Davis v. Michigan

Last updated
Davis v. Michigan
Seal of the United States Supreme Court.svg
Argued January 9, 1989
Decided March 28, 1989
Full case namePaul S. Davis v. Michigan Department of the Treasury
Citations489 U.S. 803 ( more )
109 S. Ct. 1500; 103 L. Ed. 2d 891
Argument Oral argument
Case history
PriorJudgment for Michigan, Michigan Court of Claims; affirmed, People v. Dyson, 106 Mich. App. 90, 307 N.W.2d 739 (Ct. App. 1981); leave to appeal denied by Michigan Supreme Court.
Holding
4 U.S.C.   § 111 applies to federal retirement benefits. Michigan violated intergovernmental tax immunity by taxing federal pensions while exempting its own state pensions from taxation.
Court membership
Chief Justice
William Rehnquist
Associate Justices
William J. Brennan Jr.  · Byron White
Thurgood Marshall  · Harry Blackmun
John P. Stevens  · Sandra Day O'Connor
Antonin Scalia  · Anthony Kennedy
Case opinions
MajorityKennedy, joined by Rehnquist, Brennan, White, Marshall, Blackmun, O'Connor, Scalia
DissentStevens
Laws applied
Supremacy Clause; 4 U.S.C.   § 111

Davis v. Michigan, 489 U.S. 803 (1989), is a case in the Supreme Court of the United States holding that states may not tax federal pensions if they exempt their own state pensions from taxation. [1] In the 1930s, the federal and state governments began to charge income tax on salaries paid to each other's employees. However, reciprocal treatment was required under the doctrine of intergovernmental immunity. The Court's ruling extended the reciprocity to pensions, since they are a form of deferred compensation for services previously rendered by an employee.

Supreme Court of the United States Highest court in the United States

The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all federal and state court cases that involve a point of federal law, and original jurisdiction over a narrow range of cases, including suits between two or more states and those involving ambassadors. The Court holds the power of judicial review, the ability to invalidate a statute for violating a provision of the U.S. Constitution. It is also able to strike down presidential directives for violating either the Constitution or statutory law. However, it may act only within the context of a case in an area of law over which it has jurisdiction. The Court may decide cases having political overtones, but it has ruled that it does not have power to decide non-justiciable political questions.

In United States Constitutional Law, intergovernmental immunity is a doctrine that prevents the federal government and individual state governments from intruding on each other's sovereignty. It is also referred to as a Supremacy Clause immunity or simply federal immunity from state law.

Contents

Background

Intergovernmental immunity

In McCulloch v. Maryland (1819), the Supreme Court held that Maryland could not tax the Second Bank of the United States, as it would interfere with the bank's right to exist under federal law. The decision gave rise to the principle of intergovernmental immunity, which was gradually extended from government agencies to their employees. In Dobbins v. Commissioners of Erie (1842), the Court held that states could not tax the salaries of federal officials. [2] In Collector v. Day (1870), the Court also held that the federal government could not tax the salaries of state officials. [3]

McCulloch v. Maryland, 17 U.S. 316 (1819), was a U.S. Supreme Court decision that defined the scope of the U.S. Congress's legislative power and how it relates to the powers of American state legislatures. The dispute in McCulloch involved the legality of the national bank and a tax that the state of Maryland imposed on it. In its ruling, the Supreme Court established firstly that the "Necessary and Proper" Clause of the U.S. Constitution gives the U.S. federal government certain implied powers that are not explicitly enumerated in the Constitution, and secondly that the American federal government is supreme over the states, and so states' ability to interfere with the federal government is limited.

Collector v. Day, 78 U.S. 113 (1871), was a United States Supreme Court case that questioned the United States Federal government's ability to impose a tax upon the "salary of a judicial officer of the State." Even though this particular case favors state employees' rights, it was overruled in 1939 by Graves v. New York, where the Supreme Court ruled that the income tax imposed by the State of New York on an employee of the Federal Home Owners Load Corporation was constitutional, since there was no requirement of immunity contained in the Constitution or in any act of Congress. It is still important to Constitutional law because Judge Nelson's opinion gives us a clear statement of the doctrine of dual federalism.

In 1938, President Franklin Delano Roosevelt asked Congress to remove the reciprocal tax exemption for federal and state employees. The Supreme Court subsequently overturned its precedents from the 19th century. In Helvering v. Gerhardt (1938), the Court ruled that state salaries would not be exempt from federal income tax unless it caused an "actual and substantial" burden on the governmental functions of the state. Exempting state employees from federal taxation would intrude on the "national sovereign power to tax" and create "a privileged class of taxpayers." In Graves v. New York (1939), the Court held that federal salaries were also subject to "nondiscriminatory" taxation by the states. [4]

In the Public Salary Tax Act (1939), which was codified as 4 U.S.C.   § 111, Congress clarified the circumstances in which governmental salaries could be taxed. The Act stated that federal salaries could only be taxed if the state tax "does not discriminate against such officer or employee because of the source of such compensation." If the state exempted its own employees from taxation, then it cannot tax discriminate against federal employees by subjecting federal salaries to taxation. [5]

Title 4 of the United States Code outlines the role of flag of the United States, Great Seal of the United States, Washington, DC, and the states in the United States Code.

Case background

Paul S. Davis served the federal government as a lawyer for the Securities and Exchange Commission and an administrative law judge. He retired from the federal government in 1980. [6] From 1979 to 1984, he paid $4,299 in Michigan income taxes on his federal retirement benefits. At the time, Michigan exempted its own retirement benefits from taxation. However, pensions paid by the federal government, other states, and private industry were only entitled to a $7,500 deduction. [7]

Administrative law is the body of law that governs the activities of administrative agencies of government. Government agency action can include rule making, adjudication, or the enforcement of a specific regulatory agenda. Administrative law is considered a branch of public law.

In Memphis Bank & Trust Co. v. Garner (1983), the Supreme Court held that states could not levy franchise taxes on federal bond interest if they exempted their own state bonds from taxation. Upon learning of the decision, Davis filed amended Michigan tax returns to 1979, claiming tax refunds on his federal retirement benefits. The Michigan Commissioner of Revenue, the Michigan Court of Claims, and the Michigan Court of Appeals ruled that Davis was not entitled to a refund. The Michigan courts ruled that he was not covered by the nondiscrimination provisions of 4 U.S.C.   § 111, as he was retired and therefore no longer a federal employee. Davis appealed to the U.S. Supreme Court. [1]

In a rare occurrence, Davis argued his own case pro se before the Supreme Court. Although state attorneys general often argue their own cases when they are sued in an official capacity, it is unusual for private parties to appear pro se at oral arguments. Davis divided his time with Michael K. Kellogg from the Solicitor General's office, who appeared for the United States as amicus curiae . [8]

Opinion of the Court

The Supreme Court ruled 8-1 in favor of Davis. The majority opinion, written by Justice Anthony Kennedy, held that states could not tax federal retirement benefits if they exempted their own state retirement benefits from taxation. Since retirement benefits were earned by employees as deferred compensation, federal pensions are entitled to the nondiscrimination provisions of 4 U.S.C.   § 111, which covered "pay or compensation." The state of Michigan could remedy its discriminatory taxation by either removing the tax on federal pensions or levying a tax on its own pensions. [1]

In a lone dissenting opinion, Justice John Paul Stevens argued that the tax was not discriminatory because it treated federal employees the same as other Michigan taxpayers. Since most Michigan taxpayers did not receive retirement benefits from the state, they were also subject to the Michigan income tax. [1]

Aftermath

Michigan chose to extend the income tax exemption to federal retirement benefits. Davis received $4,299 of tax refunds. [9] Fourteen states that exempted their own state pensions from taxation had to refund billions of dollars to federal retirees. [10]

The National Association of Retired Federal Employees, which filed an amicus brief in the case, [9] established the Paul S. Davis scholarship in honor of the plaintiff in the case. [11]

Related Research Articles

In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code. Under the plan, retirement savings contributions are provided by an employer, deducted from the employee's paycheck before taxation, and limited to a maximum pre-tax annual contribution of $19,000.

In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935, and the current version of the Act, as amended, encompasses several social welfare and social insurance programs.

According to the United States Government Accountability Office (GAO), there are 1,138 statutory provisions in which marital status is a factor in determining benefits, rights, and privileges. These rights were a key issue in the debate over federal recognition of same-sex marriage. Under the 1996 Defense of Marriage Act (DOMA), the federal government was prohibited from recognizing same-sex couples who were lawfully married under the laws of their state. The conflict between this definition and the Due Process Clause of the Fifth Amendment to the Constitution led the U.S. Supreme Court to rule DOMA unconstitutional on June 26, 2013, in the case of United States v. Windsor.

Federal Insurance Contributions Act tax Payroll tax to fund Social Security

The Federal Insurance Contributions Act is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Tax exemption is the monetary exemption of persons, people, property, income, or transactions from taxes that would otherwise be levied on them. Tax-exempt status can provide complete relief from taxes, reduced rates, or tax on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios.

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).

Employee benefits non-wage compensation provided to employees in addition to normal wages or salaries

Employee benefits and benefits in kind include various types of non-wage compensation provided to employees in addition to their normal wages or salaries. Instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a "salary packaging" or "salary exchange" arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree. Examples of these benefits include: housing furnished or not, with or without free utilities; group insurance ; disability income protection; retirement benefits; daycare; tuition reimbursement; sick leave; vacation ; social security; profit sharing; employer student loan contributions; conveyancing; domestic help (servants); and other specialized benefits.

The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code (USC). It is organized topically, into subtitles and sections, covering income tax in the United States, payroll taxes, estate taxes, gift taxes, and excise taxes; as well as procedure and administration. Its implementing agency is the Internal Revenue Service.

For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes and other deductions.

Income taxes in the United States are imposed by the federal, most state, and many local governments. The income taxes are determined by applying a tax rate, which may increase as income increases, to taxable income, which is the total income less allowable deductions. Income is broadly defined. Individuals and corporations are directly taxable, and estates and trusts may be taxable on undistributed income. Partnerships are not taxed, but their partners are taxed on their shares of partnership income. Residents and citizens are taxed on worldwide income, while nonresidents are taxed only on income within the jurisdiction. Several types of credits reduce tax, and some types of credits may exceed tax before credits. An alternative tax applies at the federal and some state levels.

Income taxes in Canada constitute the majority of the annual revenues of the Government of Canada, and of the governments of the Provinces of Canada. In the fiscal year ending 31 March 2018, the federal government collected just over three times more revenue from personal income taxes than it did from corporate income taxes.

A severance package is pay and benefits employees receive when they leave employment at a company unwillfully. In addition to their remaining regular pay, it may include some of the following:

Superannuation in Australia is taxed by the Australian taxation system at three points: on contributions received by a superannuation fund, on investment income earned by the fund, and on benefits paid by the fund.

For the Old Age, Survivors and Disability Insurance (OASDI) tax or Social Security tax in the United States, the Social Security Wage Base (SSWB) is the maximum earned gross income or upper threshold on which a wage earner's Social Security tax may be imposed. The Social Security tax is one component of the Federal Insurance Contributions Act tax (FICA) and Self-employment tax, the other component being the Medicare tax. It is also the maximum amount of covered wages that are taken into account when average earnings are calculated in order to determine a worker's Social Security benefit.

In the United States, the question whether any compensation plan is qualified or non-qualified is primarily a question of taxation under the Internal Revenue Code (IRC). Any business prefers to deduct its expenses from its income, which will reduce the income subject to taxation. Expenses which are deductible ("qualified") have satisfied tests required by the IRC. Expenses which do not satisfy those tests ("non-qualified") are not deductible; even though the business has incurred the expense, the amount of that expenditure remains as part of taxable income. In most situations, any business will attempt to satisfy the requirements so that its expenditures are deductible business expenses.

Tax protesters in the United States advance a number of constitutional arguments asserting that the imposition, assessment and collection of the federal income tax violates the United States Constitution. These kinds of arguments, though related to, are distinguished from statutory and administrative arguments, which presuppose the constitutionality of the income tax, as well as from general conspiracy arguments, which are based upon the proposition that the three branches of the federal government are involved together in a deliberate, on-going campaign of deception for the purpose of defrauding individuals or entities of their wealth or profits. Although constitutional challenges to U.S. tax laws are frequently directed towards the validity and effect of the Sixteenth Amendment, assertions that the income tax violates various other provisions of the Constitution have been made as well.

Mayo Foundation v. United States, 562 U.S. 44 (2011), is a United States Supreme Court case in which the Court upheld a Treasury Department regulation on the grounds that the courts should defer to government agencies in tax cases in absence of an unreasonable decision on the part of the agency.

Taxation in Estonia consists of state and local taxes. A relatively high proportion of government revenue comes from consumption taxes whilst revenue from capital taxes is one of the lowest in the European Union.

References

  1. 1 2 3 4 Davis v. Michigan, 489 U.S. 803 (1989).
  2. ↑ Dobbins v. Commissioners of Erie County, 41 U.S. 435 (1842)
  3. ↑ Collector v. Day , 78 U.S. 113 (1870)
  4. ↑ Graves v. New York, 306 U.S. 466 (1939)
  5. ↑ Shaw, Lucien W. (September 1939). "The Public Salary Tax Act of 1939". California Law Review. 27 (6): 705–711.
  6. ↑ Epstein, Lee; Walker, Thomas G. (2016). Constitutional Law for a Changing America: Institutional Powers and Constraints (9 ed.). CQ Press. ISBN   9781483384078.
  7. ↑ "Preferential pension tax treatment barred". Tulsa World. Associated Press. March 28, 1989.
  8. ↑ "Davis v. Michigan Department of the Treasury(Oral Argument)". Oyez. January 9, 1989.
  9. 1 2 Ashley, Douglas (March 29, 1989). "Court Decides All Pensions Created, Taxed Equally". Daily Press (Newport News).
  10. ↑ Paust, Mathew (April 6, 1989). "Court Decision Leads To Hearing On Pension Taxes". Daily Press (Newport News). Virginia's nearly 200,000 federal retirees pay an estimated $150 million annually in state income taxes.
  11. ↑ "Chapter President's Message" (PDF). NARFE Chapter 289 Lansing, MI Newsletter (August 2015-September 2015): 1. After the elections in October the President will appoint Chairpersons for the following Chapter functions: ... Paul Davis Scholarship
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.