Estate of Bohn v. Waddell
| Decision Date | 29 September 1992 |
| Docket Number | CA-TX,No. 1,1 |
| Citation | 848 P.2d 324,174 Ariz. 239 |
| Parties | , 16 Employee Benefits Cas. 2877 ESTATE of John L. BOHN, Shirley Bohn, Donald and Mary Rutan, husband and wife, and Carl Linton, a single man, Plaintiffs-Appellants, Cross Appellees, v. Paul WADDELL, individually and as Director of the Department of Revenue of the State of Arizona; Department of Revenue of the State of Arizona, and Craig Cormier, individually and as the Assistant Director of the Arizona Department of Revenue, et al., Defendants-Appellees, Cross Appellants. 91-008. |
| Court | Arizona Court of Appeals |
During the tax years 1984 through 1988, Arizona's income tax laws exempted from income taxation 100% of state, county, and municipal retirement benefits paid to retired employees of those political entities, while exempting only the first $2,500 of federal retirement benefits paid to retired federal employees.
On March 28, 1989, the United States Supreme Court, in Davis v. Michigan Dep't of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), invalidated a similar Michigan income tax scheme on the ground it violated the principles of intergovernmental tax immunity.
One month later several retired federal employees sued the Arizona Department of Revenue, claiming that the Arizona exemption statutes violated federal law. Although it declined to issue injunctive relief to the taxpayers, the tax court agreed. It concluded that the statutory scheme taxing federal pensions violated federal law because it did not tax state pensions in the same way. The tax court adopted a refund formula that refunded to federal retirees a small percentage of the taxes they paid on federal retirement benefits.
We hold that the tax court did not abuse its discretion in declining to issue injunctive relief to the taxpayers under 42 U.S.C. section 1983. We also hold, however, that the plaintiff-taxpayers' failure to exhaust their Arizona administrative remedies either in their individual or representative capacities prevented the tax court from ruling on their claims for Arizona income tax refunds. Accordingly, we vacate the tax court's opinions. In so doing, we do not reach the question of the propriety of the tax court's refund formula.
Because of our holding, we also need not determine the remaining issues concerning the scope and retroactivity of the United States Supreme Court's decision in Davis. Similarly, we do not reach the question whether the taxpayers' attorneys are entitled to an award of attorney's fees under the "common fund" theory.
(1) Were the taxpayers subjected to irreparable injury by the tax court's refusal to grant injunctive relief when the Department of Revenue announced that, despite the March 28, 1989 holding in Davis, it would penalize any federal employee who did not pay the Arizona income tax on federal pensions paid in 1988?
(2) Were the taxpayers required to exhaust their administrative remedies? To determine this issue, we must decide the following subordinate issues:
(a) Is the statutory refund scheme mandatory, or does the tax court have original jurisdiction of tax refund claims?
(b) Is it proper for an administrative agency to apply a constitutional doctrine to a state of facts before it?
(c) Was administrative review futile, thereby excusing the taxpayers from exhausting their administrative remedies?
After the Davis decision, Arizona taxpayers Jack and Shirley Bohn, Donald and Mary Rutan, and Carl Linton filed a complaint in the Maricopa County Superior Court. They filed for themselves and all other residents of Arizona who received United States government retirement benefits during the period in question. The suit claimed that Ariz.Rev.Stat.Ann. ("A.R.S.") section 43-1022(4) 1 violated federal law.
The complaint named the director and former directors of the Arizona Department of Revenue and their spouses as defendants. Invoking 42 U.S.C. section 1983 as authority for the action, it sought declaratory and injunctive relief, damages of "all monies unlawfully paid to or collected by the defendants under the authority of A.R.S. § 43-1022 ...," and attorney's fees and costs.
The defendants moved to dismiss the complaint or alternatively for summary judgment. The taxpayers filed a cross-motion for summary judgment, for declaratory and injunctive relief, and for class certification. See Ariz.R.Civ.P. 23(b)(2). The tax court granted the taxpayers' motion to amend their complaint to add the Department as a defendant and to state a separate claim for refund of Arizona income taxes paid on federal retirement benefits for the tax years in question.
After hearing argument on the cross-motions for summary judgment and the taxpayers' motions for class certification and declaratory and injunctive relief, the tax court: (1) granted appellees' motion to dismiss the taxpayers' damages claim under 42 U.S.C. section 1983; (2) denied the taxpayers' motion for injunctive relief; (3) treated military retirement pay the same as federal civil service retirement benefits; (4) held that the statutory scheme taxing federal pensions violated federal law because it did not tax state pensions in the same way; (5) granted plaintiffs refunds measured by "the difference between the tax federal pensioners paid on their pensions and what they would have paid had state taxpayers been similarly taxed"; (6) directed the Department to propose a refund plan consistent with that principle; and (7) announced it would not certify a class, provided the Department could devise an administrative plan to effectively administer the refund process under the doctrine of virtual representation.
Following these rulings, appellees moved to dismiss the taxpayers' second amended complaint. Their motion cited numerous grounds, including the theory that the tax court lacked jurisdiction of the refund claims because the taxpayers did not follow statutory administrative procedures. After briefing, the tax court denied the motion.
As directed, the Department submitted a proposed refund plan to the tax court. It designed the plan to operate with the named plaintiffs as "virtual representatives" of all nonparty taxpayers rather than as representatives of the putative class. After the parties had briefed the refund issue, the taxpayers' counsel filed a series of motions to join successively increasing numbers of named individuals as parties plaintiff. Each motion stated that it would be withdrawn if the court ultimately granted the taxpayers' pending motion for class certification. The tax court denied the motions.
On April 6, 1990, the tax court published its formal opinion pursuant to A.R.S. section 12-171. See Bohn v. Waddell, 164 Ariz. 74, 790 P.2d 772 (Tax 1990). Instead of permitting the case to proceed as a class action, the tax court adopted the "virtual representation" approach the Department proposed. Nevertheless, it rejected appellees' contention that the taxpayers' claim for refunds should be dismissed for failure to exhaust administrative remedies. Finally, the tax court explained in detail the legal theory supporting its decision to award an economic remedy, and the method of calculating each taxpayer's refund.
After the tax court filed its opinion, some 4,500 individual Arizona taxpayers, represented by the taxpayers' counsel, filed a motion to intervene as parties plaintiff. Characterizing the motion as having been filed "at this late date," the tax court denied it. The intervenors timely appealed from the tax court's formal order denying intervention. This court docketed their appeal as case No. 1 CA-TX 90-029.
The taxpayers moved for reconsideration, for a new trial, or alternatively to alter or amend the judgment. They also moved for an award of attorney's fees and expert witness fees. The taxpayers later requested clarification of the tax court's opinion, moved for an order withdrawing the tax court's opinion from publication, and moved for relief from the judgment.
The tax court denied the taxpayers' motions. It also declined to award attorney's fees to the taxpayers' counsel under the private attorney general doctrine or the "common fund" doctrine. Instead, it awarded the taxpayers attorney's fees limited to $105,000, plus costs, under A.R.S. section 12-348.
On March 7, 1991, the tax court issued a supplemental opinion that reaffirmed its original opinion of April 6, 1990. See Bohn v. Waddell, 167 Ariz. 344, 807 P.2d 1 (Tax 1991). 2 When the tax court issued its supplemental opinion, it simultaneously entered a final judgment approved by both sides as to form.
The taxpayers filed a timely notice of appeal. Appellees filed a timely notice of cross-appeal. We have jurisdiction pursuant to A.R.S. section 12-2101(B). 3
A long-standing principle once prohibited states from taxing federal instrumentalities. See McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819) (). This principle became known as the doctrine of intergovernmental tax immunity. At one point, the doctrine expanded to the point that neither federal or state governmental entities could tax the employees of the other. See Collector v. Day, 78 U.S. (11...
To continue reading
Request your trial
-
Tucson Elec. Power Co. v. Apache County
...164 Ariz. 74, 790 P.2d 772 (Tax 1990) and supp. op., 167 Ariz. 344, 807 P.2d 1 (Tax 1991), both vacated on other grounds, 174 Ariz. 239, 848 P.2d 324 (App.1992). Although the Bohn tax court cases are not precedential, they do indicate a remedy preferable to appellees' assertion in their res......
-
Kerr v. Waddell
...before ADOR and the State Board of Tax Appeals? Yes. We resolved a similar issue against the taxpayers in Estate of Bohn v. Waddell, 174 Ariz. 239, 848 P.2d 324 (App.1992), cert. denied, 509 U.S. 906, 113 S.Ct. 3000, 125 L.Ed.2d 693, reh. denied, 509 U.S. 941, 114 S.Ct. 15, 125 L.Ed.2d 766 ......
-
Mills v. Ariz. Bd. of Technical Registration
...do not commit to administrative agencies the power to determine constitutionality of legislation." (quoting Est. of Bohn v. Waddell , 174 Ariz. 239, 249, 848 P.2d 324 (App. 1992) )); see also Manning v. Reilly , 2 Ariz. App. 310, 312, 408 P.2d 414 (1965) ("Legal or constitutional questions ......
-
SunTrust Bank, Nashville v. Johnson
...actions seeking refunds or credits for credit sales that become bad debts,2 are a matter of legislative grace, Estate of Bohn v. Waddell, 174 Ariz. 239, 848 P.2d 324, 331 (1992); District of Columbia v. Keyes, 362 A.2d 729, 732 (D.C.1976); Scoa Indus., Inc. v. Howlett, 33 Ill.App.3d 90, 337......