HARPER v. VIRGINIA DEPARTMENT OF TAXATION
Argument of Michael J. Kator
Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-794, Henry Harper v. Virginia Department of Taxation.
Mr. Kator: Thank you, Mr. Chief Justice, and may it please the Court:
This cases arises as the sequel to Davis v. Michigan Department of the Treasury.
Petitioners are Federal retirees who, relying on Davis, sought refunds of the taxes Virginia unconstitutionally imposed on their pension.
The court below denied petitioners their refunds, principally holding that Davis was not to be applied retroactively.
This case presents the question whether Davis must be applied retroactively, and if so whether the Department of Taxation must refund petitioners the taxes unconstitutionally imposed upon them.
In reaching its conclusion to apply Davis nonretroactively, the court below relied on its application of Chevron Oil v. Huson.
Well, we submit that the lower court's Chevron analysis is flawed in every respect.
More fundamentally we submit that the court below erred in even reaching Chevron.
Foremost, retroactivity of Davis is compelled by this Court's decision in Beam v. Georgia.
In Beam this Court rejected modified or selective prospectivity in the civil arena.
It held that if this Court applies its rule to the parties before it in one case all other courts must similarly apply that rule to litigants before them.
Thus for choice of law purposes the dispositive question here is whether the Court applied its ruling to the parties in Davis.
On this point there can be no real dispute.
As a result of this Court's holding Michigan paid and Paul Davis received a refund of the taxes unconstitutionally imposed on his pension.
It is not important how or why this Court reached that determination.
It matters only under Beam that it did.
Accordingly, under Beam, the court below was required to apply Davis retroactively.
The second point that we raise is our statutory point.
What the Department of Taxation is asking the Court to do in this case is something that it has never done before.
It is asking the Court to use Chevron to ignore the plain, unambiguous terms of a lawfully enacted act of Congress.
This is not anything that any of the authorities that the Department of Taxation has cited in its brief suggests that this Court has ever done.
And admitted, it would seem to me that there's no precedent which would support it.
In enacting the Public Salary Tax Act in 1939 Congress said taxes imposed after December 31, 1938 must be non-discriminatory.
50 years later Virginia says no, that statute should go into effect December 31, 1988.
This Court cannot accept Virginia's equitable plea.
They say it's going to be very burdensome for us to comply with the statute.
Congress has spoken, and that, according to this Court's precedent, is the end of the matter.
In our briefs we speak at great detail about the Chevron analysis.
We address the bounds and propriety of prospectivity and we address the application of Chevron to the facts of this case.
As this Court has most recently applied Chevron, it could not reach a case such as this, a case against a governmental entity where there is no contention that past precedent of this Court has been overruled and where there is no suggestion that this Court has answered a novel question of law in a revolutionary manner.
Application of Chevron in any event yields retroactive application of Davis as each element of that analysis favors retroactivity.
For these reasons as well the court below erred in holding that Davis was nonretroactive.
What I think is the tricky issue in this case is not so much the choice of law issue.
The more complicated issue is the remedy issue.
The court below offered two reasons for denying petitioners' refunds.
Its first reason was that under Chevron Davis didn't need to be applied retroactively.
And that I submit is incorrect.
Its second reason was that under its own state law analysis, its own state law retroactivity analysis, Davis would not be applied retroactively.
As this Court made clear in Ashland Oil, in Beam, and the various opinions in the American Trucking Association v. Smith, the question of retroactivity of a decision of this Court is a question of Federal law, not state law.
The Virginia Supreme Court was simply wrong in holding that as a matter of state law you could deny retroactive effect to Davis.
The second thing that the Supreme Court of Virginia did in its second opinion was it suggested that no remedy was required here even if Davis is retroactive because it can continue to consider the remedial, or the equitable considerations of Chevron in the remedial calculus.
It can say even if the law is unconstitutional, the statute is unconstitutional as declared by Davis, nonetheless it can deny relief.
Unknown Speaker: Well certainly the state can, in a tax case the state can require a claimant to go through the procedures required of other claimants for tax refunds, can it not?
Mr. Kator: Certainly a state can structure its tax refund statute in a way that provides it protection.
That's not what we have here in this case.
The bottom line, as McKesson makes clear, is a clear and certain remedy for the unlawful deprivation of property.
That's what we had in this case.
Virginia seems to suggest that McKesson only applies in the situation where it's foreseeable at the time that the statute was enacted that the statute would be challenged and likely invalidated.
And I submit that McKesson cannot be so limited.
McKesson speaks in terms of constitutional due process.
The due process clause doesn't say you get due, due process may not be taken in bad faith without due process of law.
It says property may not be taken without due process of law.
Their reading of McKesson is far too parsimonious.
In this case Virginia must provide a clear and certain remedy, and their statute presumably does so.
If it doesn't, then the Constitution requires that a remedy be provided.
Unknown Speaker: Well, and I suppose the state can also put a time bar on the remedy, that you must apply for a refund or pay under protest within a certain amount of time or you can't do it?
Mr. Kator: Certainly.
As this Court held in Beam and in McKesson, the states are allowed to erect procedural barriers, procedural protections around them to shield them from liability.
And that's what most states have done.
They have created a system whereby the statute of limitations, 3 years, whatever, within which to present claims, and that's the procedure the petitioners have followed in this case.
Unknown Speaker: What are the limits in Virginia, the statute of limitations or the time requirements on a tax claim?
Mr. Kator: In an ordinary case it would be 3 years as a general rule.
It's 3 years or I believe 60 days after your Federal return is corrected in a Federal claim, piggy-backs it in that sense.
In this particular case, shortly after Davis was decided by this Court the Virginia legislature met and amended its refund statute for the explicit purpose of allowing Federal, the claims of Federal, retroactivity of Davis to be resolved, it amended the refund statute to say claims for refunds for Davis type taxes may be submitted up to a year after final resolution of the retroactivity of Davis.
So in Virginia the door is still open.
Unknown Speaker: You are only extending it to a year after this Court renders a decision in this case?
Mr. Kator: Well, perhaps this Court, perhaps the Supreme Court of Virginia on remand.
It's a little unclear, but the door is still open in Virginia.
Unknown Speaker: But how far back does that go?
Mr. Kator: Only to 1984 would be the first... I'm sorry, 1985 would be the first tax year at issue, in dispute in this case.
Most of the petitioners filed their refund claims in March, April of 1989, and that would have entitled them to go back to 1985.
So the tax years in dispute are '85, '86, '87, and '88.
Virginia didn't impose the tax in '89.
Unknown Speaker: I'm a little puzzled because they make the argument in their brief that as long as you had a prepayment procedure you don't have to have a host payment refund claim.
That seems a little inconsistent with what you've just said.
Is it... you think it's perfectly clear as a matter of Virginia law that... have they already decided that there is a remedy in this case?
Mr. Kator: In this case all the court has held is that the reason its refund statute does not apply is because of non-retroactivity of Davis.
Unknown Speaker: Right.
Mr. Kator: In its second opinion it intimated that it could continue to play the Chevron game with respect to a remedy, but that's not anything that it had done before.
We also challenge the assertion that there's any meaningful predeprivation remedy in Virginia.
In Virginia the predeprivation remedy is essentially to go to the tax commissioner and say I don't think I should have to pay these taxes.
In order to get judicial review of that determination by the tax commissioner you must pay the taxes and you are funnelled into the same refund procedure that we filed, the petitioners filed in this case.
So because this case involves constitutionality of the Virginia statute, the Virginia tax commissioner has no authority to say the tax is unconstitutional to absolve petitioners from paying that tax.
Therefore there is no meaningful predeprivation remedy.
Unknown Speaker: Even if he had that authority, does Virginia require you to go to the tax commissioner in order later to ask for a refund?
Mr. Kator: No.
And that's the second point, Your Honor.
Virginia doesn't require that you choose any one particular route.
It has various routes.
And what the argument seems to be is that well, you had this other route you could have taken and therefore we can cut off the route that you happened to choose to take.
And I submit that that would violate fundamental notions of due process as in the Brinkerhoff-Faris case.
Unknown Speaker: Virginia does not say you must go to the tax commissioner?
You can choose not to, pay the tax and challenge it later, ask for a refund later, without having gone to the tax commissioner?
Mr. Kator: You had to pay the tax first.
Unknown Speaker: Yes, you have to pay it first.
Mr. Kator: Yes.
Unknown Speaker: But I take it, or maybe it's not correct, if you apply to the commissioner for a prepayment remedy would that extend the period of time in which you have to file your refund because the, I take it the commissioner can hold your claim in abeyance while the commissioner is determining it, and then if the commissioner denies it I take it the refund remedy, the limitation of the refund remedy begins to run from either the denial or the payment.
Mr. Kator: Virginia does have a procedure whereby you can preserve a refund claim in just that manner.
But the fact remains that in terms of getting an unconstitutional tax refunded it can't be done unless you go to court, and you can't go to court unless you pay the tax.
Unknown Speaker: But there is a functional difference in the two routes in that if you apply for the predeprivation, for the prepayment determination it is going to have the effect of extending the period of time in which you have to ultimately file a court action.
Mr. Kator: Yes, it would extend your statute of limitations.
It doesn't allow you to go back any further, but it would extend the time that you could finally file suit.
But I don't see that that would necessarily reflect on the meaningfulness of the predeprivation remedy because the bottom line still remains unless you go to court you can't get your money back, and unless you pay your taxes you can't go to court.
And that is what I see as the central component of the predeprivation remedy that's required.
Unknown Speaker: Mr. Kator, I think you said that the commissioner cannot relieve you of your tax liability on grounds of unconstitutionality.
Is that correct?
Mr. Kator: That's correct.
Unknown Speaker: He can't forgive it.
Can he make a declaration of unconstitutionality and then say well, I'm terribly sorry, I can't let you go but I admit that the tax is unconstitutional?
Mr. Kator: I don't... I suspect it's conceivable that he could say I'm very sympathetic, I think this tax is unconstitutional but there's nothing I can do about it, but I know--
Unknown Speaker: He cannot make a declaration of unconstitutionality with any legally operative significance, is that what you're saying?
Mr. Kator: --Exactly.
Not in Virginia, not in the United States, and not in any jurisdiction that I'm familiar with.
Unknown Speaker: Don't they make another argument, another argument that there's some sort of an equitable doctrine of repose that the Virginia court can apply that could be comparable to a statute of limitations when they think there's gross unfairness in collecting a tax retroactively?
Mr. Kator: The argument that I understand the Department of Taxation to make is that the state has its own retroactivity analysis, the Fountain v.--
Unknown Speaker: I understood that to go not to the question of whether the rule of law is retroactive but whether there really is a state remedy.
Obviously there would not be if the statute of limitations had run or if they had said in so many words you must file a pre, you know, a prepayment challenge.
But they say there's sort of another thing, I don't know if there are any cases that support it but that there's some sort of a, they can create a doctrine of repose when they are confronted with this sudden trauma that has come over the state.
Mr. Kator: --Well, the only authority they cite for that is the Fountain case and another one that was decided on or about the same date, and those cases are retroactivity cases.
And they, the department, the attorney general's office briefed Chevron in those cases and the court came down, essentially following the Chevron analysis in state law cases, and said this is how we apply it.
I don't understand how Virginia could do that, but that comes back to my, to the bottom line of our brief which is if Virginia doesn't provide a remedy, then the Constitution must and the Fourteenth Amendment takes over.
Petitioners are entitled to a clear and certain remedy for the denial of their property, for the taking of their property, and if Virginia's statute doesn't provide it then the Fourteenth Amendment would.
And I think that this is an important point that comes up not only in this case but is before this Court in several other petitions that are pending.
Unknown Speaker: May I just interrupt you right there?
Why would it require it if you acknowledge that a statute of limitation would bar it?
Anything barred by limitation the Federal Constitution doesn't trump.
Mr. Kator: Correct.
Unknown Speaker: Now why does the Federal Constitution necessarily trumps this sort of, this new equitable doctrine they're coming up with?
Mr. Kator: Because if it's new then there wasn't a clear and certain remedy.
Unknown Speaker: I see.
Mr. Kator: You have a Brinkerhoff-Faris situation where they undermined your claim, your existing claim.
And that's what... obviously this Court cannot say Virginia's refund statute provides X.
That's for the Virginia Supreme Court to say.
But what this Court can say, and what we ask it to say, is that if Virginia's refund statute doesn't provide a remedy then the Fourteenth Amendment does.
And this is the issue, the Brinkerhoff-Faris issue that I was mentioning.
That's before the Court in the Norwest Bank case that's on petition.
It is also before the case in, the Court in the Bass case which is pending.
Recently in Georgia in the, not in the Beam case but in the Federal Retirees case, the Supreme Court of Georgia held that yes, Davis must be applied retroactively but its refund statute only applies to illegal taxes collected under a valid statute and not illegal taxes collected under an invalid statute.
And therefore in Georgia they tell us, notwithstanding what counsel for the attorney, for Georgia told this Court in Beam, that the only way to recover your taxes in Georgia is to pay them under protest.
This is the kind of, these are the kinds of defenses that are coming up in these cases now, and they're before the Court.
Unknown Speaker: Do you say that an even-handedly applied requirement that you pay under protest in order to recover cannot bar recovery?
Mr. Kator: I wouldn't say that, I wouldn't say that it... well, yes.
Unknown Speaker: What's your authority for that?
Mr. Kator: Okay.
Let me start with a case that I'm more familiar with, which is the Bass case.
In Bass the supreme court said yes, you must pay under protest.
Well, the pay under protest provision in Bass had previously been upheld by this Court as being not a plain, speedy, and efficient remedy.
I would suggest that in that context you would not have, that would not be an adequate remedy.
In, as a general rule, yes.
That's what McKesson stands for, that you can impose pay under protest.
Unknown Speaker: Well, why would the general rule, why is the general rule not applicable, could it not be applicable to this situation?
Mr. Kator: It could be, Your Honor, if it were imposed in the future.
If you try to impose it retroactively, you can't.
Unknown Speaker: Well, supposing that Virginia had in 1980, say before all of this litigation arose, adopted a rule that in order to ever get a refund for a tax you have to have paid it under protest and applied that evenhandedly up until now.
Would that be an adequate bar to recovery here to someone who had not paid under protest?
Mr. Kator: I think that that's what McKesson holds, Your Honor.
Unknown Speaker: I think it is too.
Mr. Kator: But that is not the situation that we have here.
Unknown Speaker: As I understand, you say what the situation here is that you may go through a protest procedure with the commissioner, but you need not.
You have the option of either using that or else paying the tax and seeking a refund.
Mr. Kator: Yes, as is the case with many other states.
There are various ways to go about it.
Petitioner has elected this route.
If I may reserve my remaining time.
Unknown Speaker: Very well, Mr. Kator.
Ms. Marshall, we'll hear from you now.
I think it would be helpful to me and very likely to some of my colleagues if sometime during your argument you would describe to us what the Virginia tax recovery provisions are.
Argument of Gail Starling Marshall
Mr. Marshall: Let me begin with that.
May it please the Court and Mr. Chief Justice.
The predeprivation remedy that Virginia has is not limited just to the administrative proceeding here, administrating proceeding that admittedly none of these petitioners came forward in.
It is also involves predeprivation possibility of going to court in a declaratory judgment.
And actually the Perkins case, which we cited to this Court, is in fact a declaratory judgment case.
Unknown Speaker: You say the procedure also involves going to court.
Is that an alternative?
Mr. Marshall: Yes.
Yes, Your Honor.
Unknown Speaker: You can do one or the other, and either one will be sufficient?
Mr. Marshall: There are various predeprivation remedies.
They are set forth in our supplemental appendix.
They include not only the administrative procedure which has been addressed here to the tax commissioner, and I disagree with what was stated earlier.
The tax commissioner can exonerate a taxpayer from payment.
He may not be able to declare anything unconstitutional, but he certainly can give a taxpayer relief.
Unknown Speaker: Ms. Marshall, are they... I know they are available but does the state say you must use those and unless you use those you can't come in later, which is what it seems to me it's saying here?
These people came in later and the state is now saying well, you could have come in earlier and therefore we don't have to pay you.
And they're saying well, we could have come in later but you, earlier but you didn't tell us we had to come in earlier.
Did the state tell them they had to come in earlier?
Mr. Marshall: Mr. Justice Scalia, the state gives them an option under the regulations--
Unknown Speaker: Okay.
Mr. Marshall: --which are part of our submission in our brief.
The regulations actually encourage people to use the predeprivation remedies.
What I suggest to this Court is that the predeprivation remedy or the remedy that this, these petitioners choose, and they chose a post-deprivation remedy, when they choose that, which was an option they have, they take that remedy as it is in state law.
And that remedy is not a mandatory refund remedy in facts of this nature.
For 2 decades there has been--
Unknown Speaker: Ms. Marshall, may I interrupt you just a moment before you get into that?
I just want to go back to something you said before.
I guess I have two questions.
The first is with respect to the declaratory judgment remedy.
Is that set out as a peculiar or a particular ailment of the tax refund procedure or is there simply a general statute in Virginia providing for declaratory judgment remedies?
Mr. Marshall: --There is a general statute and it is applied.
We do not, in other words our tax exemption or injunction statute does not bar that.
Unknown Speaker: Okay.
Mr. Marshall: Perkins itself, the case that our supreme court relied on in forming and declaring the nature of the refund remedy, which the option that these petitioners took, relied on the Perkins case and it itself was a declaratory judgment action.
Unknown Speaker: Okay.
Now, my second question goes to your statement that the commissioner could forgive the tax but could not declare it unconstitutional.
Mr. Marshall: Well, whether he could or not, that hasn't been litigated in Virginia, but the point is whether these petitioners could have gotten relief and they certainly could have gotten relief.
He has the authority to exonerate the taxpayer and the limitations of the kinds of reasons you can argue to the commissioner is unlimited for why you should be exonerated.
Unknown Speaker: It may be, and I certainly will accept your answer on that point, but isn't it clear that unless he is able to declare the tax unconstitutional he could not, as you put it, exonerate them on the kind of claim that we have before us here?
Mr. Marshall: No, I disagree.
The regulations in the statute, it's section 1821 of the Code, specifically state that he can compromise the claim, he can foreclose or not have any collection action or assessment action--
Unknown Speaker: Oh, I'm sure he has that general power but isn't it equally clear that he could not legally use that power without stating a legally sufficient reason?
In fact we've been saying unconstitutional, I guess it's really a supremacy clause issue here, if there's a difference.
Unless he could say yes, under the supremacy clause of the United States Constitution I may not collect this tax given the Federal statute, then he couldn't exonerate the taxpayer in this case.
Mr. Marshall: --Well, I mean, he is subject, of course, to writs of prohibition and mandamus for arbitrary actions, but, and certainly he is presumed to act in, presumptively to act in good faith reliance on what a reasonable interpretation of the law is.
But he does have the authority to exonerate.
If the petitioner, for example, had done that and had lost that case he could then have brought it to a judicial body, a declaratory judgment prior to paying the tax.
Unknown Speaker: Well, if he had gone to the commissioner first, not declaratory judgment first but if he had gone to the commissioner first could he then have sought judicial review without payment of the tax?
Mr. Marshall: As a declaratory judgment, that's correct.
Unknown Speaker: I see.
Mr. Marshall: That's correct.
Unknown Speaker: May I ask though--
Mr. Marshall: Yes.
Unknown Speaker: --Do you have any authorities in your brief for the proposition that failure to pursue the prepayment remedy bars an otherwise available post-payment refund remedy?
Mr. Marshall: Your Honor, that case has never come before the court.
In other words--
Unknown Speaker: This is the first case?
Mr. Marshall: --That's... well, I'm sorry--
Unknown Speaker: And my second question--
Mr. Marshall: --Could I--
Unknown Speaker: --I'm sorry, I didn't mean to interrupt you.
Mr. Marshall: --I wanted to say that the question of what would have occurred had they taken any of these other remedies has not been litigated in the Virginia court.
Unknown Speaker: I understand.
I'm assuming that, I'm accepting your statement they could have won if they had done it that way.
But the question I have is even so is there anything saying their failure to do it that way bars their post--
Mr. Marshall: I suggest, Your Honor, that Perkins and Capehart, the two cases in the 1970s, give notice to the petitioners that if they choose this particular remedy, which is one of several available remedies, it comes with that limitation, the limitation which has been engrafted on the law by our supreme court 2 decades ago.
And I suggest that is notice to petitioners--
Unknown Speaker: --What's the limit... I'm not sure I... that if they choose the post-refund remedy it comes with what limitation?
Mr. Marshall: --It comes with the statutory interpretation by the Virginia Supreme Court in Perkins and Capehart that in cases where there is reliance by all parties on the law and there would be a failure of the administration of justice for that to be overturned--
Unknown Speaker: I see.
Mr. Marshall: --that the remedy of refund is not mandatory.
The 1826, the part of our Code 1826 is not mandatory.
Unknown Speaker: I see.
Then my second question is at what stage of this litigation did you first advance this defense?
Mr. Marshall: At the trial court.
The Perkins and Capehart cases--
Unknown Speaker: You have argued all the way through that there's no remedy here even if there is--
Mr. Marshall: --We have argued all the way through.
Yes, Your Honor.
Unknown Speaker: --And the... why has not the Virginia Supreme Court addressed that question before?
Mr. Marshall: Well, Your Honor, I believe that there are two things that the Virginia Supreme Court did address, and there are various lens that this Court can look at the case.
If I may suggest, for example, this Court could find that Davis is prospective, and if it finds that for whatever reason this case is over because there are no other legal issues for the Court to address.
If, however, this Court finds that it is not prospective, we submit that you could still and should still affirm the decision of the Virginia Supreme Court below because the Virginia Supreme Court not only determined under Chevron that it was prospective and therefore not an erroneous or improper exaction of tax, which is what 1826 requires, but it also had another leg to its opinion in which it said that under 1826 and under our precedents, Perkins and Capehart, we look in those cases to the reliance of the parties and the factors of the administration of justice in determining whether or not our particular statutory state remedy encompasses the facts that you petitioners have chosen to bring before us and that you have, the route you have chosen to take.
Unknown Speaker: Ms. Marshall, did Perkins and Capehart make clear and did you argue in this case at the trial court that the rule is different for post-payment remedies than it is for the declaratory judgment remedy?
I mean, if I read Perkins and Capehart I would think that that applies to all remedies from the Virginia Supreme Court for taxes, whether you do it before or after.
You're arguing now though a very sophisticated and subtle distinction between post-payment remedies and prepayment remedies.
Is that clear in Perkins and Capehart, that had you come earlier we wouldn't play this equitable game, but as it is you have come late and we have a different rule for post-payment cases?
Is that clear?
Mr. Marshall: Let me suggest, Your Honor, that I believe it is clearly derived from Perkins.
Perkins was a prepayment case.
It was a declaratory judgment.
And it received the relief of the court from what was determined to be an erroneous assessment methodology used by, widespread.
Similar here where this is used in 23 states, that was used in many counties.
Capehart came later.
Capehart paid the tax and then asked for the refund, and Capehart's refund claim was denied.
So I suggest that the prepayment/post-payment is really intrinsically in those two cases.
But whether you say have we litigated a lot of cases in that area, no, Your Honor, we have not.
But I suggest to Your Honor for several reasons that whether you find Davis to be retroactive or not, the Supreme Court of Virginia should be affirmed because what Virginia has done in the second part of its opinion is it looked to its state law remedy and it has defined the scope even-handedly and based on precedent that is 2 decades old.
It has defined the scope of that remedy.
And only, I would suggest, if this Court finds that there is not, as we argue there is, a procedural bar to these further Federal constitutional questions such as due process, only if you find that that procedural bar does not exist in this case would you be correct in remanding this for the court below to consider those due process issues.
Petitioners have argued that the due process issues were argued to the Virginia Supreme Court in their reply brief at the supreme court stage, but we argue there is a state procedural bar and certainly putting it in your reply brief is not a proper way of preserving the point.
The assignments of error under Virginia law clearly state what issues are waived and which ones are not waived.
Speaking of McKesson, I'd like to mention also that in McKesson not only did they violate clearly established law at the time of the enactment and the collection of the tax, but they protested the tax ahead of time, as these people had the option to do, not the requirement to do but the option to do.
These people never came forward and raised their hand.
Also in McKesson, their complaint was based on two alternative grounds or theories of recovery, state law refund and directly on the Constitution.
That is not the case here.
These petitioners have chosen to put all of their eggs into one basket, and that is into the basket of the State Refund Act.
And we submit that that state remedy simply does not exist for them on the facts of this case.
Unknown Speaker: Ms. Marshall, you have made a statement that I don't understand.
Why have they placed all their eggs in the basket of the state refund remedy?
Mr. Marshall: When you look at their complaints, which we reproduced in the appendix, the only use they make of section 111 or the Federal law is to establish or try to bootstrap themselves into the state refund statute.
In other words they did not bring a claim on the Fourteenth Amendment.
They did not bring a claim on due process.
There is no Federal grounded claim that they have brought in their complaint.
Moreover, when they went--
Unknown Speaker: But do they have such a claim until you deny their request for compensation?
Mr. Marshall: --Well, in McKesson, McKesson brought its claim both on Federal grounds and on state grounds, and they suggest here, and even in the supreme court, the Supreme Court of Virginia, the assignments of error decide what is waived and what is put forward, and yet in assignments of error they make no claim of unconstitutionality or due process problems with the remedial face of the case.
Unknown Speaker: I assume there is no Federal constitutional remedy if the state provides an adequate refund remedy.
So if their request for refund was granted as they asked it to be there would have been no constitutional claim.
Mr. Marshall: But, Your Honor, when they brought the claim they surely knew of Perkins and Capehart.
They knew it was not a mandatory remedy and that it had certain limitations which we do suggest are similar to the policies behind the statute of limitations in repose to protect the reliance interest.
And if there's anything this case really is about, it is about settled expectations and reliance interest.
Unknown Speaker: It seems to me that's like saying a capital, a capital defendant who pursues an appeal to the state supreme court and is denied the basis of his appeal cannot then come to this Court saying that that denial was a violation of the Federal Constitution unless he has before the state court anticipated the denial and argued that the denial would be a violation of the Federal Constitution.
I'm not sure that that's true.
Mr. Marshall: Well, of course, Your Honor, when this case came to the Virginia Supreme Court the claim had been denied.
The Commonwealth was granted summary judgment by the trial court.
If there was any question at that time that Virginia's procedural scheme had any further Federal constitutional grounds, then certainly at that time it should have been presented to the Virginia Supreme Court.
Unknown Speaker: No, but the state supreme court didn't deny it on the ground there was no remedy.
It denied it because they thought there was no merit to the claim.
They thought the rule was not retroactive.
Mr. Marshall: Again, Your Honor--
Unknown Speaker: But they have never said that if the rule is retroactive you don't have a remedy.
At least they haven't said it up until now.
Mr. Marshall: --Your Honor, that is a possible way of reading the case below.
I believe another way of reading it is that it had an independent ground which said regardless of the Federal retroactivity we have to look at how our state statute and remedy that these petitioners have chosen to pursue is written and how it should, and how it has been applied in our courts.
Now, if there is a feeling in this Court that that is not clear in the decision below it would certainly be an appropriate disposition to remand it for consideration by the Virginia Supreme Court.
The Virginia Supreme Court in my view had two grounds for its state law rule.
One is it was dependent on Federal law.
That said it followed, if it's not retroactive it's not erroneous.
But it went on to say there are other reasons why, citing these 1971 cases, why our particular, the particular remedy you have chosen simply is not one that is available to you on these facts.
Unknown Speaker: Ms. Marshall, before we get away from the point, in case it should make a difference to me later, can you tell me when the first, when the point was either as a matter of pleading or briefing, when your, when the claimants here first mentioned the Fourteenth Amendment as a basis for their claim?
Mr. Marshall: I believe it was in this Court.
They state in their brief in this Court that well, if the statute does not give us, the refund statute does not give us relief we have relief directly under the Fourteenth Amendment.
Unknown Speaker: Okay.
Mr. Marshall: If you look at the assignments of error it's very clear there were two issues they presented to the Virginia Supreme Court.
Your statute clearly on its face requires that you give us a refund, and you have wrongly applied Chevron below.
Those were the two issues that were presented.
I would like to suggest that it's very important for the Court, whatever lens it sees this case through, to focus on and to look at the reliance interest and the settled expectations of the parties.
It's also important to look at the nature of the harm alleged.
What is it that Virginia is supposed to have done that was offensive to Federal law?
This is not a case, we suggest, where there was any over-reaching.
Virginia was not pushing the envelope in any way of valid taxation.
It turned out that it was in fatal collision, unknown to it and unknown to these petitioners who never came forward and raised their hands and said there was a problem until after this Court's decision in March of 1989.
But it was certainly reasonable both for the petitioners and the 23 states who have, as you know, a massive refund liability on this case of approximately $1.8 billion, it was reasonable for those states to believe that they had a legitimate purpose to give benefits to their own former state retirees, former state employees.
This was a legitimate purpose and the fact that they had done it through an indirect benefit of taxes rather than through a direct cash benefit did not appear, and reasonably so, to be of any legal significance.
What Virginia did was it exempted its state retirees, there are approximately 60,000 of those today.
Then it taxed the entire individual taxpaying public identically, $2.56 million.
Fewer than 10 percent of that are represented by the Federal retirees here.
In other words Virginia's state retirees are outnumbered by citizens and voters who are Federal retirees by about 3 to 1.
When you look at that number and you also consider, which is in the record and the affidavit and the legislative history, the disparity between the general size of Federal retirement income and the size of state retirement income you can do a rough estimate of what the value was of the benefit now found to be offending under Davis, and we don't dispute that.
We quickly changed our law immediately to conform with Davis.
But that value of the benefit given during the 4 years in issue here is approximately $8 million to $12 million.
Now we suggest that the penalty here that is being requested or demanded of a 100 percent refund, which for Virginia alone now is approximately $467 million, that no Federal interest requires that.
There is no Federal interest or underpinning in the intergovernmental tax immunity doctrine that would lead to that inequitable result.
Unknown Speaker: Are you suggesting... excuse me.
You go ahead.
Are you suggesting the retroactivity rule would be different if the discrimination was say against women instead of one class of retirees and not another?
Mr. Marshall: Well, as you know, this was based principally on the statute, and it was interpreted to be simply Federal retirees versus state.
Unknown Speaker: I understand, but I'm not sure that answers my question.
Mr. Marshall: Yes.
Unknown Speaker: You're saying that on the, that really for reasons I found very persuasive there really was a discrimination here.
Mr. Marshall: That's right.
Unknown Speaker: But supposing it was discrimination against a class that we're particularly interested in protecting, say females.
Would you make the same remedial argument?
Mr. Marshall: Oh, I think, Your Honor, that that would be an Equal Protection claim and I think that you would look to, if you were looking under a Federal rule, you would look to all of the points which this Court has established as a very workable and fair rule in Chevron.
Was it a new principle of law?
Did everyone rely on its being... I believe for example--
Unknown Speaker: Yeah, but you're making those arguments... I'm just asking you if your basic argument about remedy would be different if it were a different kind of discrimination, if it were a constitutional discrimination against women rather than statutory discrimination against some retirees and not the entire population.
Mr. Marshall: --I think that goes to, Your Honor, to the foreseeability of it and the reliance interest.
Even this Court under Title VII has found it's not--
Unknown Speaker: It seems to me it's hard to argue foreseeability when 8 members of the Court disagree with you.
Mr. Marshall: --Well, Your Honor, we had a very courtly dissent in that case, as you know, and we suggest that what was unforeseeable to the states... if it was foreseeable we wonder why did not any one of these petitioners come forward and, as they can, it doesn't cost any money, come forward and ask for a legal opinion by the highest legal officer of the state.
If it was so foreseeable at least since 1961, for example, or since McCullough, why did not a single petitioner, there are hundreds of thousands of them over the country who are in the same boat, they had every economic interest to come forward not only for a refund but taxpayers always have motivations to come forward to exonerate themselves from ongoing law.
No one came forward.
No one even--
Unknown Speaker: They claim that they didn't have to, and that gets back ultimately to the argument of whether indeed your law required that they make that claim beforehand or allows them to do it afterwards.
It all comes back to that, I suppose.
They weren't behaving unreasonably if they thought well--
Mr. Marshall: --I don't say that they were behaving unreasonably.
Nor was the state, Your Honor, behaving unreasonably.
We all found Davis and the fact that there was a legal edifice out there that cast its shadow in the direction of Davis.
We found that that was a surprise, the discrimination of a general tax doing a legitimate government purpose to benefit state retirees, the fact that that was somehow discrimination was a surprise to all of us.
We accept that now, but we also believe, Your Honor, that there is no personal compensable rights that these petitioners have suffered.
I suggested to you, for example, that there were 2.5 million taxpayers, and that the rough estimate of this now found to be offending benefit that the state gave to its own retirees was approximately $12 million a year.
That comes to $5 per taxpayer per year.
Unknown Speaker: --Well then it won't be hard to refund it if it's--
Mr. Marshall: Pardon?
Your Honor, they have never asked for that refund.
They have asked for 100 percent refund, despite the fact that the refund is 10 times the amount of the offending benefit and despite the fact that they, as a very small percentage of the 2.5 million, they did not fund the vast majority of this.
Unknown Speaker: Well, they're asking for a refund that is disproportionate to the amount of the discrimination that was imposed?
Mr. Marshall: Your Honor, I don't think there was any discrimination based on the Federal Government, but that has been decided in Davis.
Unknown Speaker: Yes.
Mr. Marshall: And what they're asking for is roughly 10 times the amount of what was now found to be the offending benefit that was given, and it was not funded by these 200,000 people.
It was funded by the entire taxpaying public and corporate taxpayers who are amici here.
Unknown Speaker: Well, why do you say it's... how do you calculate that it's 10 times the amount of the--
Mr. Marshall: This is a rough estimate based, Your Honor, on the fact that there were very many fewer, there were very many fewer state retirees in Virginia.
Virginia state retirees are about 60,000.
Federal retirees are about 200,000.
In the record is also a differential of, for example in 1982 the average Federal retiree in Virginia got $15,000 in income and the average state retiree got less than $5,000.
Unknown Speaker: --But are the class of Federal retirees asking as refunds any more than they actually paid?
Mr. Marshall: They are asking for 100 percent tax exemption, and certainly the intergovernmental tax immunity doctrine never entitled them to an exemption.
They have no personal harm which is really being redressed here.
Unknown Speaker: But Virginia I suppose has the choice after a case like Davis to say that we will withdraw the benefit we have given to state retirees and treat everybody equally.
But if you don't do that then you've got to treat Federal retirees like state retirees.
Mr. Marshall: Well, Your Honor, what I am suggesting is that there is no Federal interest that is being advanced by what really amounts to taking from these 2.5 million taxpayers a massive amount of what would otherwise be state assets available for construction of prisons and various services and transferring it to these 200,000 people.
Whatever the intergovernmental tax immunity purpose was, I don't believe it was to give a personal benefit, unlike the equal protection clause and the sex discrimination clause, where the purpose, the Federal purpose of the statute, and even in commerce clause, is to give a personal benefit to an individual.
Unknown Speaker: Ms. Marshall, you describe this as though it's a tort case, as though what's at issue is how blameworthy was Virginia and how entitled to... it's really not that, it's just a matter of, it's a simple Federal statute that says these people were entitled, given your tax structure, to this amount of money.
And they come in and they say you took this money from us, you shouldn't have done it.
Mr. Marshall: Your Honor, the statute--
Unknown Speaker: And, you know, end of problem as far as this argument is concerned.
Now, maybe they should have made their protest earlier, but I don't see that this is a tort question.
Mr. Marshall: --But, Your Honor, let's go back to what is the remedial question.
One thing that's very clear is that the plain language of section 111 says nothing about remedy.
It has no hint that it was intended to have any remedial prospect.
That therefore we contend is not, and it's not what they base their claim on.
They base their claim on 1826 of the Virginia Code.
We suggest to Your Honor that--
Unknown Speaker: I don't know what you mean when you said it has no remedial aspect to it.
You mean you think it could be disregarded by the states at will and--
Mr. Marshall: --Absolutely not, Your Honor.
Unknown Speaker: --nothing would happen?
Mr. Marshall: And it was not.
Once it was declared in Davis that there was an unexpected, and I think as J. Harvey Wilkinson, Judge Wilkinson said in the Fourth Circuit, a totally unexpected collision between these Federal statutes and what was thought to be a benign and modest state benefit, once that was determined Virginia changed its law immediately.
What I'm suggesting is that the intergovernmental tax immunity doctrine requires no more than that prospective change.
This Court has cited recently Justice Harlan in the state of Donnelly case.
Sometimes at the remedial phase recision is all that's required, not money damages.
Unknown Speaker: Well, in your position then if there had been a predeprivation proceeding brought, either administratively in the first place or by declaratory judgment, it would have been appropriate let's say in the latter instance for the court to say you're absolutely right that you should not be assessed this tax, but the only obligation Virginia has now is to change its law, and therefore under no circumstances can you get a penny back even though you win the case.
Would that have been an appropriate resolution?
Mr. Marshall: At a minimum you would certainly change the law, and that was appropriately done.
Unknown Speaker: Well, I am talking about not minimums but maximums.
Would that have been a proper application of Federal law?
Mr. Marshall: It's a position of the tax department that we would be in a totally--
Unknown Speaker: Well now, excuse me, I don't want the position of the tax department as such.
Would that have been a proper application of Federal law?
Mr. Marshall: --I do not believe so because there would have been no reliance then by the state.
In other words they would have been put on notice that a sum certain was under a cloud or a challenge of invalidity.
Unknown Speaker: No, but there would have been reliance at least with respect to the period for the tax year in question.
They would have budgeted their, they would have passed their state budget on the assumption that they were going to get this money.
So they would have had reliance.
Mr. Marshall: In a declaratory judgment though we're talking about a prepayment remedy.
What the declaratory judgment would say and what was said in Perkins is we contend that this money that we have not yet paid, you cannot rely on that because we are putting you on notice that that money is under a claim of invalidity.
And in that case we believe the equities would not be the same, that there would have been a refund remedy if the time ran and they had to pay or a declaratory judgment--
Unknown Speaker: But in the instance in which I gave in which there was the declaratory judgment, following that declaratory judgment the commissioner or the state would have been under no obligation to do anything but go ahead and collect the tax merely in hopes that the state legislature would change the law?
Mr. Marshall: --No, Your Honor, I think that after the declaratory judgment the tax collector, the tax commissioner would be obligated to follow the declaration of the law that it was an invalid tax and to withhold exaction or collection of the tax--
Unknown Speaker: Well, then the law--
Mr. Marshall: --and to refund.
Unknown Speaker: --Then the Federal statute implies something other than prospective changes of the law as the appropriate form of relief, which I think is the proposition you were disputing a moment ago.
Mr. Marshall: What I'm suggesting is that when you do not take a predeprivation route and when you do not base your claim for remedy directly on a Federal right, either through a 1983 or through any other injunctive action... for example, Phillips was an injunctive action.
It was not a refund case.
Unknown Speaker: Well, they were at least claiming a Federal right here, you don't dispute that?
Mr. Marshall: They were not basing their claim... if you look at their complaint we say it is based solely on a refund statute which--
Unknown Speaker: Well, it was based on a refund statute, but their predicate for claiming the refund was the claim of a Federal right, isn't that correct?
Mr. Marshall: --Your Honor, they used the Davis decision in order to try to establish that the plain language of the refund remedy statute applied, i.e. that it was improper or erroneous.
Unknown Speaker: I don't think we're getting anywhere.
Mr. Marshall: So, Your Honors, I would suggest that as a result of the law-changing decision that this Court made in March of 1981 that this Court should affirm the decision below.
Unknown Speaker: Thank you, Ms. Marshall.
Mr. Kator, you have 10 minutes remaining.
Rebuttal of Michael J. Kator
Mr. Kator: Thank you, Your Honor.
At the outset let me clarify the issue of whether Virginia has a declaratory judgment statute that would reach this kind of claim.
In fact Virginia has a statute in its books that states that you may not file a declaratory judgment for income taxes, and there is quite a bit of case law that says you may not do so.
Let me also address the issue of whether or not we raised a Federal claim.
Unknown Speaker: How can there be such diametric opposition on such a fundamental point?
You have cases that--
Mr. Kator: --I believe we did, we may have cited the cases in our earlier papers in this Court.
This has not been an issue until this morning.
But my recollection from 3 years ago when I was looking at this is yes, indeed Virginia has a statute, it says you may not file a declaratory judgment.
And I am certain that there is case law, for one of the things that we thought about doing was trying to enjoin the imposition of the 1988 taxes, which were not due until May 1, 1989, and we found that we couldn't do it.
I regret that I don't have that authority in front of me, but I submit that it would be very easy to find.
Unknown Speaker: --Could you provide it, please?
I'd like to see it.
Mr. Kator: I'd be delighted to, Your Honor.
The second point is the history of the Fourteenth Amendment claim, if you will.
In each of our complaints in this case, and several were consolidated, in each of the complaints there was a claim that, under statement of claims and Virginia is a notice pleading state, during the years since 1985 plaintiffs have paid excessive taxes which have been unconstitutionally and illegally exacted.
And the relief requested was a judgment for the refund of all unconstitutionally assessed and collected taxes.
I don't understand how Virginia can state that there is no constitutional claim alleged in these papers.
There certainly is.
They suggest that we didn't put in our petition our points of error, it's called.
Unknown Speaker: Well, I think there are two different constitutional violations at issue here, aren't there?
One is violation of the supremacy clause, and I take that to be referring to a violation of the supremacy clause.
The other is a violation of the takings clause or the due process clause in not giving you your money.
Mr. Kator: I think--
Unknown Speaker: And I think they're saying you didn't make that claim until now.
Mr. Kator: --To be fair, Your Honor, we didn't contemplate at the time that we filed our complaint, I think that was before McKesson came down, I don't believe that we were addressing that.
But we moved for partial summary judgment on the refund statute.
If we have to go back and move for partial summary judgment on the Constitution, I believe it's fairly pled within the complaint.
But the points of error, the circuit court for Alexandria, where this case came from, issued its opinion, and that's the opinion we appealed to the Supreme Court of Virginia, solely on retroactivity of Davis.
The issue that is raised here was raised for the first time by the attorney general in the Supreme Court of Virginia, and that was a point that we raised in our reply briefs.
We said why are you raising this point here.
And the reason they were raising that point there, and then at that time, was because that was after the Supreme Court of South Carolina in its Bass case said wait, we've got a better idea.
We'll change our refund statute and say it doesn't apply.
And that's exactly what Virginia, the attorney general is trying to convince its court to do, and to its credit the Supreme Court of Virginia has not at least yet gone and changed its refund statute.
Another point that I think bears emphasis, if it were so clear and certain that petitioners had no remedy under the refund statute, why did the Virginia General Assembly amend the statute to extend the statute of limitations for petitioners to file their claims solely and expressly for the purpose of allowing retroactivity of Davis to be resolved?
Certainly the legislature of Virginia thought the refund statute applied, and perhaps in retrospect maybe Virginia is right, it didn't apply it.
But it must now because the supreme, the legislature of Virginia has amended it to say so.
Unknown Speaker: Are you going to comment on Perkins and Capehart?
Mr. Kator: Perkins and Capehart, Your Honor, first of all those are what we would call modified prospectivity cases.
In both... in Perkins the taxpayer said your particular method of assessment is unconstitutional, and the Supreme Court of Virginia said you are right, we'll give you the remedy that you've asked for, and in Capehart... but we're going to apply that prospectively only.
And then in Capehart, when somebody else in another county tried to do it, the Supreme Court of Virginia said no, we said in Perkins prospective only and that's what we meant.
The Supreme Court of Virginia in this case, and this is at 15(a) of the cert petition, says Harper's state law contention also fails for another reason.
We previously have held that this court's ruling declaring a taxing scheme unconstitutional is to be applied prospectively only.
This is Virginia's state law prospectivity doctrine, and it's simply inapposite in a Federal question, in a case involving Federal retroactivity.
Unknown Speaker: What the state says, and now they may be right or wrong, is that the post-deprivation remedy is more limited than the predeprivation remedy, and that so long as the predeprivation remedy is full they are not required to give you a full post-deprivation remedy.
Mr. Kator: Your Honor, I think that that is an accurate statement of McKesson, that if in fact they have a full predeprivation remedy they can have no post-deprivation remedy.
But the critical point here is, what McKesson's requirement is is a clear and certain remedy.
And it was anything but clear and certain, even after this morning I submit, that Virginia's post-deprivation remedy doesn't apply to this.
If Virginia wants to change its rules and say that its post-deprivation statute doesn't apply, and there are people who have obtained refunds of unconstitutional taxes under that statute--
Unknown Speaker: That's not quite fair.
What has to be clear and certain is the availability of the predeprivation remedy, not the non-availability of the post-deprivation remedy.
Mr. Kator: --Your Honor, I would submit that what must be clear and certain is the bundle of routes available to challenge the tax.
And this brings us back into Brinkerhoff-Faris.
They simply can't say you have two statutes, two means to challenge it available to you, both adequate.
One is an adequate predeprivation remedy which... don't misunderstand me.
We dispute that there is an adequate predeprivation remedy.
But they can't say you've got two routes and therefore since you have two we're going to cut one off.
That is unconstitutional.
That the Fourteenth Amendment prohibits.
And that is what I believe Virginia is arguing that its court should do.
I don't think that it's arguing--
Unknown Speaker: I think Virginia is arguing that its court has done that.
Mr. Kator: --Well, I don't think that that can fairly be read from the supreme court's opinion.
Unknown Speaker: I realize that, but I just thought that was what the state is arguing.
Mr. Kator: Okay.
Unknown Speaker: Not that they should do it now, but that they have already done it.
Mr. Kator: Correct, Your Honor, and my point is I don't think that it is, it can be seen from that.
I think it also bears emphasis that when this case was originally brought in the Eastern District of Virginia the Virginia Attorney General pled the existence of the refund statute as a plain, speedy, and efficient remedy.
And I don't think the significance of that should be lost on the Court.
The bottom line as we see it, Your Honor, is McKesson's requirement for a clear and certain remedy.
I don't think there's any real dispute that Davis must be applied retroactively.
That being so, there must be a clear and certain remedy.
What we ask this Court to do is no more than say that it meant what it said in Davis, that it meant what it said in Beam, and that it meant what it said in McKesson, and on that basis to reverse the decision below.
Unknown Speaker: May I ask you one last question before you... the second part of the Virginia Supreme Court opinion seems to me to be responding to this argument that you made, and tell me if I am right on your presentation.
Did you argue that even if it's not retroactive as a matter of Federal law it is in any event retroactive as a matter of state law, and they said no to that?
Mr. Kator: The argument was, my argument was your refund statute says erroneous and illegal.
That's the legislature's conclusion of how it wants to gauge this, and therefore you can't play the retroactivity game.
This is essentially the argument that was accepted by the Supreme Court of Missouri in Hackman.
In rejecting that the Supreme Court of Virginia said no, the retroactivity of Davis comes first and therefore, because we find that Davis is not retroactive, it's not erroneous or illegal.
And moreover, just so you know, we have done this before.
That's essentially what their state law holding was.
If there are no further questions.
Unknown Speaker: Thank you, Mr. Kator.
Mr. Kator: Thank you.
Chief Justice Rehnquist: The case is submitted.