Huckaba v. Johnson

• Decision Date: 03 January 1978
• Citation: 281 Or. 23,573 P.2d 305
• Parties: Carey J. HUCKABA, Appellant, v. Lee JOHNSON, Attorney General of the State of Oregon, and Department of Revenue, State of Oregon, John J. Lobdell, Director, Respondents.
• Court: Oregon Supreme Court

Page 305

573 P.2d 305

281 Or. 23

Carey J. HUCKABA, Appellant, v. Lee JOHNSON, Attorney General of the State of Oregon, and Department of Revenue, State of Oregon, John J Lobdell, Director, Respondents.

Supreme Court of Oregon, Department 2.

Argued and Submitted Nov. 9, 1977.

Decided Jan. 3, 1978.

Paul J. Speck, Bend, argued the cause for appellant. On the briefs were E. G. Nilsson and Williver & Forcum, Bend.

Ted E. Barbera, Asst. Atty. Gen., Salem, argued the cause for respondents. With him on the brief were James A. Redden, Atty. Gen., and Theodore W. de Looze, Chief Tax Counsel, Salem.

Before HOLMAN, P. J., TONGUE and HOWELL, JJ., and RICHARDSON, J. Pro Tempore.

RICHARDSON, Justice Pro Tempore.

This is a suit for declaratory judgment brought before the Oregon Tax Court pursuant to ORS chapter 28. The suit challenges the constitutionality of ORS 316.067(3) of the Personal Income Tax Act. ORS 316.067(1)(c) allows a deduction from taxable income of payments received under a retirement system established by the United States; including military retirement systems. The challenged statute, ORS 316.067(3), denies this exclusion in the case of a military retiree until age 65. The question presented to the court for determination is whether the exclusion from taxable income provided in ORS 316.067(1)(c) of funds received from a retirement system established by the United States may be denied in the case of military retirees until age 65 without violating the equal protection and uniformity requirements of the state and federal constitutions. The tax court held the statute was constitutional and dismissed the complaint. Plaintiff appeals. We affirm.

The facts are relatively simple and were presented to the tax court by stipulation. Taxpayer retired after 20 years of service in the Armed Forces. He is presently under 65 years of age and receives a military pension. In addition he has earned income in excess of $2,400 per year. Under ORS 316.067(3) he is denied exclusion from taxable income of retirement benefits until he reaches age 65. The exclusion after 65 is offset dollar for dollar against other earned income.

In Dutton Lbr. Corp. v. Tax Com., 228 Or. 525, 365 P.2d 867 (1961), we set forth the applicable principles:

"The equal protection of the laws required by the Fourteenth Amendment does not prevent states from resorting to classifications for the purposes of legislation and they have a wide range of discretion in that regard (Safeway Stores v. Portland, 149 Or. 581, 595, 42 P.2d 162; Wittenberg v. Mutton, 203 Or. 438, 446, 280 P.2d 359) if the classification is reasonable, not arbitrary and rests upon some ground of difference having a fair and substantial relation to the object of the legislation, so that persons similarly situated shall be treated alike. This latitude is notably wide in classifications for purposes of taxation. Royster Guano Co. v. Virginia, 253 U.S. 412, 40 S.Ct. 560, 64 L.Ed. 989, 990. * * * " 228 Or. at 539, 365 P.2d at 874.

What is required in assessing a constitutional challenge to classification for tax benefit is a review of the grounds for the classification to determine if it rests upon a rational basis. The legislature may make distinctions of degree having a rational basis, and when subjected to judicial scrutiny they must be presumed to rest on that basis if there is any conceivable state of facts which would support it. Carmichael v. Southern Coal Co., 301 U.S. 495, 57 S.Ct. 868, 81 L.Ed. 1245, 109 A.L.R. 1327 (1937); Smith et al v. Columbia County et al, 216 Or. 662, 341 P.2d 540 (1959). It, however, is not sufficient to merely point out differences between the groups of taxpayers for divergent treatment. The differences justifying the attempted classification must bear a reasonable relationship to the legislative purpose. The legislative power to create a classification implies the authority to subclassify persons included in the general class if there is a rational basis for making this further distinction. Smith et al v. Columbia County et al, supra; State v. Kozer, 116 Or. 581, 242 P. 621 (1926).

ORS 316.067 provides in pertinent part:

"(1) There shall be subtracted from federal taxable income:

" * * *

"(c) Amounts received in the taxable year in compensation for personal services rendered in prior years, from a pension, annuity, retirement or similar fund under a public retirement system established by the United States, including the retirement system for the performance of service in the Armed Forces of the United States * * * . In the case of a public retirement system established by the United States, including the retirement system for the performance of service in the Armed Forces of the United States, the maximum amount excludable from taxable income from such pensions or annuities shall be in the amount of $2,400." ¹

" * * *

"(3) In the case of amounts received from the retirement system for performance of service in the Armed Forces of the United States as described in paragraph (c) of subsection (1) of this section the $2,400 exclusion shall be granted only to retirees age 65 or older and such exclusion is further reduced dollar for dollar to the extent of any earned income received during the taxable year. * * * "

The statutory language quoted above is the result of amendment to the Income Tax Act in 1971. As it read in 1971 prior to amendment, ORS 316.067(1)(c) allowed subtraction from taxable income of amounts received from a United States retirement system but specifically excluded military retirement income from the tax benefit regardless of the age of the retiree. Consequently, the taxpayer would not have been entitled to an exclusion even after reaching age 65.

The 1971 amendment which created the taxpayer's constitutional challenge began with the introduction of House Bill 1283 which, in its original form, would have amended ORS 316.067(1) to subtract from federal taxable income

" * * *

"(f) (t)he first $2,400 of any payments received as pension or retirement pay received for the performance of active service in the Armed Forces of the United States."

The language of ORS 316.067(1)(c) and (3) quoted above in the body of this opinion and as it read at the commencement of this proceeding was adopted as an amendment to House Bill 1283 in the Senate Committee on Taxation. The committee's deliberations provide some insight into the motives for the amendment. A senator, proposing adoption of the amendment said:

" * * * Now this amendment makes sense. In other words we won't be faced with the situation of somebody (who) has put in 20 years, went into the service at 18 and comes out at 38 would be given this tax preference. I think that this 65 amendment 65 year or older amendment it does make sense and it extends the benefit to those people who have served their country as well as to former federal employes. * * * " Senate Committee on Taxation, May 26, 1971, Tape No. 13, Side 1.

The 1971 amendment identified persons receiving income from a federal retirement system as a class who could receive the tax modification benefit. This general class was divided into two groups by the subclassification of military retirees who would not receive the income subtraction until they attained the age of 65, and then the subtraction is offset dollar for dollar against other earned income. Plaintiff asserts there is no rational basis for such subclassification of federal retirees because they are all members of a class receiving retirement income from a United States retirement system.

The Department of Revenue argues that the differences in eligibility for retirement benefits between Armed Forces retirement systems and those available to other federal employes justify the different treatment for income modification.

There are differences between the two retirement systems of a substantial nature that rationally relate to the purposes of the tax modification statute. The objective of the 1971 amendment to ORS 316.067 was to extend to military retirees a tax benefit approximately equal to that previously enjoyed by civil service retirees. The subclassification was necessary in order to not accord greater benefits to military retirees. This subclassification is based upon the differences in eligibility for retirement. Military personnel qualify for retirement after 20 years of service regardless of age. Generally persons enter the Armed Forces at an early age and if they retire after 20 years of service are still young enough to compete in the job market and commence a new career. As a result they have available not only their military retirement pay but the income from post-retirement employment. In addition they have the opportunity of qualifying for...