District of Columbia v. Bender

• Decision Date: 24 August 2006
• Docket Number: No. 06-TX-294.,No. 06-TX-255.,06-TX-255.,06-TX-294.
• Citation: 906 A.2d 277
• Parties: DISTRICT OF COLUMBIA, Appellant, v. Kenneth BENDER, et al., Appellees.
• Court: D.C. Court of Appeals

906 A.2d 277

DISTRICT OF COLUMBIA, Appellant, v. Kenneth BENDER, et al., Appellees.

No. 06-TX-255.

No. 06-TX-294.

District of Columbia Court of Appeals.

Argued June 28, 2006.

Decided August 24, 2006.

James C. McKay, Jr., Senior Assistant Attorney General for the District of Columbia, with whom Robert J. Spagnoletti, Attorney General for the District of Columbia, and Todd S. Kim, Solicitor General, were on the brief, for appellant.

Gerald H. Sherman, with whom Richard S. Marshall and David H. Dickieson, Washington, D.C., were on the brief, for appellees.

Before WASHINGTON, Chief Judge, FISHER, Associate Judge, and BELSON, Senior Judge.

BELSON, Senior Judge:

Appellant District of Columbia appeals from the trial court's March 8, 2006, decision that granted appellee taxpayers' Cross-Motion for Summary Judgment and its subsequent order of March 24, 2006, granting appellees a refund of unincorporated business franchise taxes ("UB Taxes") paid in the amount of $241,815. We disagree with the trial court's holding that Title 47, D.C.Code Enactment Act of 1996 ("Enactment Act of 1996") violated the provisions of the Home Rule Act by permitting the Council of the District of Columbia to impose the UB Tax on the personal income of a real estate partnership's nonresident partners, and reverse.

I. Background

Appellees, residents of the states of Montana, Florida, and Maryland, are partners in four partnerships which generate rental income from real estate located in the District of Columbia. Appellees paid UB Tax totaling $241,815 for the calendar years ending December 31, 1999-2000, and the fiscal years ending September 30, 2000-2002, for the four real estate partnerships. Appellees' timely refund claims for these periods were denied, and the District of Columbia Office of Tax Appeals denied their subsequent appeals. Appellees then filed suit in the Superior Court of the District of Columbia seeking refunds of the amounts paid. Both parties filed motions for summary judgment. The Superior Court granted appellees' motion for summary judgment and denied appellant's motion for summary judgment. The trial court held that the UB Tax could not be imposed on any unincorporated business income if "that net income is to be distributed to the nonresidents directly and personally" because the Enactment Act of 1996 "carried forward the prohibiting effect of [the] Home Rule Act['s]" ban on the taxation of personal income of nonresidents of D.C. This timely appeal followed.

II. The Status of the Law Applicable in the District of Columbia

A. District of Columbia Income and Franchise Act of 1947

Congress enacted the District of Columbia Revenue Act of 1947 which, inter alia, imposed an income tax on D.C. residents and resident estates and trusts and "a franchise tax upon every corporation and unincorporated business for the privilege of carrying on or engaging in any trade or business within the District and of receiving such other income as is derived from sources within the District...." District of Columbia Income and Franchise Tax Act of 1947, Pub.L. No. 80-195, ch. 258, 61 Stat. 328, 349 (codified at D.C.Code § 47-1810.01(a)(2) (2001)) (hereinafter "Tax Act of 1947"). It specifically provided that "for the purposes of this article . . . the words `taxable income' mean ... that portion of the entire net income of every nonresident which is subject to tax under title VIII of this article [Tax on Unincorporated Businesses]." 61 Stat. at 643. Congress initially set the tax rate at 5.0% per annum and raised it several times. 61 Stat. at 346. In addition, Congress established that the UB Tax would "be payable by the person or persons, jointly and severally, conducting the unincorporated business. The taxes ... may be assessed in the name of the unincorporated business or in the name or names of the person or persons liable for the payment of such taxes, or both." 61 Stat. at 346 (codified at D.C.Code § 47-1808.05 (2001)).

B. The Home Rule Act

In 1973, Congress enacted the District of Columbia Self-Government and Governmental Reorganization Act. Pub.L. No. 93-198, 87 Stat. 774 (1973) (codified at D.C.Code § 1-201.01 et seq.) (hereinafter "Home Rule Act"). The purpose of this legislation was to allow Congress to maintain its legislative power over the District of Columbia, as provided by the U.S. Constitution, but allow residents to elect local officials while creating a tripartite form of government with limited legislative powers. § 102(a), 87 Stat. at 777 (codified at D.C.Code § 1-201.02 (2001)). With respect to the Council's taxation powers, Congress mandated that

SEC. 602. (a) The Council shall have no authority to pass any act contrary to the provisions of this Act except as specifically provided in this Act, or to —

...

(5) impose any tax on the whole or any portion of the personal income, either directly or at the source thereof, of any individual not a resident of the District....

§ 602(a)(5), 87 Stat. at 813 (codified at D.C.Code § 1-206.02(a)(5) (2001)). In addition, the Home Rule Act provided:

(b) No law or regulation which is in force on the effective date of Title IV of this Act [January 2, 1975] shall be deemed amended or repealed by this Act except to the extent specifically provided herein or to the extent that such law or regulation is inconsistent with this Act, but any such law or regulation may be amended or repealed by act or resolution as authorized in this Act, or by Act of Congress....

§ 717(b), 87 Stat. at 820 (codified at D.C.Code § 1-207.61 (2001)). Further, the Home Rule Act stated:

Sec. 761. To the extent that any provisions of this Act are inconsistent with the provisions of any other laws the provisions of this Act shall prevail and shall be deemed to supersede the provisions of such laws.

§ 761, 87 Stat. at 836 (codified at D.C.Code § 1-207.61 (2001)).

C. Act of September 3, 1974

On September 3, 1974, Congress enacted legislation that provided that the Council was "authorized to change the rate of the taxes imposed under — (1) the District of Columbia Income and Franchise Tax Act of 1947." Act of Sept. 3, 1974, Pub.L. No. 93-407, § 471(1), 88 Stat. 1036, 1064. This legislation further stated that

SEC. 501. Notwithstanding any other provision of law, or any rule of law, nothing in this Act shall be construed as limiting the authority of the Council of the District of Columbia to enact any act, resolution or regulation, after January 2, 1975, pursuant to the District of Columbia Self-Government and Governmental Reorganization Act with respect to any matter covered by this Act.

§ 501, 88 Stat. at 1066.

This legislation was passed after the enactment of the Home Rule Act but before the elected Mayor and Council took office. Thus, the Council referred to in the legislation was the nine-member Council appointed by the President of the United States. See Reorganization Plan No. 3 of 1967, 32 Fed.Reg. 11669 (Aug. 11, 1967), reprinted in 1 D.C.Code at 125 (2001), and in 81 Stat. 948 (1967). Reorganization Plan No. 3 gave the appointed Council authority to determine the amount of net income subject to tax under the Tax Act of 1947; withhold tax; and establish rules and regulations to enforce the Tax Act of 1947. Id. The Home Rule Act did not abolish the Council's right to perform these functions. See § 404(a), 87 Stat. at 787 ("all functions granted to or imposed upon, or vested in or transferred to the District of Columbia Council, as established by Reorganization Plan Numbered 3 of 1967, shall be carried out by the Council in accordance with the provisions of this Act"). Thus the authority of the appointed Council to change the rate of tax imposed under the Tax Act of 1947 was transferred by the Home Rule Act to the new elected Council.

D. Title 47, D.C.Code Enactment Act of 1996

Title 47, D.C.Code Enactment Act of 1996 became effective on April 9, 1997. D.C. Law 11-254, 44 D.C.Reg. 1264 (1997). This legislation served as "a purely technical measure to enact Title 47 of the District of Columbia Code (Taxation and Fiscal Affairs) ... [and] includes strictly technical amendments to Title 47, such as clarifying erroneous cross references, [and] correcting grammatical errors." REPORT OF THE COMMITTEE OF THE WHOLE, COUNCIL OF THE DISTRICT OF COLUMBIA ON BILL 11-865, THE "TITLE 47, D.C.CODE ENACTMENT ACT OF 1996," at 1 (1996) (hereinafter Committee Report). A review of the changes made to D.C.Code §§ 47-1808.1 through 47-1808.7, the code sections pertaining to the UB Tax, indicate that there were no substantive changes made — only grammatical changes. COMMITTEE REPORT at 37-38.

E. Case Law

This court has previously held that the UB Tax is a tax "levied upon personal income." Bishop v. District of Columbia, 401 A.2d 955, 961 (D.C.1979), reinstated en banc, 411 A.2d 997, cert. denied, 446 U.S. 966, 100 S.Ct. 2943, 64 L.Ed.2d 825 (1980).¹ This court concluded that the Council's imposition of a tax on nonresident, unincorporated professionals and personal services businesses violated the Home Rule Act because "the tax burdens the taxpayer personally." Bishop, 401 A.2d at 961. However, the court expressly declined to extend this holding to the taxation of "nonresident professionals who operate an unincorporated business." Id. In District of Columbia v. Califano, 647 A.2d 761, 765 (D.C.1994), this court held "that the New York unincorporated business tax is an individual income tax." The Califano court concluded that the New York tax "operates the same way [as the UB Tax]," relying on Bishop, supra, 401 A.2d at 961 n. 18. 647 A.2d at 763. Neighboring jurisdictions have taken the view that the UB Tax is an income tax and not a franchise tax, based on this court's decisions in Bishop and Califano. See Roach v. Comptroller of the Treasury, 327 Md. 438, 610 A.2d 754, 759 (1992); Mathy v. Commonwealth, 253 Va. 356, 483 S.E.2d 802, 805 (1997).²

III. Discussion

Appellees assert that the D.C....