Hackman v. Director of Revenue, State of Mo.

• Decision Date: 25 May 1989
• Docket Number: No. 71628,71628
• Citation: 771 S.W.2d 77
• Parties: , 11 Employee Benefits Cas. 1014 Frederick & Josephine HACKMAN, Appellants/Cross-Respondents, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent/Cross-Appellant.
• Court: Missouri Supreme Court

Page 77

771 S.W.2d 77

57 USLW 2736, 11 Employee Benefits Cas. 1014

Frederick & Josephine HACKMAN, Appellants/Cross-Respondents, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent/Cross-Appellant.

No. 71628.

Supreme Court of Missouri,

En Banc.

May 25, 1989.

Rehearing Denied June 15, 1989.

P. Terence Crebs, Christopher M. Barclay, St. Louis, and Thomas R. Schwarz, Jr., Jefferson City, for appellants/cross-respondents.

J. Harlan Stamper, Joel Pelofsky, Gregory M. Bentz, Kansas City, and Randy Bakewell, Missouri Dept. of Revenue, Jefferson City, for respondent/cross-appellant.

Juan D. Keller, William D. Crampton, John E. Toma, St. Louis, and Michael J. Kator, Washington, D.C., for amici curiae.

ROBERTSON, Judge.

On March 28, 1989, the United States Supreme Court decided Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). Davis held that Michigan's income taxation scheme, which exempted from taxation all retirement benefits paid by the state or its political subdivisions but levied an income tax on retirement benefits paid retired federal employees, violated 4 U.S.C. § 111. ¹

In this case we face two issues: First, whether Missouri's exemption from income taxation of certain retirement benefits paid public employees and Missouri's concomitant failure to exempt pensions of federal retirees likewise violate principles of intergovernmental tax immunity; second, if Missouri's income taxation scheme is illegal under Davis, whether, and under what circumstances federal retirees who paid the discriminatory tax may recover a refund. This case involves the construction of the revenue laws of this state. We have jurisdiction. Mo. Const. art. V, § 3.

We hold that under the teachings of Davis Missouri's income tax scheme violates principles of intergovernmental tax immunity. We further hold that appellants herein are entitled to a refund to the extent that such refund is permitted by Section 143.801, RSMo 1986. Reversed and remanded for such further proceedings consistent with this opinion.

I.

Appellants Frederick and Josephine Hackman filed combined Missouri income tax returns for the years 1985 through 1988, inclusive. Included in the Hackmans' income for purposes of the Missouri income tax return were Mr. Hackman's military retirement benefits paid by the United States government. Following the announcement of the United States Supreme Court's decision in Davis, appellants filed claims for refund with the Director of Revenue (the Director) pursuant to Section 143.801, RSMo 1986, for tax years 1985 through 1988. As a basis for their refund claims, appellants argued that taxes paid on the federal military retirement benefits were overpayments.

On April 24, 1989, the Department of Revenue denied appellants' claims for refund. Likewise on April 24, 1989, appellants filed a timely protest of that denial, pursuant to Section 143.841, RSMo 1986. The Director denied the protest that same day.

Appellants sought review of the Director's final decision with the Administrative Hearing Commission (the Commission) pursuant to Section 621.050, RSMo 1986. The parties waived hearing and submitted the case on stipulated facts. On May 1, 1989, the Commission held that it was without jurisdiction to determine appellants' claims for refund. City of Joplin v. Industrial Commission of Missouri, 329 S.W.2d 687 (Mo. banc 1959); State Tax Commission v. Administrative Hearing Commission, 641 S.W.2d 69 (Mo. banc 1982). The Commission therefore dismissed appellants' complaint; the effect of that dismissal was to sustain the Director's decision denying the refunds. This petition for review followed.

II.

The Director of Revenue, amici curiae and appellants concede that Missouri's taxation scheme offends 4 U.S.C. § 111 under Davis. That concession is well-founded. We are aware of but three distinctions between Michigan law and Missouri law, none of which compels a contrary result.

First, § 206.30(1)(f) Mich.Comp.Laws Ann. (Supp.1988), provides in pertinent part:

(1) "Taxable income" ... means adjusted gross income as defined in the internal revenue code subject to the following adjustments;

* * * * * *

(i) Retirement or pension benefits received from a public retirement system of or created by an act of this state or a political subdivision of this state.

* * * * * *

(iv) Retirement or pension benefits from any other retirement or pension system as follows:

(A) For a single return, the sum of not more than $7,500.00.

(B) For a joint return, the sum of not more than $10,000.00.

Unlike Michigan, exemptions for state public retirement benefits from income taxation under Missouri law are not found in the taxing statutes. Instead, our legislature provides the income tax exemptions in the statutes that create the various retirement systems. See, e.g., Section 70.735 RSMo 1986 (pensions for officers and employees of political subdivisions); Sections 86.190, 86.353, 86.493 and 87.365, RSMo 1986 (police and fire pensions); Section 104.250 RSMo 1986 (pensions of former employees of the State Highway Patrol and former employees of the Department of Highways and Transportation); Section 104.540 RSMo 1986 (pensions of former elected state officials and state merit system employees); and Section 169.587 RSMo 1986 (pensions of former teachers and school employees). The effect of Missouri's scattered retirement benefit exemption statutes is identical to that of Michigan's exemption statute for purposes of a Davis analysis.

Second, Davis involved a federal civil service employee's retirement benefit; appellants receive a federal military pension. 4 U.S.C. § 111 draws no distinction between federal military personnel and civil service personnel; nor shall we draw such a distinction.

Third, Section 206.30(1)(f)(iv) expressly exempts $7,500 in retirement benefits for a single return and $10,000 for a joint return from any pension for purposes of income taxation. For the years in question, Missouri provided no such exemption for benefits received under non-state retirement plans. To the extent that Michigan permitted some exemption for federal retirees, its taxation scheme is arguably more favorable to federal retirees than is Missouri's. Nevertheless, Davis finds Michigan's plan violative of 4 U.S.C. § 111. We are confident that Davis mandates a similar condemnation of Missouri law.

We hold, as the parties concede, that Missouri's system of taxation, which exempts the receipt of public retirement benefits for purposes of Missouri income taxation, "violates principles of intergovernmental tax immunity by favoring retired state and local government employees over retired federal employees." Davis, 489 U.S. at ----, 109 S.Ct. at 1508.

III.

The United States Supreme Court did not announce whether its decision in Davis had retrospective or prospective application, perhaps in large measure because Michigan conceded ² that "to the extent appellant has paid taxes pursuant to this invalid tax scheme, he is entitled to a refund." 489 U.S. at ----, 109 S.Ct. at 1508-09. In light of this uncertainty, the Director argues that we should apply the test announced in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), and adopted by this Court in Sumners v. Sumners, 701 S.W.2d 720 (Mo. banc 1985). By application of that test, the Director contends, Davis need only be applied prospectively and appellants would not be entitled to a refund.

Before reaching the issue of retroactive/prospective application, however, a threshold inquiry is necessary. "In order to reach the retroactivity issue, this court must first decide if ... state statutory law or state case law mandates refunds of taxes paid prior to the Supreme Court's ... decision. If this state's tax refund statutes ... apply, then all other issues are irrelevant." National Can Corp. v. Dept. of Revenue, 109 Wash.2d 878, 749 P.2d 1286, 1287 (1988) (emphasis added).

The General Assembly has required that the Director:

from funds appropriated shall refund any overpayment or erroneous payment of any tax which the state is authorized to collect. The general assembly shall appropriate and set aside funds sufficient for the use of the director of revenue to make refunds authorized by this section or by final judgment of court.

Section 136.035.1, RSMo 1986. In addition, the legislature has prescribed a specific procedure by which persons who seek an income tax refund can obtain it.

A claim for credit or refund of an overpayment of any tax imposed by sections 143.011 to 143.996 shall be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later .... No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in this subsection for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

Section 143.801.1, RSMo 1986. The statute presents two requirements for securing a refund: (1) a claim based on an overpayment (2) filed within three years of the filing of the return or two years of the payment of the tax. Both requirements must be met or no credit or refund is available to the taxpayer.

As to the first requirement, this Court has previously defined the word "overpayment" for purposes of Section 143.801 in Homestake Lead v. Director of Revenue, 759 S.W.2d 847 (Mo. banc 1988). Relying on Community Federal Savings & Loan Assoc. v. Director of Revenue, 752 S.W.2d 794, 798 (Mo. banc 1988), we held that "payment of a tax which was wholly unauthorized by law was an 'overpayment.' " Homestake Lead, 759 S.W.2d at 848. The Court reasoned that:

Unlike some tax refund statutes (e.g., § 139.031, RSMo 1986), § 143.801 does not require payment under protest as a condition of filing a claim for refund. The general assembly, just as...