# Amicus Curiae Brief — Harper v. Virginia Dept. of Taxation > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0214%3A09 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1993 - **Citation:** 509 U.S. 86 ## Text Zz, ~ = ; 4UL 16 Ige | No. 91-794 IN THE Supreme Court of the United States OCTOBER TERM, 1992 HENRY H ARPER, et al., Petitioners, v. 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 — 7d 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) iv 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 Vv 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) ~ J 4 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 5 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) . 6 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. 7 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 | 9 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 i 10 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 ee 11 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- 12 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 13 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 14 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.”). 15 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. 16 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). 17 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: 18 |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. 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B96'Z61 b60'88T TEL'€29 SLI‘O81 sesuvy O16 ‘SSP ELO'RTP L68°L OZL'981 b68'18 269°LG L626 LEBS‘LE BMOT LLO'EOL'T E9E'ESL'T bIL‘6 089°996 O8S'S8T 912 P81 OORT bSZ'9SF vuBipul LOL 6h2'T LES 81Z'T PISS SIL POL = OPT B08 SPS'99T S6h'6SL eEs'09g sroulll] ByoRIJUOD = SUOT}OUNY —s SOBA UD uOoI}RS Atd Avg paren) Avg Aing Atd 9381S [BIOL SpeIquOy suotjuny -uadwog Arey jeuoneN aarpy UBI[LAID ATEULTY TEATD [PIOL PATO VoIsosoy ALBA 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 6. 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. - i. 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. 9. 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0214%3A09. Public record. Not legal advice.