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Equity achieved for Federal retirees.

Amid all of the news of increased taxes on social security and cuts in medicare, here at last is some good news to pass on to your Federal retiree clients living in the states listed below. In 1989, the Supreme Court invalidated Michigan's practice of taxing retirement benefits of Federal employees while exempting those of state and local employees (Davis v. Michigan). The Court has now applied this decision retroactively with respect to a similar statute in 23 other states. As a result of this decision, Federal retirees in these states are entitled to some type of "refund." It is important to note, however, that the Court did not mandate any specific form of remedy, leaving each state to decide how it will correct the past inequity.

For example, Virginia after Davis repealed its exemption for retirement benefits of state and local employees. Henry Harper and other Federal retirees sought a refund of taxes assessed before the statute was revised. The Virginia Supreme Court concluded that Davis was not to be applied retroactively. However, the Supreme Court reversed the Virginia court's decision.

The High Court held that "a rule of Federal law, once announced and applied to the parties to the controversy, must be given full retroactive effect by all courts adjudicating Federal law." In this case, the provisions, discriminatory in nature, must be invalid from their creation and therefore full retroactive effect must be extended to those injured.

The Court neither concluded nor mandated the equitable relief that taxpayers could seek in this matter. Though the Court did not hold that the retirees were entitled to refunds, it asserted that Federal law does require Virginia et al to provide some type of relief consistent with due process principals.

Other states subject to this holding are: Alabama, Arizona, Arkansas, Colorado, Georgia, Iowa, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, Utah, West Virginia and Wisconsin.
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Title Annotation:Tax Talk
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Sep 1, 1993
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