Weiss v. McFadden

Citation353 Ark. 868,120 S.W.3d 545
Decision Date26 June 2003
Docket NumberNo. 02-1231.,02-1231.
PartiesRichard WEISS, Director, Department of Finance and Administration v. Jimmy R. McFADDEN, William W. Joplin, and James T. French, et al.
CourtSupreme Court of Arkansas

William E. Keadle, Little Rock, for appellant.

Nichols & Campbell, P.A., by: H. Gregory Campbell and Mark W. Nichols, Little Rock, for appellees.

JIM HANNAH, Justice.

The Arkansas Department of Finance and Administration ("DFA") appeals an order of the Pulaski County Circuit Court granting partial summary judgment. The trial court found that the State violated Amendment 47 to the Arkansas Constitution when it attempted to tax benefits paid under an individual retirement account or a public or private employment related retirement system, plan or program ("retirement plan"), where the benefit taxed after-tax contributions being returned to the contributee.

This case involves only that portion of a retirement plan payment identified by the parties as the return of after-tax contributions to the plan beneficiary. In other words, what is at issue is whether a contributee who has paid income tax on the contribution made to the plan may be compelled to pay income tax on that same contribution later when the contribution is returned from the plan to the contributee. DFA agrees that the contribution is being subjected to income tax twice but argues that is the legislative intent. We note that pre-tax contributions on which no income tax was ever paid by the contributee, employer contributions on which no income tax was ever paid by the contributee, and the gain produced over the years by the retirement plan on which no income tax was ever paid by the contributee are not at issue in this case.

Appellee taxpayers represent all taxpayers who have made after-tax contributions to retirement plans, and the action was brought to protect against the State taxing the receipt of after-tax contributions from retirement plans as income. DFA argues that under Ark.Code Ann. § 26-51-307 (Supp.2001), the legislature has declared that the return of retirement plan after-tax contributions to a retiree is income. DFA further argues that the after-tax contributions are not property subject to the protection of Amendment 47. Appellee taxpayers asserted that the after-tax contributions constitute property, not income, and are thus not subject to income tax. Appellee taxpayers further argue that the attempt to levy a tax on the after-tax contributions constitutes an attempt by the State to levy an ad valorem tax on property in violation of Amendment 47 to the Arkansas Constitution.

We hold that when after-tax contributions to a retirement plan are returned to the retiree, that return is recovery of capital, which is not income. We further hold that the attempt to levy a value-based tax on the after-tax contributions constitutes an illegal exaction in that the State is attempting to levy a tax in violation of Amendment 47 to the Arkansas Constitution.

Jurisdiction properly lies in this court because the case requires the interpretation or construction of the Arkansas Constitution. Ark. R. Sup.Ct. 1-2(a)(1) (2003).

Facts

Appellee taxpayers brought an illegal-exaction suit under article 16, section 13, of the Arkansas Constitution, alleging the case was a class action as a matter of law. Appellee taxpayers set out their class as taxpayers who have contributed after-tax contributions to a retirement plan. The class members made after-tax contributions to a retirement plan during the course of their careers. Now that they have retired, the retirees receive retirement benefits that they assert include a return of after-tax contributions. No attempt has been made by the parties to lay out the retirement plans or otherwise show what portion of benefits received is comprised of after-tax contributions.1 Rather, the parties agree that some portion of the benefits is return of after-tax contributions, and the issue presented is simply whether the after-tax contributions returned constitute property or income.

The partial summary judgment did not resolve all the issues in this case. The circuit court certified this appeal pursuant to Rule 54 of the Arkansas Rules of Civil Procedure.

Standard of Review

Summary judgment is granted only when it is clear that there are no genuine issues of material fact to be litigated, and the party is entitled to judgment as a matter of law. Spears v. City of Fordyce, 351 Ark. 305, 92 S.W.3d 38 (2002). Once a moving party has established a prima facie entitlement to summary judgment, the opposing party must meet proof with proof and demonstrate the existence of a material issue of fact. Id. Upon review in this court, we determine if summary judgment was appropriate based on whether the evidentiary items presented by the moving party in support of the motion leave a material fact unanswered. Id. We view the evidence in a light most favorable to the party against whom the motion was filed, resolving all doubts and inferences against the moving party. Id.

After-Tax Contributions

DFA alleges that returned after-tax contributions are income subject to state income tax. DFA cites Ark.Code Ann. § 26-51-307 (Supp.2001), which discusses retirement or disability benefits and provides:

(a)(1) The first six thousand dollars ($6,000) of benefits received by any resident of this state from an individual retirement account or the first six thousand dollars ($6,000) of retirement benefits received by any resident of this state from public or private employment-related retirement systems, plans, or programs, regardless of the method of funding for these systems, plans, or programs, shall be exempt from the state income tax.

(2) Only individual retirement account benefits received by an individual retirement account participant after reaching the age of fifty-nine and one-half (59½) years qualify for the exemption. The only other distributions or withdrawals from an individual retirement account that qualify for the exemption before the individual retirement account participant reaches the age of fifty-nine and one-half (59½) years are those made on account of the participant's death or disability. All other premature distributions or early withdrawals including, but not limited to, those taken for medical-related expenses, higher education expenses, or a first-time home purchase do not qualify for the exemption.

(b)(1)(A) Except as provided in subdivision (b)(2) of this section, the exemption provided for in subsection (a) of this section for benefits received from an individual retirement account or from a public or private employment-related retirement system, plan, or program shall be the only exemption from the state income tax allowed for benefits received from an individual retirement account or from any publicly or privately supported employment-related retirement system, plan, or program, excepting only benefits received under systems, plans, or programs which are by federal law exempt from the state income tax.

(B) No taxpayer shall receive an exemption greater than six thousand dollars ($6,000) during any tax year under the provisions of this section.

(2) The provisions of this section shall not apply to retirement or disability benefits received under a plan, system, or fund described in § 26-51-404(b)(7).

(c) No recipient of benefits from an individual retirement account or from public or private employment-related retirement systems, plans, or programs shall be allowed to deduct or recover his cost of contribution in the plan when computing his income for state income tax purposes.

(d) An individual who is sixty-five (65) years of age or older and who does not claim an exemption under subsection (a) of this section shall be entitled to an additional state income tax credit of twenty dollars ($20.00). This credit is in addition to all other credits allowed by law.

DFA also cites Ark.Code Ann. § 26-51-404(b)(24)(B) (Supp.2001), which provides:

Annuity income received through an employment-related retirement plan shall not be subject to the provisions of § 26-51-404(b). The income shall instead be subject to the retirement income provisions of § 26-51-307.

This case involves arguments about the meaning of statutes. When reviewing issues of statutory interpretation, we keep in mind that the first rule in considering the meaning and effect of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning in common language. Cave City Nursing Home, Inc. v. Arkansas Dep't of Human Servs., 351 Ark. 13, 21-22, 89 S.W.3d 884 (2002); Yamaha Motor Corp., U.S.A. v. Richard's Honda Yamaha, 344 Ark. 44, 38 S.W.3d 356 (2001). When the language of a statute is plain and unambiguous, there is no need to resort to rules of statutory construction. Cave City, supra; Burcham v. City of Van Buren, 330 Ark. 451, 954 S.W.2d 266 (1997). A statute is ambiguous only where it is open to two or more constructions, or where it is of such obscure or doubtful meaning that reasonable minds might disagree or be uncertain as to its meaning. ACW, Inc. v. Weiss, 329 Ark. 302, 947 S.W.2d 770 (1997). When a statute is clear, however, it is given its plain meaning, and this court will not search for legislative intent; rather, that intent must be gathered from the plain meaning of the language used. Ford v. Keith, 338 Ark. 487, 996 S.W.2d 20 (1999). This court is very hesitant to interpret a legislative act in a manner contrary to its express language, unless it is clear that a drafting error or omission has circumvented legislative intent. Id.

We also note that this case includes an argument that the tax as applied to after-tax contributions constitutes a violation of the Arkansas Constitution. In Reinert v. State, 348 Ark. 1, 71 S.W.3d 52 (2002), we stated:

Statutes are presumed constitutional, and the burden of proving otherwise is on the challenger of the statute. Bunch v. State, ...

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