Stone v. Errecart

Stone v. Errecart  (94-295); 165 Vt 1; 675 A.2d 1322

[Opinion Filed 09-Feb-1996]

[Motion for Reargument Denied 6-Mar-1996]

  NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.


                                 No. 94-295


Justine & Richard Stone and                       Supreme Court
Beatrice Guyett
                                                  On Appeal from
    v.                                            Washington Superior Court

Joyce Errecart, Commissioner,                     October Term, 1995
Vermont Department of Taxes
and the State of Vermont


Alan W. Cheever, J.

       David H. Mullett of Cheney, Brock, Saudek & Mullett, P.C., Montpelier,
  for plaintiff-appellants

       Jeffrey L. Amestoy, Attorney General, and Mary L. Bachman, Special
  Assistant Attorney General, Montpelier, for defendants-appellees


PRESENT:  Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.


       DOOLEY, J.   This is a companion opinion to Hirsch v. Vermont Dep't of
  Taxes, 6 Vt. L.W. 227 (August 11, 1995), in which we held that where a
  taxpayer earned income from federal obligations, the method of calculating
  taxable income mandated by 32 V.S.A. § 5822 violated 31 U.S.C. § 3124. 
  Unlike the taxpayers in Hirsch, the taxpayers involved in this decision,
  Justine and Richard Stone and Beatrice Guyett, did not seek a refund from
  the Commissioner of Taxes pursuant to 32 V.S.A. § 5884(a), but instead went
  directly to Washington Superior Court and brought a class action.  The
  superior court dismissed plaintiffs' claim, and those of the class, for
  failure to exhaust administrative remedies.  We affirm.

       Taxpayers challenge the validity of 32 V.S.A. § 5822 as it existed for
  tax years 1989 through 1992.  During those years, the statute required the
  use of the adjustment method of calculation in determining Vermont income
  tax liability of those with federal obligation income. Taxpayers contended
  that the adjustment method illegally taxed them on interest earned on

 

  federal obligations, in violation of 31 U.S.C. § 3124 and the Supremacy
  Clause of the United States Constitution, and filed suit in Washington
  Superior Court, seeking a refund of the amount they assert was illegally
  collected.  They also moved to certify a class of all taxpayers with
  federal obligation income in the years involved.  See V.R.C.P. 23.  The
  Commissioner of Taxes filed a timely motion to dismiss, arguing that the
  superior court lacked jurisdiction because taxpayers had failed to first
  seek a refund from her as required by 32 V.S.A. § 5884. Taxpayers argued
  that it was futile to exhaust the administrative remedy because the
  Commissioner did not have the power to strike down the statute.

       On April 25, 1994, the court granted the Commissioner's motion to
  dismiss, holding that taxpayers had failed to exhaust their administrative
  remedies.  The request for class certification was denied.  Taxpayers filed
  a notice of appeal with this Court on May 11, 1994.

       This case was one of three that were appealed to this Court which
  raised the same substantive attack on 32 V.S.A. § 5822.  We consolidated
  the three cases and addressed the substantive claims in Hirsch.  We decided
  that the adjustment method of income calculation, as mandated by 32 V.S.A.
  § 5822, violated 31 U.S.C. § 3124.  In two of the cases, plaintiffs had
  exhausted all administrative remedies, and we remanded to determine the
  proper refund.  In this third case, we must decide whether plaintiffs'
  failure to exhaust administrative remedies bars retroactive relief as the
  superior court held.

       Three statutes are relevant to our decision.  The first, 32 V.S.A. §
  5884(a), provides that within three years after the date a return must be
  filed, or six months after a federal refund was received, whichever is
  later, a taxpayer may petition the Commissioner for a refund.  The
  Commissioner must hold a hearing on the request and render a decision.  See
  id.  The second, 32 V.S.A. § 5885(b), authorizes a taxpayer who is
  aggrieved by a decision of the Commissioner on a refund request to appeal
  to the superior court.

       The third statute, 32 V.S.A. § 5887(a), is central to this decision. 
  It reads, in pertinent part:

 

       § 5887.  Remedy exclusive; determination final

       (a) The exclusive remedy of a taxpayer with respect to the
       refund of monies paid in connection with a return filed under this
       chapter shall be the petition for refund provided under section
       5884 of this title, and the appeal from an adverse determination of
       the petition for refund provided under section 5885.

  We applied § 5887 in Riley v. State of Vermont, 133 Vt. 116, 329 A.2d 631
  (1974), holding that a land gains taxpayer must follow the administrative
  appeal route as a prerequisite to judicial review:

       [T]he Legislature has made its purpose abundantly clear by
       defining this statutory route as the "exclusive remedy" in 32
       V.S.A. § 5887.  This is a binding legislative limitation on the
       course of review of the action of the Commissioner of Taxes
       available to the taxpayer.

  Id. at 117, 329 A.2d  at 632.  We have applied the Riley rationale to other
  tax appeal statutes. See City of Winooski v. Matte, 125 Vt. 463, 465, 218 A.2d 458, 460 (1966) (taxpayer must file objection with town clerk to
  dispute validity of property tax assessment in defense of town's suit for
  recovery of taxes); Holbrook Grocery Co. v. Commissioner of Taxes, 115 Vt.
  275, 282, 57 A.2d 118, 122-23 (1948) (prospective taxpayer denied cigarette
  tax stamp may obtain judicial review only after application to, and
  determination by, Commissioner of Taxes).

       To the Commissioner's argument that this action is foreclosed by §
  5887, as held in Riley, taxpayers answer that exhaustion of administrative
  remedies would have been futile because the Commissioner could not have
  held the statute unconstitutional and given taxpayers any relief.  See
  Westover v. Village of Barton Elec. Dep't, 149 Vt. 356, 359, 543 A.2d 698, 700 (1988) (administrative agencies do not have power to determine
  constitutionality of statutes). They argue that exhaustion is not required
  where it would be futile.

       Although taxpayers' argument may have some force in other contexts,
  their futility claim is unavailing here.  The term "exhaustion" is used to
  describe both the judge-made common-law doctrine and a statutory direction
  that judicial review is available only if specified administrative
  procedures are first employed.  See II K. Davis & R. Pierce, Jr.,
  Administrative Law Treatise

 

  § 15.3, at 316 (3d ed. 1994).  Where the Legislature specifically mandates,
  exhaustion is required.  See McCarthy v. Madigan, 503 U.S. 140, 144 (1992). 
  Where the Legislature "has not clearly required exhaustion, sound judicial
  discretion governs."  Id.  The futility doctrine has been adopted as part
  of that discretion to dispense with unnecessary exhaustion of
  administrative remedies.  It has no place, however, in the face of a clear
  legislative command that exhaustion is required.  See Neff v. State, 861 P.2d 281, 285 (N.M. Ct. App. 1993).

       It is difficult to conceive of a clearer legislative direction than we
  have here.  Not only has the Legislature created an administrative appeal
  route with a time limit on availability, but it has made it the "exclusive
  remedy of a taxpayer with respect to the refund of monies."  The superior
  court has no jurisdiction to consider an income tax refund suit by any
  other route.  See Levy v. Town of St. Albans, 152 Vt. 139, 141-42, 564 A.2d 1361, 1363 (1989) (similar exclusive remedy language of zoning appeal
  statute deprives superior court of jurisdiction to hear zoning appeal
  except in accordance with statutory procedure).(FN1) As we held in response
  to the argument that the superior court has discretion to grant a de novo
  hearing in a tax appeal governed by § 5885, "because these statutes mandate
  that review on the agency record is the exclusive remedy in this case,
  there is no room for the exercise of judicial discretion."  State Dep't of
  Taxes v. Tri-State Indus. Laundries, Inc., 138 Vt. 292, 298, 415 A.2d 216,
  221 (1980).

       We also note that there are clear policy reasons why the Legislature
  would insist that a taxpayer go through an administrative hearing even if
  the decision-maker did not have the power to refuse to enforce a statute on
  constitutional grounds.  Under the statutory scheme,

 

  development of the record according to the more informal procedures of the
  administrative procedures act and fact-finding are entrusted to the
  Commissioner.  Id. at 295-96, 415 A.2d  at 218-19.  The Legislature may
  decide that even in a constitutional challenge, the relevant facts should
  be determined by the Commissioner rather than through the more formal
  procedures and rules of evidence applicable in court proceedings.  See
  W.E.B. DuBois Clubs of America v. Clark, 389 U.S. 309, 311-12 (1967); Hogan
  v. Musolf, 471 N.W.2d 216, 224 (Wis. 1991) (agencies would become
  ineffectual if they lost their authority to review a case every time a
  constitutional claim is asserted).  Moreover, the Commissioner is empowered
  to determine the constitutional applicability of statutes.  Alexander v.
  Town of Barton, 152 Vt. 148, 151, 565 A.2d 1294, 1296 (1989).  The
  legislature may also decide that the courts should have the benefit of the
  specialized expertise of the Commissioner.  See Neff, 861 P.2d  at 286.

       The claim-filing requirements of the tax-appeal statutes are related
  to governmental immunity and exist for the benefit of the state.  See
  Lattin v. Franchise Tax Bd., 142 Cal. Rptr. 130, 134 (Cal. Ct. App. 1977),
  overruled on other grounds, Woosley v. California, 13 Cal. Rptr. 2d 30 (Cal.
  1992).  They are conditions the Legislature places on suits against public
  entities in view of the public interests involved.  See id.; F.M.
  Burlington Co. v. Commissioner of Taxes, 134 Vt. 515, 518, 365 A.2d 531,
  533 (1976) ("In such proceedings . . . the public interest is vitally
  affected.").  We agree with the observations of the Oregon Supreme Court:

       The opportunity to plan for the fiscal consequences of
       invalidation and to minimize the disruption of state finances is at
       the heart of [the procedural remedies].  In order to protect its
       financial stability, the state has chosen to require taxpayers who
       contest the validity of a state tax law or part thereof to provide
       notice of their claim of invalidity by instituting legal action.  Until
       a taxpayer does so, the state has no way of preparing and planning
       for the consequences of the invalidation of the law at issue.

  Ragsdale v. Department of Revenue, 823 P.2d 971, 978 (Or. 1992) (en banc);
  see also Bailey v. State, 412 S.E.2d 295, 302 (N.C. 1991) (refund demand
  requirement allows state to determine whether taxes paid can be retained to
  meet public expenditures).

 

       We hold that 32 V.S.A. § 5887 requires that a taxpayer petition for a
  refund from the Commissioner pursuant to 32 V.S.A. § 5884 before going to
  superior court.  The failure of the taxpayer to exhaust this administrative
  remedy deprives the superior court of jurisdiction.  This is so even if the
  petition to the Commissioner is futile because the Commissioner is not
  empowered to grant the relief requested.

       In reaching this decision, we are cognizant that, consistent with due
  process of law, the State must provide a clear and certain remedy for an
  erroneous or unlawful tax collection to ensure that the opportunity to
  contest the tax is meaningful.  See Williams v. State, 156 Vt. 42, 52-53,
  589 A.2d 840, 847 (1990).  "[T]hat remedy is not, as a matter of
  constitutional necessity, a plenary suit in the court of general
  jurisdiction."  Id.  Due process does not prevent a state from requiring
  exhaustion of administrative remedies before judicial intervention into a
  state tax matter.  See Neff v. State, 861 P.2d  at 284; Swanson v. State,
  441 S.E.2d 537, 543 (N.C. 1994); Ragsdale, 823 P.2d  at 978; Hogan, 471 N.W.2d  at 224.  Consistent with due process, a state may impose a statute
  of limitations on retroactive relief.  See McKesson Corp. v. Division of
  Alcoholic Beverages and Tobacco, 496 U.S. 18, 45 (1990).  The remedy
  afforded here is clear and certain; there is no due process violation.

       The superior court acted properly to dismiss plaintiffs' claim for
  failure to exhaust administrative remedies.  It also acted properly in
  denying class action status because class members also failed to exhaust
  their administrative remedies.

       Affirmed.


                              FOR THE COURT:



                              _______________________________________
                              Associate Justice




  --------------------------------------------------------------------------
                                  Footnotes

FN1.  The zoning appeal statute provides that an administrative appeal to
  the zoning board of adjustment, followed by an appeal to superior court
  from an adverse decision of that board, is the "exclusive remedy" of an
  interested person with respect to a zoning dispute.  24 V.S.A. § 4472(a). 
  It is instructive that, unlike the income tax appeal statute, there is a
  specific exception for challenges to the constitutionality of zoning
  ordinances or development plans.  See id. § 4472(b).