Peterson v. Commissioner of Revenue

• Decision Date: 26 April 2005
• Citation: Peterson v. Commissioner of Revenue, 825 N.E.2d 1029, 444 Mass. 128 (Mass. 2005)
• Parties: E. Joel PETERSON & others<SMALL><SUP>1</SUP></SMALL> v. COMMISSIONER OF REVENUE.
• Court: Supreme Judicial Court of Massachusetts

825 N.E.2d 1029

444 Mass. 128

E. Joel PETERSON & others¹ v.COMMISSIONER OF REVENUE.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 7, 2005.

Decided April 26, 2005.

COPYRIGHT MATERIAL OMITTED

Stephen Schultz, Boston (Stephen M. Politi with him) for the taxpayers.

Thomas A. Barnico, Assistant Attorney General, Boston (Amy Spector, Assistant Attorney General, with him) for Commissioner of Revenue.

Carl Valvo, Boston, for J. James Marzilli, Jr., amicus curiae, submitted a brief.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN, SOSMAN, & CORDY, JJ.

SOSMAN, J.

In Peterson v. Commissioner of Revenue,441 Mass. 420, 429, 806 N.E.2d 78(2004)(Peterson I), this court held that the use of May 1, 2002, as the effective date for a change in the capital gains tax rate, as set forth in the Revenue Enhancement Act of 2002(Act), St.2002, c. 186, § 32, violated the uniformity requirement of art. 44 of the Amendments to the Massachusetts Constitution.In the wake of that decision, the Legislature enacted St.2004, c. 149, §§ 413 and 414, which provide that the effective date of the new capital gains tax rate is January 1, 2002, but simultaneously direct that the Commissioner of Revenue (commissioner) not adjust the tax liability stemming from capital gains realized between January 1, 2002, and April 30, 2002, for any taxpayer who already paid capital gains taxes at the prior rates.In an amended complaint, the plaintiffs in Peterson I allege that these new provisions concerning the effective date and nonenforcement of the new capital gains rate for transactions occurring prior to May 1, 2002, (1) violate the uniformity requirement of art. 44;(2) deprive them of due process in violation of the Fourteenth Amendment to the United States Constitution; and (3) deny them equal protection of the laws, in violation of the Fourteenth Amendmentandart. 10 of the Declaration of Rights of the Massachusetts Constitution.With respect to a remedy for these alleged constitutional violations, the plaintiffs argue that §§ 413and414 are integrated to the extent that both sections must be invalidated, resulting in an effective date of January 1, 2003.The commissioner contends that § 413 constitutes a "reasonable exemption[]," permitted by art. 44, that it does not deny the plaintiffs due process or equal protection, and that, even if § 413 must be struck as unconstitutional, it should be severed, leaving intact the January 1, 2002, effective date set forth in § 414.

The single justice reserved and reported the matter to the full court without decision.The parties agreed that the issues raised in the plaintiffs' amended complaint could be resolved by answering the following reported questions:

"1.Whether Section 413 of Chapter 149 of the Acts of 2004, when read together with Section 414 of the same Chapter, violates either Article 44 of the Amendments to the Constitution of the Commonwealth, the due process clause of the United States Constitution, the equal protection clause of the United States Constitution or Article 10 of the Declaration of Rights of the Massachusetts Constitution?

"2.If Section 413 is held to violate one or more of the provisions of the [S]tate or [F]ederal [C]onstitutions cited in Question 1, above, is it separable from Section 414 of Chapter 149 of the Acts of 2004?

"3.If Section 413 is held to violate one or more of the provisions of the [S]tate or [F]ederal [C]onstitutions cited in Question 1, above, and is held not to be separable from Section 414, whether January 1, 2002, or January 1, 2003, is the effective date for changes in the capital gains tax laws effected by the Revenue Enhancement Act of 2002?"

For the following reasons, we conclude that the § 413 directive that the commissioner not enforce the new capital gains tax rate for capital gains incurred prior to May 1, 2002, does not qualify as a "reasonable exemption[ ]" under art. 44, and that it therefore violates the uniformity requirement of art. 44 as construed in Peterson I.We also conclude that § 413 can be severed from § 414, thereby retaining the January 1, 2002, effective date provided by § 414.²

1.Background.The plaintiffs are taxpayers who realized capital gains between May 1, 2002, and December 31, 2002.Section 14 of the Act provides that all income from capital gains is to be taxed at the same 5.3 per cent rate as ordinary income (seeG.L. c. 62, § 4 [b], as amended through St.2002, c. 186, § 13), thereby eliminating the six classes of capital gains and corresponding tax rates (from no tax up to a tax of five per cent) based on the length of time the asset had been held prior to sale.SeeG.L. c. 62, § 2 (b)(3), as amended through St.1994, c. 195, § 10;G.L. c. 62, § 4, as amended through St.1994, c. 195, § 20.This change in the capital gains tax rate was made effective May 1, 2002.St.2002, c. 186, § 32.As a result, the plaintiffs incurred capital gains tax liability for their post-May 1, 2002, transactions, whereas, under prior law, the plaintiffs' transactions would have incurred either a capital gains tax at a lower rate or no capital gains tax liability at all.

In Peterson I,the plaintiffs contended that taxing capital gains for the 2002 tax year at different rates based on whether they were realized before or after May 1, 2002, violated the art. 44 requirement that taxes be "levied at a uniform rate throughout the [C]ommonwealth upon incomes derived from the same class of property."This court agreed.Peterson I, supra at 429, 806 N.E.2d 78."[A] single tax rate must be applied to income from the same class of property received during the period specified by the Legislature for measuring income.That period in this case is calendar year 2002.Only one tax rate may be applied to all long-term capital gains realized in calendar year 2002.There cannot be, consistent with art. 44, more than one long-term capital gains tax rate on income for the taxable year 2002."Id.As a result, the May 1, 2002, effective date for the increased capital gains tax rate was held unconstitutional.Id.

The increased rate could, consistent with art. 44, be made effective as of January 1, 2003.Id.However, it was also possible that, by severing the unconstitutional May 1, 2002, date set forth in § 32 of the Act, the increased rate could be made effective as of January 1, 2002.Id.,citingG.L. c. 62, § 54.Because the record was not sufficiently developed on the issue, the matter was remanded to the single justice for further proceedings with respect to the determination of the effective date of the rate change.Id.

On remand, the plaintiffs took the position that January 1, 2003, was the appropriate effective date.However, within three weeks of the issuance of the rescript to the single justice, legislation was introduced to amend the Act and set a new effective date for the capital gains tax rate.See2004 House Doc.No. 4601, §§ 127,128.See also2004 Senate Doc.No. 2401, §§ 311,355;2004 House Doc.No. 4850, §§ 413,414;2004 House Doc.No. 4744, §§ 62,64.Over the plaintiffs' objection, the single justice postponed briefing and consideration of the effective date pending the outcome of these legislative efforts to resolve the issue.

On June 25, 2004, St.2004, c. 149, was enacted, addressing inter alia the effective date of the new capital gains rate set forth in the Act.In § 414, the new rate was made effective "for tax years beginning on or after January 1, 2002."However, § 413 provided: "Notwithstanding any general or special law to the contrary the commissioner of revenue shall not adjust the tax liability with respect to capital gains for the period January 1, 2002 to April 30, 2002 for any taxpayer who, before the effective date of this act, paid that liability in full for capital gains realized between January 1, 2002 and April 30, 2002, inclusive."The effect of §§ 413and414, compared to the effect of § 32 of the Act that was previously held unconstitutional, is virtually identical.Whereas § 32 made May 1, 2002, the official effective date of the new tax rate, § 413 now directs the commissioner not to enforce or collect that new rate for any transactions occurring prior to May 1, 2002, as long as the taxpayer has already paid whatever capital gains taxes (if any) were owed under preexisting law.

The plaintiffs were allowed to amend their complaint to add a count seeking a declaratory judgment that §§ 413and414 were unconstitutional and that the commissioner could not enforce the Act's capital gains rate to their 2002 capital gains realized after May 1, 2002.The three questions dispositive of the plaintiffs' claims were then reserved and reported to the full court based on a stipulated record, which included the commissioner's estimates of the amount of capital gains taxes that would be owed, or the overpayments that would have to be refunded, depending on the court's answers to the reported questions.If § 413 were upheld, the year 2002 capital gains taxes that would not be enforced or collected in accordance with the directive of that section are on the order of $130 million to $160 million.The 2002 capital gains taxes collected at the new rate for transactions on or after May 1, 2002, that would need to be refunded if both § 413and§ 414 were struck and the effective date were January 1, 2003, are on the order of $225 million to $275 million.

2. Discussion. a. Does § 413 create a reasonable exemption?The commissioner contends that § 414 sets the effective date for the new tax rate and that § 413 creates a "one-time exemption" from that rate.While art. 44 commands that income taxes be levied "at a uniform rate" with respect to the same class of property, it permits the Legislature to "grant reasonable exemptions and abatements."The commissioner argues that the exemption granted by § 413 is a "reasonable" one within the purview of art. 44.He seeks to justify that exemption...