OCTOBER TERM, 1991
Syllabus
BARKER ET AL.
v. KANSAS ET AL.
CERTIORARI TO THE SUPREME COURT OF KANSAS No. 91-611. Argued
March 3, 1992-Decided April 21, 1992
Title 4 U. S. C. § 111 authorizes the States to tax federal
employees' compensation if the taxation does not discriminate
against the employees because of the compensation's source. After
Davis v.
Michigan Dept. of Treasury, 489 U. S. 803,
invalidated, under § 111 and the doctrine of intergovernmental tax
immunity, the Michigan income tax imposed on the benefits of
federal, but not state and local, civil service retirees,
petitioners filed suit in a Kansas state court challenging that
State's imposition of an income tax on federal military retirement
benefits but not on the benefits received by retired state and
local government employees. In affirming the trial court's grant of
summary judgment for the state defendants, the State Supreme Court
concluded that military retirement benefits constitute reduced pay
for reduced current services, in contrast to the deferred
compensation for past services embodied in state and local
government retirement benefits, and that this "significant
differenc[e]" justified the State's differential treatment of the
two classes of retirees under
Davis, supra, at 816.
Held: The Kansas tax on military retirees is inconsistent
with § 111. The State Supreme Court's conclusion that, for purposes
of state taxation, military retirement benefits may be
characterized as current compensation for reduced current services
does not survive analysis on several bases. First, there are no
"significant differences" between military retirees and state and
local government retirees in terms of calculating retirement
benefits. The amount of retired pay a service member receives is
computed not on the basis of the continuing duties he actually
performs, but on the basis of years served on active duty and the
rank obtained prior to retirement. Military benefits thus are
determined in a manner very similar to that of the Kansas Public
Employee Retirement System. Second, this Court's precedents
discussing military retirement pay provide no support for the state
court's holding. The statement in
United States v.
Tyler, 105 U.
S. 244, 245, that such pay is effectively indistinguishable
from current compensation at a reduced rate was made in the context
of the particular holding of that case, and cannot be taken as
establishing that retirement benefits are for all purposes the
equivalent of current compensation for reduced current services.
And, although
McCarty v.
McCarty, 453 U. S. 210, 222,
referred to
Tyler, it did not expressly approve
Tyler's description of mili-
595
tary retirement pay, but specifically reserved the question
whether federal law prohibits a State from characterizing such pay
as deferred compensation and urged the States to tread with caution
in this area. Third, an examination of other federal statutes
treating military retirement pay indicates that Congress for many
purposes does not consider such pay to be current compensation for
reduced current services. See,
e. g., 10 U. S. C. §
1408(c)(1); 26 u. S. C. § 219(f)(1). Thus, military retirement
benefits, like the benefits paid to Kansas government retirees, are
to be considered deferred pay for past services for purposes of §
111. Pp.597-605.
249 Kan. 186, 815 P. 2d 46, reversed and remanded.
WHITE, J., delivered the opinion for a unanimous Court. STEVENS,
J., filed a concurring opinion, in which THOMAS, J., joined,
post, p. 605.
Kevin M. Fowler argued the cause for petitioners. With him on
the brief were Kenton C. Granger, Raymond L. Dahlberg, Angela K.
Green, Roger M. Theis, John C. Frieden, and Terence A. Lober.
John F. Manning argued the cause for the United States as amicus
curiae urging reversal. With him on the brief were Solicitor
General Starr, Assistant Attorney General Peterson, Deputy
Solicitor General Wallace, and David English Carmack.
James A. D. Bartle argued the cause for respondents.
With him on the brief were Mark A. Burghart and Michael M.
Rehm.*
* Eugene O.
Duffy filed a brief for the
Retired Officers Association as
amicus curiae urging
reversal.
Briefs of
amici curiae urging affirmance were filed for
the State of Arizona et al. by
Mary Sue Terry, Attorney
General of Virginia,
H. Lane Kneedler, Chief Deputy Attorney
General, and
Gail Starling Marshall, Deputy Attorney
General,
Peter W Low, and by the Attorneys General for their
respective States as follows:
Grant Woods of Arizona,
Winston Bryant of Arkansas,
Michael J.
Bowers of Georgia,
Bonnie J. Campbell
of Iowa,
Marc Racicot of Montana,
Susan B. Loving of
Oklahoma,
Paul Van Dam of Utah, and
James E. Doyle of
Wisconsin; and for the National Conference of State Legislatures et
al. by
Richard Ruda and
Michael G.
Dzialo.
596
JUSTICE WHITE delivered the opinion of the Court.
The State of Kansas taxes the benefits received from the United
States by military retirees but does not tax the benefits received
by retired state and local government employees. Kan. Stat. Ann. §
79-3201
et seq. (1989).1 The issue before us is whether the
tax imposed on the military retirees is inconsistent with 4 U. S.
C. § 111, which provides:
"The United States consents to the taxation of payor
compensation for personal service as an officer or employee of the
United States, a territory or possession or political subdivision
thereof, the government of the District of Columbia, or an agency
or instrumentality of one or more of the foregoing, 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 payor compensation."
Shortly after our decision in
Davis v.
Michigan Dept.
of Treasury, 489
U. S. 803 (1989), which invalidated under § 111 the Michigan
income tax imposed on federal civil service re-
1 As the Kansas Supreme Court explained, to arrive at the
adjusted gross income of a taxpayer under the Kansas Income Tax
Act, the starting point is the adjusted gross income under the
federal Internal Revenue Code, which includes retirement benefits
received by retired military officials and state and local
government retirees. 249 Kan. 186, 190-191,815 P. 2d 46, 49-50
(1991). As relevant for present purposes, in calculating Kansas'
adjusted gross income, the retirement benefits of state and local
governments are deducted and are exempt from taxation. See Kan.
Stat. Ann. §79-32,117(c)(ii) (Supp. 1990); §74-4923(b) (Supp.
1990); see also 249 Kan., at 190-191, 815 P. 2d, at 49-50 (listing
classes exempt from state taxation). Benefits received under the
Federal Civil Service Retirement System and by retired railroad
employees are also exempt. Kan. Stat. Ann. §§ 79-32,117(c)(vii) and
(viii) (Supp. 1990). Not deducted and hence taxable are benefits
received by retired military personnel, certain Central
Intelligence Agency employees, officials serving in the National
Oceanic and Atmospheric Association or the Public Health Service,
and retired federal judges. See 249 Kan., at 205, 815 P. 2d, at
58.
597
tirees, two class actions were filed in Kansas District Court
challenging the state income tax imposed on military retirement
benefits. Together the classes comprised some 14,000 military
retirees, who received federal Armed Forces retirement benefits and
were subject to the Kansas income tax for one or more of the tax
years from 1984 through 1989. The classes also included spouses of
the retirees, where applicable. Plaintiff taxpayers sought a
declaratory judgment that the Kansas income tax discriminates
against them in favor of state and local government retirees, in
violation of § 111 and the constitutional principles of
intergovernmental tax immunity applied in
Davis. They also
requested a permanent injunction to prohibit assessment of the tax
against military retirees, as well as refunds of any taxes paid by
class members for the tax years 1984 through 1989.2 The District
Court granted summary judgment for the defendants, and the Supreme
Court of Kansas affirmed, 249 Kan. 186, 815 P. 2d 46 (1991). We
granted certiorari because the holding below is arguably
inconsistent with our decision in
Davis and conflicts with
decisions of other state courts of last resort. 502 U. S. 977
(1991).3
Our approach to deciding this case is controlled by
Davis, which invalidated a Michigan law that imposed taxes
on federal civil service retirees' benefits but not on benefits
received by state and local government retirees. In reaching
2 The taxpayers also relied on the Supremacy Clause of the
United States Constitution, the Privileges and Immunities Clause of
the Fourteenth Amendment, and Article 11, § 2, of the Kansas
Constitution. The taxpayers further alleged that the State deprived
them of their civil rights as secured by the United States
Constitution and laws in violation of the Fourteenth Amendment and
of 42 U. S. C. § 1983. See 249 Kan., at 188, 815 P. 2d, at 48.
3 See,
e. g., Kuhn v.
State, 817 P. 2d 101 (Colo.
1991) (en bane);
Pledger v.
Bosnick, 306 Ark. 45, 811
S. W. 2d 286 (1991); and
Hackman v.
Director of
Revenue, 771 S. W. 2d 77 (Mo. 1989) (en bane), cert. denied,
493 U. S. 1019 (1990).
598
that decision, we traced the history of 4 U. S. C. § 111 and
concluded that "the retention of immunity in § 111 is coextensive
with the prohibition against discriminatory taxes embodied in the
modern constitutional doctrine of intergovernmental tax immunity."
489 U. S., at 813. Under that doctrine, we evaluate a state tax
that is alleged to discriminate against federal employees in favor
of state employees by inquiring "whether the inconsistent tax
treatment is directly related to, and justified by, 'significant
differences between the two classes.'"
Id., at 816 (quoting
Phillips Chemical Co. v.
Dumas Independent School
Dist., 361 U. S.
376, 383 (1960)).
Well aware of
Davis, the State Supreme Court undertook
such an inquiry and concluded that significant differences existed
between military retirees, who are taxed by Kansas, and state and
local government retirees, who are not. The court proceeded to
consider the State's six proffered distinctions between military
retirees and state and local government pensioners:
"(1) [F]ederal military retirees remain members of the armed
forces of the United States after they retire from active duty;
they are retired from active duty only; (2) federal military
retirees are subject to the Uniform Code of Military Justice (UCMJ)
and may be court martialed for offenses committed after retirement;
(3) they are subject to restrictions on civilian employment after
retirement; (4) federal military retirees are subject to
involuntary recall; (5) federal military retirement benefits are
not deferred compensation but current pay for continued readiness
to return to duty; and (6) the federal military retirement system
is noncontributory and funded by annual appropriations from
Congress; thus, all benefits received by military retirees have
never been subject to tax." 249 Kan., at 196, 815 P. 2d, at 53.
599
The court deemed the first four differences significant, not
because in themselves they justified disparate tax treatment, but
because they supported the fifth distinction-that military
retirement benefits constitute reduced pay for reduced current
services, rather than deferred compensation for past services.
Id., at 197, 815 P. 2d, at 53. By contrast, "[s]tate and
local government retirement benefits are deferred compensation,"
the court found, and "not current pay."
Ibid. The court
concluded that this principal distinction between military retirees
and state and local government retirees justified their
differential treatment under the State's tax laws. Accordingly, it
held that a military retiree's benefits were as legally subject to
state taxation as the income of active military personnel, whose
pay was liable for state taxation pursuant to the United States'
consent, as expressed in 4 U. S. C. § 111.
Military retirees unquestionably remain in the service and are
subject to restrictions and recall; in these respects they are
different from other retirees, including the state and local
government retirees whom Kansas does not tax. But these
differences, standing alone, do not justify the differential tax
treatment at issue in this case. Nor do these differences
persuasively indicate that, for purposes of 4 U. S. C. § 111,
Kansas may treat military retirement pay as reduced pay for reduced
services. As a general matter, a military retiree is entitled to a
stated percentage of the pay level achieved at retirement,
multiplied by the years of creditable service. Brief for United
States as
Amicus Curiae 11, n. 16. In this respect, "retired
[military] pay bears some of the features of deferred compensation.
The amount of retired pay a service member receives is calculated
not on the basis of the continuing duties he actually performs, but
on the basis of years served on active duty and the rank obtained
prior to retirement."
McCarty v.
McCarty, 453 U. S. 210, 223, n. 16
(1981) (citation omitted). By taking into account years of service,
the formula used to calculate retirement benefits
600
leaves open the possibility of creating disparities among
members of the same preretirement rank. Such disparities cannot be
explained on the basis of "current pay for current services," since
presumably retirees subject to these benefit differentials would be
performing the same "services." Furthermore, military benefits are
determined in a manner very similar to that of the Kansas Public
Employee Retirement System. Brief for United States as
Amicus
Curiae 11, n. 16. In terms of calculating retirement benefits,
therefore, we see no significant differences between military
retirees and state and local government retirees that justify
disparate tax treatment by the State.
In holding to the contrary, however, the Kansas Supreme Court
found support in some of our precedents. In
United States v.
Tyler, 105 U.
S. 244 (1882), for example, the Court decided that officers
retired from active military service were entitled to the same
percentage increase in pay that a statute had provided for active
officers. The Court reached this result in part by characterizing
military retirement pay as "compensation [that] is continued at a
reduced rate, and the connection is continued, with a retirement
from active service only."
Id., at 245.4
The State Supreme Court also found support in
McCarty,
supra. In that case the California courts considered the
applicability of state community property laws to the military
retirement benefits for which an officer who had 18 years of
service would be eligible 2 years hence. The California courts had
held these benefits subject to division upon disso-
4 The Court explained:
"It is impossible to hold that men who are by statute declared
to be a part of the army, who may wear its uniform, whose names
shall be borne upon its register, who may be assigned by their
superior officers to specified duties by detail as other officers
are, who are subject to the rules and articles of war, and may be
tried, not by a jury, as other citizens are, but by a military
court-martial, for any breach of those rules, and who may finally
be dismissed on such trial from the service in disgrace, are still
not in the military service."
United States v.
Tyler, 105 U. S., at 246.
601
lution of the marriage. In this Court the officer challenged the
holding on two grounds: first, that his prospective retirement
benefits would be current pay, not subject to division as deferred
compensation for services performed during the marriage; and
second, that applying the community property law to retirement
benefits conflicted with the federal military scheme regardless of
whether retired pay is current income or deferred compensation. See
id., at 221. Citing and quoting
Tyler, supra, our
opinion noted that military retirees differed in some respects from
other retired federal personnel and that these differences had led
various courts, "including this one," to opine that military
retirement pay is reduced compensation for reduced current
services. 453 U. S., at 222. We found no need, however, to decide
"whether federal law prohibits a State from characterizing retired
pay as deferred compensation," because we sustained petitioner's
alternative ground for overturning the judgment below.
Id.,
at 223.
The Kansas Supreme Court reasoned that
McCarty's
recognition of the
Tyler holding, as well as the decisions
of several Courts of Appeals, indicated that
Tyler
controlled the description of military retirement pay. It thus
concluded that taxing military retirement pay as current income
could not validly be characterized as discriminating in favor of
state and local government employees, whose benefits were exempt as
being deferred compensation for past services. See 249 Kan., at
198, 815 P. 2d, at 54. For several reasons, we find this reading of
our precedents unpersuasive.
First,
Tyler's statement that retirement pay is
effectively indistinguishable from current compensation at a
reduced rate was unnecessary to reach the result that Congress
intended to include the retirement benefits of a certain class of
retired officers in its provision for increasing the pay of
active-duty officers. In holding that such retired officers were
eligible for this increase, the Court based its holding on the
"uniform treatment" of retired and active officers in
602
various statutory provisions that made the retired officers "a
part of the army" for purposes of determining eligibility for the
increase.
Tyler, 105 U. S., at 245-246. The Court described
"a manifest difference in the two kinds of retirement, namely,
retiring from active service and retiring wholly and altogether
from the service."
Id., at 245. The latter group were
ineligible for the pay increase because their connection to the
service had been completely terminated. In interpreting the
applicable statutory provisions, therefore, the "uniform treatment"
of active-duty officers and the one class of retired officers was
crucial to the decision;
Tyler thus cannot be taken as
establishing that retirement benefits are for all purposes the
equivalent of current compensation for reduced current
services.
Moreover, although
McCarty referred to
Tyler, it
did not expressly approve
Tyler's description of military
retirement pay. To the contrary, by declining to hold that federal
law forbade the States to treat military retirement pay as deferred
income and resting our decision on another ground, we reserved the
question for another case. To punctuate this point, we noted that,
despite
Tyler, the state courts were divided as to whether
military retirement pay is current income or deferred compensation.
See
McCarty, 453 U. S., at 222-223, nn. 15 and 16. We also
stated that although military retirement pay bears some of the
features of deferred compensation, two indicia of retired military
service include a restriction on activities and a chance of being
recalled to active duty. Hence, "the possibility that Congress
intended military retired pay to be in part current compensation
for those risks and restrictions suggests that
States must tread
with caution in this area, lest they disrupt the federal
scheme."
Id., at 224, n. 16 (emphasis added).
In urging States to be cautious in treating military retirement
pay,
McCarty thus should not be read to consider
Tyler as settling the issue. Indeed, our handling of the
community property dissolution issue suggests the opposite. In
Mc-
603
Carty we said that "[t]he community property division of
military retired pay rests on the premise that that pay, like a
typical pension, represents deferred compensation for services
performed during the marriage." 453 U. S., at 221. Had we accepted
as definitive for all purposes
Tyler's characterization of
such pay as current income, our decision in
McCarty would
have been simple because we would have been foreclosed from
treating military retired pay as deferred compensation. Such a
holding would have been a much easier way of deciding
McCarty than the alternative basis for decision-that the
application of California's community property law conflicted with
the federal military retirement scheme.
Finding no support for the Kansas Supreme Court's holding either
in differences in the method of calculating benefits or in our
precedents discussing military retirement pay, we examine
congressional intent, as inferred through other applicable statutes
that treat military retirement pay. Promptly after
McCarty,
for example, Congress enacted the Uniformed Services Former
Spouses' Protection Act, 10 U. S. C. § 1408(c)(1), which negated
McCarty's holding by giving the States the option of
treating military retirement pay "either as property solely of the
member or as property of the member and his spouse in accordance
with the law of the jurisdiction of such court." Because the
premise behind permitting the States to apply their community
property laws to military retirement pay is that such pay is
deferred compensation for past services, see
McCarty, supra,
at 221, Congress clearly believed that payment to military retirees
is in many respects not comparable to ordinary remuneration for
current services. To extend to States the option of deeming such
benefits as part of the marital estate as a matter of state law
would be inconsistent with the notion that military retirement pay
should be treated as indistinguishable from compensation for
reduced current services.
604
Furthermore, both federal and Kansas income tax law treat
military retirement pay as deferred compensation for the purpose of
determining deductibility of contributions to an individual
retirement account (IRA). For federal purposes, an IRA deduction is
limited to the amount of the taxpayer's compensation or $2,000,
whichever is less. But the term "compensation" does not include
"any amount received as a pension or annuity and does not include
any amount received as deferred compensation." 26 U. S. C. §
219(f)(1). Under this provision, military retirement benefits are
not compensation for the purpose of making deductible contributions
to an IRA. See generally M. Weinstein, Mertens Law of Federal
Income Taxation § 25C.12, p. 58 (1988). The State Supreme Court in
this case noted that the Kansas tax law follows the federal scheme
and does not treat military retirement pay as current compensation
for IRA purposes, like other types of retirement benefits. 249
Kan., at 201-202,815 P. 2d, at 56. The court believed that this
treatment of military retirement pay was limited to the IRA
context,
id., at 202-203, 815 P. 2d, at 57, a position we
find unpersuasive. The court's view ignores the importance of this
provision to understanding that Congress for many purposes does not
consider military retirement pay to be current compensation for
current services. The State's position is weakened further by
another fact, that Kansas tax law considers military retirement
benefits as current compensation under its general income tax
provision but it does not for IRA deductibility purposes. The court
asserted that "the distinction is not so much the characterization
as current income or deferred compensation, but rather active
versus passive activities required to earn the income."
Id.,
at 203, 815 P. 2d, at 57. But as the United States persuasively
contends: "The State's failure to treat military retired pay
consistently suggests that the State's articulated rationale is not
in fact the basis for the disparate treatment, but only a cloak for
discrimina-
605
tion against federally funded benefits." Brief for United States
as
Amicus Curiae 22.
We therefore determine that the Kansas Supreme Court's
conclusion that, for purposes of state taxation, military
retirement benefits may be characterized as current compensation
for reduced current services does not survive analysis in light of
the manner in which these benefits are calculated, our prior cases,
or congressional intent as expressed in other provisions treating
military retirement pay. For purposes of 4 U. S. C. § 111, military
retirement benefits are to be considered deferred pay for past
services. In this respect they are not significantly different from
the benefits paid to Kansas state and local government retirees.5
Accordingly, we reverse the judgment of the Kansas Supreme Court
and remand the case for further proceedings not inconsistent with
this opinion.
So ordered.
JUSTICE STEVENS, with whom JUSTICE THOMAS joins, concurring.
While I agree with the Court's explanation of why this case is
controlled by
Davis v.
Michigan Dept. of Treasury,
489 U. S. 803
(1989), I remain convinced that that case seri-
5 In listing the differences between the two classes of retirees
involved here, the State Supreme Court also observed that Kansas
state and local retirees have contributed to their retirement
benefits and that their contributions have been taxed as part of
their current income. Military personnel, on the other hand, do not
contribute to their retirement benefits, which are paid out of
annual appropriations. As we read the court, however, it did not
rest its decision on this difference and in the end returned to its
basic holding that military retirees "receive current compensation
while all persons receiving state and local government retirement
benefits receive deferred compensation." 249 Kan., at 205, 815 P.
2d, at 58. Moreover, we note that the State applies its income tax
to other federal retirees who contributed to their benefits, such
as members of the Central Intelligence Agency, Foreign Service,
bankruptcy judges, and United States magistrates. See
ibid.
606
ously misapplied the doctrine of intergovernmental tax immunity.
A state tax burden that is shared equally by federal retirees and
the vast majority of the State's citizens does not discriminate
against those retirees. See
id., at 823-824 (STEVENS, J.,
dissenting). The Federal Government has a legitimate interest in
protecting its employees from disparate treatment, but federal
judges should not be able to claim a tax exemption simply because a
State decides to give such a benefit to the members of its
judiciary instead of raising their salaries. I write separately to
make this point because what I regard as this Court's perverse
application of the nondiscrimination principle is subject to review
and correction by Congress. See
Prudential Insurance Co. v.
Benjamin, 328
U. S. 408 (1946).
Comments
Be the first to comment
Leave a Comment