Sheehy v. State

No. 90-450
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991

EDMUND F. SHEEHY, MARGARET FLEMING,
GEORGE McGOVERN, DONALD ZACK,
RICHARD G. BRANCH, CHARLES W.
VanDIEST, AND ARNOLD S. WIRTALA,
on behalf of themselves and all other
similarly situated federal employees,
both civil service employees and
military employees, residing in the
State of Montana, who have been
subjected to paying state income tax
on their pensions,
Plaintiffs and Appellants,
v.
STATE OF MONTANA, THE DEPARTMENT OF
REVENUE, a State Agency within the
Executive Branch of State Government,
of the State of Montana,
Defendants and Respondents.

APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Jeffrey M. Sherlock, Judge presiding.

COUNSEL OF RECORD:
For Appellant:
Edmund F. Sheehy, Jr. (argued), Cannon & Sheehy ;
Helena, Montana
For Respondent:
R. Bruce McGinnis (argued), Department of Revenue,
Helena, Montana

Submitted: August 15, 1991
DeciBed: November 14, 1991
Filed:
. I

Justice Fred J. Weber delivered the Opinion of the Court.

In this case, we affirm a decision of the District Court for
the First Judicial District, Lewis and Clark County, that the
plaintiffs are not entitled to refunds for state taxes paid for the
years 1983 through 1988 on their retirement benefits received under
the Federal Employeest Retirement Act.
The issue is whether the opinion of the United States Supreme
Court in Davis v. Michigan Department of the Treasury (1989), 489
U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be retroactively
applied, entitling the plaintiffs to refunds for taxes paid in
previous years.
Plaintiffs are retired federal employees who filed a petition
for declaratory relief seeking to have 5 15-30-111(2) (c)(i), MCA
(1989), declared unconstitutional. That statute provided that
Montana state income tax would be assessed on benefits received
under the Federal Employees1 Retirement Act in excess of $3,600.
In contrast, under 3 19-3-105, MCA (1989), all retirement benefits
received under Montana's Public Employeest Retirement System were
exempt from state and local taxes.
Following the decision of the United States Supreme Court in
Davis in March 1989, the District Court adopted the parties1
stipulation to the effect that 5 15-30-111 (2)(c)(i), MCA (1989),
is invalid for tax years commencing after December 31, 1988. The
plaintiffs then moved for summary judgment that Davis should be
applied retroactively and that they are entitled to refunds for
previous tax years, subject to the statute of limitations. (In
2
I I

Davis, the state had conceded that refunds for previous years would
be proper if the court found for plaintiffs.)
Using the factors set forth in LaRoque v. State (1978), 178
Mont. 315, 583 P.2d 1059, the District Court determined that Davis
should not be applied retroactively. The court ruled that the
Davis decision was neither predictable nor clearly foreshadowed.
It decided that retroactive application of Davis would not promote
the doctrine of intergovernmental tax immunity because it had
already required that, in the future, federal and state retirees
must be treated the same. Finally, it stated that adding the cost
of refunds to Montana's budget deficit would be inequitable to the
citizens of Montana. Plaintiffs appeal.

Should the United States Supreme Court's opinion in Davis be
applied retroactively, entitling the plaintiffs to refunds for
taxes paid in previous years?
We will first review the major elements of the opinion of the
United States Supreme Court in Davis. In that case, the plaintiffs
challenged a Michigan tax scheme which exempted from state taxation
all retirement benefits paid by the state to its retired employees
but taxed retirement benefits paid by other employers, including
the federal government. The Michigan Court of Appeals upheld the
tax scheme, ruling that 4 U.S.C. 6 111 did not apply to retirees
and that, under a rational basis test, the taxing scheme was not
unconstitutional because it furthered the state's interest in
attracting and retaining qualified employees. The Michigan Supreme
Court denied leave to appeal. The United States Supreme Court
granted certiorari and reversed, holding that the Michigan tax
scheme violated the concept of intergovernmental tax immunity.
In delivering the Court's opinion, Justice Kennedy first
disposed of the State's argument that 4 U.S.C. 5 111 applies only
to current employees of the federal government. In relevant part,
that statute provides:
The United States consents to the taxation of pay or
compensation for personal service as an officer or
employee of the United States ... 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 pay or compensation.
The Court stated that:
We have no difficulty concluding that civil service
retirement benefits are deferred compensation for past
years of service rendered to the Government. [Citations
omitted.] And because these benefits accrue to employees
on account of their service to the Government, they fall
squarely within the category of compensation for services
rendered "as an officer or employee of the United
States.
Davis, 489 U.S. at 808. The Court then went on to conclude that
the nondiscrimination clause applies to retirement benefits because
retirement benefits are included in "pay or c~mpensation.'~
Davis,
489 U.S. at 809.

The Court next discussed 4 U.S.C. 5 111 as a codification of
the rule that the doctrine of intergovernmental tax immunity does
not prohibit nondiscriminatory state taxation of federal employees.
Davis, 489 U.S. at 810-14. The Court stated that although
intergovernmental tax immunity is based on the need to protect each
sovereign's governmental operations from undue influence by the
other, private entities or individuals who are subjected to
discriminatory taxation on account of their dealings with a
sovereign can also receive the protection of the constitutional
doctrine. Davis, 489 U.S. at 814-15.
The Court then stated that the mode of analysis developed in
equal protection cases was "inappropriate" in Davis. Instead, the
test is whether the inconsistent tax treatment is related to and
justified by significant differences between the two classes.
Davis, 489 U.S. at 816.
The Court concluded that significant differences were not
present and that therefore the tax act in question violated
principles of intergovernmental tax immunity. Davis, 489 U.S. at
817. The Court remanded the case for further proceedings.
Plaintiffs also direct the Court's attention to the United
States Supreme Court's opinion in James B. Beam Distilling Co. v.
Georgia (1991), 501 U.S. , 111 S.Ct. 2439, 115 L.Ed. 2d 481. The
opinion in Jim Beam was issued on June 20, 1991, after oral
argument in the present case. In Jim Beam, the Court held that it
is error to refuse to apply a rule of federal law retroactively
after the case announcing the rule has already done so. Plaintiffs
argue that rule is dispositive and the decision in Davis must be
applied retroactively here because it was applied retroactively
in that case. Both parties submitted supplemental briefs
discussing the application of Jim Beam to this case.
When Jim Beam was decided, pending before the Court on
applications for certiorari were two cases in which retired federal
 I

employees in South Carolina and Virginia seek refunds of state
income taxes under theories similar to those argued here. After
Jim Beam was decided, the Court granted certiorari in both of those
cases, vacated the state court decisions denying refunds, and
remanded the cases to the state courts for I1further consid-
eration" in light of Jim Beam. Bass v. State of South Carolina
(1991)t - U.S. , 111 S.Ct. 2881, 115 L.Ed.2d 1047; Harper v.
Virginia (1991), - U.S. , 111 S.Ct. 2883, 115 L.Ed.2d 1049.
The fact that the Supreme Court remanded Bass and Harper
rather than simply reversing them indicates the Court's uncertainty
as to whether Jim Beam applies to the issue of Davisvsretroactiv-
ity. We conclude that it does not apply. In Davis, the State had
conceded that a refund was appropriate if the Court ruled for the
appellants. Davis, 489 U.S. at 817. Because of that concession,
the Court did not consider the issue of whether retroactive
application should be granted. We therefore conclude that Davis
is not authority for application of its rule retroactively. The
underpinnings of the decision in Jim Beam are the doctrine of stare
decisis and the principle of equality to all similarly situated
litigants. Jim Beam, 111 S.Ct. at 2446. Because Davis did not
rule upon the issue of retroactivity, we conclude that the doctrine
of stare decisis does not apply. We conclude that the principle
of equality or equal treatment to similarly situated litigants does
not require that all future litigants, including the litigants in
the present case, are bound by the stipulation of the State of
Michigan in Davis.
 We now consider whether retroactive application of the law set
forth in Davis is appropriate in this case. In Chevron Oil v.
Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296, the United
States Supreme Court recognized three factors to be considered
before a rule of nonretroactive application of a judicial decision
is adopted. Those factors are 1) whether the decision establishes
a new principle of law either by overruling established precedent
on which litigants have relied, or by deciding an issue of first
impression whose resolution was not foreshadowed, thereby leading
to the conclusion that the decision should not be applied
retroactively; 2) whether retroactive application will further or
retard operation of the rule in question; and 3) whether
substantial inequity will result from retroactive application.
Chevron, 404 U.S. at 106-07. Use of these three factors was
adopted by this Court in LaRoaue, 583 P.2d at 1061.
Plaintiffs argue that the result in Davis was clearly fore-
shadowed under the longstanding principle of intergovernmental tax
immunity and as a logical extension of the Court's decisions in a
series of cases. However, as the State points out, the holding in
Davis required three extensions of prior law. We will examine all
three extensions of prior law to determine if each extension was
clearly foreshadowed by previous cases.
In its first extension, the Davis Court pointed out that while
retirement pay is not actually disbursed during the time an
individual is working for the government, the amount of benefits
to be received in retirement are based and computed upon the
individualls salary and years of service. The Court Inhad no
difficultyl1 concluding that civil service retirement benefits are
deferred compensation for past years of service and therefore fall
within the category of compensation for services rendered as an
officer or employee of the United States. As authority for that
conclusion, three federal circuit cases were cited. Davis, 489

U.S. at 808.

In its Davis holding, the Michigan Court of Appeals rejected
the contention that 4 U.S.C. 9 11
1 invalidated the Michigan tax,
noting that the statute applied only to federal ttemployees.ll
Then
the Michigan court determined that the appellants1 status under
federal law in Davis was that of an "annuitantl1 rather than as an
employee and that as a result 4 U.S.C. 5 1 1 had no application.
1

The logical determination by the Michigan court together with the
action of other states which used tax schemes like Michigan's and
Montanats,suggest there is a significant question of foreshadowing
the application of 4 U.S.C. 5 1 1
1 .

The second extension of prior law took place when the Court
established the connection between the doctrine of
intergovernmental tax immunity and the protection against
discriminatory taxation of individuals under 4 U.S.C. 5 111.

Plaintiffs argue that the doctrine of intergovernmental tax
immunity had been extended to protect individuals at least since
the decision in Phillips Chemical Co. v. Dumas Independent School
Dist. (1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384. But the
Davis language addressing the relationship between
intergovernmental tax immunity and 4 U.S.C. 5 111 clearly breaks
new ground:
[I]t is reasonable to conclude that Congress drew upon
the constitutional doctrine [of intergovernmental tax
immunity] in defining the scope of the immunity retained
in 5 111. . .. Hence, we conclude that the retention of
immunity in 5 111 is coextensive with the prohibition
against discriminatory taxes embodied in the modern
constitutional doctrine of intergovernmental tax
immunity.
Davis, 489 U.S. at 813. The conclusion that the protection against
discriminatory taxation retained under 4 U.S.C. 5 111 is
coextensive with the protection under the doctrine of inter-
governmental tax immunity represented an extension of prior law.
The third extension of prior law made in Davis follows from
the first two extensions. In determining whether the state tax
discriminated against federal employees, the Court decided that a
I1significantdifference" standard should be used rather than one
of the standards typically applied in equal protection cases. As
plaintiffs point out, a "significant difference" standard had been
used in matters involving intergovernmental tax immunity. See
Philli~s,361 U.S. at 387. However, in taxation cases in which
equal protection is at issue, the Court had used as a standard the
reasonableness of the classification. See Lehnhausen v. Lake Shore
Auto Parts Co. (1973), 410 U.S. 356, 359-60, 93 S.Ct. 1001, 1003-
04, 35 L.Ed.2d 351, 355. Until the Court determined in Davis that
retirement benefits are protected under 4 U.S.C. 5 111 and that the
protections under that statute are coextensive with those provided
under the doctrine of intergovernmental tax immunity, the standard
of analysis was not clear.
 The majority opinion in Davis clearly describes the ~ichigan
view which rejected the contention that the doctrine of
intergovernmental tax immunity rendered the Michigan tax
unconstitutional as follows:
The Michigan Court of Appeals next rejected
appellant's contention that the doctrine of
intergovernmental tax immunity rendered the state's tax
treatment of federal retirement benefits
unconstitutional. Conceding that "a tax may be held
invalid ... if it operates to discriminate against the
federal government and those with whom it deals,''
.the court examined the State's justifications for the
. .
discrimination under a rational-basis test. Ibid. The
Court determined that the State's interest in "attracting
and retaining . . . qualified employees" was a
"legitimate state objective which is rationally achieved
by a retirement plan offering economic inducements," and
it upheld the statute.
Davis, 489 U.S. at 807. Using an equal protection analysis, the
Michigan court concluded that the legitimate Michigan objective was
a rational reason for the discrimination. That of course is
directly contradictory to the conclusion reached in Davis, where
the Supreme Court concluded that an equal protection analysis was
not applicable and used a different standard. The critical
significance of the standard of analysis is plain from the
following passage from the Court's opinion:
The State points to two allegedly significant differences
between federal and state retirees. ~irst,the State
suggests that its interest in hiring and retaining
qualified civil servants through the inducement of a tax
exemption for retirement benefits is sufficient to
justify the preferential treatment of its retired
employees. This argument is wholly beside the point,
however, for it does nothing to demonstrate that there
are "significant differences between the two classesw
themselves; rather, it merely demonstrates that the State
has a rational reason for discriminatins between two
similar sroups of retirees. The State's interest in
adoptins the discriminatory tax. no matter how
 substantial, is simply irrelevant to an inquiry into the
nature of the two classes receivins inconsistent
treatment. (Emphasis supplied.)
Davis, 489 U.S. at 816. Thus, while it appears that the State of
Michigan's tax statutes would have been constitutional under an
equal protection analysis, the tax statutes could not pass the
"significant differenceuttest which the Court concluded must be
applied.
In his dissent in Davis, Justice Stevens distinguished
Phillips, upon which the majority relied as precedent for use of
the "significant difference1' standard. In Phillips, the tax was
imposed only on lessees of federal property. Justice Stevens
stated that:
The States can tax federal employees or private
parties who do business with the United States so long
as the tax does not discriminate against the United
States . . .
The Court today strikes down a state tax
that applies equally to the vast majority of Michigan
residents, including federal employees, because it treats
retired state employees differently from retired federal
employees. The Court's holding is not supported by the
rationale forthe intergovernmental immunity doctrine and
is not compelled by our previous decisions. I cannot
join the unjustified, court-imposed restriction on a
State's power to administer its own affairs.
. . .
When the tax burden is shared equally by
federal agents and the vast majority of a State's
citizens, however, the nondiscrimination principle is not
applicable and constitutional protection is not
necessary.
... The Michigan tax here applies to approximately
4% million individual taxpayers in the State, including
the 24,000 retired federal employees. It exempts only
the 130,000 retired state employees. Once one
understands the underlying reason for the McCulloch
holding, it is plain that this tax does not
unconstitutionally discriminate against federal
employees.
 I

Davis, 489 U.S. at 818-21. In Justice Stevens' view the Court's
holding is not supported by the rationale for the intergovernmental
tax immunity doctrine and is not compelled by the Supreme Court's
previous decisions. Under the established equal protection
analysis, the Michigan tax scheme appeared constitutional, but it
failed the "significant difference1'test which the Court applied.
Applying the first factor under Chevron to this aspect, it appears
that Davis did establish a new principle of law.
Plaintiffs further argue that the issue of whether the Davis
decision was foreshadowed is controlled by this Court's opinion in
Jenson v. State Dept. of Labor and Industry (1984), 213 Mont. 84,
689 P.2d 1231, aff'd after remand, 221 Mont. 42, 718 P.2d 1335.
In Jenson, the issue was whether this Court's opinion in Crabtree
v. Montana State Library (1983), 204 Mont. 398, 665 P.2d 231, was
foreshadowed. This Court held that Crabtree did not create any
new law because it simply was stating the plain language of the
Veteran's Preference Act. Jenson, 689 P.2d at 1233. Plaintiffs
argue that in Davis, the Court simply was stating the plain
language of 4 U.S.C. 5 111.
However, in Davis, as the State has pointed out, there was an
additional step. 4 U.S.C. 5 111 prohibits discriminatory taxation
of "pay or compensationttreceived from the federal government.
The Court held that federal retirement benefits were included in
Itpay or compensation1'so that 4 U.S.C. 5 111 applied. Davis, 489
U.S. at 808. In Crabtree, the Court was not faced with a compar-
able preliminary issue of whether the statute was applicable to the
case at hand.
We conclude that this Court's opinion in Jenson does not
control as to whether Davis was foreshadowed. Further, because
the Davis opinion required at least three extensions of previous
law as discussed above, we hold that the result was not clearly
foreshadowed.
The second element of the Chevron test is whether retroactive
application will further or retard operation of the rule in
question. The District Court stated that it could not #'see how a
retroactive application of the Davis decision would in any way
promotegv
the concept of intergovernmental tax immunity. Plaintiffs
argue that "the state's.total disregard for 4 U.S.C. 1 111 would
be condoned if Davis is not applied retroactively."
Because we have concluded that the decision in Davis was not
foreshadowed, the plaintiffs' assertion that the tax imposed was
illegal is an overstatement. The taxation scheme was not ''illegal#'
until the Davis decision was issued, and the tax has not been
imposed since that time. We conclude that refunds as a result of
retroactive application of Davis would not promote the concept of
intergovernmental tax immunity.
In considering the third factor under Chevron the District
Court concluded that equity directed that refunds not be made due
to the financial burden on the citizens of the State of Montana.
Plaintiffs argue that equity favors making refunds because it is
Montana's public policy to provide refunds of illegally collected
taxes. But as we have discussed above, taxes collected before the
opinion in Davis were not illegally collected taxes.
4 U.S.C. 5 111 was enacted in 1939. Between that time and the
date of the Davis decision, twenty-two other states enacted and
used tax plans much like Montana's, giving tax advantages to state
retirees over other retirees. We conclude that, in view of the
acceptance and usage of similar tax plans for approximately 50
years, it would be inequitable to provide refunds to federal
retirees when those refunds would of necessity be made at the
expense of all Montana taxpayers.
After considering the three factors set out in Chevron we
conclude that the District Court did not err in concluding that
Davis should not be applied retroactively. We therefore hold that
the court did not err in ruling that the plaintiffs are not
entitled to tax refunds for the years 1983 through 1988.

T
We Concur: (
u
e
i
ce

sitting for Justice John C. ~arrison

District Judge C.B. McNeil
sitting for Justice Wm. E. Hunt.
Justice Karla M. Gray, concurring in part and dissenting in part.

I concur with that part of the majority's opinion which holds
that James B. Beam Distilling Co. v. Georgia (1991), 501U.S. -,
111 S.Ct. 2439, 115 L.Ed.2d 481, is not applicable to the issue of

the retroactivity of Davis v. Michigan Department of Treasury
(1989), 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. However,
I respectfully dissent from that part of the majority's opinion
which holds that Davis should not be applied retroactively.
I agree with the majority that the determination of whether
the United States Supreme Court's decision in Davis is to be
applied retroactively or only prospectively is governed by the
three-pronged test enunciated in Chevron Oil Co. v. Huson (1971),
404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 and utilized by this
Court in LaRoque v. State (1978), 178 Mont. 315, 583 P.2d 1059.
However, I disagree with the conclusions reached by the majority
under each prong of the test as applied to the Supreme Court's
decision in Davis. Furthermore, I believe that the weakness of the
majority s opinion is clearly demonstrated by its heavy reliance
on the overturned decision of the Michigan Court of Appeals and the
lone dissent of Justice Stevens in Davis. Such reliance by the
majority largely ignores the Davis Court majority's rationale in
reaching its decision.
For a decision to be applied only prospectively, the first
prong of the Chevron test requires that the decision "establish a
new principle of law, either by overruling clear past precedent on
which litigants may have relied ... or by deciding an issue of
first impression whose resolution was not clearly foreshadowed."
Chevron, 404 U.S. at 106. Because Davis did not overrule clear
past precedent, this Court's analysis is properly limited to the
consideration of whether the decision in Davis was clearly
foreshadowed.
The majority states that the Davis decision was not clearly
foreshadowed on the bases that in order to reach its decision in
Davis, the Supreme Court had to (1) extend 4 U.S.C. 5 111 to
federal retirees receiving pension benefits; (2) extend the
doctrine of intergovernmental tax immunity to employees of the
governmental entity as well as the entity itself; and (3) decide
that the proper standard for determining the validity of a state
statute where intergovernmental tax immunity is involved is a
Ivsignificant differenceu1standard rather than a rational basis
standard. The majority also states that the fact that twenty-
three states, including Montana, had tax schemes similar to that
of Michigan which the Supreme Court invalidated in Davis, lends
support to its conclusion that the holding in Davis was not clearly
foreshadowed.
It is my view that a plain reading of the ~ a v i sdecision
itself, together with previous United States Supreme Court
decisions, leads to the irrefutable conclusion that the Davis
decision was clearly foreshadowed. Contrary to the majority's
84, 689 P.2d 1231. As the majority opinion notes, this Court in
Jensen held that Crabtree v. Montana State Library (1983), 204
Mont. 398, 665 P.2d 231, did not create any new law because it
simply was stating the plain language of the Veteran's Preference
Act. In Davis, the Supreme Court did not create any new law
because, as the Supreme Court itself stated, the plain languaqe of
5 111 dictated its holding that the statute applies to both current
and past employees and to the pension benefits. Davis, 489 U.S.

The majority would have the reader believe that the Supreme
Court's decision in Davis constituted an unforeshadowed, abrupt and
fundamental change in the doctrine of intergovernmental tax
immunity through its holding that employees of the governmental
entity, as well as the governmental entity itself, come within the
protection of the doctrine. The majority states that "[tlhe Davis
language addressing the relationship between intergovernmental tax
immunity and 4 U.S.C. 5 111 clearly breaks new ground." Slip op.
at p. 8-9. This is simply not the case as evidenced by the Supreme
Court's own observations in Davis.
On its face, 5 111 purports to be nothing more than
a partial congressional consent to nondiscriminatory
state taxation of federal employees. It can be argued,
however, that by negative implication 5 111 also
constitutes an affirmative statutory grant of immunity
from discriminatory state taxation in addition to, and
coextensive with, the pre-existing protection afforded
by the constitutional doctrine. Resardless of whether
3 111 provides an independent basis for findins immunitv
or merely wreserves the traditional constitutional
prohibition asainst discriminatory taxes, however, the
insuirv is the same. In either case, the scope of the
conclusion, the Supreme Court in Davis did not Itextend" 4 U.S. C.
5 111 to federal retirees receiving pension benefits. The Supreme
Court made it very clear that 5 111 applies to both current and
past employees and to pension benefits based upon the plain
lansuase of the statute:
As a threshold matter, the State argues that 5 111
applies only to current employees of the Federal
Government, not to retirees such as appellant. In our
view, however, the plain language of the statute dictates
the opposite conclusion. Section 111 by its terms
applies to "the taxation of pay or compensation for
personal services as an officer or employee of the United
States.

We have no difficulty concluding that civil service
retirement benefits are deferred compensation for past
years of service rendered to the Government. [Emphasis
in original.]
Davis, 489 U.S. at 808.
Any other interpretation of the nondiscrimination
clause would be implausible at best. It is difficult to
imagine that Congress consented to discriminatory
taxation of the pensions of retired federal civil
servants while refusing to permit such taxation of
current employees, and nothing in the statutory language
or even in the legislative history suggests this result.
~avis,489 U.S. at 810. ~ssuming that the majority of eight
Justices of the United States Supreme Court intended the plain
meaning of its words, there is no room for doubt that the Supreme
Courtls holding that federal retirees fall within the protection
of 5 111 was clearly predictable or foreshadowed.
Furthermore, I believe that Davis is directly on point with
Jensen v. State Department of Labor and Industry (1984), 213 Mont.
 immunity granted or retained by the nondiscrimination
clause is to be determined by reference to the
constitutional doctrine. Thus, the dispositive question
in this case is whether the tax imposed on appellant is
barred by the doctrine of intergovernmental tax immunity.
[Emphasis added.]
Davis, 489 U.S. at 813-14.
It is true that intergovernmental tax immunity is
based on the need to protect each sovereign's
governmental operations from undue interference by the
other. Graves, 306 U.S., at 481; McCulloch v. Maryland,
4 Wheat., at 435-436. But it does not follow that
private entities or individuals who are subjected to
discriminatory taxation on account of their dealings with
a sovereign cannot themselves receive the protection of
the constitutional doctrine. Indeed all precedent is to
the contrary. In Phillips Chemical Co., supra, for
example, we considered a private corporationlsclaim that
a state tax discriminated against private lessees of
federal land. We concluded that the tax l'discriminate[d]
unconstitutionally against the United States and its
lessee," and accordingly held that the tax could not be
exacted. 361 U.S., at 387. ... [Emphasis in original. ]
The State offers no reasons for departing from this
settled rule, and we decline to do so. [Emphasis added.]
Davis, 489 U.S. at 814-15. Again, assuming the Davis Court
intended the plain meaning of its words, there can be no question
that it was clearly predictable or foreshadowed that federal
retirees fall within the protection of the doctrine of
intergovernmental tax immunity.
I also disagree with the majority's conclusion that Davis was
not clearly foreshadowed because the Supreme Court had to decide
that the proper standard for determining the validity of the state
tax scheme is a "significant difference" standard rather than a
rational basis standard. The Supreme Court in Davis made it clear
that the proper standard to be applied when intergovernmental tax
immunity is involved was settled under existins authority.
Under our precedents, It[t]he imposition of a heavier
tax burden on [those who deal with one sovereign] than
is imposed on [those who deal with the other] must be
justified by significant differences between the two
classes.I1 Phillips Chemical Co. v. Dumas Independent
School Dist., 361 U.S., at 383. In determining whether
this standard of justification has been met, it is
inappropriate to rely solely on the mode of analysis
developed in our equal protection cases. We have
previously observed that "our decisions in [the equal
protection] field are not necessarily controlling where
problems of intergovernmental tax immunity are involved,^
because Ifthe Governmentfs interests must be weighed in
the balance." -.
Id I at 385. Instead, the relevant
inquiry is whether the inconsistent tax treatment is
directly related to, and justified by, "significant
differences between the two classe~.~l- at 383-385.
Id.,
[Emphasis added.]
Davis, 489 U.S. at 815-16. The Supreme Court was citing its
decision in Phillips Chemical Co. v. Dumas Independent School Dist.
(1960), 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384, decided nearly
thirty years before Davis. Thus, the Supreme Court's application
of the "significant difference" standard in Davis was clearly
foreshadowed in light of this existing precedent.
The majority places great weight on the State's (and other
states1) reliance on the previously uncontested nature of 4 U.S.C.
§ 111 with respect to its application to federal retirees. In my
view, the fact that twenty-three states, including Montana, had tax
schemes similar to the one invalidated in Davis is conclusive of
nothing more than that Davis decided an issue of first impression.
It does not follow, as the majority opinion implies, that the Davis
decision was not foreshadowed. Where the plain language of the
statute involved, together with existing precedent, mandates a
particular holding, as was clearly shown in Davis, the prevalence
of the wrong is irrelevant to the determination of whether that
holding was clearly foreshadowed.
In applying the second prong of the Chevron test, the majority
concludes that retroactive application of Davis would not promote
the concept of intergovernmental tax immunity. I disagree. In my
view, the doctrine of intergovernmental tax immunity can only be
furthered by the retroactive application of Davis. Refusing to
apply Davis retroactively means that this Court has condoned the
State's total disregard for the plain language of 4 U.S.C. 5 111
and is akin to a continuation of past discrimination. Such a
result does not further and, indeed, retards the doctrine of
intergovernmental tax immunity in that it does not tend to deter
future State violations of the doctrine.
With respect to the third prong of the Chevron test, I
disagree with the majority's conclusion that the equities in this
case favor a nonretroactive application of Davis. In considering
the equities of retroactive application of a judicial decision, I
am fully aware that great weight must be given to the State's
reliance upon a presumptively valid statute, enacted in good faith
and by no means ~lainlyunlawful. See Lemon v. Kurtzman (1973),
411 U.S. 192, 93 S.Ct. 1463, 36 L.Ed.2d 151. However, where the
statute in question is plainly violative of federal statutory and
case law, as was Montana's tax scheme in light of the Supreme
Court's rationale in Davis, the State's reliance interests are of
little or no import. McKesson Corp. v. Div. of Alcoholic Beverages
and Tobacco (1990), 495 U.S. -, -, 110 S.Ct. 2238, 2257, 110
L.Ed.2d 17, 44.
It is true, as the majority states, that refunds to the
federal retirees would result in a financial burden on the other
taxpayers of the State; it also is true, however, that those
taxpayers have benefited greatly from the federal retirees1
overpayment of taxes over many years. In any event, the State's
and taxpayers' exposure to the disruptive impact of the tax
scheme's invalidation is limited because of the five-year statute
of limitations.
Furthermore, the State would not necessarily have to refund
the unconstitutionally collected taxes. The federal retirees have
indicated their willingness to accept a tax credit mechanism in
lieu of actual refunds as a possible remedy which, in my view, has
the potential of softening the impact on the State's financial
stability even more.
Finally, it must be recognized that, notwithstanding the
financial impact to the State, substantial inequities have been
wrought upon the federal retirees over a period of many years.
Retirees who paid the discriminatory tax and have since left
Montana or died would receive no remedy even under a proper
resolution of this case. Others would receive back only a small
portion of the discriminatory taxes they paid, no matter what
remedy might be fashioned, because of the applicable statute of
limitations. How the majority can conclude that the Chevron
"equitiesw prong favors the State, as opposed to the federal
retirees who were wrongfully discriminated against by the State,
is simply beyond my understanding.
I would reverse the judgment of the District Court and hold
that under the Chevron test, the Davis decision is to be applied
retroactively. Having so held, I would remand this case to the
District Court for a determination of the proper remedy to be
provided to the federal retirees.
Justice Terry N. Trieweiler dissenting.
I dissent from the majority opinion in its entirety.
I concur with that part of Justice Gray's opinion which
concludes that the case of Davis v. Michigan Department of Treasury (1989),

489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891, should be applied
retroactively based upon the three-prong test set forth in Chevron

Oil Companyv. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296.

Contrary to the majority1 argument, the result in Davis was
s

clearly foreshadowed by the plain language of 4 U.S .C. 5 111 and by
the Supreme Court s prior decisions in Phillips Chemical Company v. D ~ ~ m a s

4 L.Ed. 2d 384, 391-92, and Memphis Bank and Trust Company v. Gamer ( 1983) ,

459 U.S. 392, 397 n. 7, 103 S.Ct. 692, 696 n. 7, 74 L.Ed.2d 562,
567 n.7.
As pointed out by the Supreme Court in Davis:

When the first part of 5 111 is read together with the
nondiscrimination clause, the operative words of the
statute are as follows: "the United States consents to
the taxation of pay or compensation . .
. if the taxation
does not discriminate ..
. because of the source of the
pay or compensation.
Davis, 489 U . S . at 809, 109 S.Ct. at 1504, 103 L.Ed.2d at 901.

Retirement benefits are clearly deferred compensation.
Therefore, I cannot comprehend how 4 U. S.C. 5 111 could be
construed any way other than the manner in which it was construed
in Dnvis. As pointed out in Justice Gray's dissent, we have

previously held in Jensen v. S a e Department o Labor and I d s r ( 1984) , 2 1 3
tt f nuty

Mont. 84, 689 P.2d 1231, that the plain language of a statute is
sufficient to foreshadow a judicial decision which applies that
statute. I cannot think of a clearer example of that being the
case than the United States Supreme Court s application of 4 U.S .C.
g 111 in Davis.

The majority opinion is a nearly verbatim adoption of the
Department of Revenue's strained rationale that Davis was not

foreshadowed because it resulted in three extensions of prior law.
However, that same argument was made by the State of Michigan in
Davis and in each respect was refuted by the eight out of nine

Supreme Court Justices who subscribed to the majority opinion in
Dnvis. The fact that this Court would then ignore the majority

opinion and subscribe to the Department of Revenue's argument on
the basis of the lone dissent, is at best a peculiar way to apply
controlling United States Supreme Court precedent.
Having pointed out that I agree with Justice Gray's thorough
analysis of the Chevrontest for retroactivity, and concluding that

that test requires retroactive application of Davis, I do not feel

that it is necessary to apply the Chevron analysis.
 The United States Supreme Court has recently gone even further
to make clear that the result arrived at by the majority in this
case is incorrect.

In James B. Beam Distilling Company v. Georgia ( 1991) , U.S. I 111

S.Ct. 2439, 115 L.Ed.2d 481, the United States Supreme Court dealt
with a similar issue regarding retroactivity.
In the Benm case, the Court was asked to decide whether its

decision in BacchusImports, Ltd. v. Dins (1984), 468 U.S. 263, 104 S.Ct.

3049, 82 L.Ed.2d 200, should apply retroactively to claims based on
facts which preceded that decision. The effect of the Bncchzis

decision was to hold that state laws which imposed an excise tax on
imported alcoholic beverages at a rate greater than those imposed
on alcoholic beverages manufactured within that state violated the
Commerce Clause of the United States Constitution. Following the
B N C C ~ decision, the petitioner in Benm claimed that Georgia's law
ZLS

amounted to the same violation, and on that basis sought a refund
of the taxes it had previously paid in the years 1982, 1983, and
1984. The state courts in Georgia, however, refused to apply
Bncch~is
for the years in question based upon their analysis of Chevrorl

Oil Company v. Huson (1971), 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed. 2d 296.

In other words, the Supreme Court in Georgia applied the same
rationale in Beam to deny a refund that the majority relies on in

this case to deny a refund to the plaintiffs.
 Beam sought a writ of certiorari. The United States Supreme
Court granted Beam's petition and reversed the Supreme Court of
Georgia on June 20, 1991.'
In arriving at its decision, the Supreme Court concluded that
unless it specifies that its decisions are prospective only, they
are to be applied retroactively. It furthermore stated that where
its decisions are applied retroactively to one set of litigants
they must be applied retroactively to similarly situated persons
who are not barred procedurally from asserting their rights.
Particularly relevant to this case was the Court's holding that its
decision limits the possible applications of the Chevroiz Oil analysis.

The Supreme Court stated in part as follows:
Questions of remedy aside, Bacchusis fairly read to hold
as a choice of law that its rule should apply
retroactively to the litigants then before the Court.
Because the Bacchus opinion did not reserve the question
whether its holding should be applied to the parties
before it . . . it is properly understood to have
followed the normal rule of retroactive application in
civil cases. . . . Because the court in Bncchus remanded
the case solely for consideration of the pass-through
defense, it thus should be read as having retroactively
applied the rule there decided. See also Williams v .
Vermont, 472 U.S. 14, 28, 105 S.Ct. 2465, 2474, 86 L.Ed.2d
11 (1985); Enon Corp. v. Engertorz, 462 U.S. 176, 196-197, 103
S.Ct. 2296, 2308-2309, 76 L.Ed.2d 497 (1983); cf. Dnvisv.
Miclzipiz Departmeizt o Treasury, 489 U .S . 803 , 817 , 109 S .ct .
f
1500, 1508, 103 L.Ed.2d 891 (1989).

his case was argued to the Montana Supreme Court on May 7,
1991. At the time of oral argument, both parties advised this
Court of the pending Beam case and agreed that the United States
Supreme Court's decision in that case could be dispositive of the
issue in this case.
Beam, - U.S. at , 111 S.Ct. at 2445-46, 115 L.Ed.2d at 490-91.

It is significant that the Supreme Court actually cited Davis

for the principle of retroactivity. The Court then went on to add:
Bacchus thus applied its own rule, just as if it had
reversed and remanded without further ado, and yet of
course the Georgia courts refused to apply that rule with
respect to the litigants in this case. Thus, the
question is whether it is error to refuse to apply a rule
of federal law retroactively after the case announcing
the rule has already done so. We hold that it is,
principles of equality and staredecisis here prevailing over
any claim based on a Chevron Oil analysis.

... To this extent, our decision here does limit
the possible applications of the Chevroiz Oil analysis,
however irrelevant Chevroiz Oil may otherwise be to this
case. Because the rejection of modified prospectivity
precludes retroactive application of a new rule to some
litigants when it is not applied to others, the Chevron Oil
test cannot determine the choice of law by relying on the
equities of the particular case. Once retroactive
application is chosen for any assertedly new rule, it is
chosen for all others who might seek its prospective
application.
.. . [Wlhen the Court has applied a rule of law to
the litigants in one case it must do so with respect to
all others not barred by procedural requirements or res
judicata. [Citations omitted.]

Beam, - U . S . at I , 111 S.Ct. at 2446, 2447-48, 115 L.Ed.2d

The majority concludes that Beam is not applicable to this

case because the Supreme Court did not apply Davis retroactively.

It was applied retroactively, based on the stipulation of the
parties to that case. However, that reasoning ignores ~ustice
Scalia's concurring opinion which was joined in by Justice Marshall
and Justice Blackmun to the effect that both llselective
prospectivityl'and "pure prospectivityl'are beyond the power of the
Court. The implication, as far as those Justices were concerned,
is that Daviscould not have been applied prospectively even if the

parties had not agreed to apply it retroactively. Beam, U.S.

at , 111 S.Ct. at 2450-51, 115 L.Ed.2d at 496-97 (Scalia, J.,
concurring). The majority's conclusion ignores Justice OIConnorls
dissenting opinion wherein she states that the Beam decision

curtails the Chevron Ol inquiry.l1 Beam, - U.S. at
llseriously i I

111 S.Ct. at 2452, 115 L.Ed.2d at 499 (OIConnor,J., dissenting).
Finally, the majority's reasoning ignores the fact that eight days
after Beam was decided, the United States Supreme Court granted

petitions for certiorari to retired federal employees in South
Carolina and Virginia who sought retroactive application of the
Davis decision under circumstances identical to the circumstances in

this case. In those cases, the Supreme Courts of South Carolina
and Virginia rendered decisions similar to the holding of the
majority in this case. See Bass v. S a e (S.C. 1990), 395 S.E.2d 171;
tt

Harperv. Hrginia Dept. o Taxation (1991), 241 Va. 232, 401 S.E.2d 868.
f

Both of those decisions were vacated by the United States Supreme
Court, and both were remanded to the state courts for "further
consideration in light of JamesB.BenmDistilling Company v. Georgirz." Bass
v. Sozlth Carolina ( 1991) , U.S., 111 S.Ct. 2881, 115 L.Ed.2d 1047

.
(mem ) ; Harper v. yirgznia Dept. of Taxation ( 1991) , U.S. , 111 S.Ct.

2883, 115 L.Ed.2d 1049 (mem.) .
It does not seem to me that the intent of the Supreme Court to
apply Davis retroactively could be any clearer. The majority s

opinion merely postpones the inevitable and unnecessarily prolongs
the delusion of state government that it can continue to spend
money which was illegally collected and which it will ultimately
have to repay.
As far as I am concerned, the issue involved in this case is
a simple one. The State took the petitioners' money illegally.
That fact is obvious from the plain language of 4 U.S.C. 5 111. If
a private citizen took someone's money illegally, he or she would
be forced to give it back. The State ought to do the same.
The majority talks about equity. What is equitable about
allowing the State, with all its power, to illegally seize
someone's property, and then after being told what it did was
illegal, allowing the State to keep it?
The majority's strained rationale regarding the foreseeability
of Davis is transparent. When the State of Montana establishes a

policy of arbitrarily treating one group of taxpayers differently
than another group that is similarly situated, it is certainly
foreseeable that what the State is doing is illegal.
 The majority's conclusion about how to best effectuate the
purpose of the Dnvisdecision is similarly illogical. The purpose

of the Davis decision was to assure that federal employees are

treated the same as state employees. How can that purpose possibly
be furthered by allowing the State to keep the money that was
illegally taken from federal employees and spend it for the benefit
of citizens who were not similarly taxed?
The majority s decision is clearly a result-oriented decision
arrived at for the purpose of protecting the State's coffers.
However, the State's coffers are not the responsibility of this
Court. The rights of this State's citizens are.
For the reasons set forth above, the State of Montana can take
little comfort in the temporary reprieve granted by this decision.