Strelecki v. Oklahoma Tax Com'n

• Decision Date: 28 September 1993
• Docket Number: No. 77615,77615
• Citation: 1993 OK 122,872 P.2d 910
• Parties: Joseph L. STRELECKI, June C. Lankford, Leeta Lankford, James O. Worrell, Neal W. Harris and Elizabeth B. Harris, Appellants, v. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

Page 910

872 P.2d 910

1993 OK 122

Joseph L. STRELECKI, June C. Lankford, Leeta Lankford, James

O. Worrell, Neal W. Harris and Elizabeth B.

Harris, Appellants, v. OKLAHOMA TAX COMMISSION, Appellee.

No. 77615.

Supreme Court of Oklahoma.

Sept. 28, 1993.

Order Clarifying Opinion on Limited,

Grant of Rehearing March 22, 1994;

As Corrected March 23, 1994.

On Appeal from the Oklahoma Tax Commission.

Retired federal employees appeal from the Oklahoma Tax Commission's order denying their claims for refund of state income tax paid under a state taxing scheme similar to that declared invalid by the U.S. Supreme Court in Davis v. Michigan Dept. of Treasury.

THE TAX COMMISSION'S ORDER IS VACATED AND THE CAUSE REMANDED WITH DIRECTIONS

Kevin "D" Watley, Norman, and Michael J. Kator, Kator, Scott & Heller, Washington, DC, for appellants.

E. Joe Lankford, Norman, for appellants June C. Lankford and Leeta Lankford.

David Hudson, Gen. Counsel, Stanley Johnston, First Asst. Gen. Counsel, Robert B. Struble, Asst. Gen. Counsel, Oklahoma Tax Com'n, Oklahoma City, for appellee.

OPALA, Justice.

The issue urged upon us on review is whether the new rule of federal law announced in Davis v. Michigan Dept. of Treasury

¹ applies retroactively to require refunds--on Taxpayers' timely claims for a correct amount--of state income tax overpayments on Taxpayers' federal retirement income excludable under Davis? We answer in the affirmative. The U.S. Supreme Court's recent jurisprudence in Harper v. Virginia Dept. of Taxation ²--which applies the retroactivity analysis of James B. Beam Distilling Co. v. Georgia ³--mandates retroactive application of the nondiscrimination principle announced in Davis. State law affords these Taxpayers the remedy they seek

I

THE ANATOMY OF LITIGATION

The appellants [Taxpayer]

] are retired federal employees who received income from the United States during the years of 1985 through 1988 either as retired civil service employees or retired military personnel. During this period Taxpayers paid state taxes under Oklahoma income tax laws whose provisions subjected a portion of their civil service or military retirement income to state income tax while exempting from like taxation the retirement income of former state employees. ⁴ On March 28, 1989 the U.S. Supreme Court held in Davis a similar taxing scheme invalid. ⁵ Following Davis, Taxpayers timely filed amended returns, claiming refund of voluntary overpayments of income tax for four years, 1985 through 1988, both inclusive--a period which represents the time immediately preceding the Davis opinion. ⁶ Responding to Davis, the Oklahoma

Legislature provided by its 1989 amendment identical tax treatment for both state and federal retirement income. ⁷ The General Counselof the Oklahoma Tax Commission [Commission] opined that Davis must be given purely prospective application. On the basis of this advice the Commission's Income Tax Division denied Taxpayers' refund claims. ⁸

Taxpayers timely protested and demanded a hearing before the Commission. ⁹ The Income Tax Division stipulated that (a) the claims were timely and the amounts claimed for refunding correct and (b) the final determination of the legal issues presented by these claims would govern all similarly situated taxpayers who have timely sought a refund. ¹⁰ An administrative law judge found that the pre-1989 Oklahoma tax scheme was not in any significant way different from the taxation regime condemned in Davis. By applying the guidelines of Chevron Oil Co. v. Huson, ¹¹ the judge concluded that Davis must be given purely prospective application. The Commission adopted this recommendation and denied the claims. ¹² Taxpayers appeal. ¹³ The dispositive issue pressed on appeal is whether we must apply Davis retroactively. This question, answered mid-appeal by the U.S. Supreme Court in Harper, ¹⁴ will be discussed in Part III. Harper mandates that the Davis' teachings be extended to these Taxpayers.

II

THE DAVIS v. MICHIGAN DEPT. OF TREASURY

¹⁵ PRINCIPLE OF NONDISCRIMINATION

The Court in Davis reviewed a Michigan statute that exempted from state taxation all benefits paid by the state to its retired employees but taxed like benefits received from other employers, including the federal government. After paying state income taxes on his federal retirement benefits for several years, Paul Davis, a retired federal government employee and Michigan resident, challenged

the state tax law as infirm. He argued that the disparate treatment of state and federal retirement benefits discriminated against federal retirees in violation of a U.S. statute, 4 U.S.C. § 111. ¹⁶ The Michigan court upheld the state law. The U.S. Supreme Court struck it as invalid, holding the state tax statute violative both of § 111 and of the constitutional doctrine of intergovernmental tax immunity embodied in the Supremacy Clause of the U.S. Constitution. ¹⁷ After acknowledging the state's concession that a refund would be appropriate in the face of an adverse ruling, the Court stated that Davis would be due a refund. Its pronouncement neither discussed nor reserved for a later decision the temporal point of Davis' effectiveness. ¹⁸

III THE RETROACTIVITY ANALYSIS OF HARPER V. VIRGINIA DEPT. OF TAXATION

¹⁹

The Virginia tax scheme, like that of Michigan and Oklahoma, exempted from state income taxation the retirement benefits of state and local government employees while levying an income tax on federal retirement benefits. Responding to the Davis command, Virginia repealed its preferential tax regime for state and local government employees. Petitioners, federal civil service and military retirees, sought a refund of taxes assessed by Virginia before the revision of its statutory scheme to meet the Davis criteria. The Virginia Supreme Court denied relief to the petitioners, ²⁰ concluding that Davis should not be applied retroactively in the light of Chevron ²¹ and American Trucking Assns, Inc. v. Smith. ²² On certiorari, the U.S. Supreme Court ordered the Virginia Supreme Court to re-examine the petitioners' claim in keeping with its then recent pronouncement in Beam. ²³ Beam requires that a new federal rule have a retroactive application to claims arising from facts predating its decisional promulgation. ²⁴ The Virginia court reaffirmed its own previous decision, ²⁵ holding that Beam did not foreclose the continued use of the three-part Chevron ²⁶ test

because Davis did not expressly decide whether its rule applied retroactively

The U.S. Supreme Court granted certiorari a second time, reversing the Virginia judgment and giving retroactive effect to the nondiscrimination principle of Davis. ²⁷ The Court followed the retroactivity analysis in Beam: a new rule of federal law announced by the U.S. Supreme Court and applied to the parties before it in a civil action must be given full retroactive effect in all cases still open on direct review and as to all events that are not time-barred (capable of being litigated), regardless of whether they predate or postdate the announcement of the rule (the so-called "pipeline rule"). ²⁸ This rule "extend[ed] Griffith's ban against 'selective application of new rules' " to criminal cases. ²⁹

The General Rule of Retroactivity--Its Birth, Erosion and Revival

The Court notes in Harper that both the common law and its own jurisprudence have long recognized a general rule of retroactivity for its constitutional decisions. ³⁰ This principle was eroded in Linkletter v. Walker ³¹ where the Court developed a three-part test under which it could confine a new rule of criminal law to prospective application. ³² In the civil context, Chevron similarly permitted the withholding of retroactive effect to a new principle of law. ³³ Linkletter was overruled in Griffith v. Kentucky ³⁴ where the Court eliminated all limits on retroactivity of a new criminal-law rule. Griffith's teachings rest on (1) "basic norms of constitutional adjudication"--i.e., a selective application of new rules violates the principle of treating similarly situated parties the same--and (2) "the nature of judicial review," which strips the Court of the legislative prerogative to make rules of law retroactive or prospective as it sees fit. ³⁵

Griffith dicta--that "civil retroactivity ... continues to be governed by the standard announced in Chevron" ³⁶--left the issue unsettled for civil cases. The Court confronted in Smith ³⁷ the meaning of its Griffith dicta. Smith was a plurality opinion in which the Court considered whether to confine the application of a civil-law rule announced in an earlier case to events which predate that decision. ³⁸ While in Smith the Court was

split, its later opinion in Beam adopted a principle requiring retroactive application of a new civil-law (noncriminal) rule that was applied to the parties in the case in which it was announced

Beam's Implied Retroactivity Analysis ³⁹

Harper, which governs us here, gave controlling effect to Beam's retroactivity jurisprudence. The issue in Beam was whether the new constitutional rule announced in Bacchus Imports, Ltd. v. Dias ⁴⁰ should apply retroactively. Bacchus had held a Hawaiian statute violative of the Commerce Clause. ⁴¹ The offending state enactment imposed a higher excise tax on imported alcoholic products than on those produced within the state. Bacchus applied the new rule to the parties before it, but was silent as to the opinion's backward or forward reach. Following Bacchus, the James B. Beam Distilling Company sought a refund of taxes imposed on alcoholic beverages by a Georgia statute similar to that condemned in Bacchus. The state court struck the Georgia law, but after using a Chevron analysis, refused to give Bacchus the sought-for retroactive effect. ⁴² On certiorari, the U.S. Supreme Court's plurality reversed the Georgia judgment, declaring that the state court had erred in refusing to give retroactivity to a previously announced...