Dale W. Steager, as State Tax Commissioner of West Virginia, Respondent Below, Petitioner
James Dawson and Elaine Dawson, Petitioners Below, Respondents
Commissioner for the State of West Virginia, petitioner Dale
W. Steager, by counsel Katherine Schultz and L. Wayne
Williams, appeals a March 31, 2016, order of the Circuit
Court of Mercer County. In that order, the circuit court held
that a tax exemption available only to beneficiaries of
certain state retirement plans unlawfully discriminated
against certain federal retirees. The taxpayer-respondents,
James and Elaine Dawson, by counsel Michael W. Carey and
David R. Pogue, filed a response in favor of the circuit
court's order. The Tax Commissioner filed a reply.
Court has considered the parties' briefs and oral
arguments, as well as the record on appeal. Upon
consideration of the standard of review and existing
precedent, the Court finds no substantial question of law.
This case satisfies the "limited circumstances"
requirement of Rule 21(d) of the Rules of Appellate Procedure
and is appropriate for a memorandum decision rather than an
opinion. A memorandum decision reversing the circuit
court's order is therefore appropriate under Rule 21 of
the Rules of Appellate Procedure.
1939, Congress has permitted states to tax the income and the
retirement benefits of former United States government
employees. However, Congress allows state taxes upon federal
retirement benefits only "if the taxation does not
discriminate . . . because of the source of the pay or
compensation." 4 U.S.C. § 111 .
Virginia imposes taxes upon the government-provided
retirement income of most local, state and federal employees
who reside in this state. West Virginia taxes the income of
retired local and state employees received from the West
Virginia Public Employees Retirement System
("PERS") and the State Teachers Retirement System
("TRS"); it also taxes the income of retired
federal employees received from any federal or military
retirement system. W.Va. Code § 11-21-12(c)(5) .
However, West Virginia law permits the recipients of PERS,
TRS, or a general federal retirement to exempt up to $2, 000
of retirement benefits from their taxable income.
Id. The law permits recipients of military
retirement benefits to exempt up to $20, 000. W.Va. Code
§ 11-21-12(c)(7)(B). Furthermore, any taxpayer aged 65
or older may exempt up to $8, 000 from their taxable income,
regardless of the source of that income. W.Va. Code §
issue in this case is a unique tax exemption contained in
West Virginia Code § 11-21-12(c)(6) ("Section
12(c)(6)"). Section 12(c)(6) allows the recipients of
four small West Virginia retirement plans to exempt from
their taxable state income all the benefits received from
those plans. According to the Tax Commissioner, the
recipients comprise approximately two percent of all state
government retirees. The four retirement plans are the
Municipal Police Officer and Firefighter Retirement System
("MPFRS"); the Deputy Sheriff Retirement System
("DSRS"); the State Police Death, Disability and
Retirement Fund ("Trooper Plan A"); and the West
Virginia State Police Retirement System ("Trooper Plan
taxpayer in this case is James Dawson, who worked most of his
career as a deputy U.S. Marshal before being presidentially
appointed U.S. Marshal for the Southern District of West
Virginia. Mr. Dawson retired from the U.S. Marshals Service
on March 31, 2008. During his employment, Mr. Dawson was
enrolled exclusively in the Federal Employee Retirement
System ("FERS"), and he now receives benefits from
FERS. The Tax Commissioner agrees that Mr. Dawson is entitled
to exempt at least $2, 000 of FERS income from his state
taxable income; when he reaches the age of 65, he may exempt
up to $8, 000. See W.Va. Code §§
11-21-12(c)(5) and -12(c)(8).
years 2010 and 2011, Mr. Dawson and his wife Elaine filed
amended tax returns claiming an adjustment exempting Mr.
Dawson's FERS retirement income from state income tax
pursuant to Section 12(c)(6). The Tax Commissioner refused to
allow the Dawsons to claim the exemption.
Dawsons appealed, and in a hearing before the Office of Tax
Appeals asserted that there is no significant difference
between state, local, and federal law enforcement officers.
Accordingly, the Dawsons contended that the Tax
Commissioner's preferential treatment of the retirement
income of some (but not all) state and local law enforcement
officers pursuant to Section 12(c)(6) was, in fact,
discrimination against federal law enforcement officers
prohibited by 4 U.S.C. § 111. The Tax Commissioner
countered that, under the totality of the circumstances, the
Section 12(c)(6) exemption was not designed to discriminate
against federal retirees; rather, the intent of the exemption
is to give a benefit to a very narrow class of former state
and local employees. The Office of Tax Appeals rejected the
Dawsons' argument and affirmed the Tax Commissioner's
denial of the Section 12(c)(6) exemption.
Dawsons appealed to the Circuit Court of Mercer County, and
the parties repeated their arguments. In an order dated March
31, 2016, the circuit court reversed the decision of the
Office of Tax Appeals. The circuit court concluded that the
Tax Commissioner's denial of the Section 12(c)(6)
exemption to the Dawsons violated 4 U.S.C. § 111. The
Tax Commissioner now appeals the circuit court's order.
issues raised by the parties involve the interpretation of
Section 12(c)(6), and an assessment of whether it conflicts
with 4 U.S.C. § 111. "Where the issue on an appeal
from the circuit court is clearly a question of law or
involving an interpretation of a statute, we apply a de
novo standard of review." Syllabus Point 1,
Chrystal R.M. v. Charlie A.L., 194 W.Va. 138, 459
S.E.2d 415 (1995). See also, Syllabus Point 1,
Appalachian Power Co. v. State Tax Dep't of
W.Va., 195 W.Va. 573, 466 S.E.2d 424 (1995)
("Interpreting a statute or an administrative rule or
regulation presents a purely legal question subject to de
novo review."). We review the factual findings and
conclusions of the Tax Commissioner under a clearly wrong and
abuse of discretion standard. Syllabus Point 5,
Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d
780 (1995). "The 'clearly wrong' and the
'arbitrary and capricious' standards of review are
deferential ones which presume an agency's actions are
valid as long as the decision is supported by substantial
evidence or by a rational basis." Syllabus Point 3,
In re Queen, 196 W.Va. 442, 473 S.E.2d 483 (1996).
Commissioner asserts that the circuit court erred in holding
that Section 12(c)(6) was an intentionally discriminatory tax
against federal marshals. The Tax Commissioner argues that
the circuit court failed to take into account the fact that
there is no evidence in the record to suggest that Section
12(c)(6) was intended to discriminate against employees or
former employees of the federal government. Viewing West
Virginia's tax scheme in totality, the Tax Commissioner
contends that the record shows there was no calculated scheme
or blanket plan to discriminate against retired federal
marshals based on the source of their income. As we explain
below, we agree and reverse the circuit court's holding.
Davis v. Michigan Dept. of Treasury, 489 U.S. 803
(1989), the United States Supreme Court analyzed 4 U.S.C.
§ 111 and discussed its roots in the doctrine of
intergovernmental tax immunity. The doctrine traces back to
McCullough v. Maryland, 17 U.S. 316 (1819), the
seminal case where the Supreme Court recognized that Congress
was constitutionally empowered to create a "Bank of the
United States, " and held that the state of Maryland
could not impose a discriminatory tax on the Bank.
"Chief Justice Marshall's opinion for the Court
reasoned that the Bank was an instrumentality of the Federal
Government used to carry into effect the Government's
delegated powers, and taxation by the State would
unconstitutionally interfere with the exercise of those
powers." Davis, 489 U.S. at 810.
tax immunity is based on the need to protect each
sovereign's governmental operations from undue
interference by the other." Id. at 814. Prior
to 1939, the "salaries of most government employees,
both state and federal, generally were thought to be exempt
from taxation by another sovereign under the doctrine of
intergovernmental tax immunity." Id. "This
rule 'was based on the rationale that any tax on income a
party received under a contract with the government was a tax
on the contract and thus a tax "on" the government
because it burdened the government's power to enter into
the contract.'" Id. at 811 (quoting
South Carolina v. Baker,485 U.S. 505, 518 (1988)).
However, Congress enacted the "Public Salary Tax Act of
1939" (of which 4 U.S.C. § 111 is a part) "to
impose federal income tax on the ...