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 StateAgency 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, TheHonorable JeffreyM. Sherlock,Judgepresiding.

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 arenot entitled to refunds for state taxespaid for the years 1983 through 1988 on their retirement benefits received under the Federal EmployeestRetirement Act. The issue iswhether the opinion of theUnited 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 Employees1Retirement Act in excess of $3,600. In contrast,under 3 19-3-105,MCA (1989), all retirement benefits received under Montana's Public EmployeestRetirement 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 2I I Davis,the statehad conceded that refunds for previousyearswould 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. Itdecided that retroactive application of Daviswould 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 toMontana's budget deficitwould 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 themajor elements of the opinion of the United States Supreme Court in Davis. Inthat case,theplaintiffs challenged aMichigan tax schemewhich exempted from statetaxation 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 attractingand retainingqualified employees. TheMichigan SupremeCourt 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 relevantpart, that statuteprovides: The United States consents to the taxation of pay or compensation for personal service as an officer or employee of theUnited 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 accruetoemployees on account of their service to the Government, they fall squarelywithin thecategoryof 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 thenondiscriminationclauseappliestoretirementbenefitsbecause retirementbenefits 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 prohibitnondiscriminatory statetaxation of federal employees. Davis, 489 U.S. at 810-14. The Court stated that although intergovernmental tax immunity isbased on theneed toprotect each sovereign's governmental operations from undue influence by theother, 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), 501U.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 rulehas alreadydone 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 inwhich retired federalI employees in South Carolina and Virginia seek refunds of state income taxes under theories similar to those argued here. After Jim Beamwas decided, the Court granted certiorari inboth 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 indicatestheCourt's uncertainty

as towhether Jim Beam applies to the issue of Davisvsretroactivity. 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 inJim Beam are thedoctrine 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 concludethat thedoctrine of stare decisis does not apply. We conclude that the principle of equalityor equal treatmentto 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),404U.S. 97,92 S.Ct. 349, 30 L.Ed.2d 296, theUnited 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 resolutionwas not foreshadowed, thereby leading to the conclusion that the decision should not be applied retroactively; 2) whether retroactive applicationwill 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 intergovernmentaltax immunity and as a logical extension of the Court's decisions in a series of cases. However,as the Statepoints 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,theDavis Court pointed out thatwhile 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 theindividuallssalary and years of service. The Court Inhadno difficultyl1concluding 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 "annuitantl1rather 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 isa 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), 361U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. But the Davis language addressing the relationship betweenintergovernmental 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 conclusionthat theprotection 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 I1significantdifference" standard should be used rather than one of the standards typically applied in equal protection cases. As plaintiffs point out, a "significantdifference" standardhad 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 Lehnhausenv. 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 areprotected under 4U.S.C. 5 111and that the protections under that statute are coextensivewith thoseprovided 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 intergovernmentaltax immunity rendered the state's tax treatment of federal retirement benefits unconstitutional. Conceding that "a tax may be held invalid 

# .. . if it operates to discriminateagainst 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 Courtdetermined thattheState's interestin "attracting and retaining 

# . . . qualified employees" was a "legitimate stateobjective which is rationally achieved by a retirementplan offering economic inducements,"and it upheld the statute. Davis, 489 U.S. at 807. Using an equal protection analysis, the Michigan courtconcluded that the legitimate Michigan objectivewas

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 analysiswas 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: TheStatepointstotwoallegedly 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 merelydemonstrates thattheState has a rational reason for discriminatins between two similar sroups of retirees. The State's interest in adoptins the discriminatory tax. no matter howsubstantial, is simply irrelevant to an inquiry into the nature of the two classes receivins inconsistent treatment. (Emphasissupplied.) 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,includingfederalemployees, because ittreats retired stateemployeesdifferently from retired federal employees. The Court's holding is not supported by the rationalefortheintergovernmental immunitydoctrineand 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, thenondiscrimination principle isnot applicable and constitutional protection is not necessary.



# . . .TheMichigan tax here applies toapproximately 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 isnot supportedby 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 "significantdifference1'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 decisionwas foreshadowed is controlledby 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 PreferenceAct. 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 Statehas pointed out, there was an additional step. 4 U.S.C. 5 111prohibits discriminatory taxation of "pay or compensationtt received from the federal government. The Court held that federal retirement benefits were included in Itpayor compensation1' so that 4U.S.C. 5 111 applied. Davis, 489 U.S. at 808. In Crabtree, the Court was not faced with a comparablepreliminary issue ofwhether the statutewas applicable to thecase 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 iswhether retroactive application will further or retard operation of the rule in question. The District Court stated that it could not #'seehow a retroactive application of the Davis decision would in any way promotegv theconcept of intergovernmentaltax 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 isan overstatement. The taxation schemewasnot ''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 theopinion in Davis were not illegally collected taxes. 4U.S.C. 5 111was enacted in 1939. Between that time and the date of the Davis decision, twenty-two other states enacted and used taxplans much likeMontana'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

### concurwith that part of themajority's opinionwhich holds that JamesB. Beam Distilling Co. v. Georgia (1991), 501U.S. 

## -, 111 

### S.Ct. 2439, 115 L.Ed.2d 481, isnot 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 inDavis. Furthermore, I

### believe that theweakness of the majority s opinion is clearly demonstrated by its heavy reliance on the overturned decisionof theMichigan Court ofAppeals 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 anewprinciple of law,eitherby 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 Ivsignificantdifferenceu1standard 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 supportto its conclusionthat theholding in Daviswas 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 simplywas stating the plain language of theVeteran's Preference Act. In Davis, the Supreme Court did not create any new law because, as the SupremeCourt itself stated,theplain languaqe of 5 

### 111dictated its holding that the statute appliestoboth 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 inDavisconstitutedanunforeshadowed, abruptand fundamental change in the doctrine of intergovernmental tax immunity through its holding that employees of the governmental entity, aswell as the governmental entity itself, comewithin the protection of thedoctrine. Themajority states that "[tlhe Davis language addressing therelationshipbetween intergovernmental tax immunity and 4 U.S.C. 5 

### 111 clearly breaks new ground." Slip op. atp. 8-9. This is simply not the case as evidencedby the Supreme Court's own observations in Davis. On its face, 5 

### 111purports tobe 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 111provides an independentbasis 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 theconclusion, the Supreme Court in Davis did not Itextend"4 U.S.C. 5 111 to federal retirees receivingpension 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,theplain language of the statute dictates the opposite conclusion. Section 111 by its terms applies to "the taxation of pay or compensation for personal servicesasan officer or employeeof theUnited 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 implausibleat 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 legislativehistory suggests this result. ~avis,489 U.S. at 810. ~ssumingthat 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 Courtlsholding 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 Jensenv. 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 constitutionaldoctrine. Thus,thedispositivequestion in this case iswhether the tax imposed on appellant is barredby thedoctrineof intergovernmentaltax immunity.

[Emphasisadded.] 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;

### McCullochv. 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 theirdealings with a sovereign cannot themselves receive theprotection of the constitutionaldoctrine. Indeed all precedent is to the contrary. In Phillips Chemical Co., supra, for example, we considered aprivate corporationls claimthat a state tax discriminated against private lessees of federal land. We concludedthat 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. 

# .. . [Emphasisinoriginal.

### ] The State offers no reasons for departing from this settledrule,andwe declinetodo so. [Emphasisadded.] 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. 

### Ialso disagree with themajority's conclusionthat Daviswas not clearly foreshadowed because the Supreme Court had to decide that theproper standard for determining thevalidity 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 intergovernmentaltaximmunity is involved was settled under existins authority. Under ourprecedents, It[t]heimposition of aheavier 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 problemsof intergovernmentaltax immunityare

### involved,^ because IftheGovernmentfsinterests 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. [Emphasisadded.] Davis, 489 U.S. at 815-16. The Supreme Court was citing its decision in PhillipsChemical 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 thepreviously uncontested nature of 4U.S.C. § 111 with respect to its application to federal retirees. In my view, the fact that twenty-three states, includingMontana,had tax schemes similar to the one invalidated in Davis is conclusive of nothing more than that Davis decided an issue of first impression. Itdoes not follow,as themajority opinion implies,that theDavis 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, theprevalence of the wrong is irrelevant to the determination of whether that holding was clearly foreshadowed. Inapplyingthe secondprong of theChevrontest,themajority concludes that retroactive application of Davis would not promote the concept of intergovernmental tax immunity. I

### disagree. Inmy 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 relianceupon a presumptivelyvalid 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 orno import. McKessonCorp. v. Div. ofAlcoholic 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 theunconstitutionallycollected taxes. The federalretirees have indicated their willingness to accept a tax credit mechanism in lieu of actual refunds as a possible remedywhich, inmy view, has the potential of softening the impact on the State's financial stability evenmore. 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 Davisv.MichiganDepartment

### ofTreasury (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 OilCompanyv.Huson (1971), 404U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296. Contrary to the majority1 s argument, the result in Daviswas clearly foreshadowedby theplain language of 4 U.S.C. 5 111 and by the Supreme Court s prior decisions inPhillipsChemicalCompanyv.D~~mas

4 L.Ed.2d 384,391-92,andMemphisBankandTrustCompanyv.Gamer (1983)

### , 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 inDavis: 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 ofpay 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 construedin 

### Dnvis. As pointed out in Justice Gray's dissent, we have previously held inJensen

### v. StateDepartmentofLaborandIndustry (1984) 

### , 213 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 theUnited StatesSupreme Court s application of 4U.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 controllingUnited 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.TheUnited StatesSupremeCourthas recentlygoneeven further to make clear that the result arrived at by the majority in this

case is incorrect. InJamesB.BeamDistillingCompanyv.Georgia (1991)

### , U.S. I 111 S.Ct. 2439, 115 L.Ed.2d 481, theUnited States Supreme Court dealt with a similar issue regarding retroactivity. In the Benm case, the Court was asked to decide whether its decision inBacchusImports,Ltd.v.Dins (1984), 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200, should apply retroactively to claimsbased on facts which preceded that decision. The effect of the Bncchzis decisionwas tohold that state lawswhich imposed an excise tax on imported alcoholic beverages at a rate greater than those imposed

on alcoholic beveragesmanufactured within that stateviolated the Commerce Clause of the United States Constitution. Following the BNCC~ZLS decision, the petitioner inBenm 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 theyears in questionbased upon theiranalysisof Chevrorl OilCompany

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

In other words, the Supreme Court in Georgia applied the same rationale inBeam 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 thatwhere 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 relevantto this case was the Court'sholding that its decision limitsthepossible applications of theChevroizOilanalysis. 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 Bacchusopinion 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 Bncchusremanded 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, 472U.S. 14, 28, 105 S.Ct. 2465, 2474, 86 L.Ed.2d 11 (1985);EnonCorp.

### v.Engertorz, 462U.S. 176, 196-197, 103 S.Ct. 2296, 2308-2309, 76 L.Ed.2d 497 (1983);cf.Dnvisv. 

### MiclzipizDepartmeiztofTreasury, 48 9 U

# .S

# . 8 03

### , 817

### , 109 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 fortheprinciple 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 theGeorgiacourtsrefused toapply that rulewith respect to the litigants in this case. Thus, the question iswhether 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 staredecisishere prevailing over any claim based on a ChevronOilanalysis.



# . . . To this extent, our decision here does limit the possible applications of the Chevroiz Oil analysis, however irrelevant Chevroiz Oilmay otherwise be to this case. Because the rejection of modified prospectivity precludes retroactive application of a new rule to some litigants when it isnot applied to others, the ChevronOil test cannot determine the choiceof lawby 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.



# . . . [Wlhenthe 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 ~usticeScalia'sconcurringopinion whichwas joined in by JusticeMarshall and Justice Blackmun to the effect that both llselective prospectivityl' and "pureprospectivityl' arebeyond thepower of the Court. The implication, as far as those Justices were concerned, is thatDaviscould 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). Themajority's conclusion ignoresJusticeOIConnorls dissenting opinion wherein she states that the Beam decision llseriously curtails the Chevron

### Oilinquiry.l1 Beam, -U.S. at I 111 S.Ct. at 2452, 115 L.Ed.2d at 499 (OIConnor, J., dissenting). Finally, themajority's reasoning ignores the fact that eight days after Beamwas 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 Davisdecision 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.HrginiaDept.of Taxation (1991), 241 Va. 232, 401 S.E.2d 868. Both of those decisionswere vacated by the United States Supreme Court, and both were remanded to the state courts for "further consideration in light ofJamesB.BenmDistillingCompany

### v. Georgirz." Bass

### v.

### SozlthCarolina (1991 )

### , U.S.

### , 111 S.Ct. 2881, 115 L.Ed.2d 1047 (mem

# .) ;

### Harperv.yirgzniaDept.of

### Taxation (1991 )

### , U.S. 

### , 111 S.Ct. 2883, 115 L.Ed.2d 1049 (mem.)

# . Itdoesnot seem to me that the intent of the SupremeCourt to apply 

### Davis retroactively could be any clearer. The majority s opinionmerely postpones the inevitableand 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 theplain language of 4U.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? Themajority's strained rationale regardingthe 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 sameas stateemployees. How can thatpurposepossibly be furthered by allowing the State to keep the money that was illegally taken from federal employees and spend it for thebenefit of citizens who were not similarly taxed? Themajority 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 reprievegranted by thisdecision.