Pabst v. Commissioner of Taxes

• Decision Date: 04 April 1978
• Docket Number: No. 355-76,355-76
• Citation: 136 Vt. 126,388 A.2d 1181
• Parties: Fred PABST, Jr. v. COMMISSIONER OF TAXES.
• Court: Vermont Supreme Court

Page 1181

388 A.2d 1181

136 Vt. 126

Fred PABST, Jr. v. COMMISSIONER OF TAXES.

No. 355-76.

Supreme Court of Vermont.

April 4, 1978.

Motions for Reargument Denied June 6, 1978.

Gravel, Shea & Wright, Burlington, and Robert A. Schnur of Michael, Best & Friedrich, Milwaukee, Wis., for plaintiff.

M. Jerome Diamond, Atty. Gen., and Richard J. King, Asst. Atty. Gen., Montpelier, for defendant.

Before DALEY, LARROW, BILLINGS and HILL, JJ., and KEYSER, J. (Ret.), Specially Assigned.

HILL, Justice.

Appellant seeks refund of amounts paid under the Vermont gift tax law (32 V.S.A. § 7401 et seq.) for the years 1971 and 1972. The basis of appellant's claim is that certain features of Vermont's gift tax statute are unconstitutional.

In 1970, the Legislature passed laws providing for the assessment of estate and gift taxes. Public Acts 1969 (Adj. Sess.) No. 269, § 1, now 32 V.S.A. § 7401 et seq. The gift tax was made applicable to all gifts made on or after January 1, 1971. Public Acts 1969 (Adj. Sess.) No. 269, § 3 (see note to 32 V.S.A. § 7401). 32 V.S.A. § 7412 provides ¹ that the gift tax payable for each calendar year shall be an amount equal to thirty percent of a taxpayer's federal gift tax liability for that calendar year, reduced by the percentage of the taxpayer's total gifts which are not "Vermont gifts." A general provision of the estate and gift tax law (32 V.S.A. § 7475) provides that if a taxpayer's Vermont gift tax liability for any year is increased, by virtue of a change in federal law, over what the taxpayer would have paid had federal law remained as it was on January 1, 1971, then the taxpayer shall receive a credit equal to the amount of the increase. Each of appellant's constitutional arguments arises out of the "piggyback" features of the Vermont law.

Appellant made gifts in 1971 and 1972 and paid federal and, under protest, Vermont gift taxes for both of those years. For each year the Vermont gift tax paid was equal to thirty percent of the federal gift tax paid, there being no non-Vermont gifts. Federal gift tax liability for the years 1971 and 1972 was calculated, on a quarterly basis, by a three-step process. First, all federal taxable gifts made by the taxpayer since 1932 (the first year in which the federal gift tax law was applicable), including gifts made in the quarter for which the tax was being calculated, were added together; a tax on that sum was computed by reference to a rate schedule set out in 26 U.S.C. § 2502 (1970). Second, all federal taxable gifts made by the taxpayer since 1932, excluding gifts made in the quarter for which the tax was being calculated, were added together; a tax on that sum was computed by reference to the same rate schedule. Finally, the taxpayer's actual gift tax liability for the quarter was computed by subtracting the amount of the second computed tax from the amount of the first. The rate schedule used in these calculations was progressive, the rate of the tax rising as the amount of total federal taxable gifts rose.

I.

Appellant first argues that the Vermont Legislature has unconstitutionally delegated its responsibilities by adopting the federal gift tax structure and rate schedule and by mandating that federal judicial or administrative determinations shall be conclusive on questions of gift tax liability. He supports this claim with several examples illustrating how changes in federal law might affect the Vermont tax scheme. However, appellant does not cite any actual changes in the federal gift tax law during the years 1971 and 1972 which affected him. Furthermore, in the hypotheticals which appellant presents, the alleged injury resulting from a change in federal law is to the State treasury, not to the pocketbook of the individual taxpayer. As we said in Clark v. City of Burlington, 101 Vt. 391, 412, 143 A. 677, 685 (1928), appellant cannot base a constitutional challenge on theoretical irregularities, but must show that he is unfavorably affected.

Appellant also contends that 32 V.S.A. § 7492, which makes federal judicial and administrative determinations binding on the State, violates the guaranties of self-government, Vermont Const., ch. I, art. 5, and republican government, U.S. Const., art. 4, § 4. However, appellant in this case does not cite any federal judicial or administrative determinations adverse to him. Therefore, we will not consider the alleged invalidity of this delegation.

The only aspect of the Vermont gift tax law which is involved in this case and which could be said to represent a delegation of power to federal authority is the "piggyback" method of computing Vermont gift tax liability. 32 V.S.A. § 7412. There are numerous cases holding that a state may use the federal determination of income in computing state income tax liability. See Thorpe v. Mahin, 43 Ill.2d 36, 49, 250 N.E.2d 633, 640 (1969), and cases cited therein. See also Wheeler v. State, 127 Vt. 361, 249 A.2d 887 (1969). In structuring the Vermont gift tax law, the Legislature has "borrowed" not only the federal determination of taxable gifts but also the federal rate schedule. In view of the safeguards against increased gift tax liability provided by 32 V.S.A. § 7475 (which effectively freezes the applicable rate schedule as it appeared on January 1, 1971, regardless of changes in the federal law), we think the "borrowing" challenged here affects the taxpayer's rights no differently than that approved in the cases cited above. The Vermont Legislature has simply chosen to make the computation required of a Vermont gift tax payer the taking of a percentage, rather than the reference of the amount of taxable gifts to a separate Vermont rate schedule. This is not an unconstitutional delegation of responsibility to the federal government.

II.

Appellant's second claim of error is based on the contention that two aspects of the Vermont gift tax law give rise to arbitrary discrimination between taxpayers in violation of the equal protection clause of the United States Constitution and the uniformity clause of the Vermont Constitution. ² Both complained-of aspects result from the incorporation of the federal gift tax scheme into the Vermont law. One of appellant's equal protection arguments challenges the Vermont law's treatment of the federal lifetime exemption. ³ On this point, appellant alleges discrimination between himself and a hypothetical Vermont taxpayer who, though making the same pre-1971 and post-1971 gifts as appellant, did not use all of his lifetime exemption prior to 1971 and was therefore able to apply part or all of the exemption to "Vermont gifts" as well as federal gifts. Appellant's other equal protection argument challenges Vermont's use of the taxpayer's annual federal gift tax liability, which in part depends on the amount of gifts made prior to the effective date of the Vermont law, to determine Vermont gift tax liability. Here appellant emphasizes the difference between his liability under the Vermont gift tax law and the liability of a hypothetical Vermont taxpayer who, though making the same amount of Vermont taxable gifts as appellant in 1971 and 1972, would have paid less Vermont tax if he had made less federal taxable gifts in years prior to 1971.

Appellant contends that he has been arbitrarily denied the right to apply his lifetime exemption to his Vermont gifts. This contention may be illustrated by the following example. Vermont taxpayers A and B make their first taxable Vermont gifts, each in the amount of $30,000, in 1970. B claims his $30,000 exemption and pays no federal gift tax, but A declines to use any of his lifetime exemption, ⁴ paying federal gift taxes on the full $30,000. In 1971, A and B again give $30,000 each in taxable Vermont gifts, but now A claims his full $30,000 exemption, with the result that both his federal and his Vermont gift tax liabilities are zero. B, on the other hand, having used up all of his lifetime exemption in 1970, must pay federal tax on his $30,000 gift and also Vermont tax amounting to thirty percent of his federal liability. The result is that while A and B made exactly the same gifts, pre-1971 and post-1971, Vermont and non-Vermont, and paid the same amount of federal gift tax (on cumulative taxable gifts of $60,000 less the $30,000 exemption), B was required to pay Vermont gift tax in 1971 while A was able to escape all Vermont gift tax liability by claiming his exemption. Appellant, who used up all of his $30,000 exemption prior to 1971, likens his position to that of taxpayer B.

When a person subject to a statutory classification challenges that classification on equal protection grounds, and where there is no suspect class or fundamental right involved, we must uphold the classification if we find that it serves any of the purposes that are conceivably behind the statute in question, and that are within the powers of the Legislature to pursue. Andrews v. Lathrop, 132 Vt. 256, 259, 315 A.2d 860, 862 (1974).

The State in this case does not suggest any justification for withholding the exemption for post-1971 Vermont gifts from taxpayers who previously claimed their federal lifetime exemption while granting that exemption to those taxpayers who can be distinguished only by their refusal to make use of the federal exemption here because "taxpayers with comparable total federal taxable gifts will incur the same Vermont gift tax whether the exemption is deducted before or after 1971." The example presented above demonstrates that this claim of the State is in error. The State confuses the two effects of the lifetime exemption. To the extent that claiming the exemption reduces the total federal taxable gifts and therefore lowers the rate of taxation (the rate rising as the amount of total federal taxable gifts rises), the State is correct. Two taxpayers making the same gifts will be subject to the same rate if both have claimed the exemption regardless of when each...