Kuhn v. State Dept. of Revenue of State of Colo., s. 90SA299

• Decision Date: 16 September 1991
• Docket Number: 90SA300,Nos. 90SA299,s. 90SA299
• Citation: 817 P.2d 101
• Parties: 14 Employee Benefits Cas. 1586 Wendel Speer KUHN, Jr., Francis E. Becker, Jr., Bruce C. Derenthal, Julian Russell Dracon, Jacqueline Farrar, Robert J. Flor, Edward N. Gootee, Jr., David S. Harrigan, Jerry D. Jacks, Joe B. Mohorn, Richard C. Poyns, Donald L. Tatterson, Drew Charles Weyland, Richard W. Zolman, and all others similarly situated, Plaintiffs-Appellees/Cross-Appellants, v. STATE of Colorado, the DEPARTMENT OF REVENUE OF the STATE OF COLORADO, and John J. Tipton, in his capacity as Executive Director of the Department of Revenue of the State of Colorado, Defendants-Appellants/Cross-Appellees. Gary Boyd REIMER and James A. Mundt, Individually, and Gary Boyd Reimer, James A. Mundt, the Pikes Peak Chapter of the Retired Officers Association, a Colorado Non-Profit Corporation, and Chapter One of the Retired Enlisted Association, a Colorado Non-Profit Corporation, as Representatives of a Class of Those Similarly Situated Being Colorado Residents Receiving Retired Pay from the United States of America by Virtue of Federal Military Service, Plaintiffs-Appellees, and Wendel Speer Kuhn, Jr., Francis E. Becker, Jr., Bruce C. Derenthal, Julian Russell Dracon, Jacqueline Farrar, Robert J. Flor, Edward N. Gootee, Jr., David S. Harrigan, Jerry D. Jacks, Joe B. Mohorn, Richard C. Poyns, Donald L. Tatterson, Drew Charles Weyland, Richard W. Zolman, and All Others Similarly Situated, Intervenors-Appellees, v. The EXECUTIVE DIRECTOR OF the DEPARTMENT OF REVENUE OF the STATE OF COLORADO, and the State of Colorado, Defendants-Appellants.
• Court: Colorado Supreme Court

Page 101

817 P.2d 101

14 Employee Benefits Cas. 1586

Wendel Speer KUHN, Jr., Francis E. Becker, Jr., Bruce C Derenthal, Julian Russell Dracon, Jacqueline Farrar, Robert J. Flor, Edward N. Gootee, Jr., David S. Harrigan, Jerry D Jacks, Joe B. Mohorn, Richard C. Poyns, Donald L. Tatterson Drew Charles Weyland, Richard W. Zolman, and all others similarly situated, Plaintiffs-Appellees/Cross-Appellants, v. STATE of Colorado, the DEPARTMENT OF REVENUE OF the STATE OF COLORADO, and John J. Tipton, in his capacity as Executive Director of the Department of Revenue of the State of Colorado, Defendants-Appellants/Cross-Appellees Gary Boyd REIMER and James A. Mundt, Individually, and Gary Boyd Reimer, James A. Mundt, the Pikes Peak Chapter of the Retired Officers Association, a Colorado Non-Profit Corporation, and Chapter One of the Retired Enlisted Association, a Colorado Non-Profit Corporation, as Representatives of a Class of Those Similarly Situated Being Colorado Residents Receiving Retired Pay from the United States of America by Virtue of Federal Military Service, Plaintiffs-Appellees, and Wendel Speer Kuhn, Jr., Francis E. Becker, Jr., Bruce C. Derenthal, Julian Russell Dracon, Jacqueline Farrar, Robert J. Flor, Edward N. Gootee, Jr., David S. Harrigan, Jerry D. Jacks, Joe B. Mohorn, Richard C. Poyns, Donald L. Tatterson, Drew Charles Weyland, Richard W. Zolman, and All Others Similarly Situated, Intervenors-Appellees, v. The EXECUTIVE DIRECTOR OF the DEPARTMENT OF REVENUE OF the STATE OF COLORADO, and the State of Colorado, Defendants-Appellants.

Nos. 90SA299, 90SA300.

Supreme Court of Colorado, En Banc.

Sept. 16, 1991.

Coghill & Goodspeed, P.C., G. Stephen Long, Paul E. Goodspeed, Mark Apelman, Denver, Sparks Dix Enoch, P.C., R. Kenneth Sparks, Timothy V. Dix, Colorado Springs, for plaintiffs-appellees/cross-appellants, and intervenors-appellees.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., Maurice G. Knaizer, Deputy Atty. Gen., Larry A. Williams, First Asst. Atty. Gen., Thomas D. Fears, Michael L. Bieda, Asst. Attys. Gen., Denver, for defendants-appellants/cross-appellees, and defendants-appellants.

Warren, Mundt & Martin, P.C., James A. Mundt, Colorado Springs, for plaintiffs-appellees.

Justice ERICKSON delivered the Opinion of the Court.

This is a consolidated appeal by two groups of taxpayers who contend that section 39-22-104(4)(g), 16B C.R.S. (1988 Supp.), unconstitutionally discriminated between federal military retirees under age fifty-five and all other retirees under age fifty-five based on the source of their retirement pay. Section 39-22-104(4)(g) was repealed in 1989. In both Kuhn v. State, No. 89CV9164 (Denver Dist. Ct. June 8, 1990), and Reimer v. Department of Revenue, No. 89CV3837 (El Paso Dist.Ct. April 13, 1990), the trial courts found that the tax imposed under section 39-22-104(4)(g) was unconstitutional and granted the taxpayers' motions for summary judgment. Both district courts denied the taxpayers' requests for class certification. The Department of Revenue appeals both rulings that section 39-22-104(4)(g) was unconstitutional, or alternately argues that, even if unconstitutional, no refunds are due to the taxpayers. The Kuhn taxpayers cross-appeal the district court's refusal to grant their class certification.

We have jurisdiction over these appeals because both cases involve the constitutionality of a statute. See § 13-4-102, 6A C.R.S. (1987 & 1990 Supp.); High Gear & Toke Shop v. Beacom, 689 P.2d 624 (Colo.1984). We affirm Reimer. We affirm Kuhn in part and reverse in part. We remand Kuhn to the Denver District Court for further proceedings on the issue of class certification. The class action issue was not preserved as an issue on appeal in Reimer.

I

The facts underlying both Kuhn and Reimer are not in dispute. Under Colorado's taxing scheme, as it existed before section 39-22-104(4)(g) was repealed, state and private retirees under the age of fifty-five were allowed a $20,000 income tax exemption for retirement benefits. Section 39-22-104(4)(f), 16B C.R.S. (1988 Supp.). The exemption included federal nonmilitary retirement benefits. Under section 39-22-104(4)(g), however, federal military retirees under the age of fifty-five were allowed only a $2,000 exemption on their military retirement benefits. ¹

Two groups of federal military retirees brought separate actions in the Denver and El Paso District Courts, alleging that the tax scheme illegally discriminated against federal military retirees in violation of 4 U.S.C. § 111 (1988) and constitutional principles of intergovernmental tax immunity set forth by the United States Supreme Court in Davis v. Michigan Department of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989). The district court rejected the state's argument in Kuhn that, because the plaintiffs had failed to comply with the administrative procedures for requesting a tax refund, the court lacked jurisdiction over the case. The taxpayers in both Kuhn and Reimer sought class certification. Certification was denied by both district courts. The district courts granted the taxpayers' motions for summary judgment in both Kuhn and Reimer after concluding that section 39-22-104(4)(g) was unconstitutional and in violation of 4 U.S.C. § 111. Both courts ordered the Colorado Department of Revenue to make refunds to the affected plaintiffs insofar as the plaintiffs had filed refund claims within the applicable statute of limitations set forth in section 39-21-108(1)(a), 16B C.R.S. (1982). ²

In this appeal, we will address whether the district court in Kuhn correctly determined that it had subject matter jurisdiction despite the plaintiffs' failure to comply with administrative procedures for requesting a tax refund. We will then determine whether the court abused its discretion by denying the taxpayers' class certification. Finally, we will consider whether the district courts in both Kuhn and Reimer correctly concluded that section 39-22-104(4)(g) was unconstitutional and, if so, whether the state owes refunds to those it illegally taxed.

II

The state asserts that the taxpayers in Kuhn failed to comply with section 39-21-108(1)(a), which provides that a taxpayer must first file a claim for refund and then wait six months before a suit for refund may be brought. The state claims that the Denver District Court did not have jurisdiction to hear the taxpayers' case because the taxpayers did not comply with these administrative procedures. We disagree.

A party challenging the constitutionality of a statute need not first exhaust the administrative remedies provided in the statute. Fred Schmid Appliance & Television Co. v. City & County of Denver, 811 P.2d 31, 33 (Colo.1991) (challenge to Denver municipal tax); Hamilton v. City & County of Denver, 176 Colo. 6, 11-12, 490 P.2d 1289, 1292 (1971) (challenge to Denver occupational and privilege tax). Thus, the Kuhn plaintiffs were not required to comply with the administrative procedures in section 39-21-108 before challenging its constitutionality. As the district court said,

[r]equiring the plaintiffs to wait until their refund claims are denied would be futile in this case since the Department of Revenue has already publicly stated its position that it will not rule on any claims filed until a court has decided this issue. In addition, most of the plaintiffs have filed claims and six months have passed since they have done so.

We therefore agree with the district court that it had subject matter jurisdiction.

III

The next question is whether the district court in Kuhn abused its discretion by not certifying the taxpayers as a class. Normally, the decision to certify a class is within the trial court's discretion and will not be disturbed unless clearly erroneous. Friends of Chamber Music v. City & County of Denver, 696 P.2d 309 (Colo.1985). In this case, however, the trial court in Kuhn relied on an incorrect supposition in arriving at its decision not to certify the class.

Under C.R.C.P. 23(a), a class may be certified only if:

(1) The class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.

The trial court, while admitting that the group may have been numerous and that there may have been common issues, said that "class certification is not generally favored in income tax cases." While it is generally true that class actions are disfavored in cases adjudicating federal tax issues, J. Moore & J. Kennedy, Moore's Federal Practice p 23.02[2.-23] (2d ed. 1991) (hereinafter Moore's Federal Practice ), a challenge to the constitutionality of a tax statute may provide grounds for a class action because of the "risk of inconsistent or varying determinations" created by separate actions. Id. at p 23.02[2.-24]. Thus, although class certification has been denied in cases challenging a particular group of tax assessments, 78 South First St. Hous. Dev. Fund Corp. v. Crotty, 150 A.D.2d 218, 220-21, 541 N.Y.S.2d 388, 390 (1989), rev'd on other grounds, 75 N.Y.2d 982, 556 N.Y.S.2d 509, 555 N.E.2d 906 (1990), class certification in cases challenging the legality of the underlying tax statute has generally been upheld. See, e.g., Cherry Hills Farms, Inc. v. City of Cherry Hills Village, 670 P.2d 779, 783 (Colo.1983) (action challenging constitutionality of service expansion fee); see also Town of Eclectic v. Mays, 547 So.2d 96, 102 (Ala.1989) ("A class action is a permissible vehicle to restrain the enforcement of an allegedly invalid tax...."); Woosley v. State, 227 Cal.App.3d 1053, 1074-75, 266 Cal.Rptr. 385, 398 (approving class action for taxpayer refunds) (relying on Javor...