Weiss v. McFadden ( 2003 )

Jim Hannah, Justice.

The Arkansas Department of Finance and Administration (“DFA”) appeals an order of the Pulaski County Circuit Court granting partial summary judgment. The trial court found that the State violated Amendment 47 to the Arkansas Constitution when it attempted to tax benefits paid under an individual retirement account or a public or private employment related retirement system, plan or program (“retirement plan”), where the benefit taxed after-tax contributions being returned to the contributee.

This case involves only that portion of a retirement plan payment identified by the parties as the return of after-tax contributions to the plan beneficiary. In other words, what is at issue is whether a contributee who has paid income tax on the contribution made to the plan may be compelled to pay income tax on that same contribution later when the contribution is returned from the plan to the contributee. DFA agrees that the contribution is being subjected to income tax twice but argues that is the legislative intent. We note that pre-tax contributions on which no income tax was ever paid by the contributee, employer contributions on which no income tax was ever paid by the contributee, and the gain produced over the years by the retirement plan on which no income tax was ever paid by the contributee are not at issue in this case.

Appellee taxpayers represent all taxpayers who have made after-tax contributions to retirement plans, and the action was brought to protect against the State taxing the receipt of after-tax contributions from retirement plans as income. DFA argues that under Ark. Code Ann. § 26-51-307 (Supp. 2001), the legislature has declared that the return of retirement plan after-tax contributions to a retiree is income. DFA further argues that the after-tax contributions are not property subject to the protection of Amendment 47. Appellee taxpayers asserted that the after-tax contributions constitute property, not income, and are thus not subject to income tax. Appellee taxpayers further argue that the attempt to levy a tax on the after-tax contributions constitutes an attempt by the State to levy an ad valorem tax on property in violation of Amendment 47 to the Arkansas Constitution.

We hold that when after-tax contributions to a retirement plan are returned to the retiree, that return is recovery of capital, which is not income. We further hold that the attempt to levy a value-based tax on the after-tax contributions constitutes an illegal exaction in that the State is attempting to levy a tax in violation of Amendment 47 to the Arkansas Constitution.

Jurisdiction properly lies in this court because the case requires the interpretation or construction of the Arkansas Constitution. Ark. Sup. Ct. R. l-2(a)(l) (2003).

Facts

Appellee taxpayers brought an illegal-exaction suit under article 16, section 13, of the Arkansas Constitution, alleging the case was a class action as a matter of law. Appellee taxpayers set out their class as taxpayers who have contributed after-tax contributions to a retirement plan. The class members made after-tax contributions to a retirement plan during the course of their careers. Now that they have retired, the retirees receive retirement benefits that they assert include a return of after-tax contributions. No attempt has been made by the parties to lay out the retirement plans or otherwise show what portion of benefits received is comprised of after-tax contributions.¹ Rather, the parties agree that some portion of the benefits is return of after-tax contributions, and the issue presented is simply whether the after-tax contributions returned constitute property or income.

The partial summary judgment did not resolve all the issues in this case. The circuit court certified this appeal pursuant to Rule 54 of the Arkansas Rules of Civil Procedure.

Standard of Review

Summary judgment is granted only when it is clear that there are no genuine issues of material fact to be litigated, and the party is entitled to judgment as a matter of law. Spears v. City of Fordyce, 351 Ark. 305, 92 S.W.3d 38 (2002). Once a moving party has established a prima facie entitlement to summary judgment, the opposing party must meet proof with proof and demonstrate the existence of a material issue of fact. Id. Upon review in this court, we determine if summary judgment was appropriate based on whether the evidentiary items presented by the moving party in support of the motion leave a material fact unanswered. Id. We view the evidence in a light most favorable to the party against whom the motion was filed, resolving all doubts and inferences against the moving party. Id.

After-Tax Contributions

DFA alleges that returned after-tax contributions are income subject to state income tax. DFA cites Ark. Code Ann. § 26-51-307 (Supp. 2001), which discusses retirement or disability benefits and provides:

(a) (1) The first six thousand dollars ($6,000) of benefits received by any resident of this state from an individual retirement account or the first six thousand dollars ($6,000) of retirement benefits received by any resident of this state from public or private employment-related retirement systems, plans, or programs, regardless of the method of funding for these systems, plans, or programs, shall be exempt from the state income tax.

(2) Only individual retirement account benefits received by an individual retirement account participant after reaching the age of fifty-nine and one-half (59 V2) years qualify for the exemption. The only other distributions or withdrawals from an individual retirement account that qualify for the exemption before the individual retirement account participant reaches the age of fifty-nine and one-half (59 V2) years are those made on account of the participant’s death or disability. All other premature distributions or early withdrawals including, but not limited to, those taken for medical-related expenses, higher education expenses, or a first-time home purchase do not qualify for the exemption.

(b) (1)(A) Except as provided in subdivision (b)(2) of this section, the exemption provided for in subsection (a) of this section for benefits received from an individual retirement account or from a public or private employment-related retirement system, plan, or program shall be the only exemption from the state income tax allowed for benefits received from an individual retirement account or from any publicly or privately supported employment-related retirement system, plan, or program, excepting only benefits received under systems, plans, or programs which are by federal law exempt from the state income tax.

(B) No taxpayer shall receive an exemption greater than six thousand dollars ($6,000) during any tax year under the provisions of this section.

(2) The provisions of this section shall not apply to retirement or disability benefits received under a plan, system, or fund described in § 26-51-404(b)(7).

(c) No recipient of benefits from an individual retirement account or from public or private employment-related retirement systems, plans, or programs shall be allowed to deduct or recover bis cost of contribution in the plan when computing his income for state income tax purposes.

(d) An individual who is sixty-five (65) years of age or older and who does not claim an exemption under subsection (a) of this section shall be entided to an additional state income tax credit of twenty dollars ($20.00). This credit is in addition to all other credits allowed by law.

DFA also cites Ark. Code Ann. § 26-51-404(b) (24)(B) (Supp. 2001), which provides:

Annuity income received through an employment-related retirement plan shall not be subject to the provisions of § 26-51-404(b). The income shall instead be subject to the retirement income provisions of § 26-51-307.

This case involves arguments about the meaning of statutes. When reviewing issues of statutory interpretation, we keep in mind that the first rule in considering the meaning and effect of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning in common language. Cave City Nursing Home, Inc. v. Arkansas Dep’t of Human Servs., 351 Ark. 13, 21-22, 89 S.W.3d 884 (2002); Yamaha Motor Corp., U.S.A. v. Richard’s Honda Yamaha, 344 Ark. 44, 38 S.W.3d 356 (2001). When the language of a statute is plain and unambiguous, there is no need to resort to rules of statutory construction. Cave City, supra; Burcham v. City of Van Buren, 330 Ark. 451, 954 S.W.2d 266 (1997). A statute is ambiguous only where it is open to two or more constructions, or where it is of such obscure or doubtful meaning that reasonable minds might disagree or be uncertain as to its meaning. ACW, Inc. v. Weiss, 329 Ark. 302, 947 S.W.2d 770 (1997). When a statute is clear, however, it is given its plain meaning, and this court will not search for legislative intent; rather, that intent must be gathered from the plain meaning of the language used. Ford v. Keith, 338 Ark. 487, 996 S.W.2d 20 (1999). This court is very hesitant to interpret a legislative act in a manner contrary to its express language, unless it is clear that a drafting error or omission has circumvented legislative intent. Id.

We also note that this case includes an argument that the tax as applied to after-tax contributions constitutes a violation of the Arkansas Constitution. In Reinert v. State, 348 Ark. 1, 71 S.W.3d 52 (2002), we stated:

Statutes are presumed constitutional, and the burden of proving otherwise is on the challenger of the statute. Bunch v. State, 344 Ark. 730, 43 S.W.3d 132 (2001); Ford v. Keith, 338 Ark. 487, 996 S.W.2d 20 (1999). If it is possible to construe a statute as constitutional, we must do so. Jones v. State, 333 Ark. 208, 969 S.W.2d 618 (1998). Because statutes are presumed to be framed in accordance with the Constitution, they should not be held invalid for repugnance thereto unless such conflict is clear and unmistakable. Kellar v. Fayetteville Police Department, 339 Ark. 274, 5 S.W.3d 402 (1999) (citing Board of Trustees of Mun. Judges & Clerks Fund v. Beard, 273 Ark. 423, 426, 620 S.W.2d 295, 296 (1981)).

Reinert, 348 Ark. at 4.

First, with regard to statutory interpretation, the statutes in question are plain and unambiguous. We will therefore give the statutes their plain meaning. Section 26-51-307(c) clearly provides that cost of contributions to a retirement plan may not be deducted in computing income for State tax purposes. Section 26-51-404(b) (24) (B) provides that annuity income from retirement plans is subject to section 26-51-307 rather than section 26-51-404(b). As noted, a retirement plan could contain pre-tax contributions upon which no income tax has ever been paid; employer contributions upon which no income tax has ever been paid; after-tax contributions upon which income tax has been paid; and the gain from pretax contributions and after-tax contributions upon which no income tax has ever been paid. The above quoted statutes speak to income. The question is narrow — whether after-tax contributions returned to the taxpayer constitute income.

The State argues that the after-tax contributions are income when returned to a retiree based on paragraph (c) of section 26-51-307, which specifically forbids a taxpayer from deducting or recovering his cost of contribution in the plan when computing income. Section 26-51-404(b)(24)(B) likewise discusses annuity income from retirement plans. We also note that DFA argues that the $6000 exemption of Ark. Code Ann. § 26-51-307(a)(1) shields the after-tax contributions from taxation, which DFA argues results in only actual income or gain on retirement plans being taxed. Section 26-51-307 makes no mention of after-tax contributions. Section 26-51-307(a)(l) provides a $6000 exemption for the first $6000 of income received under a retirement plan.

Income

In Arkansas, a tax is imposed on the entire income of every resident. Ark. Code Ann. § 26-51-201 (Repl. 1997). Gross income is defined, in part, as “gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind. . .or dealings in property, whether real or personal, growing out of the ownership of, use of, or interest in the property; also from interest, rent, royalties, dividends, annuities. . . .” Ark. Code Ann. § 26-51-404(a)(l) (Supp. 2001). Currently, the income or gain generated by an employment related retirement plan is income. Ark. Code Ann. § 26-51-404(b)(24)(B).

Income is not defined under the Arkansas Income Tax Act of 1929. In a decision predating the 1929 Income Tax Act, Justice Hart, in a concurring opinion in Sims v. Ahrens, 167 Ark. 557, 271 S.W. 720 (1925), cited several cases from foreign jurisdictions and stated that income for purposes of income taxation income “may be defined as the gain derived from capital, from labor, or. from both combined.” Sims, 167 Ark. at 592. Although this definition offered by Justice Hart is now almost eighty years old, the definition remains consistent with how other States define income. In Holt v. New Mexico Department of Taxation & Revenue, 133 N.M. 11, 59 P.3d 491 (2002), the New Mexico Supreme Court stated:

Some courts have turned to dictionary definitions of the word “income” in order to address similar arguments, defining income as “a gain or recurrent benefit usu[ally] measured in money that derives from capital or labor.” Lucero v. Comm’r of Revenue, No. 7404 R, 2002 WL 1732987, at 3 (Minn. T.C. July 24, 2002) (quotation marks and quoted authority omitted) (alteration in original). “Wages, by common definition, constitute payment for employment services. . . . See, e.g., Black’s Law Dictionary 766, 1573 (7th ed.1999) (defining ‘income’ as ‘payment that one receives . . . from employment’ and ‘wage’ as ‘Payment for labor or services’).” Snyder v. Ind. Dep’t of State Revenue, 723 N.E.2d 487, 490 (Ind. T.C.2000) (citation omitted) (second omission in original), cert. denied, 735 N.E.2d 233 (Ind.2000). Finally, as discussed below, “income” is an extremely broad term defined by context. Income, in the context of taxes, includes within its definition employment wages and salaries, as well as “gains derived from dealings in property,” interest, rents, and royalties, among many other categories. Section 61.

Holt, 59 P.3d at 495. See also Mayer & Schweitzer, Inc. v. Director, Div. of Taxation 20 N.J.Tax 217 (N.J. Tax 2002). Income is gain derived from capital. Waite v. Waite, 21 S.W.3d 48 (Mo. Ct. App. E.D. 2000); Sims, supra. Income is also gain derived from labor. Sims, supra.

Taxation of Gain

Justice Hart, in his concurring opinion in Sims, went on to state:

A tax on income, as thus defined and ascertained, is not a property tax. The income or gain thus derived from capital, from property, from labor, or from both combined, because of its fluctuating and indeterminate nature, during this period and process of its making, has not yet become an investment or an increment to the permanent wealth or property of the individual who has to pay the tax, and therefore it is not a property tax.

Sims, 167 Ark. at 593. Where gain from labor or capital has not become an investment or, in other words, a permanent addition to the wealth of a person, it is income subject to taxation. However, as DFA noted, in Stanley v. Gates, 179 Ark. 886, 19 S.W.2d 1000 (1929), this court stated this quite clearly:

It has been well said that ‘a tax on incomes is not a tax on property, and a tax on property does not embrace incomes.’ Hence a majority of the court holds that ‘property,’ as the term is used in art. 16, § 5, of the Constitution, means the property itself as distinguished from the annual gain or revenue from it.

Stanley, 179 Ark. at 893-94. Property is to be distinguished from gain or, in other words, income.² Justice Hart, in his concurring opinion in Sims, supra, cited Waring v. Savannah, 60 Ga. 93 (1878), wherein the Georgia Supreme Court stated, “The fact is, property is a tree; income is the fruit; labor is a tree; income is the fruit; capital is a tree; income is the fruit.” Waring, 60 Ga. at 6.

The after-tax contributions were made with after-tax or net income, and “net income, after expenses are paid, becomes property when invested, or if it be money lying in a bank, or locked up at home.” Waring, 60 Ga. at 99. DFA characterizes the after-tax contributions as income when they are returned to the contributees; however, that characterization does not alter the fact that the after-tax contributions simply are not income subject to income taxation. In Benua v. City of Columbus, 170 Ohio 64, 68-69, 162 N.E.2d 467 (1959), the Ohio Supreme Court stated that “a tax levied on account of ownership of intangible property does not become an income tax simply because the amount of the tax is determined from or based on the income thereof.” See also Von Ruden v. Miller, 231 Kan. 1, 642 P.2d 91 (1982). In other words, just because the State chooses to characterize a tax as an income tax does not make it an income tax. The after-tax contributions are property or, in other words, capital that is to be distinguished from the gain from the capital. See Stanley, supra.³

In the present case, the taxpayers have already paid federal and state income taxes on the money contributed to the retirement plan. Money that a taxpayer has paid state and federal income taxes on is property owned by the taxpayer. The taxpayers are simply receiving their own property when the after-tax contributions are returned. There are no tax consequences for recovery of capital. Berkley v. Gavin, 756 A.2d 248, (Conn. 2000).⁴ In Stanley, we explained that “‘property,’ as the term is used in art. 6, § 15, of the Constitution, means property itself as distinguished from the annual gain or revenue from it.” 179 Ark. at 893-94. Clearly, this court has recognized and characterized what is property and what is income. Stanley, supra; Sims, supra. The gain or revenue from the property is to be distinguished from the property. Stanley, 179 Ark. at 893-94.

We conclude that the return of after-tax contributions is recovery of capital, and that such contributions are property, not income or gain. Therefore, they are not subject to income taxes.

Amendment 47

Amendment 47 to the Arkansas Constitution prohibits the State from levying an ad valorem tax on property. An ad valorem tax taxes property found in the State. Arco Auto Carriers v. Bennett, 232 Ark. 779, 341 S.W.2d 15 (1960) appeal dismissed and cert. denied, 365 U.S. 770 (1961). An ad valorem is a tax on the value of property. Borchert v. Scott, 248 Ark. 1041, 460 S.W.2d 28 (1970). At issue in this case is taxation of money invested by the contributee in a retirement plan. Money is intangible personal property. Michigan Nat. Bank v. Department of Treasury, 127 Mich. App. 646, 339 N.W.2d 515 (1983); see also First South, P.A. v. Yates, 286 Ark. 82, 689 S.W.2d 532 (1985). If Ark. Code Ann. §26-51-201 (Repl. 1997) were applied to the return of the after-tax contributions as DFA requests, then the tax would be an amount calculated on a percentage of the amount of money returned, or in other words, it would be a tax based on the value of the money returned. That would make it an ad valorem tax. DFA asserts, however, that a tax under Ark. Code Ann. § 26-51-201 is an income tax because the legislature says it is an income tax. However, because the money returned is after-tax funds, or in other words, recovery of capital by the taxpayer, it is not income, and the attempted taxation of the recovered capital cannot be an income tax. In Dawson v. Kentucky Distilleries, Co., 255 U.S. 288 (1921), the United States Supreme Court stated that in federal taxation, “[t]he name by which the tax is described in the statute is, of course, immaterial. Its character must be determined by its incidents.” Dawson, 255 U.S. at 292. Similarly, in the present case, the tax is not transformed into a lawful income tax just because the State asserts it is an income tax. The tax the DFA attempts to collect is a tax based on the value of property or, in other words, an ad valorem tax. Amendment 47 to the Arkansas Constitution prohibits the State from levying an ad valorem tax on property. The conflict with respect to the application of Ark. Code Ann. § 26-51-307 to after-tax contributions returned to retirees is clear and unmistakable, and therefore unconstitutional. Reinert, supra.

Affirmed.

Thornton, J., dissents. Corbin, J., not participating.

1 The dissent mistakenly attempts to argue about the nature and terms of retirement plans. There is utterly no evidence before this court regarding the nature or the terms of any retirement plan. We are presented with the very simple issue of whether after-tax contributions returned to contributees constitutes income subject to income tax or property. The dissent attempts to argue matters outside the record which this court has stated repeatedly it will not do. Rothbaum v. Arkansas Local Police, 346 Ark. 171, 55 S.W.3d 760 (2001). Additionally, the dissent attempts to analyze the issues in this case as if the only retirement plans involved are plans whereby a person makes minimum contributions to receive a lifetime contractual right to benefits. The statute speaks to “public or private employment-related retirement systems, plans, or programs. . . .” Ark. Code Ann. § 26-51-307(c). Where some plans might involve extinction of any interest in the plan upon death of the contributee, others would not.

2 The dissent fails to distinguish between property and gain or income, discussing instead an “income stream.” Income stream as used by the dissent simply characterizes the amount that is received and fails to make the required distinction between property and gain.

3 The dissent fails to understand the distinction between income and property. The dissent asserts that a contributee who has paid a lower tax or no tax on his or her contributions because of his or her financial situation at the time the contributions were made would have to pay income tax on the contribution when it was returned. The dissent is wrong. What is at issue in this case is only the after-tax contributions, or in other words, contributions of the person’s own property. If the person did not owe taxes on the money when earned, the money is his or her property when contributed, and property, or recovery of capital, is not subject to taxation as income when returned.

4 We note that under the federal tax laws, the employee who has paid taxes on contributions will recover his or her contribution as non-taxable in different ways depending on the nature of the retirement plan. See Malbon v. U.S., 846 F. Supp. 900 (1994).