Petition for Writ of Certiorari — Alarid v. Secretary

Supreme ours

2 , US.

FIL a .

OA Tet

24 840 NOV 9 1994

In The

Supreme Court of the United States

October Term, 1994

+

BENJAMIN B. ALARID, et al.,

Petitioners,

SECRETARY OF THE NEW MEXICO DEPARTMENT

OF TAXATION AND REVENUE,

Respondent.

*

On Petition For Writ Of Certiorari

To The New Mexico Court Of Appeals

¢

PETITION FOR WRIT OF CERTIORARI

¢

JERRY WERTHEIM ANDREW G. SCHULTZ

Jones, SNEAD, WERTHEIM, Ropey, DICKASON, SLOAN,

RopriGuEz & WENTWORTH, AKIN & Ross, P.A.

P.A. Post Office Box 1888

Post Office Box 2228 Albuquerque, New Mexico

Santa Fe, New Mexico 87103-1888

87504-2228 (505) 765-5900

(505) 982-0011

Counsel of Record

Counsel for Petitioners

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED FOR REVIEW

1. Does the intergovernmental tax immunity doc-

trine apply as between the several states so as to render

constitutionally invalid a state income tax that discrimi-

nates against another sovereign state or those with whom

it deals?

2. Is the application by the New Mexico Court of

Appeals of the “legal incidence” principle of the inter-

governmental tax immunity doctrine, articulated in

United States v. New Mexico, 455 U.S. 720, 735, n.11, 102

S.Ct. 1373, 1383, n.11, 71 L.Ed.2d 580 (1982), in conflict

with the “nondiscrimination” component of the inter-

governmental tax immunity doctrine applied by this

Court in Davis v. Michigan Dept. of Treasury, 489 U.S. 803,

815, n.4, 109 S.Ct. 1500, 1507, n.4, 103 L.Ed.2d 891 (1989)?

li

LISTING OF ALL PARTIES TO THIS PROCEEDING

Petitioners

Four hundred two individuals are petitioners in this

proceeding. All are retired employees of the University of

California, or spouses of those employees, and all were

parties in the proceedings before the court whose judg-

ment is sought to be reviewed. An alphabetical listing of

the petitioners is contained in Appendix A. (App. 1).

Respondent

The Respondent is the Secretary of the New Mexico

Department of Taxation and Revenue.

lil

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ........... i

LISTING OF ALL PARTIES TO THIS PROCEEDING.. ii

po eet yo yy Sr ee es iii

TABLE OF CASES AND AUTHORITIES............ Vv

EE ee ee ee ee ee 1

EE ee ee ee ee 1

oe ee Bs, gd at S| ee 2

eG ra Sk G as yd 6 asad wos 6 bev ceeeeees 2

B. Presentation Of Federal Questions In The Courts

Ee eee +

ee I ON as 6 da 5s 48 0 60-8 A Ho's bs 0 9 00 a

2. The Decision Of The Court Of Appeals ..... 7

REASONS FOR ALLOWING THE WRIT ........... 10

SE eT reer eee eee ee 17

i Liane hence eer ee chet settee wius es 18

APPENDIX

A. Alphabetical Listing of the Petitioners...... App. 1

B. Opinion of the New Mexico Court of Appeals,

CS ER ee ee App. 7

C. Order of the New Mexico Supreme Court Deny-

ing Petition for Writ of Certiorari, dated July 19,

APPT PI Tren eer ee eee ETT eT Eee App. 22

D. Order of the New Mexico Supreme Court

Denying Motion for Rehearing, dated August

Ea Ge sade reebseuN si asevecescersnes App. 23

iv

TABLE OF CONTENTS —- Continued

Page

E. Summary Judgment of the New Mexico District

Court for the County of Santa Fe, State of New

Mexico, dated February 25, 1992........... App.

Findings of Fact and Conclusions of Law by the

New Mexico District Court for the County of

Santa Fe, State of New Mexico, dated February

ya. ? baWiwusnvaee Cae aac eee App.

24

27

TABLE OF CASES AND AUTHORITIES

Page

CASEs:

Alarid v. Secretary, Dept. of Tax. & Rev., __ N.M.

__, 878 P.2d 341 (Ct. App. 1994)..... 1, 8, 10, 13, 16

Alarid v. Secretary of the New Mexico Dept. of Taxa-

tion and Revenue, __ N.M. __, 879 P2d 91

\ CRP 66 0c eho xs ound s naeeneeenk pee 1

Barker v. Kansas, ___ U.S. ___, 112 S.Ct. 1619, 118

Re es re ere ee 10, 13

Davis v. Michigan Dept. of Treasury, 489 U.S. 803,

109 S.Ct. 1500, 103 L.Ed.2d 891 (1989) ........ passim

Harper v. Virginia, ___ U.S. __, 113 S.Ct. 2510, 125

me a re eT re ore rae hare 10, 13

Massachusetts v. United States, 435 U.S. 444, 98

3-Ct. 1153, 9 LB 26 403 (1978). 20 ccc ccc cccccss 10

Memphis Bank & Trust Co. v. Garner, 459 U.S. 392,

103 S.Ct. 692, 74 L.Ed.2d 562 (1983)........ 11, 12, 14

North Dakota v. U.S., 495 U.S. 423, 110 S.Ct. 1986,

SOP RK GI (TI vn oe neces cttasacyesesenss 11

Pledger v. Bosnick, 306 Ark. 45, 811 S.W.2d 286,

(1991), cert. denied, __ U.S. ___, 113 S.Ct. 3034,

ym & es Be.) ne 6, 7, 8, 12, 13

Pledger v. Bosnick, 60 U.S.L.W. 3276 (U.S. Oct. 8,

ROE PS i a hae eak ohare ti44 Fea e 13

Pledger v. Bosnick, __ U.S. __, 113 S.Ct. 3034, 125

L.Ed.2d 721 (1993), reh’g denied, ___ U.S. ___, 114

vA. Zo, BES LBD 770 CIOS). oc ccs sccciccces 13

Phillips Chemical Co. v. Dumas Ind. Sch. Dist., 361

U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960)....... 15

vi

TABLE OF CASES AND AUTHORITIES - Continued

Page

South Carolina v. Baker, 485 U.S. 505, 108 S.Ct. 1355,

SP UTD BOE (ING koe 5 oc on esieccecacres 10, 11, 14

United States v. County of Fresno, 429 U.S. 452, 97

SEA. GOP, FD Ea Ge CRIs cre ccievesvienes cx 14

United States v. New Mexico, 455 U.S. 720, 102 S.Ct.

AS7D, 71 Lc ae DOW CRED 0556 cccsdeveweneaees 9, 14

Washington v. United States, 460 U.S. 536, 103 S.Ct.

TDG4, 7S LB BOG TIFG ls vcs cscccvsevexendevnds’ 9

MISCELLANEOUS:

y tk tame >. eee rerererrrrrrreTerrrrrr rT rere 1

NMSA 1978, § 7-2-3 (Repl. Pamp. 1988).............. 3

“A tax is imposed . . . upon the net income of

every resident individual . . . within this state.”

NMSA 1978, § 22-11-42(A) (Repl. Pamp. 1988)........ 3

“(Cjontributions and benefits mentioned in the

Educational Retirement Act shall . . . be exempt

from any state income tax.”

1990 N.M. Laws, ch. 49, §§ 17 and 24................ 3

OPINION BELOW

The opinion of the New Mexico Court of Appeals for

which review is sought is reported in Alarid v. Secretary,

Dept. of Tax. & Rev., __ N.M. __, 878 P.2d 341 (Ct. App.

1994), cert. denied, Alarid v. Secretary of the New Mexico

Dept. of Taxation and Revenue, __ N.M. __, 879 P.2d 91

(1994). The opinion of the New Mexico Court of Appeals

is attached as Appendix B. (App. 7). The Order of the

New Mexico Supreme Court denying the Petition for Writ

of Certiorari is attached as Appendix C. (App. 22).

+

JURISDICTION

The opinion of the New Mexico Court of Appeals is

dated June 7, 1994. Petitioners filed a timely Petition for

Writ of Certiorari with the New Mexico Supreme Court on

June 23, 1994. The Petition for Writ of Certiorari was

denied by the New Mexico Supreme Court on July 19,

1994. Alarid v. Secretary of the New Mexico Dept. of Taxation

and Revenue, __ N.M. __, 879 P.2d 91 (1994). Petitioners

then filed a timely Motion for Rehearing of Petition for

Writ of Certiorari on July 29, 1994. The New Mexico

Supreme Court denied the Motion for Rehearing by

Order entered August 17, 1994. The New Mexico

Supreme Court Order denying the Motion for Rehearing

is attached as Appendix D. (App. 23).

This Court’s jurisdiction is invoked under 28 U.S.C.

§ 1257 because the validity of certain state statutes impos-

ing a discriminatory income tax are drawn into question

on the ground that the statutes are repugnant to the

doctrine of intergovernmental tax immunity as fashioned

from the United States Constitution by this Court.

¢

STATEMENT OF THE CASE

A. Material Facts.

Petitioners are retired employees of the University of

California or the spouses of retired employees. The Uni-

versity of California is a public educational institution of

the State of California. For decades the University of

California has operated the Los Alamos National Labora-

tory (“LANL”) in Los Alamos, New Mexico. By succes-

sive contracts with the United States Department of

Energy and its predecessor agencies, the University of

California has performed scientific research, development

and educational services at LANL for the United States

government. The employee petitioners were previously

employed at LANL performing services under the terms

of these contracts. For ease of reference, these successive

contracts shall be referred to collectively as the “US/UC

Contract.”

Pursuant to the express provisions of the US/UC

Contract, and funding specifically provided by the

United States government, petitioners became eligible

upon their retirement from the University of California to

receive retirement income from the State of California

through the California Public Employees Retirement Sys-

tem (“Cal PERS”) the University of California Retirement

System (“UCRS”), or both. Cal PERS and UCRS are agen-

cies and instrumentalities of the State of California. These

state agencies are charged by California law with admin-

istering California’s public employment retirement sys-

tems.

The US/UC Contract requires the University of Cali-

fornia to pay the employer’s share of retirement contribi-

tions and administrative costs assessed by Cal PERS and

UCRS from a special segregated bank account in which

title to the funds remains in the United States govern-

ment until these retirement contributions and costs are

paid. The University of California acquires no right, title

or interest in these federal funds other than to pay allow-

able expenditures to Cal PERS and UCRS as specified in

the US/UC Contract.

Petitioners are New Mexico residents. From 1986

through 1989, petitioners received their retirement

income through one or both of the California public

employment retirement systems in the form of deferred

compensation. The State of New Mexico, through the

Secretary of the Department of Taxation and Revenue,

taxed this retirement income pursuant to NMSA 1978,

§ 7-2-3 (Repl. Pamp. 1988). That statute provided, in

pertinent part, that a tax was to be imposed “upon the net

income of every resident individual.”

During the same time period, the retirement income

paid to New Mexico residents who were formerly

employed by New Mexico state educational institutions,

but who were otherwise similarly situated to petitioners,

was entirely exempt from state income taxation. See

NMSA 1978, § 22-11-42(A) (Repl. Pamp. 1988). This

exemption was repealed effective January 1, 1990. 1990

N.M. Laws, ch. 49, §§ 17 and 24.

For purposes of the New Mexico income tax, the only

material difference between the retirement income of

petitioners, which was subject to New Mexico income tax,

and the retirement income of retirees of New Mexico’s

educational institutions, whose retirement income was

exempt from such taxation, was that petitioners received

their retirement income from the State of California.

B. Presentation Of Federal Questions In The Courts

Below

1. The Trial Court

In March 1991, petitioners filed a complaint in the

New Mexico district court for Santa Fe County seeking a

refund of the state income tax they had paid on their

retirement income for the years 1986 through 1989. Peti-

tioners based their claim on the ground that New Mex-

ico’s discriminatory income tax was imposed in violation

of the nondiscrimination component of the intergovern-

mental tax immunity doctrine (“ITI doctrine”). This con-

stitutional doctrine prohibits taxation by a sovereign

where the tax operates to discriminate against another

sovereign or those with whom it deals, unless the tax is

justified by significant differences between the classes of

taxpayers. See, Davis v. Michigan Dept. of Treasury, 489 U.S.

803, 812-814, 109 S.Ct. 1500, 1506-1508, 103 L.Ed.2d 891

(1989). The justification may not rest, as here, solely upon

the source of the income being taxed. Id. at 815.

Petitioners claimed that the nondiscrimination com-

ponent of the ITI doctrine was implicated in two funda-

mental respects under the facts of this case:

1. The New Mexico income tax unlawfully discrimi-

nated against those who dealt with the sovereign state of

California; and/or

2. The New Mexico income tax unlawfully discrimi-

nated against those who dealt with the United States

government.

The parties submitted these constitutional issues for

decision by the trial court on cross-motions for summary

judgment on the basis of stipulated material facts. The

trial court found in favor of petitioners, concluding that

the New Mexico income tax violated the ITI doctrine in

both of the foregoing respects. The Judgment of the trial

court is attached as Appendix E. (App. 24). The trial

court’s Findings Of Fact And Conclusions Of Law are

attached as Appendix F. (App. 27).

Citing this Court’s decision in Davis v. Michigan Dept.

of Treasury, supra, the trial court held that New Mexico’s

discriminatory income tax operated to reduce New Mex-

ico’s Own employment costs at the expense of another

sovereign government and was the type of discriminatory

legislation that the ITI doctrine was intended to bar.

Appendix F, pages App. 34-35. In the case at bar, peti-

tioners’ retirement income had been paid to the peti-

tioners by the State of California through California’s

public employment retirement systems. Relying upon the

holding and rationale of Davis, the trial court concluded

that the discriminatory taxation of petitioners’ retirement

income operated to discriminate against those who dealt

with the State of California in violation of the ITI doc-

trine. Appendix F, page App. 35, {s 11-12.

ic ie

The trial court held that neither the federal govern-

ment nor a sovereign state can infringe upon the tradi-

tional governmental functions of another sovereign state

by the imposition of a discriminatory tax. Appendix F, at

pages App. 33-34, { 5. The trial court explained:

Because the injurious effects of a discriminatory

tax imposed upon a sovereign state, or those

with whom it deals, is exactly the same irrespec-

tive of whether the tax is imposed by the federal

government or by a sister state, the purpose of

the intergovernmental tax immunity doctrine

necessarily applies . . . not only to the taxing

relationship between the sovereign states and

the federal government, but among the sovereign

states as well.

App. 33-34, I 5 (emphasis added).

In holding that the ITI doctrine applies among the

several states, the trial court also relied upon the decision

in Pledger v. Bosnick, 306 Ark. 45, 811 S.W.2d 286, 291-292

(1991), cert. denied, __ U.S. __, 113 S.Ct. 3034, 125

L.Ed.2d 721 (1993). The Arkansas Supreme Court in

Pledger held that a discriminatory state income tax

exemption in favor of retired employees of the state of

Arkansas violated the ITI doctrine with respect to nonex-

empt Arkansas taxpayers who received their retirement

income from the governmental agencies of other states.

Pledger, 811 S.W.2d at 291-292. The Court in Pledger drew

support for its holding that the ITI doctrine “applies

between the states and the federal government and

among the states themselves,” from this Court's state-

ment in Davis that the ITI doctrine forbids the imposition

of a heavier tax burden on those who deal with one

sovereign than is imposed on those who deal with the

other. Pledger, 811 S.W.2d at 291.

Besides holding that the ITI doctrine applies among

the several states, the trial court in the case at bar rested

its decision on an additional and alternative constitu-

tional ground. The trial court also held that the New

Mexico income tax impermissibly discriminated against

those who dealt with the United States government.

Appendix F, pages App. 34-35, {Is 8-10.

The trial court reasoned that because petitioners’

retirement income had been directly funded by the

United States treasury through a special segregated bank

account under the terms of the US/UC Contract, the

United States treasury sustained a direct economic bur-

den by New Mexico’s discriminatory income tax, just as

the federal treasury had with respect to the Michigan tax

that was struck down by this Court in Davis v. Michigan

Dept. of Treasury, supra. Appendix F, pages App. 34-35,

{ 8. Because New Mexico’s tax, like the Michigan tax,

operated in a discriminatory fashion to reduce New Mex-

ico’s employment costs at the expense of the federal

treasury, the trial court held the New Mexico tax to be

violative of the nondiscrimination component of the ITI

doctrine on this ground as well. Appendix F, page App.

35, { 10.

2. The Decision Of The Court Of Appeals

The New Mexico Court of Appeals reversed the judg-

ment of the trial court on two grounds. First, while

acknowledging that New Mexico’s income tax discrimi-

nated against petitioners solely because the source of

their retirement income was another sovereign state, the

Court of Appeals nevertheless concluded that the “ITI

doctrine has no applicability in the context of state-to-

state relations.” Alarid v. Secretary, Dept. of Tax. & Rev., ___

N.M. __, 878 P.2d 341, 347 (Ct. App. 1994).

In resolving this constitutional question against peti-

tioners, the Court of Appeals observed that the ITI doc-

trine is based on the need to protect each sovereign’s

governmental operations from undue interference by

another sovereign. The court concluded that since the

power to tax is only coextensive with a sovereign’s

boundaries, “New Mexico has no ability to affect Califor-

nia’s governmental functions by reaching out to tax those

functions or employees exerting those functions in Cali-

fornia. Thus, the need for each state to protect itself from

undue interference from injurious taxes by the other is

absent.” Id. at 347.

The decision of the Court of Appeals to limit applica-

tion of the ITI doctrine to federal-state relations was

influenced by “the fact that no federal case has applied

intergovernmental tax immunity between two states.” Id.

at 348. Emphasizing the absence of any federal decisions

on this constitutional question, the Court of Appeals

determined that the Arkansas Supreme Court decision in

Pledger was not persuasive because that court relied upon

decisions of the United States Supreme Court which dealt

solely with the application of the ITI doctrine to overlap-

ping (federal-state) sovereigns, and not with the taxation

by one state of another or those with whom it deals. Id. at

348.

—

The Court of Appeals also rejected petitioners’ sec-

ond constitutional claim that New Mexico’s income tax

unlawfully discriminated against those who dealt with

the United States government. In so doing, the court

applied the “legal incidence” principle of the ITI doctrine,

articulated in United States v. New Mexico, 455 U.S. 720,

102 S.Ct. 1373, 71 L.Ed.2d 580 (1982),1 as opposed to the

“nondiscrimination” principle of the ITI doctrine applied

in Davis v. Michigan Dept. of Treasury, supra.?

Finally, in supporting its decision that the New Mex-

ico income tax did not violate the ITI doctrine, the Court

of Appeals concluded that the New Mexico tax was not

impermissibly discriminatory in that it treated petitioners

no differently than the vast majority of other New Mexico

1 The Constitution grants immunity from taxation under

the “legal incidence” principle where the legal incidence of the

tax falls directly upon another sovereign government or an

instrumentality of that government. United States v. New Mexico,

455 U.S. at 735. Under this principle, if the tax is not imposed

directly upon another sovereign government there is no immu-

nity from taxation even though the economic burden of the tax

may ultimately be passed on to that government. Id. at 735. This

Court has expressly cautioned, however, that the “legal inci-

dence” principle does not apply if the tax is discriminatory in

nature. Id. at 735, n.11 (“It remains true, of course, that state

taxes on contractors are constitutionally invalid if they discrimi-

nate against the Federal Government.”).

2 Under the “nondiscrimination” principle of the ITI doc-

trine, tax immunity is not dependent upon the “legal incidence”

of the tax in question, but rather, the controlling issue is whether

the tax is discriminatory with respect to the economic burdens

that result. Washington v. United States, 460 U.S. 536, 544, 103

S.Ct. 1344, 1349, 75 L.Ed.2d 264 (1983); Davis v. Michigan Dept. of

Treasury, 489 U.S. at 815, n.4.

10

citizens whose retirement incomes were also subject to

the tax. Alarid, 878 P.2d at 347.

4

REASONS FOR ALLOWING THE WRIT

While this Court has recently addressed various

aspects of the intergovernmental tax immunity doctrine,’

no federal court has yet to examine whether intergovern-

mental tax immunity applies as between the several

states so as to invalidate a state income tax that discrimi-

nates against another sovereign state or those with whom

it deals. This question is squarely presented for decision

in this case.

The sources of state and federal tax immunity are

distinct, the former arising from the constitutional struc-

ture and a concern for protecting state sovereignty, while

the latter derives from the Supremacy Clause. South Caro-

lina v. Baker, 485 U.S. 505, 518-519, n.11, 108 S.Ct. 1355,

1364, n.11, 99 L.Ed.2d 592 (1988). It is implicit in our

governmental structure that the Constitution presupposes

and guarantees the continued existence of the States as

governmental bodies performing traditional sovereign

functions. Massachusetts v. United States, 435 U.S. 444, 455,

3 Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct.

1500, 103 L.Ed.2d 891 (1989) (a state income tax violates the ITI

doctrine where it discriminates against retirees of the federal

government); Barker v. Kansas, U.S. __, 112 S.Ct. 1619, 118

L.Ed.2d 243 (1992) (ITI doctrine prohibits a state income tax that

discriminates against federal military retirees); Harper v. Vir-

ginia, __ U.S. __, 113 S.Ct. 2510, 125 L.Ed.2d 74 (1993) (the

decision in Davis applies retroactively).

——

a

ERE ‘

11

98 S.Ct. 1153, 1161, 55 L.Ed.2d 403 (1978). To safeguard

this aspect of the constitutional plan, the modern inter-

governmental tax immunity decisions of this Court have

fashioned a consistent and reciprocal rule of immunity

which bars taxes by one sovereign that discriminate

against another sovereign or those with whom it deals?.

Davis v. Michigan Dept. of Treasury, 489 U.S. at 811; South

Carolina v. Baker, 485 U.S. at 523.

This nondiscrimination principle recognizes that the

best safeguard against the threat of excessive taxation of

another sovereign government, and the most judicially

manageable, is the requirement that a government tax in

a nondiscriminatory fashion, since the threat of unduly

interfering with another sovereign’s governmental func-

tions can only be realized if the taxing government is

willing to impose the same taxes upon itself. South Caro-

lina v. Baker, 485 U.S. at 525, n.15.

Many of the contours of the ITI doctrine are settled.

However, what remains unanswered in federal jurispru-

dence is whether the scope of this constitutional safe-

guard extends to a state tax that discriminates against

another sovereign state or those with whom it deals.°

4 This Court has recognized that a discriminatory tax on one

who deals with a sovereign government has as much potential to

interfere with governmental functions as a tax on the govern-

ment itself, and the Court’s decisions have therefore required

that taxes of this type be imposed equally on similarly situated

constituents of the taxing sovereign. See North Dakota v. U.S., 495

U.S. 423, 438, 110 S.Ct. 1986, 1996, 109 L.Ed.2d 420 (1990).

5 It should be noted that this question was implicated but

never reached in Memphis Bank & Trust Co. v. Garner, 459 U.S.

392, 103 S.Ct. 692, 74 L.Ed.2d 562 (1983). At issue in that case

was the validity under the ITI doctrine of a discriminatory bank

12

Clearly, New Mexico’s discriminatory income tax

would be unconstitutional if applied to retirees of the

federal government, because the tax would operate to

reduce New Mexico’s employment costs at the expense of

the federal treasury. Davis v. Michigan, 489 U.S. at 815,

n.4. Yet, New Mexico’s discriminatory income tax has the

very same economic impact on the State of California

when the tax is applied to retirees of that state’s public

employment retirement system. Cf., Davis v. Michigan, 489

U.S. at 815, n.4. Under the Constitution, is a sovereign

state entitled to a lesser safeguard from another state’s

discriminatory tax than is the federal government? No

federal court has addressed the issue, and of the states

passing on the question, only New Mexico so holds.

The decisions of the only two state courts which have

ruled on this point of constitutional law are in conflict.

The Arkansas Supreme Court in striking down Arkansas’

discriminatory income tax as applied to the retirement

income of civil servant retirees of other sovereign states

held that the ITI doctrine applies between the states.

Pledger v. Bosnick, 306 Ark. 45, 811 S.W.2d 286, 291-292

(1991), cert. denied, __ U.S. __, 113 S.Ct. 3034, 125

tax imposed by the state of Tennessee upon interest received by

banks on the obligations of the United States, as well as interest

on bonds and other obligations of States other than Tennessee. 459

U.S. at 394. Whether the ITI doctrine applies among the several

states under these circumstances was never addressed in Mem-

phis because of a stipulation that if the interest earned on federal

obligations were excluded from the computation of the tax

obligation of the appellant bank, no tax would be due. Id. at 395.

The discriminatory state tax was held by this Court to be invalid

with respect to the federal obligations. Id. at 398-399.

13

L.Ed.2d 721 (1993). The New Mexico Court of Appeals in

the case at bar has rejected the holding in Pledger, ruling

instead that the ITI doctrine has no application in state-

to-state relations. Alarid v. Secretary, Dept. of Tax. & Rev.,

878 P.2d at 347.

Because of the absence of federal case law on this

constitutional issue, and in light of the conflicting deci-

sions by two state courts of last resort, this Court should

settle this important question of federal law.

The decision of the New Mexico Court of Appeals

also conflicts with decisions of this Court on the question

of whether the New Mexico income tax operates to dis-

criminate against those who deal with the United States

government. The Court of Appeals confuses two distinct

aspects of the ITI doctrine, the “legal incidence” princi-

ple, and the “nondiscrimination” principle. This Court

has repeatedly contrasted these two concepts in applying

6 The question whether the ITI Doctrine applies between

the states was presented, among other issues, in the Petition for

Writ of Certiorari filed in this Court on September 3, 1991, in

Pledger v. Bosnick, supra. See, Pledger v. Bosnick, 60 U.S.L.W. 3276

(U.S. Oct. 8, 1991) No. 91-375. The petition remained pending in

this Court for nearly two years while two other aspects of the

ITI doctrine, which were likewise raised in Pledger, were

decided by this Court in related cases. See, Barker v. Kansas, 112

S.Ct. at 1622, n.3; Harper v. Virginia, 113 S.Ct. at 2515. The Court

later denied the Petition for Writ of Certiorari on the remaining

question in Pledger, whether the ITI doctrine applies between

the states. Pledger v. Bosnick, __. U.S. __, 113 S.Ct. 3034, 125

L.Ed.2d 721 (1993), reh’g denied, __ U.S. __, 114 S.Ct. 25, 125

L.Ed.2d 776 (1993).

14

the ITI doctrine. In United States v. New Mexico, 455 U.S. at

735, n.11, this Court specifically advised:

With the abandonment of the notion that the

economic — as opposed to the legal — incidence

of the tax is relevant, it becomes difficult to

maintain that federal tax immunity is designed

to insulate federal operations from the effects of

state taxation. It remains true, of course, that state

taxes on contractors are constitutionally invalid if

they discriminate against the Federal Govern-

ment. ...

(Emphasis added).

The decisions of this Court which have shaped the

“non-discrimination” principle unequivocally establish

that where the economic burden of a discriminatory tax

ultimately falls upon another sovereign government, the

tax violates the ITI doctrine notwithstanding the fact that

the legal incidence of the tax does not fall upon the

government itself. See, e.g., Memphis Bank & Trust Co. v.

Garner, 459 U.S. at 397 (where the economic but not the

legal incidence of the tax falls on the Federal Govern-

ment, such a tax generally does not violate the constitu-

tional immunity if it does not discriminate against those

with whom the Federal Government deals); United States

v. County of Fresno, 429 U.S. 452, 463, 97 S.Ct. 699, 705, 50

L.Ed.2d 683 (1977) (the economic burden on a federal

function of a state tax imposed on those who deal with

the Federal Government does not render the tax uncon-

stitutional as long as the tax is imposed non-

discriminatorily on those who deal with the state

government); South Carolina v. Baker, 485 U.S. at 523

(states can tax private parties doing business with the

15

federal government even though the financial burden

falls on the United States so long as the tax does not

discriminate against the United States or those with

whom it deals); Phillips Chemical Co. v. Dumas Ind. Sch.

Dist., 361 U.S. 376, 385, 80 S.Ct. 474, 480, 4 L.Ed.2d 384

(1960) (“it does not seem too much to require that the

State treat those who deal with the Government as well as

it treats those with whom it deals itself.”).

The controlling factor relied upon by this Court in

Davis in striking down Michigan’s discriminatory income

tax was that the United States government bore the eco-

nomic burden of Michigan’s effort to reduce its employ-

ment cost at the expense of the federal treasury, even

though the incidence of the Michigan tax did not fall

directly upon the federal government itself. Davis, 489

U.S. at 815, n.4. The same reasoning applies to the undis-

puted material facts in this case.

The cost of petitioners’ retirement benefits are paid

directly from the federal treasury pursuant to the terms

of the US/UC Contract. New Mexico’s discriminatory

income tax, like the discriminatory tax in Davis, operates

to reduce the State of New Mexico’s employment costs at

the expense of the federal treasury. This Court’s analysis

in Davis clearly illustrates that subsidization of this type

by one sovereign at the expense of another is precluded

by the “nondiscrimination” principle of the ITI doctrine,

irrespective of where the “legal incidence” of the tax lies.

Davis, 489 U.S. at 815, n.4. By relying on the “legal inci-

dence” principle as the basis for its holding, the decision

16

of the New Mexico Court of Appeals conflicts irreconcila-

bly with this Court’s opinion in Davis.”

The Court of Appeals also concluded that the New

Mexico income tax did not violate the ITI doctrine

because it treated petitioners no differently than the vast

majority of other New Mexico citizens whose retirement

incomes were also subject to the tax. Alarid, 878 P.2d at

347 (“[t]he fact that the State has chosen to exempt from

state tax one limited class of state retirees does not mean

Plaintiffs are being illegally discriminated against.”).

This very argument was advanced by Justice Stevens

in his sole dissenting opinion in Davis v. Michigan Dept. of

Treasury, 489 U.S. at 823-824 (Stevens, J. dissenting). The

income tax in Davis likewise did not discriminate against

the vast majority of Michigan residents. Nevertheless, the

majority opinion in Davis, on the basis of prior precedent,

found the tax discriminatory, invalidated the Michigan

tax and specifically rejected Justice Steven’s dissenting

position. Davis, 489 U.S. at 815, n.4. Accordingly, the New

Mexico Court of Appeals has based its decision upon a

minority position that this Court has expressly refused to

adopt.

7 The New Mexico Court of Appeals distinguished Davis

“based on the ‘incidence’ of the tax.” Alarid, 878 P.2d at 345.

However, the “incidence” of the tax oe in Davis was

precisely the same as in the case at bar. In both situations the

incidence of the tax fell upon the retirement income of the

taxpayer-retirees, and not upon the governmental entity paying

the retirement income.

Paes meant ee

17

CONCLUSION

This case presents two important constitutional ques-

tions of first impression in the federal courts. No federal

court has determined whether the ITI doctrine applies

between the several states. State courts of last resort

disagree on this issue. This Court should settle this con-

stitutional question.

The second question involves the proper application

of two distinct and contrasting components of the ITI

doctrine, the “legal incidence” rule and the “non-

discrimination” rule. The New Mexico Court of Appeals

has decided that the former applies to a discriminatory tax

contrary to a long line of decisions from this Court which

deem the incidence of the tax immaterial where the tax is

discriminatory in nature. This conflict, too, should be

resolved by this Court.

18

PRAYER

Petitioners respectfully ask that the Petition for Writ

of Certiorari directed to the New Mexico Court of Appeals

be granted and that the decision of the New Mexico

Court of Appeals be reviewed by this Court.

Respectfully submitted,

JERRY WERTHEIM ANDREW G. SCHULTZ

Jones, SNEAD, WERTHEIM, Ropey, DICKASON, SLOAN,

RODRIGUEZ & AKIN & Ross, P.A.

WENTWoRTH, P.A. Post Office Box 1888

Post Office Box 2228 Albuquerque, New Mexico

Santa Fe, New Mexico 87103-1888

87504-2228 (505) 765-5900

(505) 982-0011

Counsel of Record

Counsel for Petitioners

ARTHUR L. JARAMILLO

Jones, SNEAD, WERTHEIM,

RODRIGUEZ &

WENtTWoRTH, P.A.

Post Office Box 2228

Santa Fe, New Mexico

87504-2228

(505) 982-0011

Counsel for Petitioners

ee a ee

App. 1

APPENDIX A

PLAINTIFFS IN

Alarid v. Secretary of New Mexico

Department of Taxation & Revenue

Barbara H. Aamodt

Rodney L. Aamodt

Elizabeth A. Aiello

William P. Aiello

Antonia M. Alarid

Benjamin B. Alarid

Fidel Alarid

Loyola O. Alarid

Janet L. Albertson

Robert D. Albertson

Elaine F. Alei

Mohammed Alei, Jr.

Georgia L. Allen

Ida Mae Antos

Lawrence Antos

Catherine I. Apprill

Gilbert P. Apprill

Harold V. Argo

Helen M. Armenis

Nicholas P. Armenis

George P. Arnold

: Irene R. Arnold

| Larned B. Asprey

Margaret W. Asprey

| Lester M. Baggett

Sara W. Baggett

Melvena Bailey

Milton G. Bailey

Jean L. Balagna

John P. Balagna

Janice H. Barbo

Paul E. Barbo

David M. Barton

Lydia P. Barton

Arthur J. Beaumont

Helen R. Beaumont

Marilyn B. Bendt

Philip J. Bendt

Karl S. Bergstresser

May H. Bergstresser

James P. Bertino

Elizabeth F. Best

George H. Best

Carl W. Bjorklund

M. P. Bjorklund

Albert W. Blackstock

Doris D. Blackstock

Irene U. Boone

Zenas W. Boone

James J. Bramble

Shirley A. Bramble

Alice H. Brasfield

William D. Brasfield

Charles I. Browne

Barbara N. Buchen

John F. Buchen

Carl W. Buckland, Jr.

Marie E. Buckland

Jose M. Bustos

Lois M. Bustos

Marilyn F. Caird

Robert S. Caird

Arthur W. Campbell

Jean M. Campbell

Marie Campbell

Patrick J. Campbell

Flora J. Chaney

Melvin C. Chaney

Margaret Chavez

Pascual Chavez

Eldon L. Christensen

Inez E. Christensen

Marion L. Clancy

Michael L. Clancy

Anna Marie Clifton

David G. Clifton

Don O. Coffin

Lois M. Coffin

Concha B. Collier

Lionel P. Collier

Ina C. Coulter

James R. Coulter

Georgia P. Courtney

Geraldine H. Crowe

Warren E. Crowe

Jean L. Dabney

Winston L. Dabney

Mary A. David

Walter R. David

Shirley G. Davis

Barbara H. Desilets

James L. Desilets

Prescilla R. Diaz

Lena L. Diehl

Glen J. Dill

Jean B. Dill

Laura M. Dings

Richard G. Dings

Joseph R. Dion

App. 2

Selma R. Dion

Glessie A. Drake

Robert W. Drake

Marjorie D. Dresback

Shirley N. Dresback

Beatrice M. Dropesky

Bruce J. Dropesky

Colette W. Dugan

Paul M. Dugan

Beatrice L. Dunahugh

Kenneth J. Dunahugh

Bennie E. Duran

Helen W. Duran

Doris J. Elliott

Nellie R. Elliott

Reed O. Elliott

Robert J. Elliott

Bernard C. Eutsler

Otis A. Farmer

Pauline M. Farmer

Martha M. Faussone

Roscoe A. Faussone

Jake W. Foglesong

Mildred K. Foglesong

George P. Ford

Mary Ann Ford

Dorcile R. Fowler

Eric B. Fowler

Charlyne Fox

Lillian M. Fox

William A. Fox

William E. Fox

Darol Froman

Isabelle Froman

Paul M. Giles

Ruth I. Giles

App. 3

Ila A. Glore

J. Paul Glore

Clara B. Greco

Edward R. Grilly

Juliamarie A. Grilly

Milton L. Grissom, Jr.

Vida B. Grissom

Barbara T. Gritsko

Edward Gritsko

Fred A. Gross, Jr.

Susan K. Gross

George M. Grover

Guadalupe O. Guthrie

Kenneth H. Guthrie

Lester S. Hackenberry

Vivian H. Hackenberry

Lucille Haley

Bonnie C. Hansen

Calvin F. Hansen

Jeanette J. Hansen

Wilfred G. Hansen

B. J. Harper

Charles W. Harper

Patty L. Harper

Paul E. Harper

Lynn N. Hasenbank

Catherine H. Hayes

David A. Heimbach

Pauline P. Heimbach

O. H. Heinze

William G. Heinze

Arthur Hemmindinger

Margaret R. Hemmindinger

Harold Hessing

Lloyd A. Hewitt

Mary B. Hewitt

Richard D. Hiebert

Emily M. Hill

James H. Hill

Lavere A. Hiteman

Maria A. Hiteman

Edward W. Hones, Jr.

Virginia H. Hones

Alice M. Horpedahl

LeRoy C. Horpedahl

Jane R. Howes

Robert I. Howes

Elmer J. Huber

Marilyn J. Huber

Alvin D. Hues

Evelyn Hues

Harold M. Ide

Rose A. Ide

Betty S. Jackson

Jasper A. Jackson

Carl Johnson

George L. Johnson

Irving V. Johnson

Yvonne V. Johnson

Lawrence E. Jones

Nellie C. Jones

Edward T. Jurney

June R. Jurney

Hugh J. Karr

Mae F. Karr

Chester Kazek

Margaret Kazek

Donald J. Keigher

Mary L. Keigher

Helen S. Keller

William E. Keller

Robert N. Kennedy

App. 4

Shirley J. Kennedy

Elizabeth King

L. D. Percival King

Gordon W. Knobeloch

Jacqueline B. Knobeloch

Andrew M. Koonce

Billie R. Koonce

Barbara A. Krohn

Robert D. Krohn

Ethel Louise Krohn as

Personal Representative

of the Estate of

Roy Krohn

John E. LaBerge

Viola D. LaBerge

John D. LaMotte

Marguerite LaMotte

Ellen LaPlant

Joseph A. Leary

Theresa Leary

Glen H. Livermore

Helen Livermore

N. M. Lizut

William J. Lizut

Angela Lopez

Fedelina V. Lopez

Felipe M. Lopez

Reymundo Lopez

Ascencion Lujan

Augustine Lujan

Carolina M. Lujan

Ismael E. Lujan

Donald P. MacMillan

Martha C. MacMillan

Antonio H. Maes

Katherine A. Maraman

William J. Maraman

Bernie Martinez

Gilbert J. Martinez

Henry J. Martinez

Jesus M. Martinez

Jose A. Martinez

Jose I. Martinez

Maria V. Martinez

Vera G. Martinez

Burt J. McCloud

L. E. McCloud

Donald D. McCormick

Margery J. McCormick

Dean E. McMillan

Maurine McMillan

Harriet N. McQueen

John H. McQueen

Barbara J. Melton

George F. Melton

John D. Mench

Vera Mench

Juliana H. Merryman

Roy G. Merryman

Rene S. Mills

Robert L. Mills

Antonio J. Montoya

Aurora Montoya

James N. Morgan

Sammie Morgan

Willard C. Moyer

Lawrence J. Mullins

Ruth G. Mullins

Ruby I. Murry

Yates E. Murry

Manuel J. Naranjo

Douglas Nash

Leona Nash

Ruth I. Barnes-O’Brien

John A. O’Rourke

Patricia R. O’Rourke

Anita Osborn

Lewis Osborn

Hollis J. Page

Leslie P. Page

Eileen J. Panowski

John B. Panowski

H. Milton Peek

Mary E. Penneman

Robert A. Penneman

Carl E. Peterson

Ruby C. Peterson

Mary R. Pettit on behalf

of Roland A. Pettit

Charlotte E. Pfaff

Daniel Pfaff

Rene J. Prestwood

Sara D. Prestwood

Margaret M. Putnam

Thomas M. Putnam

Marie C. Rabideau

Sherman W. Rabideau

Marion L. Rector

Marjorie R. Rector

Sue B. Rickerson

Marilyn J. Riechman

Norman H. Riechman

Eugene H. Roach

Laura B. Roach

Dana L. Rohr

Herman L. Rohr

Annie B. Romero

Emily Romero

Jose B. Romero

App. 5

William F. Romero

Maria T. Roybal

Pedro Roybal ~

Robert G. Rupprecht

Virginia Rupprecht

Harlow W. Russ

Nida E. Russ

Ann T. Salgado

Peter G. Salgado

Alice H. Salmi

Alice H. Salmi on behalf

of Ernest W. Salmi

Consuelo R. Sandoval

Fred R. Sandoval

David S. Shaffer

Judith L. Shaffer

Spencer S. Shannon, Jr.

Everett E. Shaw

Adeline B. Smith

Alan D. Smith as Personal

Representative of the

Estate of Helen L. Smith

Alex L. Smith

Dennis K. Smith as

Personal Representative

of the Estate of

Helen L. Smith

Frances Smith

Maynard E. Smith

Frankie J. Southard

Marcella Southard

John F. Spalding

Patricia H. Spalding

Edgar R. Stein

Jeanne K. Stein

David W. Steinhaus

Jean C. Steinhaus

App. 6

Robert D. Stelzer

Viola Stelzer

Georgia M. Stenholtz

Roy J. Stenholtz

Fred L. Stewart

Joann B. Stoddard

Stephen D. Stoddard

Bernice M. Storm on behalf

of Ellery Storm

Elizabeth M. Sullivan

William H. Sullivan

Stephanie M. Sydoriak

Stephen G. Sydoriak

Carl F. Talafous

Nelda B. Talafous

John F. Taylor

Louise S. Taylor

Estate of Edith S. Tenney

Linas L. Thorn

Patricia A. Messimer-Thorn

Gloria Travis

James Travis

Marilyn W. Treiman

Isabelle G. Trujillo

Jacobo O. Trujillo

Mary J. Trujillo

Theodore T. Trujillo

Lloyd H. Ulery

Thelma J. Ulery

Manuel J. Urizar

Barbara Van Buskirk

William J. Van Buskirk

Angie T. Van de Valde

Edmund L. Van de Valde

Marion E. Van Gemert

Robert J. Van Gemert

Alvin D. Van Vessem

Helen A. Van Vessem

Douglas Venable

Douglas Venable on behalf

of Jessie A. Venable

Mary Pettit Venable

Tranquilino Vigil

Edward A. Voorhees

Jeanette B. Voorhees

Georgann L. Waterbury

Glenn R. Waterbury

Joseph L. Weber

Juanita C. Weber

Annette Weintraub

Larry Weintraub

Charles R. Wherritt

Eleanore Wherritt

Arthur Williams

Barbara Williams

Edith L. Williams

Herbert T. Williams

George M. Wing

Louise W. Zeigler

Royal K. Zeigler

Vernon L. Zeigner

App. 7

APPENDIX B

IN THE COURT OF APPEALS OF THE

STATE OF NEW MEXICO

BENJAMIN B. ALARID, et al.,

Plaintiffs-Appellees,

VS. No. 13,887

SECRETARY OF THE NEW eee

MEXICO DEPARTMENT OF June 7, )

TAXATION AND REVENUE,

Defendant-Appellant.

APPEAL FROM THE DISTRICT COURT OF SANTA FE

COUNTY JOE CRUZ CASTELLANO, JR., District Judge

JERRY WERTHEIM

ARTURO L. JARAMILLO

JONES, SNEAD, WERTHEIM, RODRIGUEZ

& WENTWORTH, P.A.

Santa Fe, New Mexico

Attorneys for Plaintiffs-Appellees

TOM UDALL

Attorney General

FRANK D. KATZ

MARGARET B. ALCOCK

Special Assistant Attorneys General

Department of Taxation and Revenue

Santa Fe, New Mexico

Attorneys for Defendant-Appellant

OPINION

FLORES, Judge.

This appeal deals with the validity of a state income

tax on retirement benefits. The New Mexico Department

App. 8

of Taxation and Revenue (the Department), appeals from

the order granting certain taxpayers (Plaintiffs) summary

judgment and ordering the Department to refund the

New Mexico state income tax which Plaintiffs paid on

their retirement incomes. On appeal, the Department

raises the following issues: (1) whether an income tax

exemption granted to retirees of New Mexico state educa-

tional institutions but not extended to retirees of Califor-

nia state educational institutions discriminates against

the federal government in violation of the doctrine of

intergovernmental tax immunity (ITI doctrine) when the

federal government funds the retirement accounts of the

California state educational institution retirees; (2)

whether the same exemption discriminates against the

sovereign State of California in violation of the ITI doc-

trine; (3) whether the trial court’s decision should be

given retroactive effect; and (4) whether the trial court

abused its discretion in awarding Plaintiffs certain costs.

We reverse the trial court on issues one and two and

accordingly do not address issue three. Furthermore, as

to issue four, since we reverse the grant of summary

judgment in favor of Plaintiffs, they are not entitled to

their costs below. See NMSA 1978, § 39-3-30 (Repl. Pamp.

1991).

BACKGROUND

Plaintiffs are retired employees of the University of

California or spouses of such employees. The University

of California is a public educational institution of the

State of California and operates Los Alamos National

App. 9

Laboratory through a contract with the federal govern-

ment. Upon their retirement from the laboratory, Plain-

tiffs became eligible to receive retirement income from

the State of California under the California Public

Employees Retirement System (CalPERS), the University

of California Retirement System (UCRS), or both. Pur-

suant to its contract with the federal government, the

University of California is required to pay the employer's

share of retirement contributions and administrative costs

assessed by CalPERS and UCRS. The University of Calli-

fornia pays these retirement costs from a special segre-

gated bank account in which title to the funds remains in

the federal government until payment of these retirement

costs is made. The University of California attains no

right, title, or interest in these federal funds other than to

make allowable expenditures as specified in the contract.

From 1986 through 1989, Plaintiffs, who are New

Mexico residents, received their retirement income

through one or both of the California retirement plans in

the form of deferred compensation. The State of New

Mexico, through the Department, taxed this income pur-

suant to NMSA 1978, Section 7-2-3 (Repl. Pamp. 1988).

That statute provided, in pertinent part, that a tax was to

be imposed “upon the net income of every resident indi-

vidual.” Id.

During the same time period, the retirement income

of other New Mexico residents formerly employed by

New Mexico state educational institutions was exempt

from state taxation. See generally NMSA 1978,

§ 22-11-42(A) (Cum. Supp. 1988). The exemption was

repealed effective January 1, 1990. See 1990 N.M. Laws,

ch. 49, §§ 17, 24.

App. 10

In March 1991, Plaintiffs filed a complaint seeking a

refund of the New Mexico income tax which they paid on

their retirement income during the calendar years of 1986

through 1989. Plaintiffs’ position was that: (1) the New

Mexico income tax exemption discriminated against them

based on their dealings with the federal government; and

(2) the tax exemption also discriminated against them

based on their dealings with the State of California.

Plaintiffs filed a motion for summary judgment

claiming that the income tax imposed on their retirement

benefits violated the ITI doctrine and, therefore, they

were entitled to a refund of those taxes. In a cross-motion

for summary judgment, the Department argued that the

ITI doctrine was not applicable since the doctrine was

concerned solely with relations between a state govern-

ment and the federal government and the basis for deter-

mining who was eligible for the New Mexico tax

exemption had nothing to do with the taxpayers’ relation-

ship to the federal government.

The trial court found that there were no genuine

issues of material fact and concluded that Plaintiffs were

entitled to summary judgment asa matter of law because

the New Mexico income tax, as applied to Plaintiffs’

retirement income, violated the ITI doctrine. The trial

court ordered the Department to determine the refund

amounts due Plaintiffs for the years 1986 through 1989

and to distribute such amounts accordingly.

DISCUSSION

The Department timely appeals and seeks reversal of

the grant of summary judgment to Plaintiffs. Summary

App. 11

judgment “is proper only when there are no genuine

issues of material fact and the moving party is entitled to

judgment as a matter of law[.]” Hyden v. Law Firm of

McCormick, Forbes, Caraway & Tabor, 115 N.M. 159, 163,

848 P.2d 1086, 1090 (Ct. App.), cert. denied, 115 N.M. 60,

846 P.2d 1069 (1993). It is a remedy which should be

applied with great caution. Id.

The trial court granted Plaintiffs summary judgment

on the basis that the taxation of Plaintiffs’ retirement

income operates to discriminate against those who deal

with the federal government and the sovereign State of

California in violation of the ITI doctrine. The ITI doc-

trine is based on the need to protect one sovereign’s

governmental operations from undue interference by

another sovereign. See Davis v. Michigan Dep't of Treasury,

489 U.S. 803, 814 (1989). In general, the ITI doctrine

prohibits taxes that are imposed directly on one sovereign

by another or that discriminate against a sovereign or

those with whom the sovereign deals. Id. at 811.

The ITI doctrine was developed early in the history

of the Republic “to help weld our federal system into a

viable Nation, by providing a safeguard for federal oper-

ations against hampering or crippling state and local

taxation.” Paul J. Hartman, Federal Limitations on State and

Local Taxation § 6:1, at 220 (1981). From its genesis it was

recognized that the pivotal point in the application of the

ITI doctrine was a question of supremacy within the

context of federalism. David M. Richardson, Federal

Income Taxation of States, 19 Stetson L. Rev. 411, 414-15

(1990). Chief Justice Marshall eloquently and elaborately

set forth the rationale of the doctrine in the landmark

case McCulloch v. Maryland:

App. 12

That the power of taxing [the National Bank] by

the states may be exercised so as to destroy it, is

too obvious to be denied. But taxation is said to

be an absolute power, which acknowledges no

other limits than those expressly prescribed in

the constitution, and like sovereign power of

every other description, is intrusted to the dis-

cretion of those who use it. But the very terms of

this argument admit, that the sovereignty of the

state, in the article of taxation itself, is subordi-

nate to, and may be controlled by the constitu-

tion of the United States. How far it has been

controlled by that instrument, must be a ques-

tion of construction. In making this construc-

tion, no principle, not declared, can be

admissible, which would defeat the legitimate

operations of a supreme government.

17 US. 316, 427 (1819).

The philosophical underpinnings of the McCulloch

case thus appear to be grounded solidly in the Supremacy

Clause, and the early cases were in harmony with these

underpinnings. See Dobbins v. Commissioners of Erie

County, 41 U.S. 434, 448-49 (1842) (invalidating state tax

on federal employee). However, in the last part of the last

century, McCulloch was read expansively to bar most

taxation by one sovereign of another. See Collector v. Day,

78 U.S. 113, 124 (1870) (invalidating federal tax on state

employee). Earlier this century, the Supreme Court con-

siderably narrowed the ITI doctrine, first by holding that

the federal government could levy on a state employee a

tax that did not threaten essential governmental func-

tions, see Helvering v. Gerhardt, 304 U.S. 405, 424 (1938),

and the very next year by overruling the Dobbins-Day line

of cases and holding that the federal government could

App. 13

levy nondiscriminatory taxes on government employees,

including state government employees, see Graves v. New

York ex rel. O'Keefe, 306 U.S. 466, 486-87 (1939).

Based on this history, Plaintiffs contend that the mod-

ern ITI doctrine bars any taxes that discriminate in any

way against a person who deals with the federal govern-

ment or a person who deals with the government of

another state. As will be seen, however, in making such

an argument Plaintiffs ignore the concept of sovereignty

that is at the heart of the ITI doctrine. Thus, although the

ITI doctrine has had an uneven course, the polestar in its

application remains whether and to what extent the state

tax at issue will impinge upon a legitimate governmental

goal of another sovereign. See Note, Supreme Court Deci-

sions in Taxation: 1981 Term, 36 Tax Law. 421, 482-85

(1983). It is against this basic standard that we must judge

the Plaintiff’s arguments.

I. The Incidence of the Tax Does Not Fall On or Discrim-

inate Against the Federal Government

Relying on Davis, the trial court first reasoned that

because Plaintiffs’ retirement benefits were ultimately

paid by the federal government, those benefits were enti-

tled to the same immunity from state taxation afforded to

the Davis employees whose retirement income was also

paid by the federal government. Davis is distinguishable

from the present case based on the “incidence” of the tax.

Moreover, not only did the New Mexico tax not fall on

the United States, but also the tax did not discriminate

against Plaintiffs based on their dealings with the federal

government.

=e

App. 14

Davis held that an income tax exemption granted to a

state’s own retirees, but not extended to federal retirees,

violated the ITI doctrine as codified in 4 U.S.C. § 111

(1988). In Davis, the only difference between the two

classes of taxpayers was the source of their income.

Employees whose retirement income was received from

the State of Michigan were exempt from state taxation,

while employees whose retirement income was received

from the federal government were not exempt. Thus,

under Davis, it was held a violation of 4 U.S.C. § 111 fora

state to discriminate against the federal government by

exempting only that retirement income received from the

state, while not exempting retirement income received

from the federal government.

The parties here stipulated that the source of Plain-

tiffs’ income was not the federal government, but rather

the State of California. Therefore, 4 U.S.C. § 111, the

cornerstone of Davis, does not apply. Although the cost of

Plaintiffs’ retirement benefits was ultimately passed on to

the federal government under the terms of its contract

with the University of California, this fact is irrelevant

because the “legal incidence” of the tax does not fall upon

the federal government or its instrumentalities. See United

States v. County of Fresno, 429 U.S. 452, 459 (1977) (“States

may not impose taxes directly on the Federal Govern-

ment, nor may they impose taxes the legal incidence of

which falls on the Federal Government.”). In this regard,

the United States Supreme Court has stated:

[U]nder [the] current intergovernmental tax

immunity doctrine the States can never tax the

United States directly but can tax any private

parties with whom it does business, even

SRNR aT tas Woot ath

App. 15

though the financial burden falls on the United

States, as long as the tax does not discriminate

against the United States or those with whom it

deals. .. . A tax is considered to be directly on

the Federal Government only “when the levy

falls on the United States itself, or on an agency

or instrumentality so closely connected to the

Government that the two cannot realistically be

viewed as separate entities.”

South Carolina v. Baker, 485 U.S. 505, 523 (1988) (citations

omitted) (quoting United States v. New Mexico, 455 U.S.

720, 735 (1982)).

In this case, the tax on Plaintiffs’ retirement income

fell directly on Plaintiffs based on their status as residents

of New Mexico. Sections 7-2-3 or 22-11-42 did not man-

date that the tax be passed on to the State of California or

the federal government. Furthermore, Plaintiffs and the

federal government are not so closely connected that they

cannot be viewed as separate entities. Plaintiffs were

employees of the University of California and the retire-

ment benefits were paid to Plaintiffs because they were

employed by the State of California, not the federal gov-

ernment. The only relationship between the federal gov-

ernment and Plaintiffs was the fact that the costs of

Plaintiffs’ retirement benefits were passed on to the fed-

eral government under the terms of the federal govern-

ment’s contract with the University of California. This

tenuous relationship does not satisfy us that Plaintiffs

and the federal government should be considered as one

entity. Also, the fact that the University of California

operated Los Alamos National Laboratory through fund-

ing provided by a contract with the federal government

does not mean that the University of California is a party

App. 16

with whom the federal government deals for intergovern-

mental immunity tax purposes. See Baker, 485 U.S. at 520.

When the legal incidence of a state tax falls upon an

entity doing business with the federal government, it is

the incidence of the tax and not the indirect economic

consequences that determines whether a tax is barred by

federal constitutional immunity. North Dakota v. United

States, 495 U.S. 423, 439 (1990); Charles A. Trost, Federal

Limitations on State and Local Taxation § 6:15, at 312 (1993

Supp.). The United States Supreme Court upheld the

imposition of New Mexico taxes in a virtually identical

factual scenario in United States v. New Mexico, 455 U.S.

720 (1982). Two of the corporations involved in that case

performed various tasks under contract with the United

States Department of Energy in the management, mainte-

nance, construction, and repair of the very same Los

Alamos National Laboratory where the present plaintiffs

were employed prior to their retirement. As in the pre-

sent case, the contracts provided that contractors would

pay employees directly from special segregated bank

accounts in which title to the funds remained in the

federal government. The United States argued, inter alia,

that the salaries paid by its contractors should not be

subjected to New Mexico tax because the contractors

were agents of the federal government. Speaking for a

unanimous court, Justice Blackmun framed the issue as

“whether the contractors can realistically be considered

entities independent of the United States.” Id. at 738. The

Court recognized that the current trend is not to limit

states’ taxation authority where there is no direct burden

upon the federal government and examined the details of

the federal relationship with the contractors providing

Partin tet tea em

App. 17

the services at the Los Alamos National Laboratory. The

Court concluded “[t]he congruence of professional inter-

ests between the contractors and the Federal Government

is not complete[.]” Id. at 740. The Court therefore upheld

the imposition of New Mexico’s gross receipts tax upon

the salaries paid by the federal contractors to their

employees working at the Los Alamos National Labora-

tory.

Plaintiffs, however, argue that the New Mexico tax

discriminates against them based on their relation to the

federal government. As United States v. New Mexico illus-

trates, Plaintiffs do not receive their retirement payments

from the federal government for purposes of constitu-

tional tax immunity analysis. The discriminatory impact

of which they complain is therefore not directed toward

the federal government and is not prohibited.

Once again, tracing the ITI doctrine to its roots makes

this point abundantly clear. In McCulloch, Chief Justice

Marshall examined the rationale behind prohibiting

states from imposing discriminatory taxes upon federal

instrumentalities:

The people of a state, therefore, give to their

government a right of taxing themselves and

their property, and as the exigencies of govern-

ment cannot be limited, they prescribe no limits

to the exercise of this right, resting confidently

on the interest of the legislator, and on the influ-

ence of the constituent over their representative,

to guard them against its abuse. But the mearis

employed by the government of the Union have

App. 18

no such security, nor is the right of a state to tax

them sustained by the same theory.

17 U.S. at 428.

In the present case, Plaintiffs are New Mexico resi-

dents and with regard to state taxation may rest “confi-

dently on the interest of the legislator, and on the

influence of the constituent[s] over their representative,

to guard against its abuse.” Id.; see also Brown v. Mierke,

No. 90-C-3341, 1994 WL 96685, at *5 (W. Va. Mar. 24, 1994)

(protection of the politically weak is a cornerstone of ITI

doctrine). In this regard, Plaintiffs are no different than

the vast majority of other New Mexico citizens whose

retirement incomes are also subject to New Mexico

income tax. The fact that the State has chosen to exempt

from state tax one limited class of state retirees does not

mean Plaintiffs are being illegally discriminated against.

See Brown, 1994 WL 96685, at *1; Schnorbus v. Director of

Revenue, 790 S.W.2d 241, 242 (Mo. 1990) (en banc), cert.

denied, 498 U.S. 1027 (1991). As Justice Stevens said in his

concurrence in Barker v. Kansas, “[a] state tax burden that

is shared equally by federal retirees and the vast majority

of the State’s citizens does not discriminate against those

retirees.” 112 S.Ct. 1619, 1626 (1992); see also, Richardson,

supra, at 436 (state tax violates ITI only if purpose or

effect of discrimination is to shift operating costs to the

other government).

For these reasons, we hold that the trial court erred

by concluding that the tax violated the ITI doctrine based

on Plaintiffs’ dealings with the federal government.

App. 19

II. Tax Discrimination Based on Dealings With the State

of California

The trial court also based its grant of summary judg-

ment on the fact that it found that the tax operated to

discriminate against those who deal with the State of

California in violation of the ITI doctrine. There is no

doubt that the tax discriminates against employees who

are residents of New Mexico, but whose source of income

is from another state’s educational institution. However,

we agree with the Department that the ITI doctrine has

no applicability in the context of state-to-state relations.

Our decision rests on the fact that the ITI doctrine is

based on the need to protect each sovereign’s government

operations from undue interference by another sovereign.

See Davis, 489 U.S. at 814. The federal government has the

ability to tax activities within New Mexico, and can

thereby affect New Mexico’s ability to carry out its gov-

ernmental functions. Similarly, in limited circumstances,

New Mexico can impose taxes on the federal government

and affect its governmental functions. Therefore, the need

for each sovereign to protect itself from undue interfer-

ence is clearly present in the case of the overlapping

sovereignty of the state and federal governments, and the

ITI doctrine is applicable. Hartman, supra, § 6:19, at

333-39.

The power to tax is, however, only coextensive with a

sovereign’s boundaries. McCulloch, 17 U.S. at 428-29.

Unlike the federal government whose sovereignty over-

laps that of all of the states, California does not have the

ability to affect governmental functions in New Mexico

by imposing taxes. Similarly, New Mexico has no ability

App. 20

to affect California’s governmental functions by reaching

out to tax those functions or employees exerting those

functions in California. Thus, the need for each state to

protect itself from undue interference from injurious

taxes by the other is absent. Consequently, there is no

basis on which to apply the ITI doctrine. Cf. Kenda K.

Tomes, State Taxation of Puerto Rican Obligations: An Inter-

est(ing) Question, 66 Chi.-Kent L. Rev. 903, 938 (1990) (the

Constitution does not prohibit a state from taxing the

income received by its residents from bonds issued by

another state).

We find support for this result not only in the philo-

sophical underpinnings of the ITI doctrine but also in the

fact that no federal case has applied intergovernmental

tax immunity between two states. In fact, all federal cases

cited by Plaintiffs in support of their argument dealt with

intergovernmental tax immunity between the federal

government and the states. Plaintiffs’ only support comes

from the state case of Pledger v. Bosnick, 811 S.W.2d 286

(Ark. 1991), cert. denied, 113 S.Ct. 3040 (1993). Pledger held

that a statutory exemption from Arkansas income tax for

the retirement income received by Arkansas state retirees

unconstitutionally discriminated against other Arkansas

residents who received retirement income from employ-

ment with United States civil service agencies, branches

of the United States armed forces, and other states’ agen-

cies and political subdivisions. As such, Pledger con-

fronted the same question which faces us today.

In concluding that the ITI doctrine applied between

the states, the Pledger court relied on Davis and Phillips

Chemical Co. v. Dumas Independent School District, 361 U.S.

376 (1960). However, we believe Pledger’s reliance on

App. 21

these cases is misplaced. In both Davis and Phillips the

Court dealt only with the application of the ITI doctrine

to overlapping sovereigns and did not apply the ITI

doctrine to taxation of one state by another state. We see

no other analysis in Pledger which supports application of

the ITI doctrine in this context. Consequently, we do not

find Pledger persuasive.

For the reasons stated, we hold that the ITI doctrine

is not applicable.

CONCLUSION

We reverse the trial court’s summary judgment

granted in favor of Plaintiffs as well as the trial court's

award of costs to Plaintiffs.

IT IS SO ORDERED.

/s/ Benny E. Flores

BENNY E. FLORES, Judge

WE CONCUR:

/s/ Lynn Pickard

LYNN PICKARD, Judge

/s/ Bruce D. Black

BRUCE D. BLACK, Judge

App. 22

APPENDIX C

IN THE SUPREME COURT OF THE:

STATE OF NEW MEXICO

Tuesday, July 19, 1994

NO. 22,205

BENJAMIN B. ALARID, et al.,

Plaintiffs-Petitioners,

vs. j

SECRETARY OF THE

NEW MEXICO DEPARTMENT

OF TAXATION AND REVENUE,

Defendant-Respondent.

ORDER

This matter coming on for consideration by the Court

upon petition for writ of certiorari, and the Court having

considered said petition and response, and being suffi-

ciently advised;

NOW, THEREFORE, IT IS ORDERED that petition for

writ of certiorari is denied.

IT IS FURTHER ORDERED that the Record in Cause

No. 13887 is returned to the Clerk of the Court of

Appeals.

ATTEST: A True Copy

KATHLEEN JO GIBSON

CLERK OF THE SUPREME

COURT

By /s/ Jane Gurulé

Chief Deputy

App. 23

APPENDIX D

IN THE SUPREME COURT OF THE

STATE OF NEW MEXICO

August 17, 1994

NO. 22,205

BENJAMIN B. ALARID, et al.,

Plaintiffs-Petitioners,

VS.

SECRETARY OF THE

NEW MEXICO DEPARTMENT

OF TAXATION AND REVENUE,

Defendant-Respondent.

ORDER

This matter coming on for consideration by the Court

upon motion for rehearing of the denial of petition for

writ of certiorari, and the Court having considered the

motion and being sufficiently advised;

NOW, THEREFORE, IT IS ORDERED that the motion

hereby is DENIED.

ATTEST: A TRUE COPY

/s/ Kathleen Jo Gibson

Clerk of the Supreme Court

of the State of New Mexico

App. 24

APPENDIX E

FIRST JUDICIAL DISTRICT COURT

COUNTY OF SANTA FE

STATE OF NEW MEXICO

BENJAMIN B. ALARID, et al., No. SF 91-593(C)

Plaintiffs,

VS.

)

)

)

)

SECRETARY OF THE NEW )

MEXICO DEPARTMENT OF )

TAXATION AND REVENUE,

)

)

Defendant.

SUMMARY JUDGMENT IN FAVOR

OF THE TAXPAYER PLAINTIFFS

THIS MATTER came before the Court upon plaintiffs’

Motion for Summary Judgment against the defendant,

Secretary of the New Mexico Department of Taxation and

Revenue (“Secretary”). Plaintiffs seek an order enjoining

the Secretary to refund income taxes paid by the plaintiffs

to the State of New Mexico based on plaintiffs’ retirement

income for the years 1986 through 1989 on the ground

that the New Mexico income tax, as applied to plaintiffs’

retirement income, violates the federal constitutional doc-

trine of intergovernmental tax immunity. The Secretary

filed a Cross-Motion For Summary Judgment seeking a

determination by the Court that the New Mexico income

tax on plaintiffs’ retirement income did not violate the

intergovernmental tax immunity doctrine. The Court has

carefully considered the pleadings, the Stipulated State-

ment of Material Facts entered into by the parties, the

ee Pr

App. 25

extensive briefs, oral arguments of the parties presented

at the hearing on January 24, 1992, and proposed findings

of fact and conclusions of law submitted by the parties.

The Court, being fully advised in the premises, hereby

determines that there are no genuine issues of material

fact and that the plaintiffs are entitled to judgment herein

as a matter of law. The Court’s Findings Of Fact and

Conclusions Of Law are attached hereto, and are hereby

incorporated in this Summary Judgment by reference.

THEREFORE, IT IS HEREBY ORDERED, ADJUDGED

AND DECREED that plaintiffs be, and hereby are,

awarded judgment in this cause against the defendant as

a matter of law. In accordance therewith, the court

ORDERS as follows:

1. The Secretary shall, as promptly as practicable,

determine the amount of New Mexico income tax that

was paid by each of the plaintiffs on their respective

retirement income from the State of California for the

years 1986, 1987, 1988 and 1989.

2. The Secretary shall thereupon prepare for each

plaintiff taxpayer an individual refund check made pay-

able to the taxpayer in the amount determined by the

Secretary, with the approval of plaintiffs’ counsel, to be

due to each plaintiff, together with interest on such

amount at the statutory rate of 15% per year, computed at

the rate of one and one-fourth percent (1 1/4%) per

month or fraction thereof, from the date of each tax-

payer’s claim for refund, in accordance with § 7-1-68,

NMSA 1978.

App. 26

3. The Secretary shall thereupon deliver said refund

checks to plaintiffs’ counsel, Jones, Snead, Wertheim,

Rodriguez & Wentworth, P.A., for ultimate distribution to

plaintiffs in accordance with the employment agreement

between plaintiffs and their counsel.

4. Plaintiffs shall be awarded their costs of this

action.

JOE CRUZ CASTELLANO JR.

DISTRICT JUDGE

SUBMITTED UPON NOTICE OF PRESENTMENT:

JONES, SNEAD, WERTHEIM, RODRIGUEZ &

WENTWORTH, P.A.

Attorneys for Plaintiffs

By /s/ A.L. JARAMILLO

JERRY WERTHEIM

ARTHUR L. JARAMILLO

Post Office Box 2228

Santa Fe, New Mexico 87504-2228

(505) 982-0011

APPROVED AS TO FORM:

/s/ Margaret B. Alcock

FRANK D. KATZ, ESQ.

MARGARET B. ALCOCK, ESQ.

Special Assistant Attorney General

Attorney for Defendant

Post Office Box 630

Santa Fe, New Mexico 87504-0630

2172B

Fe ee ee Oe

App. 27

APPENDIX F

FIRST JUDICIAL DISTRICT COURT

COUNTY OF SANTA FE

STATE OF NEW MEXICO

BENJAMIN B. ALARID, et al., No. SF 91-593(C)

Plaintiffs,

vs.

)

)

)

)

SECRETARY OF THE NEW )

MEXICO DEPARTMENT OF )

TAXATION AND REVENUE

)

)

Defendant.

THE COURTS’ FINDINGS OF FACT

AND CONCLUSIONS OF LAW

THE COURT finds and concludes in this cause as

follows:

FINDINGS OF FACT

1. The Court has jurisdiction over the parties and

the subject matter of this action and venue is properly

laid in this judicial district.

2. Plaintiffs are individuals who were formerly

employed by the University of California prior to the

commencement of this action (“employee plaintiffs”) or

spouses of such employee plaintiffs (“spouse plaintiffs”)

or both. The term “plaintiffs,” as used herein, applies

collectively to all plaintiffs.

App. 28

3. The University of California is a public educa-

tional institution of the State of California, administered

by a public corporation known as “The Regents of the

University of California.”

4. At times material to this proceeding, and for

several decades, the University of California by succes-

sive written contracts with the United States of America

and, more particularly, the United States Department of

Energy and its predecessor agencies (hereinafter referred

to as “the Federal Contract”), was engaged in the opera-

tion of the Los Alamos National Laboratory in Los

Alamos, New Mexico. Pursuant to the Federal Contract,

the University of California performed research, develop-

ment and educational activities for military and or peace-

ful applications on behalf of the Federal government in

the national public interest. Various provisions of the

Federal Contract pertinent to the issues in this case are

attached as Exhibit “1” to the Stipulated Statement of

Material Facts filed by the parties in this action. The

Court hereby incorporates by reference those contractual

provisions into its Findings as if fully set forth herein.

5. The employee plaintiffs were formerly employed

by the University of California performing services

required by the Federal Contract at the Los Alamos

National Laboratory.

6. As a material part of their employment with the

University of California, and through direct funding

specifically provided by the Federal Government under

the “Costs and Expenses” and “Payments and Advances”

Clauses of the Federal Contract, the employee plaintiffs

became eligible, upon retirement, to receive retirement

App. 29

income from the State of California under the California

Public Employees Retirement System (“PERS”) or the

University of California Retirement System (“UCRS”), or

both, in accordance with the laws of the State of Califor-

nia.

7. PERS and UCRS are agencies and instru-

mentalities of the State of California, charged by Califor-

nia law with administering statutorily created retirement

systems for the benefit of retired public employees of the

State of California, including, retired employees of the

University of California such as the employee plaintiffs.

8. During one or more of the calendar years 1986,

1987, 1988 and 1989, each of the employee plaintiffs were

retired employees of the University of California, and

each received retirement income from the State of Califor-

nia through PERS, UCRS, or both. This retirement income

constitutes deferred compensation for past years of ser-

vice rendered by the employee plaintiffs under the Fed-

eral Contract as employees of the University of

California. The plaintiffs’ retirement income was speci-

fically funded by the Federal Government as provided in

the Federal Contract.

9. During one or more of the calendar years 1986,

1987, 1988 and 1989, each of the spouse plaintiffs had a

financial and legal interest in the retirement income bene-

fits paid to his or her employee spouse by the State of

California.

10. Some or all of the retirement income received by

the plaintiffs from the State of California during one or

more of the calendar years 1986, 1987, 1988 and 1989 was

received by them while they were residents of the State of

App. 30

New Mexico. Such retirement income is hereinafter

referred to as “the subject retirement benefits.”

11. For one or more of the calendar years 1986,

1987, 1988 and 1989, the State of New Mexico, through

the Secretary, imposed and collected from the plaintiffs

income taxes on the subject retirement benefits under the

authority of the New Mexico Income Tax Act, and speci-

fically, § 7-2-3, NMSA 1978.

12. At times material to this action, certain educa-

tional institutions of the State of New Mexico, including,

the University of New Mexico (UNM), New Mexico State

University (NMSU) and New Mexico Institute of Mining

and Technology (NM Tech), by written contracts with the

United States of America (“Government Contracts”),

were engaged in the performance of services in New

Mexico comprising research, development and educa-

tional activities for military and/or peaceful applications

on behalf of the Federal Government in the national

public interest.

13. As a material part of their employment with

UNM, NMSU and NM Tech, and other educational insti-

tutions of the State of New Mexico, and pursuant to the

costs and expenses provisions and funding by the federal

government as provided in the Government Contracts,

employees of these New Mexico educational institutions

who performed services required by the Government

Contracts (“New Mexico Educational Employees”)

became eligible, upon retirement from such employment,

to receive retirement income benefits paid by the State of

New Mexico under the New Mexico Educational Retire-

ment Act (“ERA”) in accordance with the laws of the

App. 31

State of New Mexico. Such retirement benefits were

received by retired New Mexico Educational Employees

for the years 1986 through 1989, and constitute deferred

compensation for past years of service by such retired

employees to the respective New Mexico educational

institutions.

14. For the calendar years 1986, 1987, 1988 and 1989,

the State of New Mexico, pursuant to § 22-11-42, NMSA

1978, exempted from New Mexico income taxation the

retirement income paid to New Mexico Educational

Employees by the State of New Mexico under the ERA.

That statutory exemption provided that “contributions or

benefits mentioned in the Educational Retirement Act

shall . . . be exempt from any state income tax.”

15. For purposes of the New Mexico Income Tax

Act, the difference between the employment and retire-

ment income of the plaintiffs, whose retirement income

was subject to income tax in New Mexico, and the

employment and retirement income of New Mexico Edu-

cational Employees, whose retirement income was

exempt from income taxation in New Mexico, was that

the employee plaintiffs were employed by a public uni-

versity which was part of a sovereign state other than

New Mexico, specifically, the State of California, and the

ultimate source of plaintiffs’ retirement income was the

State of California, whereas, the New Mexico Educational

Employees whose retirement income was exempt from

income taxation in New Mexico, were employed by pub-

lic educational institutions which were a part of the sov-

ereign State of New Mexico and the ultimate source of

their retirement income was the State of New Mexico.

App. 32

16. Pursuant to § 7-1-26(A), NMSA 1978, the plain-

tiffs have each filed a timely application for refund of

New Mexico state income taxes paid by them on the

subject retirement benefits with the Secretary for one or

more of the calendar years 1986, 1987, 1988 and 1989,

claiming, inter alia, that the New Mexico income tax, as

applied to plaintiffs’ retirement income, violates the fed-

eral constitutional doctrine of intergovernmental tax

immunity.

17. The Secretary has denied each of the plaintiffs’

applications for refund.

18. The State of New Mexico, by § 7-1-26, NMSA

1978, permits any person who has made a tax payment or

who has had withheld from him a tax in excess of that for

which he is liable to obtain a refund by applying to the

Secretary within the statute of limitations.

19. Plaintiffs have timely commenced this civil

action for refund of the state income taxes paid by them

in excess of that for which they were liable, together with

applicable interest.

CONCLUSIONS OF LAW

1. The modern doctrine of intergovernmental tax

immunity prohibits discriminatory taxation by one sover-

eign government against another sovereign government

or those with whom it deals.

2. The rationale underlying the modern doctrine of

intergovernmental tax immunity is that a discriminatory

tax imposed upon another sovereign government or those

App. 33

with whom it deals can be escalated by the taxing sover-

eign so as to impair or potentially destroy the traditional

governmental functions of the sovereign being taxed,

causing that sovereign government, for example, to be

unable to hire employees or causing it to pay prohib-

itively high salaries or employment benefits.

3. The non-discrimination principle at the heart of

modern intergovernmental tax immunity case law recog-

nizes that the best safeguard against such excessive taxa-

tion, and the most judicially manageable, is the

requirement that a sovereign government tax in a non-

discriminatory fashion. Where a government imposes a

non-discriminatory tax, the threat of impairing another

government can be realized only if the taxing government

is willing to impose taxes that will also impair itself or its

constituents.

4. In extending the protection of the intergovern-

mental tax immunity doctrine to individuals who deal

with a sovereign government, the Supreme Court deci-

sions recognize the principle that a discriminatory tax on

one who deals with a sovereign government has as much

potential to obstruct traditional governmental functions

as a discriminatory tax imposed on the sovereign govern-

ment itself.

5. It is implicit in the constitutional scheme of our

federal republic that neither the federal government nor a

sovereign state can, by the imposition of a discriminatory

tax, impair or interfere with the traditional governmental

functions of another sovereign state. Because the inju-

rious effects of a discriminatory tax imposed upon a

sovereign state, or those with whom it deals, is exactly

App. 34

the same irrespective of whether the tax is imposed by

the federal government or by a sister state, the purpose of

the intergovernmental tax immunity doctrine necessarily

applies to both taxing relationships. Accordingly, the

intergovernmental tax immunity doctrine necessarily

applies not only to the taxing relationship between the

sovereign states and the federal government, but among

the sovereign states as well.

6. Under the intergovernmental tax immunity doc-

trine, the imposition of a heavier tax burden on those

who deal with one sovereign government than is

imposed upon those who deal with the other must be

justified by significant differences between the two

classes of taxpayers.

7. The only significant difference between the plain-

tiff taxpayers, whose retirement income was subject to

New Mexico income tax, and similarly situated retirees of

New Mexico’s educational institutions, whose retirement

income was exempt from the New Mexico income tax,

was the ultimate source of their respective retirement

income.

8. The plaintiffs’ retirement income at issue in this

case is directly and specifically funded from the federal

treasury by operation of the advance funding and costs

and expense provisions of the Federal Contract. Accord-

ingly, the Federal Government bears a direct economic

burden of New Mexico’s discriminatory taxation of plain-

tiffs’ retirement income in the same manner as it did in

the discriminatory tax imposed by the State of Michigan

App. 35

on the retirement income of federal retirees, which dis-

criminatory tax was struck down in Davis v. Michigan, 489

U.S. 803 (1989).

9. Discriminatory taxes, such as the tax at issue in

this case, enacted to reduce New Mexico’s employment

costs at the expense of federal treasury, are the type of

discriminatory taxation that the constitutional doctrine of

intergovernmental tax immunity was intended to bar.

10. The discriminatory taxation of plaintiffs’ retire-

ment income operates under the circumstances presented

in this case to discriminate against those who deal with

the Federal Government in violation of the constitutional

doctrine of intergovernmental tax immunity.

11. Additionally, or alternatively, plaintiffs’ retire-

ment income is received from the sovereign State of Cali-

fornia, and New Mexico’s discriminatory taxation of such

retirement income operates to reduce New Mexico’s

employment costs at the expense of the sovereign State of

California, and accordingly, is the type of discriminatory

taxation that the doctrine of intergovernmental tax immu-

nity was intended to bar.

12. The discriminatory taxation of plaintiffs’ retire-

ment income operates under the circumstances presented

in this case to discriminate against those who deal with

the sovereign State of California in violation of the consti-

tutional doctrine of intergovernmental tax immunity.

13. In passing upon the constitutionality of the New

Mexico income tax as applied to the plaintiffs’ retirement

income and the circumstances presented in this case, this

App. 36

Court must look beyond empty formalisms to the sub-

stance and practical operation of New Mexico’s discrimi-

natory income tax.

14. The State of New Mexico in § 7-1-26, NMSA

1978, has consented to this suit and to the refund of

income taxes paid by the plaintiffs in excess of those for

which they were liable by providing that its taxpayers

may recover all illegally collected taxes by timely apply-

ing for a refund.

15. The Court’s decision in this case does not estab-

lish a new principle of law. The extensive history of the

intergovernmental tax immunity doctrine demonstrates

that it has been applied for decades to strike down dis-

criminatory taxation such as that at issue here. The

Court’s decision in this case is, therefore, a statement of

the applicability of a long-standing doctrine to the facts

and circumstances presented in this case.

16. The principles underlying the intergovernmen-

tal tax immunity doctrine are materially advanced by

application of that constitutional doctrine to the facts and

circumstances presented in this case. To deny plaintiffs

their statutory and legal right to a refund of taxes

imposed and collected in violation of the federal Consti-

tution would compound one illegal act with another.

JOE CRUZ CASTELLANO JR.

DISTRICT JUDGE

2330B

—