St. 2002, c. 186, § 6 -3-M.G.L. c. 62, § 2(b)(3)(1994)(St. 1994, c. 195, § 10)-4-

M.G.L. c. 62, § 4 -2-,-3-CONSTITUTIONAL PROVISIONS

Article 44 of the Amendments to the Constitution of the Commonwealth -1-,-8-,-9-

Section 14 of the Revenue Enhancement Act -2-

Section 32 of the Revenue Enhancement Act -3-

Whether Stat. 2002, ch. 186, § 32, violates Article 44 of the Amendments to the Constitution of the Commonwealth because it imposes different rates of taxation during the 2002 calendar year on income derived from the same class of property.

2. This case raises important constitutional issues.

3. The outcome of this case affects whether or not the plaintiffs must pay over $1.9 million in taxes and whether the Commonwealth can collect potentially millions of other dollars in taxes. It is not only in the plaintiff’s interest to receive refunds of such substantial tax payments as soon as possible, but it is also in the Commonwealth’s interest to know whether it must generate alternative revenue sources or make needed spending cuts as soon as possible.

On July 22, 2003, the defendant Commissioner of Revenue filed a Response to Plaintiff’s Motion for Report of Case indicating that he agreed with plaintiffs that the case should be reported to the Supreme Judicial Court for the Commonwealth.

On September 3, 2003, Justice Sosman reserved and reported the case without decision for determination by the Supreme Judicial Court for the Commonwealth.

On July 23, 2002, the House of Representatives and on July 24, 2002, the Senate in General Court enacted into law chapter 186 of the Statutes of 2002, a statute entitled “An Act Enhancing State Revenues” (hereafter “the Revenue Enhancement Act”). Section 14 of the Revenue Enhancement Act amended Mass. Gen. Laws ch. 62, § 4 to provide that Part C taxable income (hereafter “capital gains”) shall be taxed at the same rate as Part B income (hereafter “ordinary income”). In 2002, ordinary income was taxed at 5.3 %. G.L. c. 62, § 4.Section 6 of the Revenue Enhancement Act defined Part C income as “capital gain income which equals the gains from the sale or exchange of capital assets held for more than 1 year”. St. 2002, c. 186, § 6. Section 32 of the Revenue Enhancement Act (hereafter “the bifurcation clause”), which was added to then H.B. No. 5250 in conference committee, see State House News Service, July 16, 2002, appended to this Brief as Exhibit # 1, provides that sections 2, 6, 7, 8 and 14 of Stat. 186, “shall be effective for tax years beginning on or after May 1, 2002, and for the portion that begins on May 1, 2002 of any taxable year beginning on or after January 1, 2002 and before May 2, 2002.” St. 2002, c. 186, § 32.

Prior to the enactment of the Revenue Enhancement Act, Part C gross income was defined to include all Part C capital gains. Part C capital gains were long-term (i.e. more than one year) gains from the sale or exchange of capital assets (except collectibles) divided into six classes based on the holding period. Gains from the sale or exchange of capital assets held for more than one year but less than or equal to two years were taxed at a five (5) per cent rate. Gains from the sale or exchange of capital assets held for more than two years but less than or equal to three years were taxed at a four (4) per cent rate. Gains from the sale or exchange of capital assets held for more than three years but less than or equal to four years were taxed at a three (3) per cent rate. Gains from the sale or exchange of capital assets held for more than four years but less than or equal to five years were taxed at a two (2) per cent rate. Gains from the sale or exchange of capital assets held for more than five years but less than or equal to six years were taxed at a one (1) per cent rate. Gains from the sale or exchange of capital assets held for more than six years were not taxed. G.L. c. 62, § 2(b)(3)(1994)(St. 1994, c. 195, § 10).

As the result of the passage of the Revenue Enhancement Act, all of the plaintiffs have needed to or shall need to pay capital gain taxes in calendar year 2002 , which they previously would not have needed to pay. Plaintiffs’ Affidavits and Tax Returns, App. at 0035-0164. 

The Revenue Enhancement Act, by taxing plaintiffs’ long term capital gains realized in the portion of the 2002 calendar tax year after May 1, 2002 at 5.3%, while not taxing long term capital gains realized in the portion of the 2002 calendar tax year prior to May 1 2002 at all or at a lower rate than 5.3%, imposes different rates of taxation on income derived from the same class of property in contravention of Article 44 of the Constitution of the Commonwealth. See Argument, infra, at 11.

Article 44 of the Amendments to the Massachusetts Constitution provides that taxes shall be levied at a uniform rate upon incomes derived from the same class of property. This Court has held on two different occasions that different timing in the acquisition or disposal of an asset cannot justify the imposition of different tax rates on different taxpayers. Salhanick v. Commissioner of Revenue, 391 Mass. 658, 661-664, 463 N.E.2d 1163 (1984); Daley v. State Tax Comm’n, 376 Mass. 861, 383 N.E.2d 1140 (1978). See Argument, infra, at 11-14.

In Opinion of the Justices, 425 Mass. 1201, 1204; 681 N.E.2d 857 (1997), the Court held that different classification of taxes must be based on differences in the “sources of income”. There is no difference in the “sources of income” of capital gains sold on April 30, 2002, and capital gains sold on May 1, 2002. See Argument, infra, at 14-15.

There is no difference in kind between a capital gain sale conducted on April 30, 2002, and a capital gain sale conducted on May 1, 2002. The amount of good judgment and business sagacity required to produce the income is no different in one case than in the other. See Argument, infra, at 15.

Permitting some taxpayers to pay one rate of taxation or no tax at all on the same kind of property for a tax year, while other taxpayers need to pay a different rate on the same kind of property for a tax year, is subject to the type of abuse which Article 44 is intended to prevent. In fact, the General Court did not add the bifurcation clause making May 1, 2002, the effective date of the Revenue Enhancement Act until it met in Conference Committee in July 2002, after a reported lobbying effort by one taxpayer who had sold a $100 million interest in his company in April 2002. See Argument, infra, at 16.

This Court has held on two occasions that it may weigh such factors as habitual practice, custom, or history in determining whether a statute violates Article 44. Opinion of the Justices, 425 Mass. 1201, 1207, 681 N.E.2d 857 (1997); Daley, supra at 866. The bifurcation provision of the Revenue Enhancement Act is unprecedented. A survey of thirty two occasions that the tax laws have been amended since its recodification in 1971 reveals that on no previous occasion has the General Court ever included a provision changing the taxability of income or the tax rate for only part of a taxable year. See Argument, infra, at 17.

The Revenue Enhancement Act, by taxing plaintiffs’ long term capital gains realized in the portion of the 2002 calendar tax year after May 1, 2002 at 5.3%, while not taxing long term capital gains realized in the portion of the 2002 calendar tax year prior to May 1 2002 at all or at a lower rate than 5.3%, imposes different rates of taxation on income derived from the same class of property in contravention of Article 44 of the Constitution of the Commonwealth.

Article 44 of the Amendments to the Massachusetts Constitution, ratified in 1915, provides:

Full power and authority are hereby given and granted to the general court to impose and levy a tax on income in the manner hereinafter provided. Such tax may be at different rates upon income derived from different classes of property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from the same class of property. The general court may tax income not derived from property at a lower rate than income derived from property, and may grant reasonable exemptions and abatements. Any class of property the income from which is taxed under the provisions of this article may be exempted from the imposition and levying of proportional and reasonable assessments, rates and taxes as at present authorized by the constitution. This article shall not be construed to limit the power of the general court to impose and levy reasonable duties and excises.

The Supreme Judicial Court has upheld the authority of the Legislature to impose different tax rates by distinguishing (a) capital gains from dividends and interest, Tax Comm’r v. Putnam, 227 Mass. 522, 531, 116 N.E. 904 (1917); (b) interest paid on loans made by finance trusts from interest paid on loans made by pawnbrokers, Barnes v. State Tax Comm’n, 363 Mass. 589, 594, 296 N.E.2d 510 (1973); (c) interest earned on in-State bank deposits from that earned on deposits in out-of-State financial institutions, Aronson v. Commonwealth, 401 Mass. 244, 253-254, 516 N.E.2d 137 (1987), cert. denied, 488 U.S. 818, 102 L. Ed. 2d 36, 109 S. Ct. 58 (1988); (d) earned income from unearned (investment) income, Ingraham v. State Tax Comm’n, 368 Mass. 242, 247 n.3, 331 N.E.2d 795 (1975), and (e) money earned in a military retirement system versus money earned in other retirement systems, Opinion of the Justices, 425 Mass. 1201; 681 N.E.2d 857 (1997) .

By contrast, the Supreme Judicial Court has held classifications to be invalid that established different tax rates based on (a) the length of time that the income-generating property had been owned, Salhanick v. Commissioner of Revenue, 391 Mass. 658, 661-664, 463 N.E.2d 1163 (1984); (b) the timing of contributions to a pension fund, Daley v. State Tax Comm’n, 376 Mass. 861, 383 N.E.2d 1140 (1978); (c) the amount of the bank deposit on which interest had been paid, Commissioner of Revenue v. Lonstein, 406 Mass. 92, 94, 546 N.E.2d 157 (1989); (d) the total amount of income received by the taxpayer, Opinion of the Justices, 266 Mass. 583, 586-587, 165 N.E. 900 (1929); and (e) the taxpayer’s income, marital status, and filing status, Massachusetts Taxpayers Foundation, Inc. v. Secretary of Administration, 398 Mass. 40, 494 N.E.2d 1311 (1986).As noted above, two cases have found that different timing in the acquisition or disposal of an asset cannot justify the imposition of different tax rates on different taxpayers. Salhanick v. Commissioner of Revenue, 391 Mass. 658, 661-664, 463 N.E.2d 1163 (1984); Daley v. State Tax Comm’n, 376 Mass. 861, 383 N.E.2d 1140 (1978). In Salhanick, the plaintiff challenged the constitutionality of taxing her capital gains, which had been held for more than six months, at a higher rate than other capital gains which had been held for less than six months. The Court, concluding that different tax rates could not be applied to the sale of iron ore depending on whether the iron ore had been held for more or less than six months, held:

In either event, the royalties derive from holding the iron ore alone. The amount of good judgment and business sagacity required to produce the income is no different in one case than in the other. . . .[A]pproval of a classification of loans according to the distinct nature of the lenders does not connote approval of a classification of royalty income according to how long the taxpayer has held the underlying property. It simply cannot fairly be said that there is a difference in kind between iron ore that is owned for one period of time and the same iron ore that is owned for another period of time.

For the reasons stated in this Brief, this Court should issue a judgment declaring that:

1. Taxing long term capital gains realized in the portion of the 2002 calendar tax year after May 1, 2002 at 5.3% while not taxing long term capital gains realized in the portion of the 2002 calendar tax year prior to May 1 2002 at all or at a lower rate than 5.3%, imposes different rates of taxation on income derived from the same class of property in contravention of Article 44 of the Constitution of the Commonwealth.

2. The commissioner shall not enforce any collection from the plaintiffs of any tax on long term capital gains realized in the portion of the 2002 calendar tax year after May 1, 2002 .

BY PLAINTIFFS’ ATTORNEYS,

________________________

Stephen Schultz, Esq., BBO # 447680

________________________

Stephen M. Politi, Esq.,

BBO # 402180

Engel & Schultz, PC

125 High Street

Suite 2601

Boston, MA 02110

(617) 951-9980

(617) 951-0048 (fax)