year after

the date of the Tax Commissioner’s decision on such

claim, seek redress from the circuit court under § 58.1-

1825. The Tax Commissioner may decide such claim on

the merits in the manner provided in § 58.1-1822 for ap-

peals under § 58.1-1821, or may, in his discretion, hold

such claim without decision pending the conclusion of

litigation affecting such claim. The fact that such claim

is pending shall not be a bar to any other action under

this chapter.

Sec. 58.1-347. Penalty for failure to file income tax

returns in time.—All individual or fiduciary income tax

returns required by law to be filed with the commissioner

of the revenue shall be filed with the commissioner of the

revenue within the time required by this chapter, unless

the time for filing such returns is extended by the Depart-

ment. Upon all returns on which tax is due, filed with or

assessed by the commissioner of the revenue after the

time herein prescribed for the filing of returns, the com-

missioner of the revenue shall assess a penalty equal to

20a

six percent of the amount of taxes assessable thereon, if

the failure is not more than one month, with an additional

six percent for each additional month or fraction thereof

during which such failure to file continues, not exceeding

thirty percent in the aggregate. Such penalty shall be

collected in the same manner as is provided by law for

the collection of other taxes.

(As amended by Chs. 629 and 642, Laws 1989; Chs.

316 and 331, Laws 1991, both effective July 1, 1991.)

"Prior to July 1, 1991, the rate was 5%.

Sec. 58.1-348. Criminal prosecution for failure or re-

fusal to file return of income or for making false state-

ment therein; limitation.—Notwithstanding any other

provisions of this title and in addition to any other

penalties provided by law, any individual or fiduciary

required under this chapter to make a return of income,

who willfully fails or refuses to make such return, at

the time or times required by law, or who, with intent

to defraud the Commonwealth, makes any false statement

in any such return, shall be guilty of a Class 1 misde-

meanor. A prosecution under this section shal] be com-

menced within five years next after the commission of

the offense.

Sec. 58.1-350. Procuring returns from delinquent in-

dividuals or fiduciaries.—The commissioner of the revenue

shal] secure a return from every delinquent individual or

fiduciary within his jurisdiction, or if any such individual

or fiduciary refuses to make a return or fails to make

such return for fifteen days after the commissioner of the

revenue calls upon him to do so, such commissioner shall,

from the best information he can obtain, make an estimate

of the income of such individual or fiduciary and report

the same to the Department.

The commissioner of the revenue shal] have authority

to assess taxes, penalties and interest upon such estimate,

and such taxes, penalties and interest shall be collected in

: 2la

like manner as is provided by law for the collection of

State taxes,

Sec. 58.1-351. When, where and how individual income

taxes payable and collectible-—Each individual and fiduci-

ary liable for income tax shall pay the same to the treas-

urer of the county or city with whose commissioner of the

revenue the taxpayer files his return at the time fixed by

law for filing the return. The full amount of the tax pay-

able as shown on the face of the return shall be so paid.

A taxpayer may file his return and pay his tax in full in

the closing days of his taxable year provided he is able

to prepare a complete return.

If any payment is not made in full when due, there

shall be added to the entire tax or to any unpaid balance

of the tax, a penalty of six percent of the amount thereof,

if thé failure is not more than one month, with an addi-

tional six percent for each additional month or fraction

thereof during which such failure to pay continues, not

exceeding thirty percent in the aggregate. The entire tax

or any unpaid halance of the tax together with such

penalty, will immediately become collectible. Interest upon

such tax or any unpaid balance of the tax, and on the

accrued penalty, shall be added at a rate determined in

accordance with £ 58.1-15, from the date the tax or any

unpaid balance of the tax, was originally due until paid.

In the case of an additional tax assessed by the com-

missioner of the revenue under the provisions of § 58.1-

307. if the return was made in good faith and the under-

statement of the amount in the return was not due to any

fault of the taxpayer, there shall be no penalty on the

additional tax because of such understatement, but in-

terest shal] be added to the amount of the deficiency at a

rate determined in accordance with § 58.1-15, from the

time the said return was required by law to be filed

until paid.

The penalty under this section shall not be applicable

to any month or fraction thereof for which the [individual]

22a

is subject to the penalty imposed under § 58.1-347. In no

event shall the total amount of penalty assessed under

this section and under § 58.1-347 exceed thirty percent

in the aggregate.

Sec. 58.1-496. Willful failure or refusal to file declara-

tion of estimated tax, or making false and fraudulent

statement, a misdemeanor.—Any person required under

this article to file a declaration of estimated tax who

willfully fails or refuses to file such declaration, at the

time or times required by this article and any person who,

with intent to defraud the Commonwealth, makes any

false statement in any such declaration, shall be guilty

of a Class 1 misdemeanor.

Reg. Sec. 630-2-499, Individual refunds; crediting over-

payment against estimated tax. -

D. Statute of Limitations. No refund of any over-

payment shall be made except upon discovery by the

department or written application of the taxpayer within

three years of the due date of the return for such taxable

year or within sixty days from the final determination of

any change or correction in the taxpayer’s liability for

federal income tax, whichever is later.

23a

APPENDIX F

EXCERPTS FROM THE

INTERNAL REVENUE CODE

{See. 111]

SEC. 111. RECOVERY OF TAX BENEFIT ITEMS.

{See. lll(a)}

(a) Depuctions.—Gross income does not include in-

come attributable to the recovery during the taxable year

of any amount deducted in any prior taxable year to the

extent such amount did not reduce the amount of tax

imposed by this chapter.

[See. 164]

SEC. 164. TAXES.

[See. 164(a)]

(a) GENERAL RULE.—Except as otherwise provided in

this section, the following taxes shall be allowed as a

deduction for the taxable year within which paid or ac-

crued:

(1) State and local, and foreign, real property

taxes.

(2) State and local personal property taxes.

(3) State and local, and foreign, income, war

profits, and excess profits taxes.

(4) The GST tax imposed on income distributions.

(5) The environmental tax imposed by section

59A.

In adidtion, there shall be allowed as a deduction State

and local, and foreign, taxes not described in the preced-

ing sentence which are paid or accrued within the tax-

able year in carrying on a trade or business or an ac-

24a

tivity described in section 212 (relating to expenses for

production of income). Notwithstanding the preceding

sentence, any tax (not described in the first senterice of

this subsection) which is paid or accrued by the taxpayer

in connection with an acquisition or disposition of prop-

erty shall be treated as part of the cost of the acquired

property or, in the case of a disposition, as a reduction

in the amount realized on the disposition.

25a

APPENDIX G

EXCERPTS FROM THE

VIRGINIA DEPARTMENT OF TAXATION

ANNUAL REPORTS

FISCAL YEAR 1988

* + * *

Number of Refunds Processed Average Refund

(cumulative totals) Turnaround Time *

1988 1987 AR’s Other Refunds

January 29,097 1,195 3 days 1 week

February 395,388 94,757 5 days 5 weeks

March 915,070 434,224 5 days 3 weeks

April 1,336,460 824,162 7 days 3 weeks

May 1,414,288 1,367,871 13 days 4 weeks

June 1,780,498 1,672,357 5 days 2 weeks

* Turnaround times reflect the number of days it took to actually

process Accelerated Refunds in the Tax Department, and not neces-

sarily the number of days it took to receive a refund.

Accelerated Refund Statistics

As of July 1, 1988

Se TE TN aicincicntinstietnaictnsbiihaneictnnssstinmanicsnans 1,780,498

pO ee a 543,071

(30.5% of all refunds issued

were originally filed as AR’s)

Accelerated Refunds Issued ................22.......00000 seiaadtihntiie 462,282

(85.1% of all AR’s were

issued as an AR)

Accelerated Refunds Denied ~.............0....cccccccccceeeeeeeeee : 80,789

(14.9% of all AR’s filed

were denied )

I 7,232

(2.1% of AR’s with

processed returns )

Average Refund Amount—1987 ..........2.............00c000------ $247.00

Average Refund Amount-——1988 ..............0.................00-- _ $202.00

(pg. 11)

¥ ¥ * ~

26a

FISCAL YEAR 1989

* * & *

Estimated the additional general fund individual in-

come tax windfall resulting from the Federal Tax Re-

form Act of 1986. The additional windfall was estimated

to be $41.7 million for fiscal year 1988, and $58.4 million

and $77.5 million for fiscal year 1989 and 1990 respec-

tively. (pg. 5)

* a * *

Audit assessments for Fiscal Year 1989 were

$10,671,346 above last year’s assessments. Part of this

success is attributable to several new audit programs and

information sharing agreements designed to encourage

voluntary tax compliance and _ increase _ collections.

(pg. 15)

FISCAL YEAR 1991

-_ * * *

Furthermore, the department’s compliance programs

have helped Virginia to maintain a stable tax structure

and low tax rates. The state’s income tax rates for in-

dividuals and corporations have not increased since 1972,

and the sales and use tax rate has only increased by .05

percent since 1968. According to a Special Report issued

by the Tax Foundation in October, 1991, Virginia’s state

tax burden is $10.85 below the national average tax bur-

den of $64.87 per $1,000 of income, which is tied for the

fifth lowest among the states based on fiscal year 1990

estimates. This low tax burden benefits all Virginia

citizens. (pg. 12)

* + & *

APPENDIX H

XCERPT FROM DoD ATLAS—FY 1989

r |

DoD ESTIMATED PAYROLL AND PRIME CONTRACTS BY STATE

(THOUSANDS OF DOLLARS)

FISCAL YEAR 1989

27a

n MeAak&e oo

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VY Nn = ON

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District of

1,235,964

4,452,383

1,864,180

578,733

74,789

1,229,312

4,424,027

1,829,823

570,715

74,122

6,652

28,356

34,357

8,018

667

1,115,876

5,492,485

3,773,609

2,234,004

285,497

66,730

2,092,292

191,892

98,955

740,461

98,044

153,749

271,133

40,274

39,122

386,633

2,215,970

112,486

1,731,308

1,362,357

564,469

1,030,474

1,030,707

639,481

34,934

Columbia

Florida

Hawaii

Idaho

Georgia

29a

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30a

APPENDIX I

AMERICAN BAR ASSOCIATION

SECTION OF TAXATION

REPORT TO HOUSE OF DELEGATES

RECOMMENDATION

RESOLVED that the American Bar Association rec-

ommends to the state legislatures and municipal govern-

ing bodies of the United States that they adopt standards

for state and local tax procedures that call for: (1)

identical statutes of limitatiuns for deficiencies and re-

funds; (2) identical interest rates for deficiencies and

refunds; (3) no automatic imposition of penalties; (4)

payment of disputed taxes only after the taxpayer is pro-

vided a hearing; (5) no seizure of property until after

final adjudication; (6) a period of at least ninety days

between the date of the deficiency notice and the date a

notice of appeal is due; (7) the elimination of state fees

to cover audit expenses; (8) providing taxpayers with

due process; and (9) eliminating the need for taxpayers

to relitigate identical legal issues in the same jurisdic-

tion.

REPORT

For many years taxpayers have objected to perceived un-

fair and arbitrary treatment in compliance, assessment,

and appeals of state and local taxes. When taxpayers

perceive such treatment, voluntary compliance is seriously

threatened. Addressing these concerns should increase

respect for the tax system and improve the level of vol-

untary compliance.

Recent years have witnessed a significant increase in the

amount of taxes raised at the state and local levels. For

3la

example, for the twelve months ended March 1989, state

and local governments collected $488.1 billion—a 6.3 per-

cent increase over the twelve month period that ended

March 1988. Increased tax revenues have resulted from

tax increases (e.g., rate increases, new taxes, broaden-

ing of existing tax bases) and enhanced enforcement of

existing tax laws. The enhanced enforcement of state

and local tax laws has increased the number of sensitive

contacts between taxpayers and revenue collection agen-

cies. The increase in contacts has heightened taxpayers’

awareness of tax collection procedures. All of this has

focussed discussion on the need for state tax policy mak-

ers and legislatures to give serious consideration to the

procedural rights of taxpayers.

Consideration has led to very different responses. Some

states have adopted procedural reforms through legisla-

tion while some states have done so through policy pro-

nouncements from the revenue agency within the execu-

tive branch that is charged with implementing the tax

laws. Further, some states have created a taxpayer ad-

vocate office, similar to the consumer advocate offices cre-

ated during the 1960s and 1970s. Other differences are

the ability to record interviews with auditors and the

ability to sue the states. A comparison of all the laws

that have passed is beyond the scope of this Report.

In September of 1988, California became the first state

to adopt a taxpayers’ bill of rights. California’s legis-

lation preceded the federal taxpayers’ bills of rights. Sub-

sequent to California’s adoption, Arkansas, Illinois, In-

diana, Kansas, Ohio, Oregon, and South Carolina also

adopted taxpayer’s bill of rights through legislation. Ha-

waii, Maryland, New York (state and city) and Texas

adopted procedural reforms through policy pronounce-

ments.

Over the years model legislation has been recommended

that addressed procedural, due process and policy con-

siderations in the state and local tax area. In addition to

32a

these model acts endorsed by the ABA, it is appropriate

to enumerate broad principles to guide state tax policy

makers and legislatures.

A review of the procedural reforms adopted by thirteen

states reveals that none of the thirteen states have

adopted all of the principles recommended.

Specific statutory language is not recommended because it

is viewed that: (i) it is almost impossible to draft lan-

guage to amend or replace existing language that is in

many instances scattered throughout the statutory frame-

work of the various states; (ii) some states have already

enacted certain of the recommended principles into their

statutes and would find statutory language covering addi-

tional principles difficult to use; (iii) informal discus-

sions with officials from various states and with national

tax organizations reveal that they do not think that statu-

tory language would be desirable in this circumstance;

and, (iv) it would be desirable to affect the procedural

tax reform process that is currently sweeping the states

in a timely fashion.

PRINCIPLES

1. Statutes of Limitations—Other than Fraud

State and local statutes of limitations for assessments,

in cases other than those involving fraud, should be

the same for deficiency assessments and refunds.

Federal audit adjustments should open state and local

income tax periods which are otherwise closed by stat-

ute only for those issues raised in the federal audit.

2. Interest Rates

Interest rates for deficiencies and refunds should be

the same. Interest is payment for the time value of

money. It should not be imposed at a rate that pun-

ishes a taxpayer for failure to pay taxes timely. State

and local efforts to encourage timely payment of taxes

33a

and to punish non-compliance should be addressed by

penalties and/or civil or criminal sanctions.

. Penalties

There should be no automatic imposition of penalties.

Reasons for proposed penalties should be provided to

the taxpayer by the taxing agency. The taxpayer

should be given an opportunity to appeal, and penal-

ties should be abated upon a showing by the taxpayer

of reasonable cause. Penalties should not be enacted

by legislatures to raise revenue—they should be de-

signed solely to encourage compliance.

. Payment After Hearing

Taxpayers should not be required to post a bond or

make a payment of a disputed tax until they have

been afforded an opportunity for a hearing.

. Seizure of Property

A state or municipality should only be able to seize a

taxpayer’s property or levy against a taxpayer’s as-

sets after a final adjudication of the disputed amount

or as a result of a jeopardy assessment where the

probability of payment would be substantially reduced

by the passage of time.

. Appeal Period

Taxpayers should not have to file a notice of appeal

until at least ninety days have passed from the date

on the notice of assessment. A reasonable period there-

after should be allowed for adequate preparation be-

fore a hearing is held and an opportunity should exist

for the taxpayer to amend an appeal.

. Fees

Taxpayers should not have to pay the state or local

government a fee for its expenses in auditing the

taxpayers. Taxpayers should not have to pay the state

ov.

34a

or local government’s court costs or litigation fees if

a taxpayer prevails in a dispute.

Due Process

Taxpayers should be afforded both an opportunity for

a hearing before an independent tribunal and receive

an appealable decision therefrom. Taxpayers should

also have the opportunity to be represented by counsel

and afforded other standards of due process like the

use of discovery.

Application of Decisions

Once the highest court in a jurisdiction rules on a

particular legal issue taxpayers should not have to

relitigate the identical issue in the same jurisdiction.

COMMENTS ON PRINCIPLES

Statutes of Limitation—Other than Fraud

The underlying premise supporting civil statutes of

limitation is that there is a period beyond which es-

tablishing the factual characteristics of a case becomes

burdensome, difficult or impractical. This is, likewise,

true with regard to issues arising under state and

local tax laws.

Several states have statutes of limitation that allow

the state and local government a longer period to as-

sess a tax deficiency than the taxpayer has to claim a

refund. This is perceived as creating an inequity,

particularly when the taxpayer has not committed

fraud.

In the area of taxation, the facts needed to establish

the taxpayer’s correct liability are generally reflected

in the taxpayer’s books and records. In many in-

stances, taxpayers maintain books and records solely

for the purposes of being able to substantiate prior

35a

tax positions. Determining the period of time during

which taxpayers should be required to maintain books

and records is a subjective matter best left to the

judgment of the legislature. However, once a tax-

payer has been asked to maintain books and records

and to continue being exposed to potential increases

related to past tax periods, it seems only fair to re-

quire that the government also expose itself to the

risk of having to refund taxes erroneously paid for a

like period.

Because many states and local jurisdictions use fed-

eral taxable income or federal adjusted gross income

as a starting point in determining state income or

franchise taxes, a federal audit adjustment may trig-

ger the need to file an amended state or local income

, tax return. Often, the federal audit adjustment is

made after the statute of limitation has expired for

auditing the state or local income tax return. When

this occurs, the federal audit adjustment should not

be used by the state or local government as an excuse

to audit the taxpayer’s state or local income tax re-

turn for issues other than those raised in a federal

audit.

. Interest Rates

Consistent with the treatment of interest applied to

federal income tax deficiencies and refunds, some

states and local governments apply a higher interest

rate to deficiencies than they pay when taxes are

refunded.

This appears to be an unjustifiable position if one ac-

cepts the premise that interest should be the payment

for the time value of money. Interest should not be

used to punish a taxpayer for the over- or under-

payment of taxes—this is best done through penalties

and other civil criminal sanctions.

36a

Some commentators have advanced the argument that

higher interest rates are justified for deficiencies than

for refunds because the state takes a credit risk with

respect to the taxpayer's ability to pay the deficiency

whereas the taxpayer presumably bears a smaller

risk. Some taxpayers, however, are excellent credit

risks, on a par with governmental bodies. It is in-

equitable to apply a higher interest rate to all tax-

payers with deficiencies because a few are poor credit

risks. If there is a question about a taxpayer's ability

to pay a deficiency, seizure of property remedies are

available. See comment on seizure of property, below.

Penalties

In recent years, the imposition of penalties has begun

to be used as a revenue raising technique. Many tax

jurisdictions automatically add penaity assessments to

virtually all tax deficiencies. This is inappropriate if

a taxpayer is neither notified of the reasons for the

proposed penalties nor provided an opportunity to ap-

peal such penalties. At a minimum, the tax agency

should be required to have some basis for the penalty

imposition. Further, penalties should be abated upon

a showing of a reasonable cause.

Payment After Hearing

In many instances, taxpayers are required to post a

bond or make payment of disputed taxes before being

afforded an opportunity for an administrative appeal.

This is inconsistent with federal income tax procedure

and may often impose a severe hardship on taxpayers,

especially when taxes erroneously collected from tax-

payers are later refunded at below market interest

rates.

Seizure of Property

Many state and local tax authorities abuse their power

to seize property by exercising this power much too

frequently. This power should be utilized only after

37a

a final adjudication of the disputed amount or in

instances where a designated governmental official de-

termines that the probability of payment (7.¢.; the

collection for a deficiency) would be substantially re-

duced by the passage of time. The standards utilized

to determine whether a jeopardy assessment is appro-

priate should be similar to those adopted by the fed-

eral government for purposes of the collection of fed-

eral taxes. Treasury Regulation 1.6851-1/1) (a) sets

forth three conditions where a collection is in jeop-

ardy; (i) the taxpayer is or appears to be “designing

quickly” to leave the United States or go into hiding;

(ii) the taxpayer is or appears to be “designing

quickly” to place taxpayer’s assets outside the reach

of the government by removing, concealing, dissipating

or transferring the assets; or, (iii) the taxpayer's fi-

nancial solvency is or appears to be imperiled.

Appeal Period

A taxpayer’s ability to appeal a tax assessment is

basic to providing the taxpayer with due process. The

regular delays encountered with mailing assessment

notices and the amount of time necessary to evaluate

such notices and determining whether an appeal is

appropriate require that taxpayers be provided at

least ninety days from the date on the assessment

notice to file a notice of appeal. Shorter appeal pe-

riods often effectively eliminate any opportunity for

due process.

As a related matter, once a notice of appeal is filed,

taxpayers should be given time to amend such notice

in order to perfect the appeal. Otherwise, a require-

ment that the taxpayer set forth his entire case may

in some instances deprive taxpayers of the opportu-

nity to analyze thoroughly the notice of assessment in

conjunction with the taxpayer’s books and records and

other relevant information.

38a

Fees

Some jurisdictions impose fees on taxpayers for ex-

penses incurred in auditing the taxpayer and for

legal costs incurred in defending tax appeals. While

user fees may be an appropriate way of funding gov-

ernment services, it is unreasonable to charge tax-

payers for the state’s audit costs and it is also un-

reasonable to charge court costs if the taxpayer pre-

vails in a dispute.

Due Process

Minimum standards of due process should be afforded

a taxpayer when a tax is in dispute. Those standards

include: (i) the opportunity to appeal an assessment

before an independent tribunal; (ii) the opportunity

to receive a decision from the independent tribunal

which decision can then be appealed to a court; (iii)

representation by counsel; (iv) the ability to call wit-

nesses including government witnesses; and, (v) the

availability of discovery to all parties.

It is believed that if the first level administrative ap-

peal is provided by a part of an agency that has rev-

enue collection responsibilities, then a de novo appeal

should be provided to the taxpayer. In at least one

jurisdiction (New York State) the revenue collection

agency (i.e., the Department of Taxation and Fi-

nance) cannot appeal unfavorable decisions from the

Tax Appeals Tribunal to the courts. The concern is

that this may have a chilling effect on the willingness

of the tax tribunal to rule in favor of the taxpayer

on the theory that the taxpayer can always appeal

to the courts.

The burden of proof should generally be on the tax-

payer, but, irrespective of who bears the burden of

proof, the burden should ordinarily be met by a pre-

ponderance of the evidence.

10.

39a

Application of Decisions

State and local governments should establish proce-

dures for implementing judicial resolutions of legal

issues. Once the tax authority has lost a legal issue

against a taxpayer, before the highest court in the

state, there should exist some mechanism for ensur-

ing that similarly situated taxpayers will not be faced

with the litigation of legal issues that have already

been resolved.

Prospectivity

There is a strong reluctance on the part of state and

local governments to grant tax refunds when a tax

has been held to be illegal or unconstitutional. Some-

times, there is a reluctance to refund taxes to the

taxpayer litigant, and other times there is a reluc-

tance to refund taxes to all similarly situated tax-

payers unless those taxpayers have filed protective

refund claims and/or lawsuits. The reluctance to

grant refunds provides taxpayers with a disincentive

to contest taxes and may serve to erode confidence in

a voluntary system of tax compliance.

The issue of whether federal law requires state and

local governments to provide taxpayers with retroac-

tive relief when taxes have been exacted in violation

of the commerce clause is before the U.S. Supreme

Court in the case of McKesson Corporation v. State

of Florida (October 1989 Term). While the tax au-

thorities’ reluctance to part with taxes that have been

spent is understandable, the government’s should

either be prepared to refund taxes or they should

escrow disputed taxes. However, no position is being

taken on this issue, at this time, pending a review

of the forthcoming Supreme Court decision.

Respectfully submitted,

JAMES P. HOLDEN

August, 1990

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.