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U.S. Supreme Court Holds That West Virginia Tax Exemption Unlawfully Discriminates Against Federal Law Enforcement Retirees

April 7, 2019

By: Chris M. Hunter

The United States Supreme Court recently put an end to West Virginia’s practice of exempting pension income of certain State law enforcement officers from the State’s income tax while disallowing the exemption for similarly situated federal retirees.  At issue was a provision in the State’s tax code that exempts from West Virginia income tax pension payments received from a number of pension funds set up for retired State law enforcement officers and firefighters.  


The taxpayer in the case, James Dawson, worked most of his career as a U.S. Marshall, retiring in 2008 and receiving pension payments from the Federal Employee Retirement System (“FERS”).  For tax years 2010 and 2011, Mr. Dawson claimed the exemption in W.Va. Code § 11–21–12(c)(6) for his FERS payments.  Section 12(c)(6) exempts the entirety of any pension payments to retired law enforcement personnel or firefighters whose benefits are paid from State-sourced retirement funds:

(c) Modifications reducing federal adjusted gross income.—There shall be subtracted from federal adjusted gross income to the extent included therein: ...
(6) Retirement income received in the form of pensions and annuities after the thirty-first day of December, one thousand nine hundred seventy-nine, under any West Virginia police, West Virginia Firemen's Retirement System or the West Virginia State Police Death, Disability and Retirement Fund, the West Virginia State Police Retirement System or the West Virginia Deputy Sheriff Retirement System, including any survivorship annuities derived from any of these programs, to the extent includable in gross income for federal income tax purposes[.]

The Tax Commissioner refused to allow Dawson the exemption; the Office of Tax appeals upheld the Tax Commissioner’s position (that the exemption did not apply), but the Circuit Court of Mercer County disagreed, holding that the Tax Commissioner’s denial of the exemption violated 4 U.S.C. § 111, which provides that “[t]he United States consents to the taxation of pay or compensation for personal service as an officer or employee of the United States ... if the taxation does not discriminate against the officer or employee because of the source of the pay or compensation.”  

Decision by the West Virginia Supreme Court of Appeals

In May of 2017, the West Virginia Supreme Court of Appeals issued a decision in the case
Steager v. Dawson, 2017 WL 2172006 (W.Va. 2017). On appeal, the court noted that West Virginia imposes taxes upon government-provided retirement income of most local, state, and federal employees who reside within the state. The State allows exemptions for certain government employees ($2,000 for teachers, $20,000 for military personnel, etc.) and only provides a total exemption to the relatively small number of State employees listed in W.Va. Code § 11–21–12(c)(6). The court found that Section 12(c)(6) did not discriminate against Mr. Dawson because the intent of the exemption contained in Section 12(c)(6) was to give a benefit to a narrow class of state retirees. The court found that because (1) Mr. Dawson received more favorable treatment than some civilian State retirees and (2) Section 12(c)(6) was not intended to apply to all retired State law enforcement officers, the Tax Commissioner’s denial of the exemption did not run afoul of 4 U.S.C. § 111.

The High Court

The United States Supreme Court, however, saw things differently. Justice Gorsuch, delivering the opinion of the Court, foreshadowed the Court’s ultimate conclusion by framing the issue as “whether a State may discriminate against federal retirees in that way.” The Court began its legal analysis by explaining that § 111 codifies a legal doctrine almost as old as the U.S. itself, which was first articulated in McCulloch v. Maryland.  McCulloch bars most taxation by one sovereign of the employees of another.  The intergovernmental tax immunity doctrine came to be understood to bar only discriminatory taxes and was codified into §111 in 1938.

Next, the Court noted that the parties agreed that there were no significant differences between Mr. Dawson’s former job responsibilities and those of the tax-exempt state law enforcement retirees. The State attempted to justify its disparate treatment of retired federal law enforcement officers by pointing out that the favored class of State employees is very small. But the Court stated that § 111 disallows any state tax that discriminates against a federal employee.

The State also argued that the exemption was not applied in a discriminatory manner because not all state law enforcement officers received it. Again, the Court was unpersuaded. According to the Court, the question isn’t whether federal retirees are similarly situated to state retirees who don’t receive a tax benefit. Instead, the relevant inquiry is whether they are similarly situated to state retirees who do receive the benefit. Ultimately, the Court reversed the judgment of the West Virginia Supreme Court of Appeals and remanded the case for a determination of the appropriate remedy in light of its ruling.

There are a number of appeals pending before the West Virginia Office of Tax appeals similar to those at issue in Dawson, which have been held in abeyance pending the Supreme Court’s decision. In light of the Court’s ruling, the Office of Tax Appeals recently sent out notices to all appellants stating that it was awaiting guidance from the Tax Commissioner regarding precisely how to proceed in light of the Dawson opinion.


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