Beattie Through Beattie v. United States, A85-209 Civil
| Citation | 635 F. Supp. 481 |
| Decision Date | 13 March 1986 |
| Docket Number | No. A85-209 Civil,A85-359 Civil and A85-387 Civil.,A85-209 Civil |
| Parties | Mary Elizabeth BEATTIE, a minor, Through her next friend, J. Patrick BEATTIE, Plaintiff, v. UNITED STATES of America, Defendant. David J. GREISEN, By and Through his father and natural guardian, Ronald E. GREISEN, Plaintiff, v. UNITED STATES of America, Defendant. Catherine Anne BEATTIE, a minor, Through her next friend, J. Patrick BEATTIE, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Alaska |
David G. Shaftel, Ron Zobel and Steven O'Hara, Bankston & McCollum, Anchorage, Alaska, for plaintiffs.
F. Michael Kovach, Jr., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.
(Motion for Summary Judgment by United States of America Granted)
In 1969 after Alaska received $900 million for Prudhoe Bay oil leases, Governor Keith Miller proposed an "Alaska Permanent Resources Fund" to be invested and its earnings used to fund future state budgets. The plan did not receive legislative support. Instead these funds and some $400 million in interest were used by the state in its operation and capital budgets. The "disappearance" of this fund caused a public outcry which resulted in the creation of a state savings account. The bill creating this account was vetoed by Governor Jay Hammond because it ran afoul of the Constitution of the State of Alaska which prohibits the dedication of public revenue for special purposes. Thereafter, a constitutional amendment, title IX, section 7, was passed by the voters to overcome this impediment. The Alaska Permanent Fund was established on November 2, 1976.
The goals of the Permanent Fund as outlined in AS 37.13.020 are: (1) conservation of a portion of the state's mineral resource revenues to benefit all generations of Alaskans; (2) maintenance of the safety of the principal while maximizing total return; and (3) management of the Permanent Fund as a savings device to allow maximum use of disposable income for purposes defined by law. Funding is derived from three sources: dedicated revenue, legislative appropriations, and interest earnings.
The Alaska Constitution requires that at least 25% of all mineral lease rentals, royalties, royalty sale proceeds, federal mineral revenue sharing payments and bonuses be placed in the fund. Title IX, section 15. Subsequent legislation provided that this percentage be increased to 50% for certain types of oil and gas receipts.
The legislature has made two special appropriations to the Permanent Fund. The first was for $900 million in 1981 (ch. 35 SLA 1980) and the second was for $1.8 billion in 1982 (ch. 101 SLA 1982).
In 1980, the state legislature enacted the Permanent Fund dividend program (ch. 21 SLA 1980, hereinafter "the 1980 Act")1 to distribute annually a portion of the Permanent Fund's earnings directly to the state's adult residents. Under the 1980 Act, each Alaska resident 18 years of age or older would receive one dividend per each year of residency since 1959, the year of statehood. The dividends would be paid yearly, starting with a value of $50 per dividend in 1979. The initial payment to long-term residents would be $1,050 each, while a new resident, having lived only one month of 1979 in Alaska, would receive $4 (1/12th of the $50 dividend for 1979).
The legislative intent of the dividend program was: (1) to provide a mechanism for equitable distribution to the people of Alaska of at least a portion of the state's energy wealth derived from the development and production of natural resources belonging to them as Alaskans; (2) to encourage persons to maintain their residence in Alaska and to reduce population turnover in the state; and (3) to encourage increased, longterm awareness and involvement by the residents of the state in management and expenditure of the Alaska Permanent Fund. Ch. 21 SLA 1980 § 1(b).
In 1980 two relatively new residents, Ronald M. Zobel and Patricia L. Zobel, challenged the Permanent Fund dividend program (the 1980 Act) on the grounds that the dividend plan discriminated between new and old residents of the state without adequate justification. They claimed that the dividend plan violated their rights to equal protection and to migrate freely and enjoy equal rights with other citizens of the state.
The Alaska Supreme Court, in Williams v. Zobel, 619 P.2d 448 (Alaska 1980), held the 1980 Permanent Fund income distribution statute did not violate the equal protection clauses of the Alaska and United States Constitutions. Id. at 464. That court carefully examined the statute's purposes (listed in the statute itself, ch. 21 SLA 1980 § 1(b)) and held "that the purposes underlying this statute are legitimate under state law." Id. at 459.
It is important to note that under article IX, section 6 of the Alaska Constitution, no appropriation of public money may be made "except for a public purpose". It is therefore clear that there was a "public purpose" behind the Permanent Fund dividend program.
The United States Supreme Court reversed Williams v. Zobel, supra, holding "that the Alaska dividend distribution plan violates the guarantees of the Equal Protection Clause of the Fourteenth Amendment." Zobel v. Williams, 457 U.S. 55, 65, 102 S.Ct. 2309, 2315, 72 L.Ed.2d 672 (1982). The Court pointed out that the Alaska Supreme Court had relied on a single justification to support the retrospective application of the dividend program favoring established residents over new residents. The justification — to reward citizens for past contributions — was found to be constitutionally unacceptable by the United States Supreme Court. As stated by the Court:
Section 4 of the 1980 Act provided that invalidation of any portion of the dividend distribution plan rendered the whole plan invalid.
Sec. 4. If any provision enacted in sec. 2 of this Act is held to be invalid by the final judgment, decision or order of a court of competent jurisdiction, then ... all provisions enacted in sec. 2 of this Act are invalid and of no force or effect.
Ch. 21 SLA 1980 § 4. Consequently, the decision in Zobel v. Williams, supra, would have rendered the whole dividend program invalid if the Alaska legislature had not enacted substitute legislation.
In anticipation of a possible reversal of the Alaska Supreme Court decision, the Alaska legislature considered and passed a bill amending the 1980 Act so that, in the event the United States Supreme Court found any of its terms unconstitutional, they would immediately be replaced with constitutionally sound provisions. This "backstop" legislation (ch. 102 SLA 1982) became operative shortly after the United States Supreme Court decision in Zobel and was codified as AS 43.23.005-.095. The legislature did not amend the purposes of the 1980 Act when it enacted the "backstop" legislation in 1982.
The 1982 Act provided payment of $1,000 as a 1982 dividend to each eligible resident, including children. The 1983 dividend payment to each resident Alaskan was $386. In 1983 and thereafter, each Alaskan resident receives, by law, a pro rata share of the total amount available for distribution.
The amount available for distribution is one-half of the average net income of the Permanent Fund over a five-year period. An individual is eligible for a Permanent Fund dividend so long as he or she is a state resident of at least six months' duration (AS 43.23.005) and intends to remain permanently in the state (AS 43.23.095(7)).
After enactment of the Permanent Fund dividend program, the Department of Revenue sought advice from the Internal Revenue Service by letter dated November 19, 1980, concerning the tax treatment of the dividends. In Private Letter Ruling 8121122, dated February 27, 1981, the IRS informed the state that the dividends were not gifts but would be taxable as income. The IRS has also issued Revenue Ruling 85-39, 1985-13 I.R.B. 5, in which it determined that monies received by Alaskans from the Alaska natural resource wealth through the dividend program would be taxed as income under section 61 of the Internal Revenue Code.
After Zobel was decided and the "backstop" legislation went into effect, it became apparent that some minors who received only the $1,000 dividend were required to file an income tax return, even though they would owe no tax. United States Senator Murkowski proposed an amendment to pending federal legislation that would require a tax return only of someone who received more than $1,000 in income. Then, as now, a tax return was required of anyone receiving income in the amount of $1,000 or more. As ultimately passed on January 6, 1983, section 542(a) of Public Law No. 97-424 provides that:
Nothing in section 6012(a) of the Internal Revenue Code of 1954 shall be construed to require the filing of a return with respect to income taxes ... by an individual whose only gross income for the taxable year is a grant of $1,000 received from a State which made such grants generally to residents of such State. 96 Stat. 2195 (1983). This legislation obviated the need for some minors to file returns.
The state began mailing dividend checks after the Zobel decision. Attached to each check was a statement that the dividend amount must be reported as taxable federal income.
The three cases presently before the Court, which have been consolidated for purposes of resolving dispositive motions, each raise the question of the correct tax treatment of dividends received from the Alaska Permanent Fund. The central issue is whether the Alaska Permanent Fund dividends are included in gross income.
Case No. A85-209 Civil was brought by Plaintiff Mary Elizabeth...
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