Gunther v. Dubno

• Citation: 195 Conn. 284,487 A.2d 1080
• Court: Connecticut Supreme Court
• Decision Date: 26 February 1985
• Parties: George L. GUNTHER et al. v. Orest T. DUBNO, Commissioner of Revenue Services et al.

Page 1080

487 A.2d 1080

195 Conn. 284

George L. GUNTHER et al. v. Orest T. DUBNO, Commissioner of Revenue Services et al.

Supreme Court of Connecticut.

Argued Dec. 11, 1984.

Decided Feb. 26, 1985.

Ronald L. Sheiman, Westport, with whom, were, Richard P. Gilardi, Stratford, and, on brief, Michael L. Shapiro, Stratford, for appellants (plaintiffs).

Richard K. Greenberg, Asst. Atty. Gen., with whom were Robert L. Klein, Asst. Atty. Gen., and, on brief, Joseph I. Lieberman, Atty. Gen., for appellees (defendants).

Before PETERS, C.J., and PARSKEY, SHEA, DANNEHY and FRANCIS X. HENNESSY, JJ. PETERS, Chief Justice.

The principal issue on this appeal is the constitutionality of the Connecticut tax on the net income of unincorporated businesses that was enacted in 1981. Forty-two named plaintiffs brought a class action, on behalf of themselves and others similarly situated, against the commissioner of revenue services and the treasurer of the state of Connecticut challenging the constitutionality of Public Acts 1981, No. 81-255, §§ 2 through 22, as amended by Public Acts 1981, No. 81-411, §§ 7, 8. ¹ The plaintiffs sought injunctive, declaratory and monetary relief from tax liability under the act as well as from the penalties imposed by the act for failure to comply with its provisions. The trial court, Hon. Irving Levine, state trial referee, found the issues for the defendants and the plaintiffs appealed. We find no error.

The act, which is entitled "An Act Concerning State Tax Revenue for the Fiscal Year Commencing July 1, 1981," imposes a net income tax on unincorporated businesses and institutes a fourth method for computing the previously enacted corporate business tax. Although the act did not become effective until July 1, 1981, the provisions at issue were expressly made applicable to tax years beginning on or after January 1, 1981. Public Acts 1981, No. 81-255, § 37. Both taxes were subsequently repealed for tax years beginning on or after January 1, 1983. ² As the trial court noted, the repeal does not render this case moot since the plaintiffs continue to have the right to seek refunds and to avoid liability for the two years during which the tax was in effect.

The principal provisions of the act impose a tax on an unincorporated business ³ whose gross income exceeds $50,000 and whose net income exceeds $15,000. Public Acts 1981, No. 81-255, § 3(b); Public Acts 1981, No. 81-411, §§ 7, 42; General Statutes (Rev. to 1983) § 12-611(b)(1), (b)(2). Such a business is liable for a minimum tax of $250. In the alternative, the tax is calculated at 5 percent of taxable net income. Public Acts 1981, No. 81-255, § 3(a); General Statutes (Rev. to 1983) § 12-611(a). ⁴ Any business that meets the threshold test for liability must pay whichever of these two alternate amounts is the greater.

In addition to establishing the unincorporated business tax, Public Acts 1981, No. 81-255, adds a fourth base of taxation for incorporated businesses. Public Acts 1981, No. 81-255, § 22; Public Acts 1981, No. 81-411, § 8; General Statutes (Rev. to 1983) § 12-219. The act imposes a 5 percent tax on those corporations with gross incomes in excess of $50,000 that would have been taxed in a lesser amount under the previously existing three bases for taxation of corporate income. ⁵

In their complaint, the plaintiffs attacked the constitutionality of Public Acts 1981, No. 81-255 as amended on three grounds. They claimed that it impermissibly: (1) establishes arbitrary and unreasonable classifications in violation of the equal protection clauses of the United States and the Connecticut constitutions; (2) defines liability in language which is so vague as to be void for vagueness under the due process clauses of the United States and the Connecticut constitutions; and (3) imposes retroactive liability in violation of the due process clauses of the United States and the Connecticut constitutions. The same claims are renewed upon this appeal. Like the trial court, we find them unpersuasive.

I

In their first assignment of error, the plaintiffs focus on the classification of exemptions under the unincorporated business tax. The plaintiffs claim that the act establishes classifications that are unreasonable and arbitrary under the equal protection clauses of our federal and state constitutions, ⁶ principally because the act provides for notch exemptions rather than for total exemptions. In contrast to a total exemption, which "leaves a specified amount of income untaxed for all taxpayers ... the notch exemption essentially designates the class of taxpayers subject to the tax. For those taxpayers within the taxed class, all income denoted ... is subject to the tax without any threshold exemption." Miller v. Heffernan, 173 Conn. 506, 513, 378 A.2d 572 (1977), appeal dismissed, 434 U.S. 1057, 98 S.Ct. 1226, 55 L.Ed.2d 758 (1978). The notch exemptions of which the plaintiffs complain are the statutory thresholds of $50,000 of gross income and $15,000 of net income, ⁷ below which no tax at all is payable and above which the minimum tax of $250 is due and owing.

In our assessment of this claim, we must begin with the established principle that those who challenge the constitutionality of a state statute bear the heavy burden of demonstrating beyond a reasonable doubt that the presumption of its validity has been overcome. See, e.g., Kellems v. Brown, 163 Conn. 478, 486, 313 A.2d 53 (1972), appeal dismissed, 409 U.S. 1099, 93 S.Ct. 911, 34 L.Ed.2d 678 (1973); Adams v. Rubinow, 157 Conn. 150, 152-53, 251 A.2d 49 (1968). A party challenging a tax statute on the grounds of equal protection bears an even greater burden because "[a]s this court emphasized in Kellems v. Brown, supra, 163 Conn. at 487, 313 A.2d 53, quoting Madden v. Kentucky, 309 U.S. 83, 88, 60 S.Ct. 406, 408, 84 L.Ed. 590 [1940], ' "in taxation, even more than in other fields, legislatures possess the greatest freedom in classification. Since the members of a legislature necessarily enjoy a familiarity with local conditions which this Court cannot have, the presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it." ' " Miller v. Heffernan, supra, 173 Conn. at 509-10, 378 A.2d 572. Nonetheless, even for the purposes of taxation, the legislature does not have an unlimited power to create classifications. The classifications that it selects cannot be arbitrary but " 'must rest upon some ground of difference having a fair and substantial relation to the object of the legislation.' " (Citations omitted.) Allied Stores v. Bowers, 358 U.S. 522, 527, 79 S.Ct. 437, 441, 3 L.Ed.2d 480 (1959); see United Illuminating Co. v. New Haven, 179 Conn. 627, 636-37, 427 A.2d 830 (1980); Kellems v. Brown, supra, 163 Conn. at 490, 313 A.2d 53. Recognizing that any plan of taxation necessarily has some discriminatory impact; San Antonio Independent School District v. Rodriguez, 411 U.S. 1, 41, 93 S.Ct. 1278, 1301, 36 L.Ed.2d 16, reh. denied, 411 U.S. 959, 93 S.Ct. 1919, 36 L.Ed.2d 418 (1973); United Illuminating Co. v. New Haven, supra, 179 Conn. at 641, 427 A.2d 830; we have previously stated the operative test for the validity of a tax statute to be the following: " 'As long as some conceivable rational basis for the difference exists, "a classification is not offensive merely because it is not made with mathematical nicety." ' " (Emphasis in original.) (Citations omitted.) United Illuminating Co. v. New Haven, supra, 640-41, 427 A.2d 830.

The trial court found a rational basis for the notch exemptions in Public Acts 1981, No. 81-255 as amended in the distinction between those unincorporated businesses that functionally resemble incorporated businesses and those that are essentially "Mom and Pop" enterprises. The legislature intended to tax the former category because incorporated businesses were already being taxed, but intended to continue to exempt the latter group of smaller businesses.

The plaintiffs do not disagree with this statement of the legislature's original intentions nor do they contest the legitimacy of such a plan in principle. They argue, however, that the legislature abandoned this rational plan when the first notch exemption, which had originally been set at $150,000 of gross income, was subsequently reduced to $50,000. In their view, the ultimate reach of the statute became too sweeping to accomplish its valid purpose of exempting the small businesses which had originally been targeted for special treatment. Furthermore, with respect to the second notch exemption, the plaintiffs argue that the exemption of businesses with a net income below $15,000 fails to leave the average family budget intact, as the legislature may have intended. The plaintiffs rely, for this argument, on statistical evidence before the trial court ⁸ that showed the average budget of an urban family of four in 1979 ranging from a low of $13,623 to a high of $36,891.

The plaintiffs' position is untenable. It is not part of the judicial function to fine tune the legislature's definition of what constitutes a "Mom and Pop" business enterprise or an average family budget for tax purposes. "[A] legislature is not bound to tax every member of a class or none, as long as some rational basis for the designated distinction exists." Miller v. Heffernan, supra, 173 Conn. at 511, 378 A.2d 572; see Carmichael v. Southern Coal & Coke Co., 301 U.S. 495, 509-10, 57 S.Ct. 868, 872-73, 81 L.Ed. 1245 (1937). At most, the plaintiffs have shown that the plan selected by the legislature "resulted in some inequities to individual taxpayers." Proof of the existence of the inequities that inevitably follow from every legislative decision of inclusion and...