Richard Weiss, Director of the Arkansas Department of Finance and Administration v. Jimmy R. McFadden, William W. Joplin and James T. French, On Behalf of Themselves and All Taxpayers Similarly Situated. Affirmed. Dickey, C.J., Brown, and Thornton, JJ., dissent. (6 PAGES + 3-PAGE DISSENT + 4-PAGE DISSENT PUBLISHED) [HTML, WP5.1]

Richard WEISS, Director of the Arkansas Department of Finance and Administration v. Jimmy R. McFADDEN, William W. Joplin and James T. French, On Behalf of Themselves and All Taxpayers Similarly Situated

04-696

Supreme Court of Arkansas

Opinion delivered December 9, 2004

1. Appeal & error - circuit court sitting as trier of fact - standard of review. - Where the circuit court sits as the trier of fact, the standard of review on appeal is not whether there is substantial evidence to support the finding of the court, but whether the circuit court's findings were clearly erroneous or clearly against the preponderance of the evidence; a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a firm conviction that a mistake has been committed; disputed facts and determinations of credibility are within the province of the fact-finder; at issue is whether the circuit court erred in fashioning a remedy; in fashioning a remedy, a chancellor has broad power, limited only to the extent that the remedy must be reasonable and justified by the proof.

2. Appeal & error - law-of-the-case doctrine - serves to effectuate efficiency & finality of judicial process. - The venerable doctrine of law of the case prohibits a court from reconsidering issues of law and fact that have already been decided on appeal; the doctrine serves to effectuate efficiency and finality in the judicial process, and provides that a decision of an appellate court establishes the law of the case for the trial upon remand andfor the appellate court itself upon subsequent review; on the second appeal, the decision of the first appeal becomes the law of the case, and is conclusive of every question of law or fact decided in the former appeal, and also of those that might have been, but were not, presented.

3. Attorney & client - law-of-the-case doctrine - rationale for adherence to strict application has not changed. - The rationale for adherence to a strict application of the rule, i.e., avoidance of the disorder and unpredictability that would follow a departure from the doctrine, has not changed.

4. Appeal & error - law-of-the-case doctrine - doctrine inapplicable if there is material change in facts. - The doctrine is conclusive only where the facts on the second appeal are substantially the same as those involved in the prior appeal; it does not apply if there is a material change in the facts; here, there was no change of fact with respect to the retirees and their pensions; the only change on the present appeal was the application of the voluntary payment rule.

5. Appeal & error - issue already raised in McFadden II - holding of first appeal law of the case. - The issue of whether the circuit court erred in applying a front-end loaded method to taxes paid after filing of the lawsuit in1999 was already raised by DF&A in Weiss v. McFadden, 356 Ark. 123, ___ S.W.3d ___ (2004)[McFadden II]; according to thesupreme court in McFadden II, DF&A was appealing the circuit court's decision on the refund method and alleged that the circuit court erred in adopting "appellee's methodology"; the "appellee's methodology," as noted in the opinion in McFadden II, was the "front-end loaded" method; after considering the arguments of the parties, the supreme court held in McFadden II that with respect to the refund method, "the trial court did not err in refusing to apply 26 U.S.C. § 72 to employment-related retirement plans"; further the supreme court held, "Because the trial court erred in refusing to apply the voluntary-payment rule to illegally-exacted taxes paid in the years prior to 1999, we reverse and remand on this point with instructions to fashion a remedy consistent with this opinion"; as the circuit court correctly stated in its May 13, 2004, Order Upon Remand: "The only issue remanded to this court was the application of the voluntary payment rule to illegally exacted taxes paid in years prior to 1999."

6. Appeal & error -- no error in circuit court's application of voluntary-payment rule - findings of circuit court affirmed. - There was no error in the circuit court's application of the voluntary-payment rule in this case where the refunds for taxes paid prior to filing the lawsuit in 1999 are handled differently than refunds for taxes paid after the lawsuit was filed; no authority was cited that required the circuit court to utilize the same methods for both periods; the circuit court was clearly attempting to exercise equity to assure that retired pensioners receive the refund due within a time frame that provides some reasonable form of actual relief; some retirees may have passed away since this action wasbegun almost five years ago, and such retirees have been effectively denied relief; there was no showing that the remedy ordered by the circuit court was unreasonable or not justified by the proof; upon remand, the circuit court did precisely what it was ordered to do by the supreme court in McFadden II; the findings of the circuit court were not clearly erroneous; the supreme court found no error and affirmed.

Appeal from Pulaski Circuit Court; Raymond C. Kilgore, Judge, affirmed.

William E. Keadle, Revenue Legal Counsel, for appellant.

Nichols & Campbell, P.A., by: H. Gregory Campbell and Mark W. Nichols, for appellees.

Jim Hannah, Justice. The Arkansas Department of Finance & Administration (DF&A) appeals a decision of the Pulaski County Circuit Court entered after this case was remanded to the circuit court in Weiss v. McFadden, 356 Ark. 123, ___ S.W.3d ___ (2004) (McFadden II). DF&A argues that the circuit court erred in ordering a "front-end loaded" refund method for class members who retired after the lawsuit was filed in 1999, and that the circuit court erred in ordering a refund method for taxes paid prior to the lawsuit that was different than the refund method to be used for taxes paid after the lawsuit was filed.

The appeal in McFadden II involved assertions by DF&A that the refund method fashioned by the circuit court was in error. Under the doctrine of law of the case, this same issue may not be raised again on the present appeal. Further, the decision of the circuit court to use a different refund method for taxes paid prior to filing the lawsuit in 1999 is not clearly erroneous. Our jurisdictionis pursuant to Ark. Sup. Ct. R. 1-2(a)(1) and (7).

Facts

This case concerns an attempt by DF&A to tax return of capital as if it were income. In Weiss v. McFadden, 353 Ark. 868, 120 S.W.3d 545 (2003)(McFadden I), this court held that the return to a retiree of after-tax contributions made to a retirement plan is not income subject to income tax because it constitutes return of capital rather than income. We further held that an income tax levied against after-tax contributions constituted an ad valorem tax in violation of Amendment 47 of the Arkansas Constitution. Therefore, the tax constituted an illegal exaction under article 16, section 13 of the Arkansas Constitution.

In McFadden II, this court held that the circuit court erred in failing to apply the voluntary payment rule in formulating its refund plan to benefits paid to retirees prior to the filing of the complaint in this case in1999. This court further held that the circuit court did not err in refusing to apply 26 U.S.C. §72 in fashioning the remedy in this case. The case was remanded for application of the voluntary payment rule.

Standard of Review

This case was tried with the circuit court sitting as the trier of fact. The standard of review on appeal is not whether there is substantial evidence to support the finding of the court, but whether the circuit court's findings were clearly erroneous or clearly against the preponderance of the evidence. Farm Credit Midsouth, PCA v. Reece Contractors, Inc., ___ Ark. ___, ___ S.W.3d ___ (Oct. 28, 2004). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a firm conviction that a mistake has beencommitted. Farm Credit, supra. Disputed facts and

determinations of credibility are within the province of the fact-finder. Id. At issue on this case is whether the circuit court erred in fashioning a remedy. In Lotz v. Cromer, 317 Ark. 250, 253, 878 S.W.2d 367 (1994), this court correctly stated that "[i]n fashioning a remedy, a Chancellor has broad power, limited only to the extent that the remedy must be reasonable and justified by the proof."

Law of the Case

In Cadillac Cowboy, Inc. v. Jackson, 347 Ark. 963, 69 S.W.3d 383 (2002), this court discussed law of the case and stated:

The venerable doctrine of law of the case prohibits a court from reconsidering issues of law and fact that have already been decided on appeal. The doctrine serves to effectuate efficiency and finality in the judicial process. Frazier v. Fortenberry, 5 Ark. 200 (1843); see also, 5 Am. Jur. 2d Appellate Review § 605 (1995). We have said the following with regard to the law-of-the-case doctrine:

The doctrine provides that a decision of an appellate court establishes the law of the case for the trial upon remand and for the appellate court itself upon subsequent review. Kemp v. State, 335 Ark. 139, 983 S.W.2d 383 (1998). On the second appeal, the decision of the first appeal becomes the law of the case, and is conclusive of every question of law or fact decided in the former appeal, and also of those which might have been, but were not, presented. Griffin v. First Nat'l Bank, 318 Ark. 848, 888 S.W.2d 306 (1994).

Clemmons v. Office of Child Support Enforcement, 345 Ark. 330, 346, 47 S.W.3d 227, 237 (2001). The rationale for the adherence to a strict application of the rule--the avoidance of the disorder and unpredictability that would follow a departure from the doctrine--has not changed.

Cadillac Cowboy, 347 Ark. at 970. The doctrine is conclusive only where the facts on thesecond appeal are substantially the same as those involved in the prior appeal. Lake View Sch. Dist. No. 25 v. Huckabee, 351 Ark. 31, 91 S.W.3d 472 (2002). It does not apply if there is a material change in the facts. Id. In the case before us, there is no change of fact with respect to the retirees and their pensions. The only change on the present appeal is the application of the voluntary payment rule.

Front-End Loaded Method

The issue of whether the circuit court erred in applying a front-end loaded method to taxes paid after filing of the lawsuit in1999 was already raised by DF&A in McFadden II. In McFadden II, this court stated that the appeal concerned "the refund mechanism fashioned by the trial court upon remand of Weiss I (McFadden I) as well as the issue of the constitutionality of Act 380 of 1991." McFadden II, 356 Ark. at 126. This court also stated:

Both the appellee taxpayers and the DF&A proposed refund mechanisms as a remedy for taxes that had been illegally exacted from the appellees. The trial court opted for the appellees' methodology, which allows retirees to recover the full benefit of their after-tax contributions. The DF&A appeals this ruling, asserting that the trial court erred in (1) refusing to apply the voluntary-payment rule to any illegally-exacted taxes that were paid prior to the filing of the lawsuit in 1999, and (2) refusing to apply 26 U.S.C. § 72, which prorates recovery of after-tax contributions on federal tax returns.

Id. Therefore, according to this court in McFadden II, DF&A was appealing the circuit court's decision on the refund method and alleged that the circuit court erred in adopting the "appellee's methodology." The "appellee's methodology," as noted in the opinion in McFadden II, was the "front-end loaded" method.

After considering the arguments of the parties, this court held in McFadden II that with respect to the refund method, "the trial court did not err in refusing to apply 26 U.S.C. § 72 to employment-related retirement plans." Further we held, "Because the trial court erred in refusing to apply the voluntary-payment rule to illegally-exacted taxes paid in the years prior to 1999, we reverse and remand on this point with instructions to fashion a remedy consistent with this opinion." McFadden II, 356 Ark. at 131. As the circuit court correctly stated in its May 13, 2004, Order Upon Remand: "The only issue remanded to this court was the application of the voluntary payment rule to illegally exacted taxes paid in years prior to 1999."

Voluntary Payment Rule

There is no error in the circuit court's application of the voluntary payment rule in this case where the refunds for taxes paid prior to filing the lawsuit in 1999 are handled differently than refunds for taxes paid after the lawsuit was filed. No authority is cited which requires the circuit court to utilize the same methods for both periods in this case. The circuit court was clearly attempting to exercise equity to assure that retired pensioners receive the refund due within a time frame that provides some reasonable form of actual relief. Some retirees may have passed away since this action was begun almost five years ago, and such retirees have been effectively denied relief.

There is no showing that the remedy ordered by the circuit court is unreasonable ornot justified by the proof. Upon remand, the circuit court did precisely what it was ordered to do by this court in McFadden II. The findings of the circuit court are not clearly erroneous. We find no error and affirm.

Dickey, C.J., Brown and Thornton, JJ., dissent.

Ray Thornton, Justice, dissenting. Because I believe that the majority misapplies the law-of-the-case doctrine and fails to reach the issues properly before this court, I respectfully dissent.

The majority inconsistently holds that we may not rule on the front-end loaded method in this appeal, claiming such rulings would be barred by the law-of-the-case doctrine while simultaneously approving the trial court's abandonment of the front-end loaded method for contributions returned prior to 1999. The majority also inconsistently allows application of 26 U.S.C. § 72 to pre-1999 returns without making that rule applicable to all returns. The majority's opinion applied the law-of-the-case doctrine. This doctrine prevents a court from reconsidering issues of law or fact that have already been decided on a previous appeal. Jones v. Double "D" Properties, Inc., Ark. , S.W.3d (April 29, 2004). This doctrine serves to effectuate the efficiency and finality of the judicial process and is meant to maintain consistency while avoiding reconsideration of issues once decided during the course of a single, continuing lawsuit. Jones, supra (citing Cadillac Cowboy, Inc. v. Jackson, 347 Ark. 963, 69 S.W.3d 383 (2002)). An exception, however, to the law-of-the-case doctrine is when there is materially different evidence presented after the issuance of the appellate court's mandate to the trial court. Wilson v. Wilson, 301 Ark. 80, 781 S.W.2d 487 (1989).

In this case, subsequent to the decision in Weiss v. McFadden, 356 Ark. 123, S.W.3d (2004) ("McFadden II"), the trial court held a hearing to take further evidence and preserve thesubsequent record for appeal. At this hearing, new testimony was taken concerning the availability of data from the federal government, the methodology of wide-scale refunds, and the nature and ratio of post-tax contributions in retirement accounts under federal law. Quite simply, there was new evidence regarding the very issue that appellants now bring to this court's attention. Specifically, there is now testimony before the trial court that, under federal law, even if a retiree chooses to recover a lump-sum amount of post-tax contributions in the initial payments from their benefit system, the balance still contains post-tax contributions over the life of the retiree. This is directly related to our statement in McFadden II, supra that "either the appellees have received their post-tax contributions or they have not."

There is sufficient new evidence that the record on this appeal is materially different from the previous records, and the issues argued by appellants are squarely within the above-noted exception to the law-of-the-case doctrine. See, e.g. Wilson, supra.

Furthermore, the majority relies on the circuit court's decision about what was to be decided on remand. This is error and violative of the mandate rule under our jurisprudence. The mandate rule is the legal principle that a lower court is bound to follow the dictates of a superior court and that the jurisdiction conferred on the trial court upon remand is bounded by the mandate and decision of the superior court. City of Dover v. A.G. Barton, 342 Ark 521, 29 S.W.3d 698 (2000). When we remand with specific instructions, those instructions must be followed as found in both the mandate and opinion. Id. A lower court is bound to follow both the letter and spirit of the opinion and mandate of the appellate court. Id.(emphasis added). In working equity, a trial court should look beyond the mere words of affirmance or reversal and look to the effect of the opinion in proceeding upon remand. Glover v. Woodhaven Homes, Inc., 346 Ark. 397, 57 S.W.3d 211 (2001) (quoting Kneeland v. American Loan & Trust Co., 138 U.S. 509 (1891)).

In the matter under review, I believe that our holding in McFadden II, supra, was not followed. Appellees proposed a remedy that ignored the effect of our ruling, and that remedy was accepted by the trial court. The mandate rule should require us to clarify that holding now. In examining both the mandate and opinion of McFadden II, it is clear that we did not approve of the trial court's remedy. We found that the remedy did not apply the voluntary-payment rule to any of the taxes in the case when illegal exaction jurisprudence requires the application of the voluntary-payment rule to taxes paid before the illegal-exaction suit was filed. See e.g., McFadden II, supra. We remanded based on this issue, but only after noting that the appellees' suggested remedy was not viable. Furthermore, we stated that there were equitable solutions to this remedial quagmire and gave one example that allowed a recovery of income tax paid on the portion of benefits that were the return of post-tax contributions and took into account the voluntary-payment rule. In Weiss v. McFadden, 353 Ark. 868, 120 S.W.3d 545 (2003) ("McFadden I"), we noted that the parties agreed that some portion of the benefits paid to the retirees was post-tax contributions being returned. If the trial court did not follow the letter and spirit of our previous opinions, the mandate rule is not a bar toadjudicating the issues. Our instruction to fashion a remedy providing for a harmonious treatment of federal and state tax laws was not followed by the trial court.1

I believe that it was reversible error to reject our conclusion in McFadden II that the state-tax treatment must be harmonious with that of federal taxation. Accordingly, I would reverse and remand this case with instructions to the trial court to craft a remedy that is harmonious as to the state and federal treatment of the post-tax contribution corpus in the retirees annuity accounts.

For the forgoing reasons, I respectfully dissent. I am authorized to state that Chief Justice Dickey and Justice Brown join in this dissent.

1 I note that appellees have discovered and seek to call to the attention of the court a statutory provision approving the use of 26 U.S.C. § 72. This statute was not cited to us in the original appeal and the law of the case prevents us from considering it now.