No. 95-1542 In the Supreme Court of the United States OCTOBER TERM 1995 LELAND COOPER, ET AL., PETITIONERS v. MASSACHUSETTS COMMISSIONER OF REVENUE ON PETITION FOR A WRIT OF CERTIORARI TO THE SUPREME JUDICIAL COURT OF MASSACHUSETTS BRIEF FOR THE UNITED STATES AS AMICUS CURIAE SUPPORTING PETITIONERS DREW S. DAYS,III Solicitor General LORETTA C ARGRETT Assistant Attorney General DAVID ENGLISH CARMACK KEVIN M. BROWN Attorneys Department of Justice Washington, D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether state taxation of the non-contributory retirement plan benefits paid to. federal... military retirees violates 4 U.S.C. 111 when all contributory and some non-contributory retirement plan benefits paid to state and local employees are wholly exempt from state tax. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Interest of the United States . . . . 1 Statement . . . . 2 Argument . . . . 4 Conclusion . . . . 8 TABLE OF AUTHORITIES Cases: Barker v. Kansas, 503 U.S. 594 (1992) . . . . 1, 4, 5, 7 Davis v. Michigan Dep't of the Treasury, 489 U.S. 803(1989) . . . . 1,4, 5,7 Filios v. Commissioner, 615 N.E. 2d 933(Mass. 1993), certi. denied. 114 S. Ct. 1538 (l994) . . . . 2, 3-4 Harper v. Virginia Dep't of Taxation, 509 U.S. 86 (1993) . . . . 4 Phillips Chemical Co. v. Dumas Independent School District, 361 U. S. 376 (1960) . . . . 5 Reich v. Collins, 115 S. Ct. 547 (1994] . . . . 4 Constitution and statutes: U. S. Const. Amend. XIV (Equal Protection Clause) . . . . 5 Mass. Ann. Laws, ch. 62 (Law. Co-op. 1990): 2 . . . . 2(a)(l)(I) . . . . 2 2(a)(2)(E) . . . . 2, 16 3B(a)(3) . . . . 3 3B(a)(4) . . . . 2, 3, 6 Mass. Ann. Laws, ch. 32 (Law. Co-op, 1993): 1 . . . . 6 12 (2) . . . . 6 22 . . . . 6 22C . . . . 6 22(10) . . . . 2 1973 Mass. Acts, ch. 876, 1 . . . . 2 4 U.S.C. 111 . . . . 1, 3, 5, 7 26 U.S.C. 61(a)(9) . . . . 2 26 U.S.C. 61(a)(ll) . . . . 2 (III) ---------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM 1995 No. 95-1542 LELAND COOPER, ET AL., PETITIONERS v. MASSACHUSETTS COMMISSIONER OF REVENUE ON PETITION FOR A WRIT OF CERTIORARI TO THE SUPREME JUDICIAL COURT OF MASSACHUSETTS BRIEF FOR THE UNITED STATES AS AMICUS CURIAE SUPPORTING PETITIONERS INTEREST OF THE UNITED STATES The Commonwealth of Massachusetts requires members of the United States Armed Forces to pay state income tax on their retirement pay. Pensions and annuities paid to retired state and local govern- ment employees, however, are exempt from taxation under the Massachusetts scheme. The States may not discriminate in taxing the income of federal employees. See 4 U. S. Cl. 111; Davis v. Michigan Dep't of the Treasury, 489 U.S, 803 (1989); Barker V.. Kansas, 503 U.S. 594 (1992). The (1) ---------------------------------------- Page Break ---------------------------------------- 2 United States has a `continuing interest in ensuring that its employees are not subjected to discrimina- tory state tax treatment. STATEMENT 1. Massachusetts imposes an income tax on retire- ment benefits, pensions and annuities. 1. The State wholly exempts from this tax, however, any "[i]ncome from any contributory annuity, pension, endowment or retirement fund of the United States government or the commonwealth or any political `subdivision thereof, * * * to which the employee has con- tributed." Mass Ann. Laws ch. 62, 2(a)(2)(E) (Law. Co-op. 1990). Payments received by persons who participated in the pre-1938 noncontributory retire- ment system for state and local police and freemen are also exempt from the Massachusetts income tax. 1973 Mass. Acts, ch. 876, 1. Under the current, contributory retirement system for state and local employees in Massachu- setts, 10% of the retirement funds are contributed by the employee and 90% by the government units. Filios v. Commissioner, 615 N.E. 2d 933, 935 (Mass. 1993), cert. denied, 114 S.Ct. 1538 (1994). Massachu- setts exempts from the state income tax up to $2,000 per year contributed by an employee to a retirement fund. See Mass. Ann. Laws ch. 32, 22(10) (Law. Co- op. 1993); id. ch. 62, Par. Par. 2(a)(1)(1), 3B(a)(4). 2. ___________________(footnotes) 1 Gross income is defined for purposes of the Massachusetts tax as federal gross income subject to state adjustments. Mass. Ann. Laws ch. 62, 2 (Law. Co-op. 1990). Pension income is included in federal gross income. 26 U.S.C. 61(a)(9) and (11). 2 The $2,000 limit on the tax deduction for the employee share of the annual contribution is reduced by any amount that the employee has paid that year as his personal share of federal ---------------------------------------- Page Break ---------------------------------------- 3 The Massachusetts provisions have the following effect: (i)Federal, state and local employees who participate in contributory retirement systems pay no state income tax on amounts contributed by them not in excess of $2,000 per year. Without regard to whether, and to what extent, such personal contri- butions have or have not in fact been taxed, and to what extent the system is funded by employee contributions, participants in "contributory" plans pay no state tax on retirement benefits as received. (ii) Police and fire employees who receive retirement benefits under the pre-1938 Massachusetts noncon- tributory retirement system also pay no state tax on their retirement benefits. (iii) But federal military retirees, whose pension "system is noncontributory, do pay state income tax on retirement payments. 2. Petitioners are Massachusetts residents who paid state income taxes on federal military pension income from 1986 through 1992 (Pet. App. A4). Petitioners filed applications for abatement of the state income tax paid on their military retirement benefits with the Massachusetts Appellate Tax Board, asserting that the more favorable tax treat- ment afforded to the retirement benefits of state and local government employees violated the non- discrimination requirement of 4 U.S.C. 111 and the constitutional doctrine of intergovernmental im- munity (Pet. App. A4). Relying on the holding of the Massachusetts Supreme Judicial Court in Filios v. Commissioner of Revenue, supra, the Board rejected petitioners' claims (Pet. App. A4). ___________________(footnotes) employment taxes. Mass. Ann. Laws ch. 62, 3B(a)(3) and (4) (Law. Co-op. 1990). ---------------------------------------- Page Break ---------------------------------------- 4 3. The Supreme Judicial Court affirmed (Pet. App. A3-A8). Noting that the retirement "systems of the Commonwealth and its local governments were "con- tributory" and that the retirement system of the federal military was "noncontributory," the court concluded that this "determining factor" justified a different tax treatment of the retirement benefits under the plans (id. at A5), The court stated that the fact that Massachusetts employees contribute only 10% of the funding of the retirement benefits in their "contributory" plans does not render such contributions "illusory" (id. at A?). The court also concluded that the Massachusetts exemption for retirement benefits received by municipal fire and police personnel under the pre-1938 noncontributory system is not "discriminatory within" the meaning of 4 U.S.C. 111" because the exemption favors a class of retirees "not because * * *. the source of the pay or compensation' is the Commonwealth rather than the Federal government, but on the basis of occupa- tion (police and firefighters) and date of first employ- ment (before 1938)" (id. at A8). ARGUMENT This decision in this case misinterprets and misapplies the decisions of this court in Barker V. Kansas, 503 U.S. 594 (1992), and Davis v. Michigan Dep't of the Treasury, 489 U.S 803 (1989). 3 1. Congress has consented to. state taxation of federal employees only when "the taxation does not discriminate against the * * * employee because of ___________________(footnotes) Barker and Davis apply to all open tax years and are therefore applicable to this case. See Harper v. Virginia Dep't of Taxation, 509 U. S 86 (1993). See also Reich v. Collins, 115 S.Ct. 547 (1994). ---------------------------------------- Page Break ---------------------------------------- 5 the source of the pay or compensation." 4 U.S.C. 111. This statutory nondiscrimination requirement is coextensive with the prohibition against discrimina- tory taxes embodied in the constitutional doctrine of intergovernmental tax immunity. Davis v. Michigan Dep't of the Treasury, 489 U.S. at 812-813. As the Court emphasized in Davis, the standard for deter- mining whether a state tax abridges the immunities of the federal government is quite different from the standard under which state economic regulations are tested under the Equal Protection Clause. 489 U.S. at 816. Inconsistent state tax treatment of federal and state employees is permitted only when it "is directly related to, and justified by, `significant differences between the two classes.'" Ibid., quoting Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376, 383 (1960). Applying this standard, the Court rejected as insufficient the distinctions asserted to exist between federal and state retirement programs in invalidating state tax provisions that discriminated against federal pension benefits in Davis and Barker. In this ease, Massachusetts asserts a distinction that was not directly at issue in Davis or Barker. Massachusetts taxes "noncontributory" federal military retirement benefits while exempting from tax the "contributory" retirement benefits paid to ___________________(footnotes) 4 In Barker v. Kansas, the Kansas Supreme Court had noted that the military retirement system was noncontributory while the State used a contributory system. See 503 U.S. at 605 n.5. The Kansas court, however, "did not rest its decision on this difference" and this Court therefore did not directly ad- dress that issue on the merits. Ibid. ---------------------------------------- Page Break ---------------------------------------- 6 court reasoned that the difference between "contributory" `and "noncontributory" systems is significant because the Commonwealth taxes personal contributions to the retirement system as income in the year in which the contribution is made. Under the noncontributory federal military retirement system, -by contrast, pension funding is not included in the gross income of the employee and is therefore not subject to tax at the time of funding (pet. App. A6). This asserted distinction is unpersuasive. Massa- chusetts retirement benefits" are principally funded through government contributions. See, e.g., Mass. Ann. Laws ch. 32, Par. Par. 1, 12(2), 22C (Law. Co-op. 1993). The state or local governmental unit contri- butes 90% of the funding for retirement benefits; and the state and local employee is not subject to state tax on up to $2,000 per year for any funding that they contribute. See Mass. Ann. Laws ch. 62, Par. Par. 2(a)(1)(1), 3B(a)(4) (Law. Co-op. 1990); note 2, supra. Thus, Massachusetts seeks to justify taxation of the full measure of military retired pay on the ground that some very small part of the benefits received by state and local employees may have previously been taxed by the State (Pet. App. A7). The rationale of the court below is further undermined by the fact that the Commonweal ex- empts from state tax all retirement benefits paid to municipal police and firemen under the pre-1938 non- contributory retirement plan. While the record of this case does - not disclose how many persons currently receive such benefits, that does not alter the fact that the State's "nondiscriminatory" ration- ale is inconsistent with the State's facially discrimi- natory legislation. ---------------------------------------- Page Break ---------------------------------------- 7 Moreover, the rationale offered by the Supreme Judicial Court is foreclosed by this Court's decision in Davis v. Michigan Dep't of the Treasury, supra. In Davis, the State sought to justify its tax discrimination against federal retirees by contending that the retirement benefits paid to federal employees were, as a general matter, more generous than those paid to state retirees. 489 U.S. at 816-187. The Court rejected that purported justification because "[a] tax exemption truly intended to account for differences in retirement benefits would not discriminate on the basis of the source of those benefits * * *; rather, it would discriminate on the basis of the amount of benefits received by individual retirees." Id. at 817. Under this same reasoning, a tax intended to account for prior taxation of retirement funding would not discriminatorily exempt certain benefits based on their source; instead it would apply to retirement benefits generally and exempt benefits only to the extent that they reflect previously taxed contri- butions. Under the standard applied by the Court in Davis and Barker, Massachusetts's facially discriminatory taxation of military retirement benefits lacks any coherent or consistent rationale. It is therefore invalid under 4 U.S.C. 111. If the decision in this case were allowed to stand, it would serve as a guidepost for States seeking to circumvent the clear restric- tions imposed by 4 U.S.C. 111 and this Court's de- cisions. ---------------------------------------- Page Break ---------------------------------------- 8 CONCLUSIONS The petition for a writ of certiorari should be granted. Respectfully submitted. DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General DAVID ENGLISH CARMACK KEVIN M BROWN Attorneys APRIL 1996