Anonymous Taxpayer v. Dept. of Revenue

• Decision Date: 28 April 2008
• Docket Number: No. 26473.,26473.
• Citation: 377 S.C. 425,661 S.E.2d 73
• Parties: ANONYMOUS TAXPAYER, Appellant, v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.
• Court: South Carolina Supreme Court

661 S.E.2d 73

377 S.C. 425

ANONYMOUS TAXPAYER, Appellant, v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

No. 26473.

Supreme Court of South Carolina.

Heard January 10, 2008.

Decided April 28, 2008.

A. Camden Lewis, Ariail E. King, of Lewis & Babcock, and John M.S. Hoefer, of Willoughby & Hoefer, all of Columbia, for Appellant.

Ronald W. Urban, of SC Department of Revenue, Vance J. Bettis and Shahin Vafai, both of Gignilliat, Savitz & Bettis, all of Columbia, for Respondent.

Justice BEATTY:

In this revisited challenge to the change in state tax exemptions for retired state employees, Appellant Anonymous Taxpayer appeals the circuit court's decision to affirm the administrative law court's (ALC's) order denying class certification and dismissing his claims. We affirm.

FACTUAL/PROCEDURAL BACKGROUND

Prior to 1989, state and local government retirement benefits were exempt from state taxes while only the first $3,000 of federal retirement benefits was exempt. S.C.Code Ann. § 9-1-1680 (1986). In 1989, the United States Supreme Court held the doctrine of intergovernmental immunity and 4 U.S.C. § 111 (1997), prohibited the states from taxing federal government retirees at a greater rate than state and local government retirees. Davis v. Michigan Dep't of Treasury, 489 U.S. 803, 818, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). The Court informed states they could cure the problem "either by extending the tax exemption to retired federal employees (or to all retired employees), or by eliminating the tax exemption for retired state and local government employees." Id. In response to Davis, our Legislature sought to standardize state taxation on both federal and state retirees by deleting the full tax exemption to state and local government retirees, increasing state retirement benefits by 7%, and allowing a comprehensive exemption for only the first $3,000 of all government retirement benefits. Act No. 189, Part II, § 39, 1989 S.C. Acts 1436 (Act 189).¹

Anonymous Taxpayer (Appellant) retired in 1997 and filed an action on behalf of himself and all other similarly situated state retirees in 1998 against the State, the different State Retirement Systems, the Department of Revenue, and the Budget and Control Board. Appellant alleged breach of contract and challenged the constitutionality of Act 189. The trial court denied the State's motion to dismiss for failure to exhaust the administrative remedies. Finding retirees had no contractual or property right in a tax exemption, the court granted the State's motion to dismiss for failure of the complaint to state a cause of action.

This Court reversed, finding: (1) the trial court should have dismissed the matter without prejudice because the retirees failed to first exhaust their administrative remedies; and (2) the trial court erred in granting a motion to dismiss on the novel issue of whether the retirees had constitutional causes of action for impairment of contract and taking without just compensation. Evans v. State, 344 S.C. 60, 67-69, 543 S.E.2d 547, 551 (2001). The Court found pursuing administrative remedies would not deprive retirees of their constitutional right to a jury trial on their breach of contract cause of action. The Court noted that, assuming there was a valid contract between retirees and the Retirement Systems, the Retirement Systems could not be held liable for any alleged breach once Act 189 became effective because performance would have been rendered impossible by the enactment of law, and thus, retirees did not have a valid breach of contract action. Evans, 344 S.C. at 67, 543 S.E.2d at 551 ("Since State Retirees do not have a viable breach of contract action, pursuing their action through the administrative process does not violate their right to a jury trial."). The case was remanded to the trial court, dismissed without prejudice, and pursued through administrative channels.²

On August 31, 2001, the Department of Revenue issued a final order denying Appellant's request for a refund of the amount of tax paid after the enactment of Act 189. The Department found: Appellant's claims were barred by the statute of limitations; there was no contractual right to the tax exemption; even assuming there was a contract, there was no substantial impairment of the contract; if there was a substantial impairment, repeal of the tax exemption was reasonable and necessary to carry out the legitimate government purpose; and repeal of the exemption did not amount to a taking. The Department also found that Appellant could not file a claim for a refund on behalf of a class.

Appellant requested a contested case hearing before the Administrative Law Court (ALC) on behalf of himself and all similarly situated state retirees, restating his impairment of contract, taking without just compensation, and denial of due process claims. The ALC issued an order on June 14, 2002, initially granting Appellant partial summary judgment by concluding the retirement code gave rise to a contract between the State and retirees. However, the ALC vacated this order upon reconsideration. The matter was submitted upon stipulations, depositions, and briefs.

On February 20, 2003, the ALC denied Appellant's motion for class certification, finding: (1) there was no language in the Revenue Procedures Act that provided for class actions; (2) the Act required the Department to issue refunds to any other taxpayer who had also applied for refunds once a taxpayer prevails on his claim that a tax was imposed wrongfully; and (3) the Act stated that there was no "other remedy than those provided" in the Act, such that a class action suit would be barred. On April 29, 2004, the ALC issued its final order on the merits, finding: (1) the statute of limitations barred Appellant's claims; (2) the contract cause of action failed on the merits because Appellant could not prove there was a contract, there was a substantial impairment of the contract, or that Act 189 was not reasonable or necessary; and (3) Appellant failed to prove Act 189 constituted a taking of private property without just compensation or that it was a deprivation of property without due process of law. The ALC dismissed Appellant's claims and denied all relief. The circuit court affirmed the ALC's findings on appeal. This appeal followed.

DISCUSSION

I. Impairment of Contract

Appellant argues the enactment of Act 189 impaired his retirement contract, thus violating the Contract Clause of the United States Constitution. In discussing the Contract Clause, the Supreme Court said, "Although the Contract Clause appears literally to proscribe `any' impairment, ... `the prohibition is not an absolute one and is not to be read with literal exactness like a mathematical formula.'" United States Trust Co. of New York v. New Jersey, 431 U.S. 1, 21, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977) (quoting Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398, 428, 54 S.Ct. 231, 78 L.Ed. 413 (1934)). "The Contract Clause is not an absolute bar to subsequent modification of a State's own financial obligations. As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose." United States Trust Co., 431 U.S. at 25, 97 S.Ct. 1505. To establish a contract clause violation, Appellant must show To establish a contract clause violation, Appellant must show: (1) the existence of a contract; (2) the law changed actually impaired the contract and the impairment was substantial; and (3) the law was not reasonable and necessary to carry out a legitimate government purpose. Hodges v. Rainey, 341 S.C. 79, 93, 533 S.E.2d 578, 585 (2000).

A. Existence of Contract

The major question in this case is whether the pre-Act 189 tax exemption amounted to a contract. Appellant argues a contract existed based on the contractually-significant language used in the Retirement Code.

"Generally, statutes do not create contractual rights." Layman v. State, 368 S.C. 631, 637, 630 S.E.2d 265, 268 (2006). However, a contract created by statute may be found to exist in this state only where contractual rights are expressly found in the language of the statute. Id. at 638, 630 S.E.2d at 268. Specifically, the Court looks for contractually-significant language within the statute in determining whether a contract was intended to be created by the Legislature. Id. at 641, 630 S.E.2d at 270. In Layman, the contractually-significant language included words to the effect that a "member who is eligible," "complies with the requirements of this article," and "shall agree." Id. at 639, 630 S.E.2d at 269.

Former section 9-1-1680 contained the following language:

The right of a person to an annuity or retirement allowance or to the return of contributions, an annuity or retirement allowance itself, any optional benefit or any other right accrued or accruing to any person under the provisions of this chapter, and the moneys of the System created hereunder, are hereby exempted from any State or municipal tax and exempted from levy and sale, garnishment, attachment or any other process whatsoever and shall be unassignable except as herein specifically otherwise provided.

S.C.Code Ann. § 9-1-1680 (1986).

In reviewing this statute, the circuit court held there was no contractually-significant language that would evidence the Legislature's intent for the tax exemption to be contractually binding. Appellant argues, however, that language from other sections of the entire Retirement Code renders all the subsections in the Code, including the tax exemption, a contract with state retirees. This argument is unavailing in light of our opinion in Layman where the language of the statute sections were evaluated individually for contractually-significant language. See Layman, 368 S.C. at 643, 630 S.E.2d at 271 (evaluating separately the TERI statute and the working retirees statute, both found within...