Witte v. Director of Revenue

• Decision Date: 02 April 1992
• Docket Number: Nos. 73358,73441,s. 73358
• Citation: 829 S.W.2d 436
• Parties: Victor R. WITTE, Jr., and Antonina M. Witte, Appellants, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 436

829 S.W.2d 436

Victor R. WITTE, Jr., and Antonina M. Witte, Appellants, v. DIRECTOR OF REVENUE, Respondent.

Nos. 73358, 73441.

Supreme Court of Missouri,

En Banc.

April 2, 1992.

Rehearing Denied April 21, 1992.

Victor R. Witte, Jr., St. Louis, for appellants.

William L. Webster, Atty. Gen., Carole Iles, Asst. Atty. Gen., Jefferson City, for respondent.

KENNETH W. SHRUM, Special Judge.

Victor and Antonina Witte appeal from two decisions of the Administrative Hearing Commission that upheld the Director of Revenue's assessments of state income tax deficiencies for 1987 and 1988. The appeals, now consolidated, involve the construction and validity of a state revenue law. This court has jurisdiction. Mo. Const. art. V, §§ 3 and 18; § 621.189, RSMo 1986.

The underlying facts are not in dispute and can be recited briefly. Victor Witte, an attorney, has been employed by the federal government since 1966. Throughout his employment he has participated in the Civil Service Retirement System (CSRS), 5 U.S.C. §§ 8301, et seq. Mandatory contributions to CSRS are deducted from his pay. Victor Witte pays Medicare taxes but not old age, survivors, and disability insurance (OASDI) taxes under the Federal Insurance Contributions Act, 26 U.S.C. §§ 3101, et seq. Because he is a member of CSRS, Victor Witte is not covered by the federal insurance programs financed by the OASDI tax.

"Newer" federal employees are not eligible to participate in CSRS; many of them instead participate in the Federal Employees' Retirement System (FERS), 5 U.S.C. §§ 8401, et seq. FERS members pay OASDI taxes and receive Social Security retirement benefits. In 1987, Victor Witte declined an opportunity, pursuant to federal legislation, to transfer to FERS from CSRS.

The appellants filed combined Missouri individual income tax returns for 1987 and 1988, electing to take the Missouri itemized deductions set out in § 143.141, RSMo 1986. The appellants included in their deductions the amounts of Victor Witte's mandatory contributions to CSRS: $3,015 for 1987 and $3,635 for 1988.

The Director disallowed the deductions attributable to CSRS contributions and assessed deficiencies of $200.53 for 1987 and $140.07 for 1988, plus additions to tax and interest. Ultimately, the appellants sought review by the Administrative Hearing Commission (AHC). The AHC held a separate hearing on each deficiency assessment and concluded that contributions to CSRS may not be used to increase the itemized deduction of § 143.141. The AHC also concluded that it lacked authority to declare the statute unconstitutional. The Wittes appeal.

The appellants contend that Davis v. Michigan Depart. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891 (1989), and Hackman v. Director of Revenue, 771 S.W.2d 77 (Mo. banc 1989), cert. denied, 493 U.S. 1019, 110 S.Ct. 718, 107 L.Ed.2d 738 (1990), mandate reversal because the Director's assessments violate 4 U.S.C. § 111 and principles of intergovernmental tax immunity.

In Davis, the Court held that Michigan's income taxation scheme, which exempted from taxation all retirement benefits paid by the state or its political subdivisions but levied an income tax on retirement benefits paid by the federal government, violated "principles of intergovernmental tax immunity by favoring retired state and local government employees over retired federal employees." 489 U.S. at 817, 109 S.Ct. at 1508, 103 L.Ed.2d at 906.

In Hackman, this court held that, under the teachings of Davis, Missouri's exemption from income taxation of certain state retirement benefits and its concomitant failure to exempt federal retirement benefits violated principles of intergovernmental tax immunity. 771 S.W.2d at 78-80. The appellants now argue that Davis and Hackman, which concern the tax treatment of benefits received by government retirees, control this appeal which concerns the deductibility (or lack of deductibility) of employee contributions to government-mandated retirement programs. We disagree with the appellants that Davis and Hackman require reversal, and we affirm the decisions of the Administrative Hearing Commission.

Intergovernmental tax immunity has both constitutional and statutory bases. In Davis, the Court briefly recounts the development of the concept from its genesis as a constitutional doctrine in M'Culloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579 (1819), to its Congressional enactment as part of the Public Salary Tax Act of 1939. See Ch. 59, § 4, 58 Stat. 575, codified as 5 U.S.C. § 84a. This Congressional statement of intergovernmental tax immunity was amended in 1966 and redesignated 4 U.S.C. § 111, which provides in pertinent part:

The United States consents to the taxation of pay or compensation for personal service as an officer or employee of the United States ... by a duly constituted taxing authority having jurisdiction, if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation.

The interplay between the constitutional doctrine of intergovernmental tax immunity and 4 U.S.C. § 111 is discussed in Davis, in which the Court observes that, "[r]egardless of whether § 111 provides an independent basis for finding immunity or merely preserves the traditional constitutional prohibition against discriminatory taxes ... the inquiry is the same. In either case, the scope of the immunity granted or retained by the nondiscrimination clause is to be determined by reference to the constitutional doctrine." 489 U.S. at 813-14, 109 S.Ct. at 1507, 103 L.Ed.2d at 904.

The Davis opinion then proceeds to a discussion of the constitutional doctrine of intergovernmental tax immunity. Of particular note are the Court's observations that the underlying rationale for the doctrine is "the need to protect each sovereign's governmental operations from undue interference by the other," 489 U.S. at 814, 109 S.Ct. at 1507, 103 L.Ed.2d at 904, and that "[t]he danger that a State is engaging in impermissible discrimination against the Federal Government is greatest when the State acts to benefit itself and those in privity with it." Id. at 815 n. 4, 109 S.Ct. at 1507 n. 4, 103 L.Ed.2d at 905 n. 4.

The issue is not the bare existence of discriminatory treatment; the issue is whether the discrimination can be justified. Phillips Chemical Co. v. Dumas Indep. School Dist., 361 U.S. 376, 382, 80 S.Ct. 474, 478, 4 L.Ed.2d 384, 389 (1960). There exists justification for " '[t]he imposition of a heavier tax burden on [those who deal with one sovereign] than is imposed on [those who deal with the other]' " where there are " 'significant differences between the two classes.' " Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905, quoting Phillips Chemical, 361 U.S. at 383, 80 S.Ct. at 479, 4 L.Ed.2d at 389.

In determining whether discrimination can be justified, courts should not rely "solely on the mode of analysis developed in ... equal protection cases.... '[Those decisions] are not necessarily controlling where problems of intergovernmental tax immunity are involved' because 'the [federal] Government's interests must be weighed in the balance.' " Davis, 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905, quoting Phillips Chemical, 361 U.S. at 385, 80 S.Ct. at 480, 4 L.Ed.2d at 390-91. ¹

Rather than applying an equal protection mode of analysis to an intergovernmental tax immunity case, the "relevant inquiry," Davis instructs, is "whether the inconsistent tax treatment is directly related to and justified by 'significant differences between the two classes.' " 489 U.S. at 816, 109 S.Ct. at 1508, 103 L.Ed.2d at 905, quoting Phillips Chemical, 361 U.S. at 383-85, 80 S.Ct. at 479-80, 4 L.Ed.2d at 389-91. However, as the Kansas Supreme Court observed in Barker v. State, 249 Kan. 186, 815 P.2d 46 (1991), neither Davis nor Phillips Chemical provides further guidance about how to determine whether the inconsistent tax treatment is "directly related to, and justified by, 'significant differences between the two classes.' " 815 P.2d at 52. Nor does Davis or Phillips Chemical tell us how to factor the federal government's interest into the equation.

We proceed, then, on the basis that a showing of significant differences between the two classes which directly relate to and justify the inconsistent tax treatment will, a priori, satisfy the requirement of Davis and Phillips Chemical that we weigh the federal government's interests "in the balance." We bear in mind the principles that undergird this recent pronouncement of the United States Supreme Court:

[I]n analyzing the constitutionality of a state law, it is not appropriate to look to the most narrow provision addressing the [federal] Government or those with whom it deals. A state provision that appears to treat the [federal] Government differently on the most specific level of analysis may, in its broader regulatory context, not be discriminatory.

North Dakota v. United States, 495 U.S. 423, 110 S.Ct. 1986, 1996, 109 L.Ed.2d 420 (1990).

As we engage in the Davis and Phillips mode of analysis, we must keep in mind matters of burden of proof. As a general rule, the constitutionality of a statute is presumed, and the burden is on the challenging party to prove the statute is unconstitutional. Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 364, 93 S.Ct. 1001, 1006, 35 L.Ed.2d 351, 357-58 (1973): Schnorbus v. Director of Revenue, 790 S.W.2d 241, 242-43 (Mo. banc 1990), cert. denied, 498 U.S. 1027, 111 S.Ct. 679, 112 L.Ed.2d 671 (1991). The burden of overcoming the presumption of the constitutionality of a statute is not sustained by generalities of law or fact. Commonwealth v. Jackson, 369 Mass. 904, 344 N.E.2d 166, 175 (1976); Thompson v. City of Chelsea, 358 Mass. 1, 260 N.E.2d 699, 702-03 (1970). "The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it." Madden...