Supreme Court Rules on Local Tax Refund Refusal Case
The United States Supreme Court recently decided (6-3) the case of Armour v. City of Indianapolis, No. 11-161 (June 4, 2012), the only significant state tax case that the Court considered this term. This case is important for tax policy reasons for taxpayers and state and local governments as it may be interpreted rather broadly to affect how states and municipalities may assess and forgive taxes. Cities and jurisdictions potentially may rely on this case in designing tax amnesty and tax forgiveness programs, as Armour clarifies that administrative concerns can be sufficient to justify tax-related distinctions and governmental policy decisions without running afoul of the U.S. Constitution.
In Armour, the City of Indianapolis relied on the state's Barrett Law and allowed 180 taxpayers the option of paying for a sewer improvement project either immediately in a lump-sum basis ($9,278 each) or in smaller increments monthly over a period of up to 20 years. Soon after the project was commenced and payments were made by the taxpayers, the City abandoned the Barrett Law method of financing sewer improvements in favor of a new system that imposes less of a financial burden on property owners. To ease the transition, the City discharged all outstanding Barrett Law assessments owing as of November 1, 2005, but did not give refunds to 38 property owners who had paid their Barrett Law assessments in full or in part. Most of the aggrieved property owners challenged the City's action, and ultimately, the Indiana Supreme Court ruled that the City acted properly in seeking to reduce administrative costs and preserve its limited resources.
In affirming the Indiana Supreme Court's decision, the U.S. Supreme Court agreed that the City’s tax policy and distinction between those who had already paid and those who had not yet paid did not violate the Equal Protection Clause of the Fourteenth Amendment because forgiving only the outstanding assessment balances was rationally related to a legitimate governmental interest - reducing administrative costs. The Court held that the City had a rational basis for distinguishing between lot owners who had already paid their share of project costs up front and those who had not. The local taxing authority was not required to refund payments made by those who had paid their assessments in full, but at the same time was permitted to forgive the remaining obligations of identically situated taxpayers who chose to pay over a multi-year installment plan.
The Supreme Court agreed with the City that granting refunds to the property owners who had paid full or partial assessments would create an administrative hardship and that its decision to forgive Barrett Law payments met a key test. Per the Court's opinion, “The City’s administrative concerns are sufficient to show a rational basis for its distinction. Petitioners propose other forgiveness systems that they argue are superior to the City’s system, but the Constitution only requires that the line actually drawn by the City be rational . . . State law says nothing about forgiveness . . . To adopt petitioners’ view would risk transforming ordinary violations of ordinary state tax law into violations of the Federal Constitution.” As the Supreme Court affirmed that administrative burdens and costs can be a rational basis for state and local government decision making, the Court concluded that there was no Equal Protection Clause violation. Justices Breyer, Ginsburg, Kagan, Kennedy, Sotomayor, and Thomas joined the majority opinion, while Chief Justice Roberts and Justices Alito and Scalia dissented.
Previously, on February 29, 2012, the United States Supreme Court heard oral arguments in Armour v. City of Indianapolis.
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