Herrick v. Lindley, s. 78-1020

• Decision Date: 03 July 1979
• Docket Number: 78-1047,Nos. 78-1020,s. 78-1020
• Citation: 391 N.E.2d 729,59 Ohio St.2d 22,13 O.O.3d 13
• Parties: , 13 O.O.3d 13 HERRICK et al., Appellees and Appellants, v. LINDLEY, Tax Commr., Appellant and Appellee, et al. (Two cases.)
• Court: Ohio Supreme Court

Page 22

59 Ohio St.2d 22

391 N.E.2d 729, 13 O.O.3d 13

HERRICK et al., Appellees and Appellants, v. LINDLEY, Tax Commr., Appellant and Appellee, et al. (Two cases.)

Nos. 78-1020, 78-1047.

Supreme Court of Ohio.

July 3, 1979.

Syllabus by the Court

Pursuant to the language of R.C. 145.561 and 3307.711, Public Employees Retirement System and State Teachers Retirement System retirees have a vested right to receive a retirement allowance or similar benefit at the rate fixed by law when such benefit was conferred; however, neither of such sections grants a vested right to a continuing exemption from state income tax.

On January 22, 1974, by amended complaint, plaintiffs-appellees instituted a class action in the Court of Common Pleas of Franklin County. The action was commenced on behalf of a plaintiff class comprised of an estimated 40,000 participants in either the Public Employees Retirement System (PERS) or the State Teachers Retirement System (STRS), who retired prior to October 16, 1972. On that date, R.C. 145.56 and 3307.71 were amended so as to subject PERS and STRS retirement benefits to the state income tax levied by R.C. 5747.02.

Appellees sought a declaratory judgment that the amendments to these sections, as applied to the plaintiff class, violated the provisions of Section 28, Article II of the Constitution of Ohio. Appellees further demanded that an injunction issue restraining collection of the tax upon retirement benefits received by the plaintiff class, and that taxes previously paid on such benefits be refunded.

Appellant Tax Commissioner filed a motion to dismiss for lack of jurisdiction over the subject matter, lack of jurisdiction over the person, and for failure to state a claim. The trial court granted appellant's motion and dismissed the complaint. On appeal, the Court of Appeals reversed the order of the trial court and remanded the cause for further proceedings. This court affirmed the decision of the Court of Appeals in Herrick v. Kosydar (1975), 44 Ohio St.2d 128, 339 N.E.2d 626.

Upon remand, the trial court declared the amendments to R.C. 145.56 and 3307.71 unconstitutional to the extent that they were found to operate retrospectively. In addition, the court enjoined the levy and collection of the state income tax upon retirement benefits vesting prior to October 16, 1972, and ordered appellant to compute the amount of taxes wrongfully collected in the past.

The Court of Appeals, with one judge dissenting, affirmed those parts of the lower court's judgment which struck down the amendments to the statutes and enjoined the levy and collection of the state income tax upon retirement benefits received by the plaintiff class. However, the court reversed that portion of the judgment which ordered appellant to compute the amount of taxes theretofore collected.

The causes are now before this court pursuant to the allowance of defendant's motion to certify the record in No. 78-1020, and of plaintiff's motion to certify the record in No. 78-1047.

George, Greek, King, McMahon & McConnaughey, David A. Johnston, Jr., and John P. Mazza, Columbus, for appellees and appellants.

William J. Brown, Atty. Gen., and John C. Duffy, Jr., Asst. Atty. Gen., for appellant and appellee.

HOLMES, Justice.

The most significant issue presented by these appeals is whether those participants in either PERS or STRS who retired prior to October 16, 1972, have a vested right to receive their retirement benefits exempt from the state income tax. If they have such a vested right, then the levy of the state income tax upon their retirement benefits would constitute a retroactive tax, violative of Section 28, Article II of the Ohio Constitution.

Prior to October 16, 1972, PERS and STRS retirement benefits were by statute exempted from all state taxes. On that date, the General Assembly amended R.C. 145.56 and 3307.71 excepting the newly enacted state income tax from that exemption, and thereby levying the state income tax upon such benefits. (134 Ohio Laws 930, 931.)

As amended, R.C. 145.56, which relates to PERS, now provides that:

"The right of a person to a pension, an annuity, or retirement allowance itself, any optional benefit, any other right accrued or accruing to any person under sections 145.01 to 145.57 of the Revised Code, or of any municipal retirement system established subject to such sections, under the laws of this state or any charter, the various funds created by sections 145.01 to 145.57 of the Revised Code, or under such municipal retirement system, and all moneys and investments and income thereof, are hereby exempt from any state tax, Except the tax imposed by section 5747.02 of the Revised Code, and any county, municipal, or other local tax, and shall not be subject to execution, garnishment, attachment, the operation of bankruptcy, or the insolvency laws, or other process of law, and shall be unassignable except as specifically provided in such sections." (Emphasis denotes amendment.)

Similarly, in relation to STRS, R.C. 3307.71, as amended, provides:

"The right of a person to a pension, an annuity, or retirement allowance itself, any optional benefit, any other right accrued or accruing to any person under sections 3307.01 to 3307.72 of the Revised Code, the various funds created by section 3307.65 of the Revised Code and all moneys and investments and income thereof, are hereby exempt from any state tax, Except the tax imposed by section 5747.02 of the Revised Code, and any county, municipal, or other local tax, and shall not be subject to execution, garnishment, attachment, the operation of bankruptcy or insolvency laws, or any other process of law whatsoever and shall be unassignable except as specifically provided in sections 3307.01 to 3307.72 of the Revised Code." (Emphasis denotes amendment.)

Appellees contend that these sections, as they read until 1972, conferred a valuable benefit in the form of an absolute exemption from state taxation, and that they had acquired a vested right in this exemption to be received upon retirement. Appellees predicate this contention upon a theory similar to promissory estoppel, arguing that during their period of employment they were continually assured that they would receive a tax exempt pension. Appellees argue further that when they retired with this tax exemption intact, the General Assembly could not "reach back" and levy a tax upon their pensions after they had retired.

In support of their contention, appellees rely upon the following definition of a "retrospective law" given by Justice Story, and approved by this court in Rairden v. Holden, Admr. (1864), 15 Ohio St. 207, 210, and in subsequent cases:

" 'Upon principle, every statute which takes away or impairs vested rights, acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions or considerations already past, must be deemed retrospective.' "

We hereby reaffirm the validity of this definition, but note, however, that it does not aid appellees. The amendments to R.C. 145.56 and 3307.71 did indeed create a "new obligation." However, that obligation did not affect "transactions or considerations already past." The state income tax levied by R.C. 5747.02 is a tax upon income. See Chope v. Collins (1976), 48 Ohio St.2d 297 (358 N.E.2d 573.) Thus, the transaction which is subject to the obligation to pay income tax is the realization of income, and the tax upon income realized after the effective date of the amendments is not retrospective in nature.

As this court stated in Lakengren v. Kosydar (1975), 44 Ohio St.2d 199, at page 204, 339 N.E.2d 814, at page 817:

" * * * As a practical matter, a tax levied upon income of a particular period, whether payable immediately or in the future, is a tax taken from that income, and that taking may not be made retroactively. This in no way prevents the General Assembly from levying a...