Duffy v. Wetzler

• Court: New York Supreme Court — Appellate Division
• Writing for the Court: Before THOMPSON; THOMPSON
• Citation: Duffy v. Wetzler, 174 A.D.2d 253, 579 N.Y.S.2d 684 (N.Y. App. Div. 1992)
• Decision Date: 15 January 1992
• Parties: , 14 Employee Benefits Cas. 2616 Eugene H. DUFFY, et al., Respondents-Appellants, Albert Engel, et al., proposed Plaintiffs-Intervenors-Appellants, v. James W. WETZLER, etc., et al., Appellants-Respondents.

Page 684

579 N.Y.S.2d 684

174 A.D.2d 253, 14 Employee Benefits Cas. 2616

Eugene H. DUFFY, et al., Respondents-Appellants Albert Engel, et al., proposed Plaintiffs-Intervenors-Appellants, v. James W. WETZLER, etc., et al., Appellants-Respondents.

Supreme Court, Appellate Division Second Department.

Jan. 15, 1992.

Robert Abrams, Atty. Gen., Albany (Peter H. Schiff and Denise A. Hartman, of counsel), for appellants-respondents James W. Wetzler and Roderick G.W. Chu, individually and as present or former New York State Com'r of Taxation and Finance, and Edward V. Regan, individually and as Comptroller of the State of N.Y.

O. Peter Sherwood, Corp. Counsel, New York City (Edward F.X. Hart, Stanley Buchsbaum, Frances J. Henn, and Edith I. Spivack, of counsel), for appellants-respondents Anthony Shorris, Stanley E. Grayson, Abraham Biderman, and Paul Crotty, individually and as present or former Com'r of Finance of the City of New York, and the City of New York.

Anderson Kill Olick & Oshinsky, P.C., New York City (Rudolph W. Giuliani, Mark L. Weyman, and Roberto Velez, of counsel), Phelan & Costello, P.C., New York City (John J. Phelan III, Robert J. Costello, and Michael F. Fitzgerald, of counsel), and O'Neil, Cannon & Hollman, S.C., Milwaukee, Wis. (Eugene O. Duffy and Gregory W. Lyons, of counsel), for respondents-appellants and proposed plaintiffs-intervenors-respondents-appellants. (One brief filed)

Before THOMPSON, J.P., and KUNZEMAN, MILLER and O'BRIEN, JJ.

THOMPSON, Justice Presiding.

The main issue arising at bar is whether the decision in the instant case should be applied retroactively, or prospectively, pursuant to the recent decision of the United States Supreme Court in James B. Beam Distilling Co. v. Georgia, 501 U.S. ----, 111 S.Ct. 2439, 115 L.Ed.2d 481 [hereinafter Beam ]. We conclude that an analysis of Beam requires prospective application on the facts. For the reasons which follow therefore, we modify the order and judgment from which the first appeal ensues, and affirm the orders appealed from.

I

The plaintiffs commenced this action on May 9, 1989, on behalf of themselves and purportedly all Federal retirees similarly situated, seeking a declaratory judgment, a permanent injunction, and damages as a result of the United States Supreme Court decision on March 28, 1989, in Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 [hereinafter Davis ]. In that case, the Supreme Court invalidated, as unconstitutional, Michigan's tax scheme which exempted from taxation pensions paid to former State employees but taxed the pensions paid to all other retirees, including those of the Federal government. Davis' ratio decidendi was predicated on a construction of 4 U.S.C. § 111, which provides, in pertinent part, that the Federal government consents to the taxation of its officers or employees "by a duly constituted taxing authority having jurisdiction, if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation" (emphasis added). The Davis court held that 4 U.S.C. § 111 applied to both retirement and ordinary income, and it found discrimination, and a violation of the principles of intergovernmental tax immunity in Michigan's exemption of State retiree pensions. While it will be more relevant later, it bears noting at this juncture that Davis never decided the point regarding prospectivity or retroactivity, and therefore made no determination as to refunds of those taxes which had been unconstitutionally assessed and collected.

Interestingly enough, at the time of the Davis decision, at least 19 states, including New York, had tax or pension statutes that included exemptions similar to Michigan's. Not surprisingly, Davis spawned a mass of litigation in many states on behalf of Federal retirees seeking, as do the plaintiffs at bar, an adjudication of the constitutionality of such statutes and/or refunds of taxes paid.

In 1920, both the Greater New York Charter and the New York Civil Service Law were amended to render exempt from State and municipal taxes the pensions of officers and employees of the State and City (see, L.1920, ch. 427, ch. 741). In 1939, a similar provision was incorporated into the New York Constitution as article XVI, § 5 which provides that "[a]ll salaries, wages and other compensation, except pensions, paid to officers and employees of the State and its subdivisions and agencies shall be subject to taxation" (emphasis added). This provision was also legislated into Tax Law § 612(c)(3), one of the statutes at issue, "subtract[ing] from federal adjusted gross income * * * [p]ensions to officers and employees of this State". Also in 1939, in response to Graves v. People ex rel. O'Keefe, 306 U.S. 466, 59 S.Ct. 595, 83 L.Ed. 927 and the Public Salary Tax Act of that year (5 U.S.C. former § 84a [now 4 U.S.C. § 111], New York first began to tax the compensation paid to Federal employees (see, L.1939, ch. 619; codified as Tax Law § 359[6] and later repealed by L.1987, ch. 267). For the first time in 1966, the City adopted a personal income tax containing an identical exemption for State and City pensions (see, New York City Administrative Code, § T46-112.0[c][3]; L.1966 ch. 773, § 12[c]. In 1981, the State Legislature added a section to both the State and City personal income taxes which exempted from taxation pension benefits of all kinds up to the first $20,000 for any retirees over the age of 59 1/2 (Tax Law § 612[c][3-a]; Administrative Code, § 11-1712[c][3-a]. At the crux of the instant action is the taxation of pension benefits of Federal retirees above this first $20,000, and of the total pension benefits of all Federal retirees under the age of 59 1/2.

Soon after the Davis decision, and prior to this action, efforts were made to conform the State and City taxing schemes to Davis. On July 21, 1989, the Legislature amended Tax Law § 612(c)(3) and § 11-1712 of the Administrative Code to place pensions paid to Federal retirees in the same position as pensions of State retirees. The Legislature declared that the amendment was to take effect "immediately and shall apply to federal pension benefits received in taxable years beginning on or after January 1, 1989" (L.1989, ch. 664, §§ 3; L.1989, ch. 664, §§ 1, 2).

The plaintiffs' second amended complaint, served on December 23, 1989, set forth four causes of action. The first alleged a violation of 42 U.S.C. § 1983 and sought damages against the defendant Wetzler, the current Commissioner of Taxation and Finance of the State, and various current and former functionaries in the State and City finance departments. The plaintiffs alleged that in enforcing the impugned Tax Law and Administrative Code, these defendants violated the plaintiffs' right guaranteed under 4 U.S.C. § 111 (principles of intergovernmental tax immunity), US Constitution, article VI, § 2, and the due process and equal protection clauses of the United States Constitution. The second cause of action sought a declaration that Tax Law § 612(c)(3) and New York City Administrative Code § 11-1712(c)(3) were unconstitutional. It also sought a refund for the years 1986 through 1989 and asked that those refund rights not be qualified by permitting only prospective application of the decision. In the third cause of action, the plaintiffs sought an injunction against the State and City defendants preventing them from collecting taxes on Federal pensions for the years 1986 through 1989, and to set up a trust fund for repayment of such allegedly unlawfully collected taxes. The fourth cause of action sought a refund from the City for money had and received. The second amended complaint also sought class certification and class attorneys' fees. After service of their answers, the State and City defendants moved for summary judgment on the ground that Davis applied prospectively only, since it was completely unforeseeable.

The Supreme Court (Le Vine, J.), inter alia, determined that the plaintiffs were entitled to refunds and enjoined the defendants from collecting the taxes as described therein for the period 1986 through 1988 (Duffy v. Wetzler, 148 Misc.2d 459, 555 N.Y.S.2d 543). The court reasoned that the Davis decision mandated a declaration that "the City and State personal income tax scheme which taxed Federal pension benefits * * * while exempting from taxation State and local pension benefits, [was] discriminatory, invalid and unconstitutional" (Duffy v. Wetzler, supra, at 470, 555 N.Y.S.2d 543). It observed that the 1989 amendments to the Tax Law and the Administrative Code were prospective only. "Thus, Federal Pension benefits received in years prior to 1989 remain[ed] subject to taxation and collection to the extent that the Statute of Limitation applie[d]" (Duffy v. Wetzler, supra, at 465, 555 N.Y.S.2d 543). The court found that there was no need to determine "whether Davis * * * should have prospective or retroactive application, as the question of entitlement, method and extent of a tax refund is governed by New York's Tax Law" (Duffy v. Wetzler, supra, at 466, 555 N.Y.S.2d 543). It referred to Tax Law § 687(a), which provided, in pertinent part, that a claim for a credit or an overpayment of income tax must be filed within the later of two periods, either three years from the date of filing of the return or two years from the date of payment of the tax. The court in Duffy found that although "overpayment" was not defined in the Tax Law, a reference to Federal income tax law, as well as Supreme Court decisions, yielded the conclusion "that overpayments arising out of the payment of a tax later held to be unconstitutional are recoverable in the same manner as other overpayments, provided that a timely claim is filed" (Duffy v. Wetzler, supra, at 466, 555 N.Y.S.2d 543). We disagree.

II

Central to the issue of tax refunds is the prior determination of the...