The Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed a taxpayer’s action for declaratory relief because the taxpayer failed to exhaust administrative remedies. The taxpayer challenged the constitutionality of the legislature’s action not to pay interest on refunds of the unconstitutional capital gains taxes. The remedies provided by the act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. (DeMoranville v. Commissioner of Revenue, Mass. Supreme Judicial Ct., Dkt. No. SJC-10460, 06/03/2010.)
Background. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2004) 806 NE2d 784 (Peterson I), the Massachusetts Supreme Judicial Court held that §32 of L. 2002, c. 186 (2002 act), which set a higher capital gains tax rate effective May 1, 2002, violated the uniformity requirement of Art. 44 of the Amendments to the Massachusetts Constitution because it applied different tax rates to capital gains obtained within the same tax year. In response to Peterson I, the Massachusetts Legislature enacted L. 2004, c. 149 (2004 act) establishing the effective date of the new capital gains tax rate to January 1, 2002 and directing that the Commissioner not adjust the tax liability for capital gains realized between January 1, 2002 and April 30, 2003 for any taxpayer who already paid capital gains taxes at the prior rates. In Peterson v. Commissioner of Revenue (Mass. Sup. Jud. Ct., 2005) 825 NE2d 1029 (Peterson II), the Massachusetts Supreme Judicial Court struck out §413 of the 2004 act as unconstitutional but severable from the section setting January 1 2002 as the effective date of the higher capital gains rate. The legislature again responded by enacting L. 2005, c. 163 (abatement act), which changed the effective date of the new tax rate from January 1, 2002 to January 1, 2003 and addressed the remedy for those taxpayers who had paid long-term capital gains taxes at the higher rate in 2002. It provided that any taxpayers who overpaid capital gains taxes may apply for an abatement pursuant to the administrative procedures generally set for tax abatements and the Commissioner is to abate such overpayments in four equal installments without interest. This provided the exclusive basis for relief stemming from overpayment of the capital gains taxes in 2002.
Action for declaratory relief. In 2002, the taxpayer sold his business and paid capital gains taxes that he would not have been required to pay prior to the 2002 act, which provided that long-term capital gains realized on or after May 1, 2002 were taxed as ordinary income at 5.3%, a rate higher than gains realized before that date. Following the enactment of the abatement act, the taxpayer applied for abatement and received four installments of the refund without interest. On March 18, 2008, the taxpayer filed an action for declaratory relief asserting that the legislature’s determination that no interest was to be paid on the refund of the unconstitutional capital gains taxes is unconstitutional and that he has not been fully compensated for his payment of the wrongful taxes. The taxpayer alleges that his action for declaratory relief is proper because pursuit of administrative remedies would have been futile since neither the Commissioner nor the Board has the authority to declare a statute unconstitutional. His action for declaratory relief was dismissed and he appealed.
Failure to exhaust administrative remedies. The Massachusetts Supreme Judicial Court held that the Superior Court properly dismissed the taxpayer’s declaratory action for failure to exhaust administrative remedies which are deemed exclusive by the abatement act. Even if the Board could not have declared the abatement act facially unconstitutional, it could have declared the statute unconstitutional or illegal as applied to the taxpayer, and could have awarded him interest. Accordingly, the administrative remedies provided by the abatement act were not seriously inadequate. Unless the administrative remedy is seriously inadequate it should not be displaced by an action for a declaration. The Massachusetts Supreme Judicial Court further held that the judge did not abuse her discretion, noting that she concluded that the issues were not sufficiently recurrent or of sufficient public importance to merit declaratory relief in the light of the adequate administrative remedies proscribed and made exclusive by the legislature.
For more information on this or other recent Massachusetts cases, contact tax attorney Moore McLaughlin at 401-421-5115 ext 212 or by e-mail at MMcLaughlin@McLaughlinQuinn.com.
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