U.S. Marshal Service Retiree Wins Big at Supreme Court

The Supreme Court sided with a retired federal employee in his fight to get state income tax treatment for his federal pension.

A unanimous United States Supreme Court has decided a state tax case that will be of interest to retired federal law enforcement personnel living in West Virginia (Dawson v Steager, West Virginia State Tax Commissioner, U.S. Supreme Court No. 17-419, 2/20/19).

West Virginia taxes the pension of all federal retirees residing in the state. However, it exempts retirement benefits of its own state and local law enforcement retirees. Mr. Dawson, a retired U.S. Marshal, sued citing the intergovernmental tax immunity doctrine (4 USC 111) for the proposition that his pension as a federal law enforcement retiree should receive the same tax free treatment that West Virginia affords its own law enforcement retirees.

Under the cited doctrine, the United States agrees to state taxation of federal employees’ pay and compensation, but only if the state does not discriminate as to the source of the pay.

The West Virginia trial court found that Dawson’s federal duties were pretty much the same as those of state and local law enforcement officers who enjoyed an exemption from state tax and held that the West Virginia tax law did in fact discriminate under section 111. However, the West Virginia Supreme Court reversed its trial court, opining that after all West Virginia never meant to discriminate against former federal marshals. It is a narrow preference for a small class of West Virginia citizens that does not “meaningfully interfere with federal government operations.”

The U.S. Supreme Court did not buy this narrow distinction argument calling it “irrelevant.” As the court opines, “The relevant question under [section] 111 is not whether federal retirees are similarly situated to state retirees who do not receive a tax break; it is whether they are similarly situated to those who do.” Furthermore, the state trial court found no significant difference between the duties performed by Mr. Dawson and his state counterparts.

Reversed and remanded.

Dawson v. Steager

About the Author

Susan McGuire Smith spent most of her federal legal career with NASA, serving as Chief Counsel at Marshall Space Flight Center for 14 years. Her expertise is in government contracts, ethics, and personnel law.