Opinion of the Justices to the Senate

• Decision Date: 14 July 1997
• Parties: OPINION OF THE JUSTICES TO THE SENATE.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 857

681 N.E.2d 857

425 Mass. 1201

OPINION OF THE JUSTICES TO THE SENATE.

Supreme Judicial Court of Massachusetts.

July 14, 1997.

On July 14, 1997, the Justices submitted the following answers to questions propounded to them by the Senate.

To the Honorable the Senate of the Commonwealth of Massachusetts:

The undersigned Justices of the Supreme Judicial Court respectfully submit their responses to the questions set forth in an order adopted by the Senate on May 13, 1997, and transmitted to this court on May 15, 1997.

The order recites that Senate No. 1620, a bill pending before the General Court, entitled "An Act relative to the taxation of military pensions," exempts from income taxation by the Commonwealth retirement pay of retired members of the uniformed services of the United States. The bill amends G.L. c. 62, § 2 (a ) (2)(E), by inserting in line 55 after the word "contributed" the following: ", or any income received from the United States government as retirement pay for a retired member of the Uniformed Services of the United States, as defined in 10 U.S.C. [§ ] 1072, regardless of whether the retiree contributed to the retirement system." The order further recites that grave doubt exists as to the constitutionality of the bill if enacted into law and requests our opinion on the following questions

"1. Does Senate No. 1620 comply with the provision of Article 44 of the Amendments to the Constitution of the [425 Mass. 1202] Commonwealth that requires an income tax to 'be levied at a uniform rate ... upon incomes derived from the same class of property'?

"2. If the answer to Question 1 is in the negative, does the exemption from income taxation of retirement pay of retired members of the uniformed services of the United States by Senate No. 1620 constitute a reasonable exemption or abatement as provided in said Article 44?"

We invited interested parties to submit briefs. In response, we received briefs in support of the bill from the following: the Joint Committee on Taxation, the Governor, the Massachusetts Council of Military Organizations, and Kenneth R. Depperman. No brief was filed against the bill.

1. General Laws c. 62, § 2, defines gross income, adjusted gross income, and taxable income for purposes of the State income tax. Under that provision, "Massachusetts gross income" means gross income as defined by the Internal Revenue Code, subject to modifications provided for within the section. General Laws c. 62, § 2 (a ) (2)(E), currently provides for a deduction from gross income for "[i]ncome from any contributory annuity, pension, endowment or retirement fund of the United States government or the commonwealth or any political subdivision thereof ... to which the employee has contributed." ¹ The bill would amend this provision, so as to allow a deduction as well for retirement pay received by retired members of the United States uniformed services ² from the military retirement system, which, in fact, is a noncontributory system. The end result would be that income received from Federal, State, or other public contributory systems and from the noncontributory military retirement system would be exempt ³ from the State income tax, while income from private contributory systems and from other noncontributory systems would be taxable. ⁴

The inquiry is whether this treatment of income from the military retirement system would comply with art. 44 of the Amendments to the Massachusetts Constitution. That article provides in part:

"Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax The Legislature has considerable discretion under art. 44 to define and designate "different classes of property" for the purposes of setting income tax rates. Daley v. State Tax Comm'n, 376 Mass. 861, 865-866, 383 N.E.2d 1140 (1978). It may tax different classes at different rates, choose to tax only some classes and not others, and restrict the classes of income against which deductions may be applied. Commissioner of Corps. & Taxation v. Adams, 316 Mass. 484, 486-488, 55 N.E.2d 697 (1944). ⁵ A tax measure is presumed valid and is entitled to the benefit of any constitutional doubt, and the burden of proving its invalidity falls on those who challenge the measure. Daley, supra at 865, 383 N.E.2d 1140. Andover Sav. Bank v. Commissioner of Revenue, 387 Mass. 229, 235, 439 N.E.2d 282 (1982). A classification of property is valid under art. 44 so long as it is not arbitrary or "grossly oppressive and unequal" and a "reasonable ground" exists for the classification. Tax Comm'r v. Putnam, 227 Mass. 522, 531, 116 N.E. 904 (1917). To be reasonable, the classification must reflect "actual underlying differences in the property," Barnes v. State Tax Comm'n, 363 Mass. 589, 594, 296 N.E.2d 510 (1973), such that the property is not of the "same kind" as other property that is subjected to a different tax rate. Salhanick v. Commissioner of Revenue, 391 Mass. 658, 662, 463 N.E.2d 1163 (1984). The classification must be based on differences in the "sources of income," not on characteristics of the property owners or taxpayers. Opinion of the Justices, 266 Mass. 583, 586-587, 165 N.E. 900 (1929). However, a classification which refers to persons engaged in a particular occupation is nonetheless valid if the distinction rests on "the nature of the business and incidents which characterize the property employed therein." Barnes, supra at 594, 296 N.E.2d 510.

may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may ... grant reasonable exemptions and abatements."

On the basis of these considerations, this court has upheld some distinctions in classification as valid and have disallowed others. The court has upheld the authority of the Legislature to impose different tax rates by distinguishing (a) capital gains from dividends and interest, Putnam, supra; (b) interest paid on loans made by finance trusts from interest paid on loans made by pawnbrokers, Barnes, supra; (c) interest earned on in-State bank deposits from that earned on deposits in out-of-State financial institutions, Aronson v. Commonwealth, 401 Mass. 244, 253-254, 516 N.E.2d 137 (1987), cert. denied, 488 U.S. 818, 109 S.Ct. 58, 102 L.Ed.2d 36 (1988); and (d) earned income from unearned (investment) income, see Ingraham v. State Tax Comm'n, 368 Mass. 242, 247 n. 3, 331 N.E.2d 795 (1975). By contrast, the court has held classifications to be invalid that established different tax rates based on (a) the timing of contributions to a pension fund, Daley, supra; (b) the length of time that the income-generating property had been owned, Salhanick, supra at 661-664, 463 N.E.2d 1163; (c) the amount of the bank deposit on which interest had been paid, Commissioner of Revenue v. Lonstein, 406 Mass. 92, 94, 546 N.E.2d 157 (1989); and (d) the total amount of income received by the taxpayer, Opinion of the Justices, supra at 586-588, 165 N.E. 900.

Currently, G.L. c. 62, § 2 (a ) (2)(E), specifies that income received from public contributory retirement systems is deductible from gross income and is thereby exempt from State taxation. No such exclusion is provided for other retirement pay, including that from the noncontributory military retirement system. The statute therefore treats public contributory retirement systems as a separate class of property (i.e., source of income) In Filios v. Commissioner of Revenue, 415 Mass. 806, 615 N.E.2d 933 (1993), cert. denied, 511 U.S. 1030, 114 S.Ct. 1538, 128 L.Ed.2d 191 (1994), the court rejected a challenge to State income taxation of Federal military retirement benefits brought on the basis of both art. 44 and 4 U.S.C. § 111 (1994), which prohibits discriminatory State taxation of Federal employees based on the "source of the pay or compensation." ⁷ The United States Supreme Court had previously ruled that it was a violation of 4 U.S.C. § 111, and of the constitutional doctrine of intergovernmental tax immunity which the statute codified, for a State to impose its income tax on Federal employee pensions while exempting State employee pensions from the tax, unless "significant differences" between the two classes justified the inconsistency. A State's desire (however reasonable in terms of the State's legitimate interests) to provide an economic benefit to its employees did not justify the distinction. Davis v. Michigan Dep't of the Treasury, 489 U.S. 803, 812-817 & n. 4, 109 S.Ct. 1500, 1506-09 & n. 4, 103 L.Ed.2d 891 (1989). The court determined in the Filios case that our State income tax did not discriminate against Federal employees and thus did not violate 4 U.S.C. § 111, because our statute determined the tax status of income received from a public retirement system according to whether the system was contributory or noncontributory, not whether the source of compensation was State or Federal. Military retirees were subjected to State income tax because they belonged to a noncontributory system; other Federal retirees who belonged to contributory systems were not taxed. The court concluded that a distinction based on the type of retirement system satisfied the "significant differences" test set forth in the Davis decision. The classification did not violate art. 44, either, because there was an "actual underlying distinction" between the systems. Considering that contributions to the two types of plans were taxed differently, it was reasonable to tax distributions differently as well, so as not to subject contributory plan participants to double taxation. ⁸ Filios, supra at 809-812, 615 N.E.2d 933. ⁹

from other retirement systems, and imposes different tax rates accordingly. ⁶

Although the court concluded in the Filios case that the State does...