ROANOKE TIMES

                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: SATURDAY, June 19, 1993                   TAG: 9306190233
SECTION: VIRGINIA                    PAGE: A-1   EDITION: METRO 
SOURCE: BONNIE V. WINSTON STAFF WRITER
DATELINE: RICHMOND                                LENGTH: Long


RETIREES WIN TAX SUIT

Virginia's 200,000 federal and military retirees won a hollow victory Friday in their quest for refunds of up to $467 million in illegally collected state income taxes.

While the U.S. Supreme Court ruled 7-2 that a 1989 decision requiring equal treatment of federal and state retirees must be applied retroactively, the retirees won't be getting their money back anytime soon - if ever.

The high court declined to order refunds for the pensioners, who claim that Virginia unfairly taxed them while exempting from taxation the retirement benefits paid to former state and local government workers.

Instead, the justices returned the case to the Virginia Supreme Court. The complex, 14-page majority opinion by Justice Clarence Thomas said the Virginia court should decide whether state law gave the retirees an adequate avenue to challenge the taxes before paying them. If so, refunds may not be required, the court said. If not, the state must pay.

In dueling press conferences Friday, representatives of the retirees and the state promised a continued fight.

"I will make sure we will continue to argue the legal merits of our case to protect Virginia's taxpayers from having to pay anything they shouldn't have to pay," said Attorney General Stephen D. Rosenthal.

"If we have to dig into our pockets even more, we will. They owe us money," said George Rodericks, president of a suburban Richmond chapter of the National Association of Retired Federal Employees.

A core group of about 400 retirees who brought the suit, including lead plaintiff Dr. Henry W. Harper III of Arlington, already has kicked in at least $100,000 to fight the case.

With both sides adamant, the case could remain in court for years. The next round is expected in September, when the state Supreme Court reconvenes after a summer recess.

But whatever the state court decides, another appeal to the U.S. Supreme Court also appears likely. And despite the court's 7-2 tally on Friday's decision, the two concurring opinions and one dissenting opinion that accompanied it suggested the court is volatile on the subject of retroactive tax refunds.

Gov. Douglas Wilder and other state leaders expressed relief that Virginia may not be forced to ante up. Wilder already is projecting that Virginia may be $700 million short of the revenue it needs for the two-year budget beginning July 1, 1994.

"I would like to think, in terms of an immediate hit, Virginia has dodged the bullet," Wilder said Friday.

He and others suggested that the amount to be returned - and the way it may be paid - may not be $467 million in cash. Representatives of some retirees said Friday they would be willing to take tax credits over a period of several years as compensation. One said the state's real liability may be less than $300 million.

For almost 50 years, the state gave its retired employees a break by not taxing their pensions. Federal retirees paid state income taxes on their pensions, however, until a March 1989 decision by the U.S. Supreme Court struck down such disparate treatment.

Virginia and 23 other states immediately found themselves potentially liable for up to $2 billion in taxes wrongfully collected. Virginia, with more federal retirees than any state covered by the decision, had the largest potential liability.

Mary Sue Terry, then Virginia's attorney general, acknowledged the decision caught her office by surprise. "Everybody knew about it and nobody did anything about it," her spokesman said at the time, a comment that may continue to haunt Terry as she seeks the governorship this fall.

In May 1989, members of Harper's group, the National Association of Retired Federal Employees, and the Military Retirees Taxpayers Association, filed suit claiming refunds, but were rebuffed repeatedly in state courts.

By mid-1989, the General Assembly had repealed the discriminatory law and given federal retirees one year from the time the courts finally settled the issue to file for refunds.

The key to the future of the dispute may be the adequacy of state laws allowing taxpayers to go to court or to the state tax commissioner to get a tax law or assessment overturned before payment.

When appeals are made to the commissioner, the Tax Department is prohibited from collecting pending a decision, said Deputy Attorney General Gail S. Marshall.

"Like all other taxpayers, federal pensioners could have asked a state court to declare Virginia's tax unconstitutional anytime during the 47 years between the enactment of this tax law in 1942 and the Davis decision in 1989," Rosenthal said Friday. "They chose not to do so, and therefore, nothing more is required."

But Michael Kator, a Washington attorney who argued on behalf of the retirees, said in a telephone interview that the procedures don't adequately protect the rights of the retirees in this situation.

"You cannot argue constitutionality before an administrative agency," Kator said. "The tax commissioner can't decide a law is unconstitutional. And we couldn't have gone to court without first paying the tax."

Several pensioners said Friday they may seek relief from the General Assembly.



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