Thanks to Carl Smith for bringing the case of Dawson v. Steager to my attention. This case was decided by the Supreme Court on February 20 in a unanimous victory for a federal marshal who retired to West Virginia. Even though the issue in the case concerns a refund of state taxes, it has a procedural aspect and deserves some attention. I do not know if the decision has implications beyond West Virginia but knowing about the decision will allow you to check to see if any problems continue to exist with the laws in your state.
read more...Mr. Dawson spent the bulk of his career as a federal marshal. After retiring to West Virginia, he noticed that the state had a law that exempted from taxation the pensions of certain law enforcement officials who retired after working for the state of West Virginia. It’s not clear how he knew about the Supreme Court precedent in this area or maybe he just felt the law was unfair and happened to bring the issue up across the dinner table from a tax lawyer with knowledge of the precedent but his case follows closely behind a Supreme Court case decided three decades ago, Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989).
Justice Gorsuch, rendering the opinion for a unanimous court, framed the issue as follows:
If you spent your career as a state law enforcement officer in West Virginia, you’re likely to be eligible for a generous tax exemption when you retire. But if you served in federal law enforcement, West Virginia will deny you the same benefit. The question we face is whether a State may discriminate against federal retirees in that way.
The problem for West Virginia is that 30 years ago the Supreme Court faced a very similar issue concerning state employees in Michigan whose pensions were exempted by state statue there and retired federal employees living in Michigan whose pensions were not exempted. In the Davis case the Supreme Court decided that the state could not exempt the pensions of its employees while taxing the pensions of federal employees because of 4 USC 111. Describing that statute Justice Gorsuch stated:
In that statute, the United States has consented to state taxation of the “pay or compensation” of “officer[s] or employee[s] of the United States,” but only if the “taxation does not discriminate against the officer or employee because of the source of the pay or compensation.” §111(a).
He provided background for the adoption of section 111:
Section 111 codifies a legal doctrine almost as old as the Nation. In McCulloch v. Maryland, 4 Wheat. 316 (1819), this Court invoked the Constitution’s Supremacy Clause to invalidate Maryland’s effort to levy a tax on the Bank of the United States. Chief Justice Marshall explained that “the power to tax involves the power to destroy,” and he reasoned that if States could tax the Bank they could “defeat” the federal legislative policy establishing it. Id., at 431–432. For the next few decades, this Court interpreted McCulloch “to bar most taxation by one sovereign of the employees of another.” Davis v. Michigan Dept. of Treasury, 489 U. S. 803, 810 (1989). In time, though, the Court softened its stance and upheld neutral income taxes—those that treated federal and state employees with an even hand. See Helvering v. Gerhardt, 304 U. S. 405 (1938); Graves v. New York ex rel. O’Keefe, 306 U. S. 466 (1939). So eventually the intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes. It was this understanding that Congress “consciously . . . drew upon” when adopting §111 in 1939. Davis, 489 U. S., at 813.
In Mr. Dawson’s case the trial court in West Virginia determined that his duties were essentially similar to the duties of the state law enforcement officers whose pensions were exempted. Based on that determination the trial court held for Mr. Dawson applying the Davis precedent; however, the Supreme Court of West Virginia reversed finding that the state did not intend to discriminate against this class of retired federal employees but only intended to benefit certain state law enforcement retirees. The Supreme Court was not buying what West Virginia was selling and reversed the decision of the state supreme court. Read the opinion to see the other arguments made by the state but the Supreme Court rightly dismissed them with little effort.
I have to think that this decision did not come as a big surprise in West Virginia. It’s possible that other federal law enforcement officers who have retired to West Virginia will seek to show that their duties paralleled the duties of the individuals exempted by the state. I do not know if the fight will now morph to see how close others may be to federal marshals or if the state will amend its statute to eliminate the exemption altogether. Given the small number of individuals covered here and the types of work performed by those individuals, I doubt that the state will eliminate the exemption just because of this opinion.
So, Mr. Dawson is going to get a refund of taxes he has paid; however, the procedural issue facing him and others who are similarly situated is how far back can he go? In the Davis case federal retirees could not obtain the state taxes they had paid for every year but were limited to the years for which the refund statute remained open. So, retired federal law enforcement officials in West Virginia who were not already clued into this case need to file their refund claims ASAP in order to preserve the right to obtain as many years of refunds as possible.
After the Davis case came out, and not before it because his son was not paying attention to the issue, my father, a retired federal employee living in Virginia filed claims for all open years and eventually received a nice refund. It took several years before he received his refund because of the high number of federal employees in Virginia and the strong efforts by Virginia to obtain a ruling from the Supreme Court that the Davis case did not apply in Virginia for a variety of reasons similar in spirit to the arguments made by West Virginia in the Dawson case.
To follow up on Keith’s last paragraph, one of the arguments that Virginia made to avoid the result in Davis was that Davis should apply prospectively only. Thus, all refund claims for years filed prior to Davis should be rejected. In Harper v. Virginia Dept. of Taxation, 509 U.S. 86 (1993), the Supreme Court held that when it announces an interpretation of law in a civil context, that interpretation applies retroactively. The Supreme Court gave Virginia the option of retroactively taxing all of its employees the way the federal employees had been taxed or giving refund to the federal employees. Politically, of course, Virginia could never choose the first course, so it paid refunds. See Harper v. Virginia Dept. of Taxation, 250 Va. 184 (Va. sup. Ct. 1994).