                        STATE OF WEST VIRGINIA

                      SUPREME COURT OF APPEALS

Dale W. Steager, as
State Tax Commissioner of West Virginia,                                  FILED
Respondent Below, Petitioner                                            May 17, 2017
                                                                          released at 3:00 p.m.
vs)     No. 16-0441 (Mercer County 15-C-326)                            RORY L. PERRY II, CLERK
                                                                      SUPREME COURT OF APPEALS
                                                                           OF WEST VIRGINIA
James Dawson and
Elaine Dawson,
Petitioners Below, Respondents

                         MEMORANDUM DECISION
                                                                                            1
       The Tax Commissioner for the State of West Virginia, petitioner Dale W. Steager,
by counsel Katherine Schultz and L. Wayne Williams, appeals a March 31, 2016, order
of the Circuit Court of Mercer County. In that order, the circuit court held that a tax
exemption available only to beneficiaries of certain state retirement plans unlawfully
discriminated against certain federal retirees. The taxpayer-respondents, James and
Elaine Dawson, by counsel Michael W. Carey and David R. Pogue, filed a response in
favor of the circuit court’s order. The Tax Commissioner filed a reply.

       The Court has considered the parties’ briefs and oral arguments, as well as the
record on appeal. Upon consideration of the standard of review and existing precedent,
the Court finds no substantial question of law. This case satisfies the “limited
circumstances” requirement of Rule 21(d) of the Rules of Appellate Procedure and is
appropriate for a memorandum decision rather than an opinion. A memorandum decision
reversing the circuit court’s order is therefore appropriate under Rule 21 of the Rules of
Appellate Procedure.

       Since 1939, Congress has permitted states to tax the income and the retirement
benefits of former United States government employees. However, Congress allows state
taxes upon federal retirement benefits only “if the taxation does not discriminate . . .
because of the source of the pay or compensation.” 4 U.S.C. § 111 [1998].

       West Virginia imposes taxes upon the government-provided retirement income of
most local, state and federal employees who reside in this state. West Virginia taxes the
income of retired local and state employees received from the West Virginia Public

        1
            Mr. Steager replaced Mark W. Matkovich as Tax Commissioner in January
2017.
                                            1

Employees Retirement System (“PERS”) and the State Teachers Retirement System
(“TRS”); it also taxes the income of retired federal employees received from any federal
or military retirement system. W.Va. Code § 11-21-12(c)(5) [2006]. However, West
Virginia law permits the recipients of PERS, TRS, or a general federal retirement to
                                                                              2
exempt up to $2,000 of retirement benefits from their taxable income. Id. The law
permits recipients of military retirement benefits to exempt up to $20,000. W.Va. Code §
11-21-12(c)(7)(B). Furthermore, any taxpayer aged 65 or older may exempt up to $8,000
from their taxable income, regardless of the source of that income. W.Va. Code § 11-21­
12(c)(8).

       At issue in this case is a unique tax exemption contained in West Virginia Code §
11-21-12(c)(6) (“Section 12(c)(6)”). Section 12(c)(6) allows the recipients of four small
West Virginia retirement plans to exempt from their taxable state income all the benefits
received from those plans. According to the Tax Commissioner, the recipients comprise
approximately two percent of all state government retirees. The four retirement plans are
the Municipal Police Officer and Firefighter Retirement System (“MPFRS”); the Deputy
Sheriff Retirement System (“DSRS”); the State Police Death, Disability and Retirement
Fund (“Trooper Plan A”); and the West Virginia State Police Retirement System
(“Trooper Plan B”).3

       The taxpayer in this case is James Dawson, who worked most of his career as a
deputy U.S. Marshal before being presidentially appointed U.S. Marshal for the Southern
District of West Virginia. Mr. Dawson retired from the U.S. Marshals Service on March
31, 2008. During his employment, Mr. Dawson was enrolled exclusively in the Federal
Employee Retirement System (“FERS”), and he now receives benefits from FERS. The
Tax Commissioner agrees that Mr. Dawson is entitled to exempt at least $2,000 of FERS


      2
         W.Va. Code § 11-21-12(c)(5) provides, in pertinent part, that a taxpayer may
exempt from adjusted gross income “the first two thousand dollars of benefits received
under any federal retirement system to which Title 4 U.S.C. § 111 applies[.]”
       3
         W.Va. Code § 11-21-12(c)(6) provides:
       (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[.]
                                           2

income from his state taxable income; when he reaches the age of 65, he may exempt up
to $8,000. See W.Va. Code §§ 11-21-12(c)(5) and -12(c)(8).

        For tax years 2010 and 2011, Mr. Dawson and his wife Elaine filed amended tax
returns claiming an adjustment exempting Mr. Dawson’s FERS retirement income from
state income tax pursuant to Section 12(c)(6). The Tax Commissioner refused to allow
the Dawsons to claim the exemption.

       The Dawsons appealed, and in a hearing before the Office of Tax Appeals asserted
that there is no significant difference between state, local, and federal law enforcement
officers. Accordingly, the Dawsons contended that the Tax Commissioner’s preferential
treatment of the retirement income of some (but not all) state and local law enforcement
officers pursuant to Section 12(c)(6) was, in fact, discrimination against federal law
enforcement officers prohibited by 4 U.S.C. § 111. The Tax Commissioner countered
that, under the totality of the circumstances, the Section 12(c)(6) exemption was not
designed to discriminate against federal retirees; rather, the intent of the exemption is to
give a benefit to a very narrow class of former state and local employees. The Office of
Tax Appeals rejected the Dawsons’ argument and affirmed the Tax Commissioner’s
denial of the Section 12(c)(6) exemption.

       The Dawsons appealed to the Circuit Court of Mercer County, and the parties
repeated their arguments. In an order dated March 31, 2016, the circuit court reversed the
decision of the Office of Tax Appeals. The circuit court concluded that the Tax
Commissioner’s denial of the Section 12(c)(6) exemption to the Dawsons violated 4
U.S.C. § 111. The Tax Commissioner now appeals the circuit court’s order.

        The issues raised by the parties involve the interpretation of Section 12(c)(6), and
an assessment of whether it conflicts with 4 U.S.C. § 111. “Where the issue on an appeal
from the circuit court is clearly a question of law or involving an interpretation of a
statute, we apply a de novo standard of review.” Syllabus Point 1, Chrystal R.M. v.
Charlie A.L., 194 W.Va. 138, 459 S.E.2d 415 (1995). See also, Syllabus Point 1,
Appalachian Power Co. v. State Tax Dep’t of W.Va., 195 W.Va. 573, 466 S.E.2d 424
(1995) (“Interpreting a statute or an administrative rule or regulation presents a purely
legal question subject to de novo review.”). We review the factual findings and
conclusions of the Tax Commissioner under a clearly wrong and abuse of discretion
standard. Syllabus Point 5, Frymier-Halloran v. Paige, 193 W.Va. 687, 458 S.E.2d 780
(1995). “The ‘clearly wrong’ and the ‘arbitrary and capricious’ standards of review are
deferential ones which presume an agency’s actions are valid as long as the decision is
supported by substantial evidence or by a rational basis.” Syllabus Point 3, In re Queen,
196 W.Va. 442, 473 S.E.2d 483 (1996).

       The Tax Commissioner asserts that the circuit court erred in holding that Section
12(c)(6) was an intentionally discriminatory tax against federal marshals. The Tax

                                             3

Commissioner argues that the circuit court failed to take into account the fact that there is
no evidence in the record to suggest that Section 12(c)(6) was intended to discriminate
against employees or former employees of the federal government. Viewing West
Virginia’s tax scheme in totality, the Tax Commissioner contends that the record shows
there was no calculated scheme or blanket plan to discriminate against retired federal
marshals based on the source of their income. As we explain below, we agree and
reverse the circuit court’s holding.

       In Davis v. Michigan Dept. of Treasury, 489 U.S. 803 (1989), the United States
Supreme Court analyzed 4 U.S.C. § 111 and discussed its roots in the doctrine of
intergovernmental tax immunity. The doctrine traces back to McCullough v. Maryland,
17 U.S. 316 (1819), the seminal case where the Supreme Court recognized that Congress
was constitutionally empowered to create a “Bank of the United States,” and held that the
state of Maryland could not impose a discriminatory tax on the Bank. “Chief Justice
Marshall’s opinion for the Court reasoned that the Bank was an instrumentality of the
Federal Government used to carry into effect the Government’s delegated powers, and
taxation by the State would unconstitutionally interfere with the exercise of those
powers.” Davis, 489 U.S. at 810.4

        “[I]ntergovernmental tax immunity is based on the need to protect each
sovereign’s governmental operations from undue interference by the other.” Id. at 814.
Prior to 1939, the “salaries of most government employees, both state and federal,
generally were thought to be exempt from taxation by another sovereign under the
doctrine of intergovernmental tax immunity.” Id. “This rule ‘was based on the rationale
that any tax on income a party received under a contract with the government was a tax
on the contract and thus a tax “on” the government because it burdened the government’s
power to enter into the contract.’” Id. at 811 (quoting South Carolina v. Baker, 485 U.S.
505, 518 (1988)). However, Congress enacted the “Public Salary Tax Act of 1939” (of
which 4 U.S.C. § 111 is a part) “to impose federal income tax on the salaries of all state
and local government employees,” Davis, 489 U.S. at 810, and also to expressly permit
states to tax the salaries of federal employees. Id. at 811.5



       4
         The intergovernmental tax immunity doctrine is founded upon the Supremacy
Clause (Article VI) of the United States Constitution which provides, in part: “This
Constitution, and the laws of the United States which shall be made in pursuance thereof;
and all treaties made, or which shall be made, under the authority of the United States,
shall be the supreme law of the land[.]”
       5
          Congress adopted the Public Salary Tax Act contemporaneously with the
Supreme Court’s decision in Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939),
which held that a state could levy non-discriminatory income taxes upon a federal
employee. Davis, 489 U.S. at 811-812.
                                             4

        The Supreme Court found, however, that Congress “did not waive all aspects of
intergovernmental tax immunity[.]” Id. at 812. The final clause of 4 U.S.C. § 111
provides, “The 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.” This clause prohibits “state taxes that discriminate against federal
employees on the basis of the source of their compensation.” Davis, 489 U.S. at 811.
The Supreme Court concluded that this clause embodies “the modern constitutional
doctrine of intergovernmental tax immunity.” Id. at 813. Under the doctrine, if a heavier
tax burden is imposed upon a class of individuals who deal with the federal government
than is imposed upon those individuals who deal with state government, then “the
relevant inquiry is whether the inconsistent tax treatment is directly related to, and
justified by, ‘significant differences between the two classes.’” Id. at 815-816 (quoting
Phillips Chemical Co. v. Dumas Independent School Dist., 361 U.S. 376, 383 (1960)).

       In Davis, the Supreme Court considered a Michigan state tax scheme under which
“the retirement benefits of retired state employees are exempt from state taxation while
the benefits received by retired federal employees are not.” Davis, 489 U.S. at 806. The
Supreme Court specifically identified the state scheme as a “blanket exemption[.]” Id. at
817. The Supreme Court had “no difficulty” concluding that federal retirement benefits
are a form of compensation protected from discrimination under 4 U.S.C. § 111. Id. at
808-809. More importantly, the Supreme Court concluded that the blanket state tax
exemption was precluded by 4 U.S.C. § 111 because it “violates principles of
intergovernmental tax immunity by favoring retired state and local government
employees over retired federal employees.” Id. at 817.

       Several years later, this Court was presented with an opportunity to apply Davis
and 4 U.S.C. § 111 to the exemption contained in Section 12(c)(6). In Brown v. Mierke,
191 W.Va. 120, 443 S.E.2d 462 (1994), the taxpayers were retirees from the armed forces
of the United States who received military pensions.6 As recipients of a military pension,
the Tax Commissioner agreed that the taxpayers were entitled to exempt at least $2,000
of pension income from their state taxable income; if they were over age 65, they could
exempt up to $8,000. 191 W.Va. at 121, 443 S.E.2d at 463 (citing W.Va. Code §§ 11-21­
12(c)(5) and -12(c)(9)).7 The taxpayers, however, claimed they were entitled to exempt
all of their pension income from state taxation under Section 12(c)(6). The taxpayers
argued, “West Virginia’s exemption of certain firefighters’ and police officers’ retirement


      6
         In Barker v. Kansas, 503 U.S. 594 (1992), the Supreme Court held that federal
military retirement benefits are protected from discrimination under 4 U.S.C. § 111.
       7
         Subsequent to our decision in Brown, and effective after the 2002 tax year, the
recipients of military retirement income may exempt up to $20,000 from their taxable
income. W.Va. Code § 11-21-12(c)(7)(B).
                                            5

benefits renders the tax of military pensions prohibited and discriminatory.” 191 W.Va.
at 123, 443 S.E.2d at 465.

        This Court rejected the taxpayers’ argument in Brown. We noted that in cases
where the Supreme Court had found a state tax exemption improperly discriminated
against federal retirees under 4 U.S.C. § 111 – such as the Michigan exemption for all
state retirees in Davis – the state had afforded a blanket exemption to all state retirees.
Our analysis of Section 12(c)(6) turned on the fact that West Virginia’s tax law “exempts
a narrow class of state employees from state taxation while taxing federal employees.”
191 W.Va. at 124, 443 S.E.2d at 466 (emphasis added).

       Applying Davis, we recognized in Brown that “the test of whether a state tax
scheme violates 4 U.S.C. § 111 is whether there exists substantial differences between the
two classes that justify the discrimination.” Id. We concluded, however, that West
Virginia’s limited, multi-tiered series of tax exemptions differed from the “schemes
invalidated by the Supreme Court in that there is no intent in the West Virginia scheme to
discriminate against federal retirees; rather, the intent is to give a benefit to a very narrow
class of former state and local employees.” Id. Summarizing the law, we found in
Syllabus Point 2:

              Challenges to a state tax scheme under 4 U.S.C. § 111 can succeed
       only when one purpose of the challenged scheme is shown to discriminate
       against the officer or employee because of the source of pay or
       compensation. In determining whether such discrimination exists, a court
       will look to the totality of the circumstances to ascertain whether the intent
       of the scheme is to discriminate against employees or former employees of
       the federal government.

191 W.Va. at 121, 443 S.E.2d at 463.

        The Brown Court upheld Section 12(c)(6) and found it did not violate 4 U.S.C. §
111 and the doctrine of intergovernmental tax immunity. The ruling turned on the
totality of the circumstances. First, the record in Brown indicated that (as of 1991) 1,624
retired police and firefighters were exempt from taxation by Section 12(c)(6) – “about
four percent of all state and local retirees in West Virginia.” 191 W.Va. at 121, 443
S.E.2d at 463. Furthermore, an analysis of the entire scheme of tax exemptions showed
no intent to discriminate against former employees of the federal government:

              [T]hree facts conclusively demonstrate that no calculated scheme or
       plan exists to discriminate against retired military personnel based on the
       source of their income: (1) retired military personnel are treated more
       favorably than West Virginians who have retired from civilian occupations;
       (2) retired military personnel are treated equally with all persons retired
       from the West Virginia Public Employees Retirement System and the West
                                              6
       Virginia Teachers Retirement System; and (3) along with state public
       employees and teachers, military retirees are treated substantially more
       favorably than persons retired from the West Virginia Judicial Retirement
       System.

191 W.Va. at 125, 443 S.E.2d at 467. As further evidence of a lack of discriminatory
intent, the Court noted:

               That the judges of this Court, statewide elected officials with rather
       substantial personal political followings and not a few friends in the West
       Virginia Legislature, are taxed at a substantially higher rate than retired
       members of the Armed Forces of the United States, and both military
       retirees and the majority of retired state employees are taxed at lower rates
       than West Virginians retired from private sector occupations renders it
       extraordinarily difficult to infer that any of the pernicious dynamics that
       either the ancient doctrine of intergovernmental tax immunity or 4 U.S.C. §
       111 are designed to remedy is implicated.

191 W.Va. at 125-26, 443 S.E.2d at 467-68.

       We now turn to the circumstances of this case. Section 12(c)(6) exempts from
state taxation the retirement income of many state and local firefighters and law
enforcement officers, but not federal marshals. The taxpayer, Mr. Dawson, asserts that
there are no significant differences between the powers and duties of state and local law
enforcement officers and those of federal marshals. Mr. Dawson contends that this
inconsistent tax treatment is proscribed by 4 U.S.C. § 111 because, as the Supreme Court
said in Davis, it is not “directly related to, and justified by, significant differences
between the two classes.” 489 U.S. at 815-816.

        The Tax Commissioner counters that the exemption at issue in Davis was a global
or blanket exemption: the Davis tax exemption applied to all state retirees but no federal
retirees. In this case, the tax exemption in Section 12(c)(6) applies to a narrow but
diverse class of state retirees. Of 53,184 total state government retirees in 2010, less than
two percent are eligible for the exemption. For example, the Tax Commissioner showed
that in 2010, only 260 retired deputy sheriffs (less than 0.5% of all state retirees) received
a pension from the DSRS and were entitled to use the Section 12(c)(6) exemption. An
unknown number of other deputy sheriffs, all of whom started working before the DSRS
was established in 1998, cannot use the Section 12(c)(6) exemption because they are
among the 22,040 retirees receiving a pension from PERS. The Tax Commissioner also
showed some state retirement plans provide cost of living increases (like Trooper Plan A
or Plan B) while some do not (like MPFRS or DSRS). Some state retirees have
contributed to and therefore receive social security (DPRS) while some do not (Trooper
Plans A and B). Further, the exemption in Section 12(c)(6) applies to firefighters, but not

                                              7

to emergency medical technicians or paramedics.8 The Section 12(c)(6) exemption also
does not apply to law enforcement officers employed by the Department of Natural
Resources9 or by the Capitol Police.10

       It is well settled that tax exemptions are strictly construed against the taxpayer.
Where a person claims an exemption from a law imposing a tax, the law is strictly
construed against the person claiming the exemption. Syllabus Point 2, State ex rel.
Lambert v. Carman, 145 W.Va. 635, 116 S.E.2d 265 (1960) (“Where a person claims an
exemption from a law imposing a license or tax, such law is strictly construed against the
person claiming the exemption.”); Syllabus Point 3, Owens-Illinois Glass Co. v. Battle,
151 W.Va. 655, 154 S.E.2d 854 (1967) (“Where a person claims an exemption from a
law imposing a tax, such law must be construed strictly against the person claiming the
exemption.”). Under Syllabus Point 2 of Brown, the Dawsons were required to establish
that the tax scheme established by Section 12(c)(6) discriminates against a federal retiree
because of the source of his or her income. However, in determining whether such
discrimination exists, this Court “will look to the totality of the circumstances to ascertain
whether the intent of the scheme is to discriminate against employees or former
employees of the federal government.” Id.

        In light of the totality of the circumstances, and the totality of the structure of West
Virginia’s tax and retirement scheme, Section 12(c)(6) did not discriminate against Mr.
Dawson. The intent of the exemption contained in Section 12(c)(6) was to give a benefit
to a narrow class of state retirees. The record conclusively demonstrates that Mr.
Dawson received more favorable tax treatment than state civilian retirees, whose status as
retirees affords them no special exemption. Unlike state civilian retirees, federal retirees
like Mr. Dawson are allowed to exempt $2,000 from their taxable income. W.Va. Code §
11-21-12(c)(5). Mr. Dawson also received more favorable tax treatment than retired state
justices and circuit judges, who likewise are afforded no exemption for their state
                      11
retirement income. Most importantly, Mr. Dawson received the same tax treatment as

       8
          Individuals who provide emergency medical services may receive retirement
benefits from PERS or, if employed after 2008, the Emergency Medical Services
Retirement System (“EMSRS”). See W.Va. Code § 16-5V-1 et seq.
       9
          See W.Va. Code § 20-7-1 et seq. (establishing natural resources police officers
and setting duties and powers).
       10
           The Capitol Police is formally known as the “Division of Protective Services.”
See W.Va. Code § 15-5D-2 [2002] (“The state facilities protection division within the
department of military affairs and public safety shall hereafter be designated the division
of protective services. The purpose of the division is to provide safety and security at the
capitol complex and other state facilities.”).
       11
           Most retired circuit judges and supreme court justices receive benefits from the
Judges’ Retirement System and cannot use the exemption applicable to recipients of
                                               8

the former state employees who make up as the vast majority of all state retirees:
recipients of benefits from PERS and the Teachers Retirement System. Additionally only
some law enforcement officers (such as deputy sheriffs receiving benefits from DSRS)
are permitted to rely upon the Section 12(c)(6) exemption, while others (such as deputy
sheriffs receiving benefits from PERS) are not.

        When this Court first upheld Section 12(c)(6) in Brown in 1994, the number of
retirees who qualified for the exemption comprised four-percent of all state-pension
recipients. In the years at issue in this case, the number who qualify for the exemption
has diminished to two percent of all state-pension recipients. Similar to what we found in
Brown, the total structure of West Virginia’s system for taxing personal income does not
discriminate against retired members of the United States Marshals Service in violation
of 4 U.S.C. § 111. Section 12(c)(6) gives a benefit to a very narrow class of former state
and local employees, and that benefit was not intended to discriminate against former
federal marshals.

      The circuit court erred in finding that Section 12(c)(6) was contrary to 4 U.S.C. §
111. Accordingly, the circuit court’s March 31, 2016, order must be reversed.

                                                                 Reversed and remanded.



ISSUED: May 17, 2017

CONCURRED IN BY:

Chief Justice Allen H. Loughry II
Justice Robin Jean Davis
Justice Margaret L. Workman
Justice Menis E. Ketchum
Justice Elizabeth D. Walker




PERS benefits in W.Va. Code 11-21-12(c)(5). However, family court judges, as well as
a handful of former circuit judges and justices, are members of PERS and can use the
exemption. See W.Va. Code § 51-9-5 [1987] (permitting circuit judges and justices to
elect PERS coverage); W.Va. Code § 51-2A-6(g) [2011] (providing family court judges
are not eligible to participate in the Judges’ Retirement System).
                                            9
