Ex parte Melof

• Decision Date: 28 May 1999
• Citation: 735 So.2d 1172
• Parties: Ex parte Fred MELOF et al. (In re Fred Melof, et al. v. Fob James, et al.).
• Court: Alabama Supreme Court

735 So.2d 1172

Ex parte Fred MELOF et al.

(In re Fred Melof, et al. v. Fob James, et al.).

1971900.

Supreme Court of Alabama.

May 28, 1999.

Charles A. Dauphin and Elizabeth L. Wood of Baxley, Dillard, Dauphin & McKnight, Birmingham, for petitioners.

Ron Bowdon, counsel, Department of Revenue, and asst. atty. gen.; and Mark Griffin, asst. counsel, Department of Revenue, and asst. atty. gen., for respondent Commissioner of Revenue for the State of Alabama.

HOUSTON, Justice.

This case presents the question whether Alabama's retirement-benefit taxation classifications conflict with Amendment 25 to the Alabama Constitution of 1901 and equal-protection guarantees of the United States and Alabama Constitutions.

On April 14, 1989, this class action was filed in the Montgomery County Circuit Court against the Governor and the State commissioner of revenue in their official capacities (hereinafter collectively referred to as "the State"), on behalf of four subclasses of persons who had paid Alabama state income tax on retirement benefits received through the retirement programs of their employers: the Federal Government (including the military services); certain Alabama political subdivisions; and private employers. The complaint alleged that Alabama's system of exempting certain state retirees from income tax on retirement benefits while taxing the retirement benefits of private retirees and some public retirees (hereinafter that system is called the "retirement-tax structure") violated the Equal Protection Clause of the Fourteenth Amendment as well as an equal-protection guarantee of the Alabama Constitution provided under the combination of §§ 1, 6, and 22.

The case was filed pursuant to the United States Supreme Court's decision in Davis v. Michigan Dep't of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), holding that Michigan's practice of applying different income-tax structures on federal and state retirement income was invalid under 4 U.S.C. § 111 and under the intergovernmental-tax-immunity doctrine.

The circuit court consolidated this case with two other cases that had been filed against the State: Rinehart v. Sizemore, CV-89-704, and Olts v. Sizemore, CV-89-734. Those two cases involved the taxation of retirement benefits of federal and military retirees. The parties involved in all three cases agreed to: 1) ratify Rinehart as establishing the appropriate class to represent the federal and military retirees, 2) dismiss the Olts case, and 3) sever the claims of the private retirees from those of the federal and military retirees. A judgment was eventually entered for the federal and military retirees in Sizemore v. Rinehart, 611 So.2d 1064 (Ala.Civ.App. 1992), writ quashed, 611 So.2d 1069 (Ala. 1993).

The four subclasses of retirees (with their representatives) are as follows:

"(1) Fred Melof; Melof receives a pension pursuant to a `defined benefit plan' as a former employee of United States Steel Corporation. Since tax year 1991, Melof's retirement benefits have been exempt from income tax. Melof represents taxpayers who have paid income tax on private retirement benefits for the years 1985 to 1990.

"(2) E.K. Alley; Alley, a retired police officer, received a pension and annuity from the City of Birmingham and the Alabama Peace Officers Annuity and Benefit Fund. Alley paid income tax for the years 1985 through 1990 on his retirement benefits in excess of $8,000.00 per year. Alley represents two subclasses: (a) eligible peace officers and fire fighters who paid income tax on retirement benefits in excess of $8,000.00 per year for the years 1985 through 1990; and (b) taxpayers who have paid income tax on retirement benefits from a municipal, county or public board which has not or had not joined the State Employees Retirement System of Alabama for the years 1985 through the present.

"(3) Marilyn Mooring; Mooring, a retired private school teacher, receives a pension pursuant to a `defined contribution plan' offered by her former employer. Mooring represents taxpayers who have paid income tax on retirement benefits received from a `defined contribution plan,' or other private or public allowances, pensions or annuities for the years 1985 through the present."

Melof v. James, 735 So.2d 1166 (Ala.Civ. App.1998).

The representatives of the four subclasses described above ("representatives") filed an amended complaint that restated the allegations of equal-protection violations, but added the further allegation that Alabama's retirement-tax structure violated the provisions of Amendment 25 of the Alabama Constitution, which requires that "[i]n the event the legislature levies an income tax, such tax must be levied upon the salaries, income, fees, or other compensation of state, county and municipal officers and employees, on the same basis as such income taxes are levied upon other persons." The representatives sought a refund of all taxes determined by the court to have been collected from class members in violation of constitutional principles within the statutory three-year period of limitations.

The representatives and the State moved for summary judgments. The trial court entered a summary judgment for the State, holding that, "for Alabama tax purposes, Alabama's pre-1991 and post-1991 classification of retirement benefits is not in violation of the provisions of Amendment 25 to the Alabama Constitution, the Equal Protection Clause or the equal protection provisions of the Alabama Constitution," and it thus denied the representatives' requests for refund of taxes paid on their retirement benefits. The Court of Civil Appeals affirmed. Melof v. James, 735 So.2d 1166. We granted the representatives' petition for certiorari review and heard oral arguments. We now affirm.

Issue I

Whether Alabama's retirement-tax structure violates Amendment 25 to the Alabama Constitution of 1901.

The exemptions and constitutional amendments at issue were adequately recounted in their historical context by the Court of Civil Appeals:

"Amendment 25 to the Alabama Constitution of 1901 was ratified in 1933. It authorized the State to levy an income tax on Alabama citizens, but prohibited any special income tax treatment of the income of public officers and employees. Subsequent to the ratification of Amendment 25, the Legislature enacted an Alabama income tax in 1935. 1935 Ala. Acts No. 194.

"The Legislature created the Teachers Retirement System of Alabama (`TRS') and the State Employees Retirement System of Alabama (`ERS') in 1939 and 1945, respectively. 1939 Ala. Acts, Act No. 419, and 1945 Ala. Acts, Act No. 515. Each of the acts creating the two retirement systems contains a provision exempting the systems' retirement benefits from any state or municipal tax. These exemptions remain in effect today. § 16-25-23 and § 36-27-28, Ala. Code 1975.

"Amendment 61 to the Alabama Constitution of 1901 was ratified in 1947. Section C. of that Amendment provides:

"`All laws relating to the income tax, not in conflict herewith and valid on the date of the ratification of this amendment, are hereby validated and confirmed.'

"In 1958, the Legislature codified the previously granted exemptions to retirement benefits of TRS and ERS members into the income tax statutes. 1959 Ala. Acts, Act No. 112.

"Pursuant to § 36-27-6(a), Ala.Code 1975, counties, municipalities, and public or quasi-public boards of the state may join the ERS and thereby qualify their retirees for the exemption of retirement benefits from Alabama income tax.

"Beginning with the tax year 1991, the Legislature exempted from income tax the retirement benefits received by Alabama taxpayers from: 1) the TRS, 2) the ERS, 3) political subdivisions of the State for employment as firefighters or peace officers, 4) any United States Government source; and 5) a "defined benefit plan," as defined in § 414(j) of the Internal Revenue Code of 1986. §§ 40-18-19 through -20, Ala.Code 1975.

"Before 1991, for the tax years beginning in 1987, firefighters received an exemption on the first $8,000 per year of retirement compensation. Before 1991, for the tax years beginning in 1984, peace officers received an exemption on the first $8,000 per year of retirement compensation. Before 1991, there was no exemption for private retirement benefits. The retirement benefits of Alabama teachers, state employees, and federal civil service employees were exempt from tax before 1991 and for the years in question in this case.

"The Internal Revenue Code, as amended by the Employee Retirement Income Security Act (`ERISA'), Pub.L. No. 93-406, 1974, classifies qualified retirement plans as `defined benefit plans' and `defined contribution plans.' The distinction between the two types of plans is that an employee's benefit under a `defined contribution plan' is the amount in an account in the employee's name, while an employee's benefit under a `defined benefit plan' is specified by the terms of the plan. In other words, a `defined contribution plan' specifies how much goes into the plan, while a `defined benefit plan' specifies how much comes out of the plan.

"The retirement benefits distributed by the TRS and the ERS are from a `defined benefit plan,' meaning that the employee's benefit is specified by the terms of the plan. § 16-25-14 and § 36-27-16, Ala.Code 1975."

Melof v. James, 735 So.2d at 1168-69.

In essence, Amendment 25 to the Alabama Constitution of 1901 does three things: 1) it allows the Legislature to institute an income tax; 2) it tells how the tax funds are to be distributed; and 3) it prohibits the State from imposing on the citizenry at large an income-tax structure that differs from that applied to state employees. Amendment 25 reads in full:

"Article XXII. The legislature shall have the power to levy and collect taxes for state purposes on net incomes from whatever source derived within this state, including the incomes derived from salaries, fees and

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