Kerr v. Waddell

• Court: Arizona Court of Appeals
• Writing for the Court: TOCI; VOSS, P.J., and GRANT
• Citation: Kerr v. Waddell, 185 Ariz. 457, 916 P.2d 1173 (Ariz. App. 1996)
• Decision Date: 23 April 1996
• Docket Number: No. 1,CA-TX,1
• Parties: Clark J. KERR and Billie Sue Kerr, husband and wife, Susan Moran, Steve Allen, and John Udall, on behalf of themselves and all persons resident in Arizona who were employees of the United States Government in any one or all of the years during the period 1984 through the present and who paid Arizona income taxes on federal retirement contributions for any of such years, and all members of the certified class, Plaintiffs-Appellants, Cross-Appellees, v. Paul WADDELL, individually and as Director of the Department of Revenue of the State of Arizona, Craig Cormier, individually and Assistant Director of the Arizona Department of Revenue, and all unknown agents, employees, successors in office, assistants and all others acting in concert with them or at their direction, and the Department of Revenue of the State of Arizona, Defendants-Appellees, Cross-Appellants. 92-0010.

Page 1173

916 P.2d 1173

185 Ariz. 457

Clark J. KERR and Billie Sue Kerr, husband and wife, Susan Moran, Steve Allen, and John Udall, on behalf of themselves and all persons resident in Arizona who were employees of the United States Government in any one or all of the years during the period 1984 through the present and who paid Arizona income taxes on federal retirement contributions for any of such years, and all members of the certified class, Plaintiffs-Appellants, Cross-Appellees, v. Paul WADDELL, individually and as Director of the Department of Revenue of the State of Arizona, Craig Cormier, individually and Assistant Director of the Arizona Department of Revenue, and all unknown agents, employees, successors in office, assistants and all others acting in concert with them or at their direction, and the Department of Revenue of the State of Arizona, Defendants-Appellees, Cross-Appellants.

No. 1 CA-TX 92-0010.

Court of Appeals of Arizona Division 1, Department T.

April 23, 1996.

[185 Ariz. 459] Bonn, Luscher, Padden & Wilkins, Chartered by Brian A. Luscher, Paul V. Bonn, Randall D. Wilkins, Phoenix, and O'Neil, Cannon & Hollman, S.C. by Eugene O. Duffy, Gregory W. Lyons, Milwaukee, WI, for Appellants/Cross-Appellees.

Grant Woods, Attorney General by Gail H. Boyd, Assistant Attorney General, Patrick Irvine, Assistant Attorney General, Phoenix, for Appellees/Cross-Appellants.

OPINION

TOCI, Judge.

Arizona previously exempted from income taxation all contributions to retirement plans paid for by state or local governmental employers, but levied an income tax on retirement contributions paid for by the federal government. The United States Supreme Court found a similar tax scheme violative of the doctrine of intergovernmental tax immunity in Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). The taxpayers in this case filed suit in tax court seeking refunds and declaratory and injunctive relief under 42 U.S.C. § 1983 (1981).

On appeal, we held that the trial court erred in not dismissing the taxpayers' state-law claims for failure to exhaust administrative remedies. Kerr v. Waddell, 183 Ariz. 1, 8, 899 P.2d 162, 169 (App.1994) ("Kerr I "). We further held that taxpayers need not exhaust their administrative remedies to bring a claim under 42 U.S.C. § 1983 in tax court and that the tax scheme violated the doctrine of intergovernmental tax immunity. Id. at 10, 14, 16, 899 P.2d at 172, 176, 178. After we decided Kerr I, the United States Supreme Court issued its decision in National Private Truck Council, Inc. v. Oklahoma Tax Commission, --- U.S. ----, 115 S.Ct. 2351, 132 L.Ed.2d 509 (1995), which held that state courts cannot hear § 1983 claims challenging tax laws when adequate legal remedies exist.

On remand from the Arizona Supreme Court, we vacate our previous opinion and file this opinion in its stead. We hold that the tax court's subject matter jurisdiction to hear state-law tax claims and § 1983 tax claims is subject to the exhaustion of administrative remedies. Because Arizona's administrative tax procedure is an adequate legal remedy that was not exhausted in this case, we find that the trial court lacked subject matter jurisdiction to hear these claims. Accordingly, we reverse the tax court's conclusions on the merits and remand with instructions to dismiss the taxpayers' suit seeking refunds and declaratory and injunctive relief under 42 U.S.C. § 1983.

I. FACTS AND PROCEDURAL BACKGROUND

In Davis, the United States Supreme Court considered a Michigan income tax scheme that differed in its treatment between the retirement benefits of state and federal employees. 489 U.S. at 805, 109 S.Ct. at 1502. Michigan defined taxable income in a manner that excluded all retirement benefits received from the state or its political subdivisions, but included retirement benefits received from the federal government. Id. at 806, 109 S.Ct. at 1503. The Court held that the discriminatory treatment of federal employees violated the doctrine of intergovernmental tax immunity and 4 U.S.C. § 111 (1985), which prohibits discrimination against officers and employees of the federal government because of the source of their income or compensation. Id. at 817, 109 S.Ct. at 1508-09.

After the Supreme Court's decision in Davis, federal employees Clark Kerr and his wife, Susan Moran, Steve Allen, and John Udall ("the taxpayers") filed a complaint in the tax court seeking relief under 42 U.S.C. § 1983 against the director and assistant director of the Arizona Department of Revenue ("ADOR"), and ADOR itself (collectively "defendants"). The taxpayers attacked Arizona's income tax statutes excluding from state income taxation the retirement contributions of state and local government employees, while taxing the retirement contributions of federal employees. The taxpayers sought a declaration that the state's tax scheme was unconstitutional, an injunction prohibiting defendants from collecting taxes on federal employee retirement contributions, income tax refunds for the years 1984 through 1988, and damages. ¹ The taxpayers also moved to certify a class of approximately 41,500 federal employees, their estates, and survivors. None of the taxpayers prosecuted a claim for refunds through the Arizona administrative process before filing the action in the tax court.

After cross-motions for summary judgment on various issues, the tax court held: (1) the taxpayers were not required to exhaust their administrative remedies before bringing this action; (2) as a matter of law, the individual defendants were qualifiedly immune from liability on the taxpayers' claims for damages pursuant to 42 U.S.C. § 1983; (3) a violation of 4 U.S.C. § 111 is legally cognizable under § 1983; (4) the action was properly maintainable as a class action; (5) as applied A.R.S. section 43-1022(2) violated the doctrine of intergovernmental tax immunity and, thus, unconstitutionally discriminated against the taxpayers; and (6) except to the extent that A.R.S. section 43-1022(2) discriminated against the taxpayers, the Arizona scheme of income taxation of contributions to governmental retirement plans did not violate the doctrine of intergovernmental tax immunity.

With the summary judgment proceedings, the tax court denied the taxpayers' motion for an order directing the state to extend to them prospectively the state income tax exemption it had declared violative of the intergovernmental tax immunity doctrine. The tax court also determined that, pursuant to Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the legal principle established by Davis would not be retrospectively applied. Therefore, the taxpayers were not entitled to refunds of Arizona income taxes previously paid on contributions to federal retirement systems. The tax court entered judgment in accordance with its rulings. The taxpayers appealed. The defendants cross-appealed.

On September 13, 1994, we issued our opinion resolving the appeal and cross-appeal. Kerr v. Waddell, 183 Ariz. 1, 899 P.2d 162. We affirmed in part the tax court's grant of declaratory relief, holding: (1) violation of the doctrine of intergovernmental tax immunity, codified as 4 U.S.C. § 111, gave rise to an enforceable right under 42 U.S.C. § 1983; (2) the taxpayers could not be required to exhaust their administrative remedies before bringing claims for damages and declaratory and injunctive relief pursuant to 42 U.S.C. § 1983 in the tax court; (3) A.R.S. section 43-1022(2) violated the intergovernmental tax immunity doctrine by excluding state and local employees' contributions to retirement plans not "picked up" by the employer under 26 U.S.C. § 414(h), but not those of similarly situated federal employees; and (4) the tax court's refusal to declare that the taxpayers were entitled to be exempted prospectively from Arizona income taxation of their contributions to federal retirement plans was not error. Finally, we affirmed the entry of summary judgment in favor of the individual defendants on the taxpayers' claim for damages under 42 U.S.C. § 1983, based on qualified immunity.

We reversed other portions of the tax court's judgment. We held that A.R.S. section 43-1001(2) violated the intergovernmental tax immunity doctrine by taxing federal retirement contributions while exempting state and local retirement contributions. We held that the adoption of federal adjusted gross income as Arizona gross income in section 43-1001(2) without any compensating deduction of the federal retirement contributions that are automatically included in it discriminated against federal employees. We also held that the tax court lacked subject matter jurisdiction to rule on the taxpayers' state-law refund claims because they failed to exhaust their administrative remedies before ADOR and the Board of Tax Appeals ("BOTA"). We vacated the tax court's decision not to enjoin further enforcement of A.R.S. section 43-1001(2) and remanded for further consideration of that decision in light of our conclusion that section 43-1001(2) unconstitutionally discriminated against federal workers. Finally, because of our resolution of the dispositive issues, we noted that we were not required to address other issues.

Our supreme court granted review and remanded the case to this court for reconsideration in light of the United States Supreme Court's opinion in National Private Truck Council, and we requested supplemental briefing on additional issues in light of that case. We now vacate our opinion of September 13, 1994, and reverse the tax court's judgment with directions to dismiss the action in its entirety.

II. DISCUSSION

A. State-Law Claims

Arizona provides an administrative remedy for individuals who believe they have been wrongly denied a tax refund. A.R.S. section 42-130 (1991) provides that if ADOR disallows a claim for refund, it must notify the taxpayer, who then...