Taxpayers across Massachusetts continue to receive rebates as the result of Engel & Schultz’s successful constitutional challenge to the change in the capital gains tax rate in the middle of the calendar year 2002.

In the case of Peterson v. Commissioner of Revenue (Peterson I), Engel & Schultz successfully obtained a ruling from the Massachusetts Supreme Judicial Court ruling declaring that it was unconstitutional to make effective a change in the tax laws in the middle of the 2002 calendar year, thus, taxing some taxpayers, while not taxing other taxpayers, for the same types of transactions.

In response to Peterson I, the legislature passed a law purporting to treat all taxpayers the same, stating that all taxpayers owed capital gains taxes in 2002, but then exempting from that taxation those taxpayers who had already filed their tax returns and paid no capital gains tax for the year 2002. Engel & Schultz challenged the constitutionality of this new legislation. The Commonwealth sought to justify this new legislation by arguing that it was reasonable to exempt persons from taxation who sold their assets prior to May 1, 2002, under the doctrine of “reliance”. The Massachusetts Supreme Judicial Court, at Engel & Schultz’s urging, rejected this argument, and declared the new law, like the first law, to be unconstitutional.

Both houses of the legislature, in response to Peterson II, initially voted for bills which would have established January 1, 2002, as the effective date of the change in the capital gains tax laws, thus, providing rebates to no taxpayers.   The governor, through his Commissioner of Revenue, initially argued for the constitutionality of the original tax law, and then requested the court to set January 1, 2002, as the effective date of the change in the capital gain tax.

In response, Engel & Schultz crafted a compromise, eventually adopted by the legislature, providing for a four year payout of the tax abatement, resulting in more than $200 million of tax rebates. Engel & Schultz partner Stephen Schultz was lead counsel in the case.