Kenneth R. Depperman, Et Al. Carl Richard Mockler, William J. Tillo, Et Al., Joseph Bonica, and Sayre A. Schwarztreuber v. Commissioner of Revenue (March 22, 2000)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD

KENNETH R. DEPPERMAN, ET AL 	v.	COMMISSIONER OF REVENUE
CARL RICHARD MOCKLER,
WILLIAM J. TILLO, ET AL,
JOSEPH BONICA, AND
SAYRE A. SCHARZTRAUBER

Docket Nos. F234866 & F245456,	Promulgated: 
	F227146, F230118, F234928	March 22, 2000
	F230448 and F246096


	These are consolidated appeals under the formal procedure pursuant to G.L. c. 62C, § 39, from the refusal of the Appellee Commissioner of Revenue to abate income taxes assessed under G.L. c. 62, § 2(a) for the tax years 1991 through 1995.  Because the appeals raised the identical issues, the Board allowed the parties' motions to consolidate the appeals.
	Chairman Gurge heard the Appellee's Motion for Judgment on the Pleadings and was joined in the decision for the Appellee by Commissioners Scharaffa, Lomans, Burns, and Gorton.
	These findings of fact and report are promulgated at the request of the Appellants, pursuant to G.L. c.  58A, § 13 and 831 CMR 1.32.
	Kenneth R. Depperman, pro se, for the Appellants.
John Delosa, Esq., Debra Rokosz, Esq. and Kerry-Lyn Eadie, Esq. for the Appellee. 

FINDINGS OF FACT AND REPORT

These appeals raise the issue of whether income which the Appellants received from a noncontributory United States military pension is exempt from the Massachusetts personal income tax.  Based on the undisputed facts contained in the parties' pleadings, the Appellate Tax Board ("Board") made the following findings of fact.
	The Appellants are all residents of the Commonwealth who received income from a United States military retirement pension ("military pension") during the tax years at issue.  The amount of income received was based on the details of their military service.  The Appellants paid the Massachusetts income taxes due on the income received from their military pensions.
	The Appellants timely filed applications for abatement with the Commissioner of Revenue ("Commissioner") and appeals to this Board from the Commissioner's denial of their applications for abatement.  Accordingly, the Board found that it had jurisdiction over these appeals.
	The United States military retirement system is a noncontributory system.  Military personnel do not have separate, identified amounts deducted periodically from their pay and deposited in segregated retirement fund accounts from which retirement benefits are to be paid.
	The Appellants claim that their military pension benefits are exempt from the Massachusetts personal income tax.  For the reasons discussed in the following Opinion, the Board ruled that the Appellants' military pension benefits were properly subject to the Massachusetts personal income tax because the pension benefits were paid from a noncontributory plan.  Accordingly, the Board issued decisions for the Appellee in these appeals.

OPINION
	It is undisputed that the Appellants received retirement income from a noncontributory military pension.  The only issues raised in these appeals were issues of law regarding whether the governing exemption statute,       G.L. c. 62, § 2(a)(2)(E), violated federal and state constitutional provisions as well as a federal statute.  Accordingly, because resolution of the issues of law was sufficient to determine the decision of the Board, determination of the appeals on the Commissioner's Motion for Judgment on the Pleadings was appropriate.  See 831 CMR 1.22 and 1.31.  
Massachusetts gross income is defined under         G.L. c.  62, § 2(a) as "federal gross income," with certain additions and deductions.  For federal purposes, Internal Revenue Code § 61(a)(11) provides that pensions are included within the definition of gross income.  For the years at issue, G.L. c. 62, § 2(a)(2)(E) provided an exemption from Massachusetts gross income for "income 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 contributed" [emphasis added].  Accordingly, because no exemption was allowed for income derived from a noncontributory government pension during the years at issue, the Massachusetts income tax treatment of a government pension depended on whether or not the retiree contributed to the particular pension fund.



It is undisputed in these appeals that the United States military retirement system is a noncontributory system. Military personnel make no direct contributions out of their compensation toward their federal retirement plans.  See Filios v. Commissioner of Revenue, 415 Mass 808, 810 (1993), cert. denied, 114 S.Ct. 1538 (1994); Cooper v. Commissioner of Revenue, 421 Mass. 557, 559 (1995).  The military pension benefits which these Appellants received are from a noncontributory retirement system.  Accordingly, under the express terms of        G.L. c. 62, § 2(a)(2)(E), the Appellants were not permitted to exclude their military retirement income when determining their Massachusetts gross income for the tax years at issue.
The Appellants argue, however, that the provisions of G.L. c. 62, § 2(a)(2)(E) unlawfully discriminate against federal employees in violation of 4 U.S.C. § 111. The Massachusetts Supreme Judicial Court has, however, rejected this same argument in Filios and Cooper.  The Court determined that the distinction between "contributory" and "noncontributory" in a retirement plan was significant.  In a contributory plan, the amounts contributed have been previously taxed to the employee while in a noncontributory plan, such amounts contributed on behalf of that employee are not taxed upon contribution.  "Thus, taxing distributions from contributory plans can lead to double taxation, while taxing distributions from noncontributory plans will not."  Filios, 415 Mass. at 810.  
The Court found that differing tax treatment was not based on whether the source of retirement income was from the state government or from the federal government.   Rather, it was based on whether or not the taxpayer contributed to the retirement plan.  Military retirees had their income taxed by the Commonwealth because their retirement plan was noncontributory.  Accordingly, the Court in Filios and Cooper concluded that G.L. c. 62, §  2(a)(2)(E) did not discriminate against federal retirees and therefore did not violate 4 U.S.C. § 111.  Filios, 415 Mass. at 812 and Cooper, 421 Mass at 562.
	The facts presented in these appeals are substantially the same as those at issue in Filios and Cooper.  Accordingly, the  Board  finds  that the  provisions  of G.L. c. 62, § 2(a)(2)(E) do not unlawfully discriminate against federal  employees  and  therefore  do  not  violate  4  U.S.C. § 111. 
	The Appellants' argument that G.L. c. 62 § 2(a)(2)(E) violates Article 44 of the Amendments to the Massachusetts Constitution, which requires income from the same class of property to be taxed at a uniform rate, is unavailing in the present appeals because it was also explicitly rejected in Filios, 415 Mass. at 812.
	Finally, the Appellants assert in the present appeals that the provisions of G.L. c. 62, § 2(a)(2)(E) violate the Equal Protection Clause of Fourteenth Amendment of the United States Constitution. "A tax measure is presumed valid and is entitled to the benefit of any constitutional doubt, and the burden of proving its invalidity falls on those who challenge the measure." Opinion of the Justices, 425 Mass. 1201, 1203-1204 (1997), quoting Daley v. State Tax Commission, 376 Mass. 861, 865-866 (1978); see also Andover Savings Bank v. Commissioner of Revenue, 387 Mass. 229, 235 (1982).
A state legislature has wide latitude in enacting its tax laws without offending Constitutional principles.  The United States Supreme Court has ruled that:

It is inherent in the exercise of the power to tax that a state be free to select the subjects of taxation and to grant exemptions.  Neither due process nor equal protection imposes upon a state any rigid rule of equality of taxation .... [A legislature] may make distinctions of degree having a rational basis, and when subjected to judicial scrutiny they must be presumed to rest on that basis if there is any conceivable state of facts which would support it.  Carmichael v. Southern Coal & Coke Co., 301 U.S. 495, 509, (1937), citing Rast v. Van Deman & Lewis Co., 240 U.S. 342; 357 (1916); Heisler v. Tomas Colliery Co., 260 U.S. 245, 255 (1922); Swiss Oil Corp. v. Shanks, 273 U.S. 407, 413 (1927); Lawrence v. State Tax Commissioner, 286 U.S. 276, 284 (1932); Metropolitan Casualty Insurance Co. v. Brownell, 294 U.S. 580, 584 (1935).   Also see Federal Communications Commission v. Beach Communications, et. al., 508 U.S. 307, 313 (1993) [emphasis added]. 


"Any distinction in a tax statute that has a rational basis will survive a challenge of the equal protection clause." Liberty Mutual Insurance Company v. Commissioner of Revenue, 405 Mass. 352, 358 (1989) quoting Smith v. Commissioner of Revenue, 383 Mass. 139, 141 (1981). See also Lily Transportation Corp. v. Board of Assessors of Medford, 427 Mass. 228, 232, (1998); Seller Corp. v. Commissioner of Revenue, 384 Mass 635, 639 (1981).  "Absent a showing that a statute burdens a suspect group or fundamental interest, it will be upheld as long as it is rationally related to the furtherance of a legitimate state interest." The Prudential Insurance Company of America v. Commissioner of Revenue, 429 Mass. 560, 568 (1999), quoting Dickerson v. Attorney General, 396 Mass. 740, 743 (1986).
Accordingly, in reviewing the constitutionality of distinctions made in tax legislation, the issue is "whether [the legislation] is rationally related to a legitimate State interest." Opinion of the Justices to the House of Representatives, 408 Mass. 1215, 1223 (1990), citing San Antonio Independent School District v. Rodriguez, 411 U.S. 1, 16-17 (1973); Pinnick v. Cleary, 360 Mass. 1, 27-28 (1971).
The distinction made in G.L. c. 62, § 2(a)(2)(E) is between income derived from contributory governmental pensions and income derived from noncontributory governmental pensions.  The Court in Filios recognized that the underlying distinction between the classes is a meaningful one: "taxing distributions from contributory plans can lead to double taxation, while taxing distributions from noncontributory plans will not." Id. at 810.
Under a rational-basis review, "the statute bears a strong presumption of validity, and the burden of proving the measure invalid rests with the party challenging it." The Prudential Insurance Company of America, supra.  See also, Aloha Freightways, Inc. v. Commissioner of Revenue, 428 Mass. 418, 423 (1998).  The Appellants have failed to show that there is no rational basis to support the statute in question, and thus have failed to demonstrate a violation of the Equal Protection Clause of the Fourteenth Amendment of the United States Constitution.
Based on the foregoing, the Board ruled that the Appellants' income from noncontributory military pensions was not exempt from gross income pursuant to the provisions of G.L. c. 62, § 2(a)(2)(E).  In addition, the Board ruled that the Appellants did not meet their burden of proving that G.L. c. 62, §2(a)(2)(E) violated 4 U.S.C § 111, Article 44 of the Amendments to the Massachusetts Constitution, or the Equal Protection Clause of the Fourteenth Amendment of the United States Constitution.  Accordingly, the Board issued decisions for the Appellee in these appeals.

					APPELLATE TAX BOARD

					By:					___
						Abigail Burns, Chairman



A true copy,


Attest:__________________                                                                      
       Clerk of the Board

 Shortly after the Supreme Judicial Court affirmed the Board in Filios v. Commissioner of Revenue, 415 Mass. 808 (1993) and Cooper v. Commissioner of Revenue, 421 Mass. 557 (1995), ruling that military pensions were subject to Massachusetts income tax, the governing statute was amended to exclude "[i]ncome from any contributory annuity, pension, endowment or retirement fund of the United States government or the commonwealth or any political subdivision thereof including the optional retirement system established by section forty of chapter fifteen A, to which the employee has contributed, or any income received from the United States government as retirement pay for a retired member of the Uniformed Services of the United States, as defined in 10 U.S.C. section 1072, regardless of whether the retiree contributed to the retirement system."  St. 1997, c. 139, § 1  The amendment was effective for all tax years beginning on or after January 1, 1997.  St. 1997, c. 139, § 2.  Accordingly, the issue involved in the present appeals will not arise for any tax years beginning on or after January 1, 1997.

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