No. 90-450 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1991 

EDMUND F. SHEEHY, MARGARET FLEMING, 

GEORGE McGOVERN, DONALD ZACK, 

RICHARD G. BRANCH, CHARLES W. 

VanDIEST, AND ARNOLD S. WIRTALA, 

on behalf of themselves and all other 

similarly situated federal employees, 

both civil service employees and 

military employees, residing in the 

State of Montana, who have been 

subjected to paying state income tax 

on their pensions, 

Plaintiffs and Appellants, 

v. 

STATE OF MONTANA, THE DEPARTMENT OF 

REVENUE, a State Agency within the 

Executive Branch of State Government, 

of the State of Montana, 

Defendants and Respondents. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis and Clark, 

The Honorable Jeffrey M. Sherlock, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Edmund F. Sheehy, Jr. (argued) , Cannon & Sheehy ; 

Helena, Montana 

For Respondent: 

R. Bruce McGinnis (argued), Department of Revenue, 

Helena, Montana 

Filed: 

Submitted: August 15, 1991 

DeciBed: November 14, 1991 
. I 

Justice Fred J. Weber delivered the Opinion of the Court. 

In this case, we affirm a decision of the District Court for 

the First Judicial District, Lewis and Clark County, that the 

plaintiffs are not entitled to refunds for state taxes paid for the 

years 1983 through 1988 on their retirement benefits received under 

the Federal Employeest Retirement Act. 

The issue is whether the opinion of the United States Supreme 

Court in Davis v. Michigan Department of the Treasury (1989), 489 

U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be retroactively 

applied, entitling the plaintiffs to refunds for taxes paid in 

previous years. 

Plaintiffs are retired federal employees who filed a petition 

for declaratory relief seeking to have 5 15-30-111(2) (c) (i), MCA 

(1989), declared unconstitutional. That statute provided that 

Montana state income tax would be assessed on benefits received 

under the Federal Employees1 Retirement Act in excess of $3,600. 

In contrast, under 3 19-3-105, MCA (1989), all retirement benefits 

received under Montana's Public Employeest Retirement System were 

exempt from state and local taxes. 

Following the decision of the United States Supreme Court in 

Davis in March 1989, the District Court adopted the parties1 

stipulation to the effect that 5 15-30-111 (2) (c) (i) , MCA (1989), 

is invalid for tax years commencing after December 31, 1988. The 

plaintiffs then moved for summary judgment that Davis should be 

applied retroactively and that they are entitled to refunds for 

previous tax years, subject to the statute of limitations. (In 

2 
I I 

Davis, the state had conceded that refunds for previous years would 

be proper if the court found for plaintiffs.) 

Using the factors set forth in LaRoque v. State (1978), 178 

Mont. 315, 583 P.2d 1059, the District Court determined that Davis 

should not be applied retroactively. The court ruled that the 

Davis decision was neither predictable nor clearly foreshadowed. 

It decided that retroactive application of Davis would not promote 

the doctrine of intergovernmental tax immunity because it had 

already required that, in the future, federal and state retirees 

must be treated the same. Finally, it stated that adding the cost 

of refunds to Montana's budget deficit would be inequitable to the 

citizens of Montana. Plaintiffs appeal. 

Should the United States Supreme Court's opinion in Davis be 

applied retroactively, entitling the plaintiffs to refunds for 

taxes paid in previous years? 

We will first review the major elements of the opinion of the 

United States Supreme Court in Davis. In that case, the plaintiffs 

challenged a Michigan tax scheme which exempted from state taxation 

all retirement benefits paid by the state to its retired employees 

but taxed retirement benefits paid by other employers, including 

the federal government. The Michigan Court of Appeals upheld the 

tax scheme, ruling that 4 U.S.C. 6 111 did not apply to retirees 

and that, under a rational basis test, the taxing scheme was not 

unconstitutional because it furthered the state's interest in 

attracting and retaining qualified employees. The Michigan Supreme 
Court denied leave to appeal. The United States Supreme Court 

granted certiorari and reversed, holding that the Michigan tax 

scheme violated the concept of intergovernmental tax immunity. 

In delivering the Court's opinion, Justice Kennedy first 

disposed of the State's argument that 4 U.S.C. 5 111 applies only 

to current employees of the federal government. In relevant part, 

that statute provides: 

The United States consents to the taxation of pay or 

compensation for personal service as an officer or 

employee of the United States . . . by a duly constituted 

taxing authority having jurisdiction, if the taxation 

does not discriminate against the officer or employee 

because of the source of the pay or compensation. 

The Court stated that: 

We have no difficulty concluding that civil service 

retirement benefits are deferred compensation for past 

years of service rendered to the Government. [Citations 

omitted.] And because these benefits accrue to employees 

on account of their service to the Government, they fall 

squarely within the category of compensation for services 

rendered "as an officer or employee of the United 

States. 

Davis, 489 U.S. at 808. The Court then went on to conclude that 

the nondiscrimination clause applies to retirement benefits because 

retirement benefits are included in "pay or c~mpensation.'~ Davis, 

489 U.S. at 809. 

The Court next discussed 4 U.S.C. 5 111 as a codification of 

the rule that the doctrine of intergovernmental tax immunity does 

not prohibit nondiscriminatory state taxation of federal employees. 

Davis, 489 U.S. at 810-14. The Court stated that although 

intergovernmental tax immunity is based on the need to protect each 

sovereign's governmental operations from undue influence by the 
other, private entities or individuals who are subjected to 

discriminatory taxation on account of their dealings with a 

sovereign can also receive the protection of the constitutional 

doctrine. Davis, 489 U.S. at 814-15. 

The Court then stated that the mode of analysis developed in 

equal protection cases was "inappropriate" in Davis. Instead, the 

test is whether the inconsistent tax treatment is related to and 

justified by significant differences between the two classes. 

Davis, 489 U.S. at 816. 

The Court concluded that significant differences were not 

present and that therefore the tax act in question violated 

principles of intergovernmental tax immunity. Davis, 489 U.S. at 

817. The Court remanded the case for further proceedings. 

Plaintiffs also direct the Court's attention to the United 

States Supreme Court's opinion in James B. Beam Distilling Co. v. 

Georgia (1991), 501 U.S. , 111 S.Ct. 2439, 115 L.Ed. 2d 481. The 

opinion in Jim Beam was issued on June 20, 1991, after oral 

argument in the present case. In Jim Beam, the Court held that it 

is error to refuse to apply a rule of federal law retroactively 

after the case announcing the rule has already done so. Plaintiffs 

argue that rule is dispositive and the decision in Davis must be 

applied retroactively here because it was applied retroactively 

in that case. Both parties submitted supplemental briefs 

discussing the application of Jim Beam to this case. 

When Jim Beam was decided, pending before the Court on 

applications for certiorari were two cases in which retired federal 
I 

employees in South Carolina and Virginia seek refunds of state 

income taxes under theories similar to those argued here. After 

Jim Beam was decided, the Court granted certiorari in both of those 

cases, vacated the state court decisions denying refunds, and 

remanded the cases to the state courts for I1further consideration" in light of Jim Beam. Bass v. State of South Carolina 

(1991)t - U.S. , 111 S.Ct. 2881, 115 L.Ed.2d 1047; Harper v. 

Virginia (1991), - U.S. , 111 S.Ct. 2883, 115 L.Ed.2d 1049. 

The fact that the Supreme Court remanded Bass and Harper 

rather than simply reversing them indicates the Court's uncertainty 

as to whether Jim Beam applies to the issue of Davisvs retroactivity. We conclude that it does not apply. In Davis, the State had 

conceded that a refund was appropriate if the Court ruled for the 

appellants. Davis, 489 U.S. at 817. Because of that concession, 

the Court did not consider the issue of whether retroactive 

application should be granted. We therefore conclude that Davis 

is not authority for application of its rule retroactively. The 

underpinnings of the decision in Jim Beam are the doctrine of stare 

decisis and the principle of equality to all similarly situated 

litigants. Jim Beam, 111 S.Ct. at 2446. Because Davis did not 

rule upon the issue of retroactivity, we conclude that the doctrine 

of stare decisis does not apply. We conclude that the principle 

of equality or equal treatment to similarly situated litigants does 

not require that all future litigants, including the litigants in 

the present case, are bound by the stipulation of the State of 

Michigan in Davis. 
We now consider whether retroactive application of the law set 

forth in Davis is appropriate in this case. In Chevron Oil v. 

Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296, the United 

States Supreme Court recognized three factors to be considered 

before a rule of nonretroactive application of a judicial decision 

is adopted. Those factors are 1) whether the decision establishes 

a new principle of law either by overruling established precedent 

on which litigants have relied, or by deciding an issue of first 

impression whose resolution was not foreshadowed, thereby leading 

to the conclusion that the decision should not be applied 

retroactively; 2) whether retroactive application will further or 

retard operation of the rule in question; and 3) whether 

substantial inequity will result from retroactive application. 

Chevron, 404 U.S. at 106-07. Use of these three factors was 

adopted by this Court in LaRoaue, 583 P.2d at 1061. 

Plaintiffs argue that the result in Davis was clearly foreshadowed under the longstanding principle of intergovernmental tax 

immunity and as a logical extension of the Court's decisions in a 

series of cases. However, as the State points out, the holding in 

Davis required three extensions of prior law. We will examine all 

three extensions of prior law to determine if each extension was 

clearly foreshadowed by previous cases. 

In its first extension, the Davis Court pointed out that while 

retirement pay is not actually disbursed during the time an 

individual is working for the government, the amount of benefits 

to be received in retirement are based and computed upon the 
individualls salary and years of service. The Court Inhad no 

difficultyl1 concluding that civil service retirement benefits are 

deferred compensation for past years of service and therefore fall 

within the category of compensation for services rendered as an 

officer or employee of the United States. As authority for that 

conclusion, three federal circuit cases were cited. Davis, 489 

U.S. at 808. 

In its Davis holding, the Michigan Court of Appeals rejected 

the contention that 4 U.S.C. 9 111 invalidated the Michigan tax, 

noting that the statute applied only to federal ttemployees.ll Then 

the Michigan court determined that the appellants1 status under 

federal law in Davis was that of an "annuitantl1 rather than as an 

employee and that as a result 4 U.S.C. 5 111 had no application. 

The logical determination by the Michigan court together with the 

action of other states which used tax schemes like Michigan's and 

Montanats, suggest there is a significant question of foreshadowing 

the application of 4 U.S.C. 5 111. 

The second extension of prior law took place when the Court 

established the connection between the doctrine of 

intergovernmental tax immunity and the protection against 

discriminatory taxation of individuals under 4 U.S.C. 5 111. 

Plaintiffs argue that the doctrine of intergovernmental tax 

immunity had been extended to protect individuals at least since 

the decision in Phillips Chemical Co. v. Dumas Independent School 

Dist. (1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. But the 

Davis language addressing the relationship between 
intergovernmental tax immunity and 4 U.S.C. 5 111 clearly breaks 

new ground: 

[I]t is reasonable to conclude that Congress drew upon 

the constitutional doctrine [of intergovernmental tax 

immunity] in defining the scope of the immunity retained 

in 5 111. . . . Hence, we conclude that the retention of 

immunity in 5 111 is coextensive with the prohibition 

against discriminatory taxes embodied in the modern 

constitutional doctrine of intergovernmental tax 

immunity. 

Davis, 489 U.S. at 813. The conclusion that the protection against 

discriminatory taxation retained under 4 U.S.C. 5 111 is 

coextensive with the protection under the doctrine of intergovernmental tax immunity represented an extension of prior law. 

The third extension of prior law made in Davis follows from 

the first two extensions. In determining whether the state tax 

discriminated against federal employees, the Court decided that a 

I1significant difference" standard should be used rather than one 

of the standards typically applied in equal protection cases. As 

plaintiffs point out, a "significant difference" standard had been 

used in matters involving intergovernmental tax immunity. See 

Philli~s, 361 U.S. at 387. However, in taxation cases in which 

equal protection is at issue, the Court had used as a standard the 

reasonableness of the classification. See Lehnhausen v. Lake Shore 

Auto Parts Co. (1973), 410 U.S. 356, 359-60, 93 S.Ct. 1001, 1003- 

04, 35 L.Ed.2d 351, 355. Until the Court determined in Davis that 

retirement benefits are protected under 4 U.S.C. 5 111 and that the 

protections under that statute are coextensive with those provided 

under the doctrine of intergovernmental tax immunity, the standard 

of analysis was not clear. 
The majority opinion in Davis clearly describes the ~ichigan 

view which rejected the contention that the doctrine of 

intergovernmental tax immunity rendered the Michigan tax 

unconstitutional as follows: 

The Michigan Court of Appeals next rejected 

appellant's contention that the doctrine of 

intergovernmental tax immunity rendered the state's tax 

treatment of federal retirement benefits 

unconstitutional. Conceding that "a tax may be held 

invalid . . . if it operates to discriminate against the 

federal government and those with whom it deals,'' . . .the court examined the State's justifications for the 

discrimination under a rational-basis test. Ibid. The 

Court determined that the State's interest in "attracting 

and retaining . . . qualified employees" was a 

"legitimate state objective which is rationally achieved 

by a retirement plan offering economic inducements," and 

it upheld the statute. 

Davis, 489 U.S. at 807. Using an equal protection analysis, the 

Michigan court concluded that the legitimate Michigan objective was 

a rational reason for the discrimination. That of course is 

directly contradictory to the conclusion reached in Davis, where 

the Supreme Court concluded that an equal protection analysis was 

not applicable and used a different standard. The critical 

significance of the standard of analysis is plain from the 

following passage from the Court's opinion: 

The State points to two allegedly significant differences 

between federal and state retirees. ~irst, the State 

suggests that its interest in hiring and retaining 

qualified civil servants through the inducement of a tax 

exemption for retirement benefits is sufficient to 

justify the preferential treatment of its retired 

employees. This argument is wholly beside the point, 

however, for it does nothing to demonstrate that there 

are "significant differences between the two classesw 

themselves; rather, it merely demonstrates that the State 

has a rational reason for discriminatins between two 

similar sroups of retirees. The State's interest in 

adoptins the discriminatory tax. no matter how 
substantial, is simply irrelevant to an inquiry into the 

nature of the two classes receivins inconsistent 

treatment. (Emphasis supplied.) 

Davis, 489 U.S. at 816. Thus, while it appears that the State of 

Michigan's tax statutes would have been constitutional under an 

equal protection analysis, the tax statutes could not pass the 

"significant differenceut test which the Court concluded must be 

applied. 

In his dissent in Davis, Justice Stevens distinguished 

Phillips, upon which the majority relied as precedent for use of 

the "significant difference1' standard. In Phillips, the tax was 

imposed only on lessees of federal property. Justice Stevens 

stated that: 

The States can tax federal employees or private 

parties who do business with the United States so long 

as the tax does not discriminate against the United 

States . . . The Court today strikes down a state tax 

that applies equally to the vast majority of Michigan 

residents, including federal employees, because it treats 

retired state employees differently from retired federal 

employees. The Court's holding is not supported by the 

rationale forthe intergovernmental immunity doctrine and 

is not compelled by our previous decisions. I cannot 

join the unjustified, court-imposed restriction on a 

State's power to administer its own affairs. 

. . . When the tax burden is shared equally by 

federal agents and the vast majority of a State's 

citizens, however, the nondiscrimination principle is not 

applicable and constitutional protection is not 

necessary. 

. . . The Michigan tax here applies to approximately 

4% million individual taxpayers in the State, including 

the 24,000 retired federal employees. It exempts only 

the 130,000 retired state employees. Once one 

understands the underlying reason for the McCulloch 

holding, it is plain that this tax does not 

unconstitutionally discriminate against federal 

employees. 
I 

Davis, 489 U.S. at 818-21. In Justice Stevens' view the Court's 

holding is not supported by the rationale for the intergovernmental 

tax immunity doctrine and is not compelled by the Supreme Court's 

previous decisions. Under the established equal protection 

analysis, the Michigan tax scheme appeared constitutional, but it 

failed the "significant difference1' test which the Court applied. 

Applying the first factor under Chevron to this aspect, it appears 

that Davis did establish a new principle of law. 

Plaintiffs further argue that the issue of whether the Davis 

decision was foreshadowed is controlled by this Court's opinion in 

Jenson v. State Dept. of Labor and Industry (1984), 213 Mont. 84, 

689 P.2d 1231, aff'd after remand, 221 Mont. 42, 718 P.2d 1335. 

In Jenson, the issue was whether this Court's opinion in Crabtree 

v. Montana State Library (1983), 204 Mont. 398, 665 P.2d 231, was 

foreshadowed. This Court held that Crabtree did not create any 

new law because it simply was stating the plain language of the 

Veteran's Preference Act. Jenson, 689 P.2d at 1233. Plaintiffs 

argue that in Davis, the Court simply was stating the plain 

language of 4 U.S.C. 5 111. 

However, in Davis, as the State has pointed out, there was an 

additional step. 4 U.S.C. 5 111 prohibits discriminatory taxation 

of "pay or compensationtt received from the federal government. 

The Court held that federal retirement benefits were included in 

Itpay or compensation1' so that 4 U.S.C. 5 111 applied. Davis, 489 

U.S. at 808. In Crabtree, the Court was not faced with a comparable preliminary issue of whether the statute was applicable to the 
case at hand. 

We conclude that this Court's opinion in Jenson does not 

control as to whether Davis was foreshadowed. Further, because 

the Davis opinion required at least three extensions of previous 

law as discussed above, we hold that the result was not clearly 

foreshadowed. 

The second element of the Chevron test is whether retroactive 

application will further or retard operation of the rule in 

question. The District Court stated that it could not #'see how a 

retroactive application of the Davis decision would in any way 

promotegv the concept of intergovernmental tax immunity. Plaintiffs 

argue that "the state's. total disregard for 4 U.S.C. 1 111 would 

be condoned if Davis is not applied retroactively." 

Because we have concluded that the decision in Davis was not 

foreshadowed, the plaintiffs' assertion that the tax imposed was 

illegal is an overstatement. The taxation scheme was not ''illegal#' 

until the Davis decision was issued, and the tax has not been 

imposed since that time. We conclude that refunds as a result of 

retroactive application of Davis would not promote the concept of 

intergovernmental tax immunity. 

In considering the third factor under Chevron the District 

Court concluded that equity directed that refunds not be made due 

to the financial burden on the citizens of the State of Montana. 

Plaintiffs argue that equity favors making refunds because it is 

Montana's public policy to provide refunds of illegally collected 

taxes. But as we have discussed above, taxes collected before the 
opinion in Davis were not illegally collected taxes. 

4 U.S.C. 5 111 was enacted in 1939. Between that time and the 

date of the Davis decision, twenty-two other states enacted and 

used tax plans much like Montana's, giving tax advantages to state 

retirees over other retirees. We conclude that, in view of the 

acceptance and usage of similar tax plans for approximately 50 

years, it would be inequitable to provide refunds to federal 

retirees when those refunds would of necessity be made at the 

expense of all Montana taxpayers. 

After considering the three factors set out in Chevron we 

conclude that the District Court did not err in concluding that 

Davis should not be applied retroactively. We therefore hold that 

the court did not err in ruling that the plaintiffs are not 

entitled to tax refunds for the years 1983 through 1988. 

We Concur: (ueice T 

sitting for Justice John C. ~arrison 

District Judge C.B. McNeil 

sitting for Justice Wm. E. Hunt. 
Justice Karla M. Gray, concurring in part and dissenting in part. 

I concur with that part of the majority's opinion which holds 

that James B. Beam Distilling Co. v. Georgia (1991), 501U.S. -, 

111 S.Ct. 2439, 115 L.Ed.2d 481, is not applicable to the issue of 

the retroactivity of Davis v. Michigan Department of Treasury 

(1989), 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. However, 

I respectfully dissent from that part of the majority's opinion 

which holds that Davis should not be applied retroactively. 

I agree with the majority that the determination of whether 

the United States Supreme Court's decision in Davis is to be 

applied retroactively or only prospectively is governed by the 

three-pronged test enunciated in Chevron Oil Co. v. Huson (1971), 

404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 and utilized by this 

Court in LaRoque v. State (1978), 178 Mont. 315, 583 P.2d 1059. 

However, I disagree with the conclusions reached by the majority 

under each prong of the test as applied to the Supreme Court's 

decision in Davis. Furthermore, I believe that the weakness of the 

majority s opinion is clearly demonstrated by its heavy reliance 

on the overturned decision of the Michigan Court of Appeals and the 

lone dissent of Justice Stevens in Davis. Such reliance by the 

majority largely ignores the Davis Court majority's rationale in 

reaching its decision. 

For a decision to be applied only prospectively, the first 

prong of the Chevron test requires that the decision "establish a 
new principle of law, either by overruling clear past precedent on 

which litigants may have relied . . . or by deciding an issue of 

first impression whose resolution was not clearly foreshadowed." 

Chevron, 404 U.S. at 106. Because Davis did not overrule clear 

past precedent, this Court's analysis is properly limited to the 

consideration of whether the decision in Davis was clearly 

foreshadowed. 

The majority states that the Davis decision was not clearly 

foreshadowed on the bases that in order to reach its decision in 

Davis, the Supreme Court had to (1) extend 4 U.S.C. 5 111 to 

federal retirees receiving pension benefits; (2) extend the 

doctrine of intergovernmental tax immunity to employees of the 

governmental entity as well as the entity itself; and (3) decide 

that the proper standard for determining the validity of a state 

statute where intergovernmental tax immunity is involved is a 

Ivsignificant differenceu1 standard rather than a rational basis 

standard. The majority also states that the fact that twentythree states, including Montana, had tax schemes similar to that 

of Michigan which the Supreme Court invalidated in Davis, lends 

support to its conclusion that the holding in Davis was not clearly 

foreshadowed. 

It is my view that a plain reading of the ~avis decision 

itself, together with previous United States Supreme Court 

decisions, leads to the irrefutable conclusion that the Davis 

decision was clearly foreshadowed. Contrary to the majority's 
84, 689 P.2d 1231. As the majority opinion notes, this Court in 

Jensen held that Crabtree v. Montana State Library (1983), 204 

Mont. 398, 665 P.2d 231, did not create any new law because it 

simply was stating the plain language of the Veteran's Preference 

Act. In Davis, the Supreme Court did not create any new law 

because, as the Supreme Court itself stated, the plain languaqe of 

5 111 dictated its holding that the statute applies to both current 

and past employees and to the pension benefits. Davis, 489 U.S. 

The majority would have the reader believe that the Supreme 

Court's decision in Davis constituted an unforeshadowed, abrupt and 

fundamental change in the doctrine of intergovernmental tax 

immunity through its holding that employees of the governmental 

entity, as well as the governmental entity itself, come within the 

protection of the doctrine. The majority states that "[tlhe Davis 

language addressing the relationship between intergovernmental tax 

immunity and 4 U.S.C. 5 111 clearly breaks new ground." Slip op. 

at p. 8-9. This is simply not the case as evidenced by the Supreme 

Court's own observations in Davis. 

On its face, 5 111 purports to be nothing more than 

a partial congressional consent to nondiscriminatory 

state taxation of federal employees. It can be argued, 

however, that by negative implication 5 111 also 

constitutes an affirmative statutory grant of immunity 

from discriminatory state taxation in addition to, and 

coextensive with, the pre-existing protection afforded 

by the constitutional doctrine. Resardless of whether 

3 111 provides an independent basis for findins immunitv 

or merely wreserves the traditional constitutional 

prohibition asainst discriminatory taxes, however, the 

insuirv is the same. In either case, the scope of the 
conclusion, the Supreme Court in Davis did not Itextend" 4 U.S. C. 

5 111 to federal retirees receiving pension benefits. The Supreme 

Court made it very clear that 5 111 applies to both current and 

past employees and to pension benefits based upon the plain 

lansuase of the statute: 

As a threshold matter, the State argues that 5 111 

applies only to current employees of the Federal 

Government, not to retirees such as appellant. In our 

view, however, the plain language of the statute dictates 

the opposite conclusion. Section 111 by its terms 

applies to "the taxation of pay or compensation for 

personal services as an officer or employee of the United 

States. 

We have no difficulty concluding that civil service 

retirement benefits are deferred compensation for past 

years of service rendered to the Government. [Emphasis 

in original.] 

Davis, 489 U.S. at 808. 

Any other interpretation of the nondiscrimination 

clause would be implausible at best. It is difficult to 

imagine that Congress consented to discriminatory 

taxation of the pensions of retired federal civil 

servants while refusing to permit such taxation of 

current employees, and nothing in the statutory language 

or even in the legislative history suggests this result. 

~avis, 489 U.S. at 810. ~ssuming that the majority of eight 

Justices of the United States Supreme Court intended the plain 

meaning of its words, there is no room for doubt that the Supreme 

Courtls holding that federal retirees fall within the protection 

of 5 111 was clearly predictable or foreshadowed. 

Furthermore, I believe that Davis is directly on point with 

Jensen v. State Department of Labor and Industry (1984), 213 Mont. 
immunity granted or retained by the nondiscrimination 

clause is to be determined by reference to the 

constitutional doctrine. Thus, the dispositive question 

in this case is whether the tax imposed on appellant is 

barred by the doctrine of intergovernmental tax immunity. 

[Emphasis added.] 

Davis, 489 U.S. at 813-14. 

It is true that intergovernmental tax immunity is 

based on the need to protect each sovereign's 

governmental operations from undue interference by the 

other. Graves, 306 U.S., at 481; McCulloch v. Maryland, 

4 Wheat., at 435-436. But it does not follow that 

private entities or individuals who are subjected to 

discriminatory taxation on account of their dealings with 

a sovereign cannot themselves receive the protection of 

the constitutional doctrine. Indeed all precedent is to 

the contrary. In Phillips Chemical Co., supra, for 

example, we considered a private corporationls claim that 

a state tax discriminated against private lessees of 

federal land. We concluded that the tax l'discriminate[d] 

unconstitutionally against the United States and its 

lessee," and accordingly held that the tax could not be 

exacted. 361 U.S., at 387. . . . [Emphasis in original. ] 

The State offers no reasons for departing from this 

settled rule, and we decline to do so. [Emphasis added.] 

Davis, 489 U.S. at 814-15. Again, assuming the Davis Court 

intended the plain meaning of its words, there can be no question 

that it was clearly predictable or foreshadowed that federal 

retirees fall within the protection of the doctrine of 

intergovernmental tax immunity. 

I also disagree with the majority's conclusion that Davis was 

not clearly foreshadowed because the Supreme Court had to decide 

that the proper standard for determining the validity of the state 

tax scheme is a "significant difference" standard rather than a 

rational basis standard. The Supreme Court in Davis made it clear 

that the proper standard to be applied when intergovernmental tax 
immunity is involved was settled under existins authority. 

Under our precedents, It[t]he imposition of a heavier 

tax burden on [those who deal with one sovereign] than 

is imposed on [those who deal with the other] must be 

justified by significant differences between the two 

classes.I1 Phillips Chemical Co. v. Dumas Independent 

School Dist., 361 U.S., at 383. In determining whether 

this standard of justification has been met, it is 

inappropriate to rely solely on the mode of analysis 

developed in our equal protection cases. We have 

previously observed that "our decisions in [the equal 

protection] field are not necessarily controlling where 

problems of intergovernmental tax immunity are involved,^ 

because Ifthe Governmentfs interests must be weighed in 

the balance." -. Id I at 385. Instead, the relevant 

inquiry is whether the inconsistent tax treatment is 

directly related to, and justified by, "significant 

differences between the two classe~.~l - Id., at 383-385. 

[Emphasis added.] 

Davis, 489 U.S. at 815-16. The Supreme Court was citing its 

decision in Phillips Chemical Co. v. Dumas Independent School Dist. 

(1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384, decided nearly 

thirty years before Davis. Thus, the Supreme Court's application 

of the "significant difference" standard in Davis was clearly 

foreshadowed in light of this existing precedent. 

The majority places great weight on the State's (and other 

states1) reliance on the previously uncontested nature of 4 U.S.C. 

§ 111 with respect to its application to federal retirees. In my 

view, the fact that twenty-three states, including Montana, had tax 

schemes similar to the one invalidated in Davis is conclusive of 

nothing more than that Davis decided an issue of first impression. 

It does not follow, as the majority opinion implies, that the Davis 

decision was not foreshadowed. Where the plain language of the 

statute involved, together with existing precedent, mandates a 
particular holding, as was clearly shown in Davis, the prevalence 

of the wrong is irrelevant to the determination of whether that 

holding was clearly foreshadowed. 

In applying the second prong of the Chevron test, the majority 

concludes that retroactive application of Davis would not promote 

the concept of intergovernmental tax immunity. I disagree. In my 

view, the doctrine of intergovernmental tax immunity can only be 

furthered by the retroactive application of Davis. Refusing to 

apply Davis retroactively means that this Court has condoned the 

State's total disregard for the plain language of 4 U.S.C. 5 111 

and is akin to a continuation of past discrimination. Such a 

result does not further and, indeed, retards the doctrine of 

intergovernmental tax immunity in that it does not tend to deter 

future State violations of the doctrine. 

With respect to the third prong of the Chevron test, I 

disagree with the majority's conclusion that the equities in this 

case favor a nonretroactive application of Davis. In considering 

the equities of retroactive application of a judicial decision, I 

am fully aware that great weight must be given to the State's 

reliance upon a presumptively valid statute, enacted in good faith 

and by no means ~lainly unlawful. See Lemon v. Kurtzman (1973), 

411 U.S. 192, 93 S.Ct. 1463, 36 L.Ed.2d 151. However, where the 

statute in question is plainly violative of federal statutory and 

case law, as was Montana's tax scheme in light of the Supreme 

Court's rationale in Davis, the State's reliance interests are of 
little or no import. McKesson Corp. v. Div. of Alcoholic Beverages 

and Tobacco (1990), 495 U.S. -, -, 110 S.Ct. 2238, 2257, 110 

L.Ed.2d 17, 44. 

It is true, as the majority states, that refunds to the 

federal retirees would result in a financial burden on the other 

taxpayers of the State; it also is true, however, that those 

taxpayers have benefited greatly from the federal retirees1 

overpayment of taxes over many years. In any event, the State's 

and taxpayers' exposure to the disruptive impact of the tax 

scheme's invalidation is limited because of the five-year statute 

of limitations. 

Furthermore, the State would not necessarily have to refund 

the unconstitutionally collected taxes. The federal retirees have 

indicated their willingness to accept a tax credit mechanism in 

lieu of actual refunds as a possible remedy which, in my view, has 

the potential of softening the impact on the State's financial 

stability even more. 

Finally, it must be recognized that, notwithstanding the 

financial impact to the State, substantial inequities have been 

wrought upon the federal retirees over a period of many years. 

Retirees who paid the discriminatory tax and have since left 

Montana or died would receive no remedy even under a proper 

resolution of this case. Others would receive back only a small 

portion of the discriminatory taxes they paid, no matter what 

remedy might be fashioned, because of the applicable statute of 
limitations. How the majority can conclude that the Chevron 

"equitiesw prong favors the State, as opposed to the federal 

retirees who were wrongfully discriminated against by the State, 

is simply beyond my understanding. 

I would reverse the judgment of the District Court and hold 

that under the Chevron test, the Davis decision is to be applied 

retroactively. Having so held, I would remand this case to the 

District Court for a determination of the proper remedy to be 

provided to the federal retirees. 
Justice Terry N. Trieweiler dissenting. 

I dissent from the majority opinion in its entirety. 

I concur with that part of Justice Gray's opinion which 

concludes that the case of Davis v. Michigan Department of Treasury (1989) , 

489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be applied 

retroactively based upon the three-prong test set forth in Chevron 

Oil Companyv. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296. 

Contrary to the majority1 s argument, the result in Davis was 

clearly foreshadowed by the plain language of 4 U.S .C. 5 111 and by 

the Supreme Court s prior decisions in Phillips Chemical Company v. D~~mas 

4 L. Ed. 2d 3 8 4, 39 1-9 2, and Memphis Bank and Trust Company v. Gamer ( 19 8 3 ) , 

459 U.S. 392, 397 n. 7, 103 S.Ct. 692, 696 n. 7, 74 L.Ed.2d 562, 

567 n.7. 

As pointed out by the Supreme Court in Davis: 

When the first part of 5 111 is read together with the 

nondiscrimination clause, the operative words of the 

statute are as follows: "the United States consents to 

the taxation of pay or compensation . . . if the taxation 

does not discriminate . . . because of the source of the 

pay or compensation. 

Davis, 489 U.S. at 809, 109 S.Ct. at 1504, 103 L.Ed.2d at 901. 

Retirement benefits are clearly deferred compensation. 

Therefore, I cannot comprehend how 4 U. S.C. 5 111 could be 

construed any way other than the manner in which it was construed 
in Dnvis. As pointed out in Justice Gray's dissent, we have 

previously held in Jensen v. State Department of Labor and Industry ( 19 8 4 ) , 2 13 

Mont. 84, 689 P.2d 1231, that the plain language of a statute is 

sufficient to foreshadow a judicial decision which applies that 

statute. I cannot think of a clearer example of that being the 

case than the United States Supreme Court s application of 4 U. S . C. 

g 111 in Davis. 

The majority opinion is a nearly verbatim adoption of the 

Department of Revenue's strained rationale that Davis was not 

foreshadowed because it resulted in three extensions of prior law. 

However, that same argument was made by the State of Michigan in 

Davis and in each respect was refuted by the eight out of nine 

Supreme Court Justices who subscribed to the majority opinion in 

Dnvis. The fact that this Court would then ignore the majority 

opinion and subscribe to the Department of Revenue's argument on 

the basis of the lone dissent, is at best a peculiar way to apply 

controlling United States Supreme Court precedent. 

Having pointed out that I agree with Justice Gray's thorough 

analysis of the Chevrontest for retroactivity, and concluding that 

that test requires retroactive application of Davis, I do not feel 

that it is necessary to apply the Chevron analysis. 
The United States Supreme Court has recently gone even further 

to make clear that the result arrived at by the majority in this 

case is incorrect. 

In James B. Beam Distilling Company v. Georgia ( 19 9 1 ) , U.S. I 111 

S.Ct. 2439, 115 L.Ed.2d 481, the United States Supreme Court dealt 

with a similar issue regarding retroactivity. 

In the Benm case, the Court was asked to decide whether its 

decision in BacchusImports, Ltd. v. Dins (1984), 468 U.S. 263, 104 S.Ct. 

3049, 82 L.Ed.2d 200, should apply retroactively to claims based on 

facts which preceded that decision. The effect of the Bncchzis 

decision was to hold that state laws which imposed an excise tax on 

imported alcoholic beverages at a rate greater than those imposed 

on alcoholic beverages manufactured within that state violated the 

Commerce Clause of the United States Constitution. Following the 

BNCC~ZLS decision, the petitioner in Benm claimed that Georgia's law 

amounted to the same violation, and on that basis sought a refund 

of the taxes it had previously paid in the years 1982, 1983, and 

1984. The state courts in Georgia, however, refused to apply 

Bncch~is for the years in question based upon their analysis of Chevrorl 

Oil Company v. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed. 2d 296. 

In other words, the Supreme Court in Georgia applied the same 

rationale in Beam to deny a refund that the majority relies on in 

this case to deny a refund to the plaintiffs. 
Beam sought a writ of certiorari. The United States Supreme 

Court granted Beam's petition and reversed the Supreme Court of 

Georgia on June 20, 1991.' 

In arriving at its decision, the Supreme Court concluded that 

unless it specifies that its decisions are prospective only, they 

are to be applied retroactively. It furthermore stated that where 

its decisions are applied retroactively to one set of litigants 

they must be applied retroactively to similarly situated persons 

who are not barred procedurally from asserting their rights. 

Particularly relevant to this case was the Court's holding that its 

decision limits the possible applications of the Chevroiz Oil analysis. 

The Supreme Court stated in part as follows: 

Questions of remedy aside, Bacchusis fairly read to hold 

as a choice of law that its rule should apply 

retroactively to the litigants then before the Court. 

Because the Bacchus opinion did not reserve the question 

whether its holding should be applied to the parties 

before it . . . it is properly understood to have 

followed the normal rule of retroactive application in 

civil cases. . . . Because the court in Bncchus remanded 

the case solely for consideration of the pass-through 

defense, it thus should be read as having retroactively 

applied the rule there decided. See also Williams v. 

Vermont, 472 U.S. 14, 28, 105 S.Ct. 2465, 2474, 86 L.Ed.2d 

11 (1985) ; Enon Corp. v. Engertorz, 462 U.S. 176, 196-197, 103 

S.Ct. 2296, 2308-2309, 76 L.Ed.2d 497 (1983); cf. Dnvisv. 

Miclzipiz Departmeizt of Treasury, 4 8 9 U . S . 8 0 3 , 8 17 , 10 9 S . ct . 1500, 1508, 103 L.Ed.2d 891 (1989). 

 his case was argued to the Montana Supreme Court on May 7, 

1991. At the time of oral argument, both parties advised this 

Court of the pending Beam case and agreed that the United States 

Supreme Court's decision in that case could be dispositive of the 

issue in this case. 
Beam, - U.S. at , 111 S.Ct. at 2445-46, 115 L.Ed.2d at 490-91. 

It is significant that the Supreme Court actually cited Davis 

for the principle of retroactivity. The Court then went on to add: 

Bacchus thus applied its own rule, just as if it had 

reversed and remanded without further ado, and yet of 

course the Georgia courts refused to apply that rule with 

respect to the litigants in this case. Thus, the 

question is whether it is error to refuse to apply a rule 

of federal law retroactively after the case announcing 

the rule has already done so. We hold that it is, 

principles of equality and staredecisis here prevailing over 

any claim based on a Chevron Oil analysis. 

. . . To this extent, our decision here does limit 

the possible applications of the Chevroiz Oil analysis, 

however irrelevant Chevroiz Oil may otherwise be to this 

case. Because the rejection of modified prospectivity 

precludes retroactive application of a new rule to some 

litigants when it is not applied to others, the Chevron Oil 

test cannot determine the choice of law by relying on the 

equities of the particular case. Once retroactive 

application is chosen for any assertedly new rule, it is 

chosen for all others who might seek its prospective 

application. 

. . . [Wlhen the Court has applied a rule of law to 

the litigants in one case it must do so with respect to 

all others not barred by procedural requirements or res 

judicata. [Citations omitted.] 

Beam, - U.S. at I , 111 S.Ct. at 2446, 2447-48, 115 L.Ed.2d 

The majority concludes that Beam is not applicable to this 

case because the Supreme Court did not apply Davis retroactively. 

It was applied retroactively, based on the stipulation of the 

parties to that case. However, that reasoning ignores ~ustice 
Scalia's concurring opinion which was joined in by Justice Marshall 

and Justice Blackmun to the effect that both llselective 

prospectivityl' and "pure prospectivityl' are beyond the power of the 

Court. The implication, as far as those Justices were concerned, 

is that Daviscould not have been applied prospectively even if the 

parties had not agreed to apply it retroactively. Beam, U.S. 

at , 111 S.Ct. at 2450-51, 115 L.Ed.2d at 496-97 (Scalia, J., 

concurring). The majority's conclusion ignores Justice OIConnorls 

dissenting opinion wherein she states that the Beam decision 

llseriously curtails the Chevron Oil inquiry. l1 Beam, - U.S. at I 

111 S.Ct. at 2452, 115 L.Ed.2d at 499 (OIConnor, J., dissenting). 

Finally, the majority's reasoning ignores the fact that eight days 

after Beam was decided, the United States Supreme Court granted 

petitions for certiorari to retired federal employees in South 

Carolina and Virginia who sought retroactive application of the 

Davis decision under circumstances identical to the circumstances in 

this case. In those cases, the Supreme Courts of South Carolina 

and Virginia rendered decisions similar to the holding of the 

majority in this case. See Bass v. State (S.C. 1990), 395 S.E.2d 171; 

Harperv. Hrginia Dept. of Taxation (1991), 241 Va. 232, 401 S.E.2d 868. 

Both of those decisions were vacated by the United States Supreme 

Court, and both were remanded to the state courts for "further 

consideration in light of JamesB. BenmDistilling Company v. Georgirz." Bass 
v. Sozlth Carolina ( 19 9 1 ) , U.S. , 111 S.Ct. 2881, 115 L.Ed.2d 1047 

(mem . ) ; Harper v. yirgznia Dept. of Taxation ( 19 9 1 ) , U.S. , 111 S.Ct. 

2883, 115 L.Ed.2d 1049 (mem.) . 

It does not seem to me that the intent of the Supreme Court to 

apply Davis retroactively could be any clearer. The majority s 

opinion merely postpones the inevitable and unnecessarily prolongs 

the delusion of state government that it can continue to spend 

money which was illegally collected and which it will ultimately 

have to repay. 

As far as I am concerned, the issue involved in this case is 

a simple one. The State took the petitioners' money illegally. 

That fact is obvious from the plain language of 4 U.S.C. 5 111. If 

a private citizen took someone's money illegally, he or she would 

be forced to give it back. The State ought to do the same. 

The majority talks about equity. What is equitable about 

allowing the State, with all its power, to illegally seize 

someone's property, and then after being told what it did was 

illegal, allowing the State to keep it? 

The majority's strained rationale regarding the foreseeability 

of Davis is transparent. When the State of Montana establishes a 

policy of arbitrarily treating one group of taxpayers differently 

than another group that is similarly situated, it is certainly 

foreseeable that what the State is doing is illegal. 
The majority's conclusion about how to best effectuate the 

purpose of the Dnvisdecision is similarly illogical. The purpose 

of the Davis decision was to assure that federal employees are 

treated the same as state employees. How can that purpose possibly 

be furthered by allowing the State to keep the money that was 

illegally taken from federal employees and spend it for the benefit 

of citizens who were not similarly taxed? 

The majority s decision is clearly a result-oriented decision 

arrived at for the purpose of protecting the State's coffers. 

However, the State's coffers are not the responsibility of this 

Court. The rights of this State's citizens are. 

For the reasons set forth above, the State of Montana can take 

little comfort in the temporary reprieve granted by this decision.