PRELIMINARY MEMORANDUM No. 11161CSX ARMOUR, et al.

(property owners allege tax scheme violates the equal protection) v. CITY OF INDIANAPOLIS, INDIANA, et al. (city provides rational basis for differentiation) State/Civil Timely Cert to Ind SCt (Sullivan; conc: Shepard, David; diss: Rucker, Dickson)

1. SUMMARY:

The issue in this case is whether the City of Indianapolis violated the equal

protection rights of property owners who prepaid their sewer bills and were not given a refund after the city changed its sewer fee policy. Petrs maintain that the Ind SCt erred in determining that resps had a rational basis for treating taxpayers who paid the assessment in full differently from taxpayers who paid in installments. Given this issue has widespread implications on how governments function, the varying interpretations of the Courts precedents, and that the Court has never specifically addressed this issue, I recommend the Court GRANT. Indianas Barrett Law allows municipalities to fund

2. FACTS AND BACKGROUND:

public improvements through special assessments levied against and apportioned equally among benefited homeowners. Using the Barrett Law, the City of Indianapolis (City), resp, funded numerous sewer projects, including connecting 180 properties in the Northern Estates neighborhood to the Indianapolis sewer system. The Indianapolis Board of Public Works (Board) levied a $9,278 special assessment that the property owner could either pay up front or in monthly installments, subject to an annual interest rate. The owners of thirty-one of the parcels, petrs, chose to pay the assessment

2 immediately in its entirety. One year after levying the special assessment, the Board approved the discontinuance of the use of the Barrett Law funding in Marion County and replaced it with the Septic Tank Elimination Program (STEP). Under STEP, a homeowner would pay a flat $2,500,00 sewer connection fee to the County and a monthly sewer bill. As a result of the change, the City on December 7, 2005 adopted Resolution No. 101, 2005 (Resolution 101). Resolution 101 forgave all outstanding Barrett Law assessment balances owned as of November 1, 2005. Consequently, property owners who chose to pay their assessment in monthly installments were forgiven from future payment. Owners who chose to pay their assessment in their entirety were given no reimbursement. The property owners requested compensation from the City in February of 2006 and were denied on the grounds that it would be unfair to owners who had paid assessments for other Barrett Law projects. 3. DECISIONS BELOW: On July 22, 2007 Petrs filed a complaint in Ind tct against the City

of Indianapolis and related entities and officials (resps). The petrs asserted, among other things, a claim under 42 U.S.C. 1983, alleging that the Citys arbitrary classification of taxpayers violated the Equal Protection Clause of the Fourteenth Amendment. All parties filed for summary judgment; the Ind tct granted the petrs motion, and entered judgment against resps. On appeal, the petrs abandoned their due process claim, arguing that the resps violated The Equal Protection Clause. The Ind Ct App determined that the resps lacked a rational basis for eliminating the debt of installment taxpayers while denying any relief to owners who paid the assessment up front violating the Equal Protection Clause of the U.S. Constitution. Resps were ordered to pay back $8,968 to the homeowners in addition to paying interest and attorneys fees. The Ind SCt granted the Citys motion to transfer the case, vacating the decision of the Ind Ct App. In a 3-2 decision by the Ind SCt, the majority reversed the tct judgment against resp which held the City violated the Equal Protection Clause and found no constitutional violation under the 14th Amendment

3 had occurred. Justice Frank Sullivan wrote the majority opinion and was joined by Chief Justice Randall T. Shepard and Justice Steven David, while Justices Robert Rucker and Brent Dickson dissented. The majority found that the citys rationale was that low- and middle-class families were more likely to have been paying gradually and those who paid in full up front were likely higher income, meaning the rationale was reasonable and coincided with the governments interest in moving away from the Barrett Law system because of the financial burdens it created, dictating that [t]he City clearly has a legitimate interest in not emptying its coffers to provide refunds to those who had already paid their assessment. City of Indianapolis v. Armour, 946 N.E.2d 553, 563. The court reasoned, because Allegheny Pittsburgh was the rare case where the facts precluded any plausible interference that the reason for the unequal assessment practice was legitimate in this case. Id. at 567. Justices Rucker, joined by Justice Dickson, dissented, finding the citys rational basis wasnt sufficient and was used as more a blanket reason without any practical justification of the rationale actually doing what it claimed to do. Particularly, [t]he stated purpose in Resolution 101 simply fails to express any connection to the distinction between residents who elected to pay their assessment in a lump sum and those who elected to pay in installments. In my view this disconnect demonstrates that the classification fails to have a fair and substantial relation to the statutory objective. Id. at 572 citing Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 527 (1959). 4. CONTENTIONS: Petrs: [1] The Ind SCt decision directly conflicts with the decisions

of state SCts. Four state SCts have held that the Equal Protection Clause prohibits tax-forgiveness measures that differentiate between taxpayer who promptly paid their tax assessments in full and those who delayed full payment. See Armco Steel Corp. v. Dept of Treasury, 358 N.W.2d 839 (Mich. 1984); Perk v. City of Euclid, 244 N.E.2d 475, 477 (Ohio 1969); Richey v. Wells, 166 So. 817, 819 (Fla. 1936); State ex rel. Stephan v. Parrish, 891 P.2d 445, 457 (Kan. 1995). The cases established that a state or

4 municipal taxing authority could not consistent with the Equal Protection Clause; implement a discriminatory tax-forgiveness mechanism that punishes taxpayers who pay their taxes in full and rewards taxpayers who delay payment. Despite the Citys grossly discriminatory taxation regime similar to Armco, Perk, Richey, and Parrish the Ind SCt ruled that the City did not act unconstitutionally. [2] The decision below also directly conflicted with a recent decision in which an Ind dct,

addressing the exact same question, arrived at the opposite conclusion. In Cox v. City of Indianapolis, No. 1:09-cv-435WTL-DML, 2010 WL 2484620, at *2 (US Dist. Ct., SD Ind. June 14, 2010). A federal district court, relying heavily on the persuasive authority of the Ind Court of Appeals opinion that was reversed by the Ind Supreme Court, concluded that the Indianapolis ordinance violated the Equal Protection Clause (Cox v. City of Indianapolis, No. 1:09-cv-435WTL-DML, 2010 WL 2484620, at *2 (US Dist. Ct., SD Ind. June 14, 2010). Moreover, in a subsequent decision addressed to the question of remedy, the federal court took note of the Indiana Supreme Court's decision but did not change its own view, observing that [w]hile Indiana Supreme Court decisions regarding issues of state law are binding on this Court, such decisions are only persuasive authority on matters of federal law such as the interpretation of the Equal Protection Clause of the U.S. Constitution. (Cox v. City of Indianapolis, No. 1:09-cv-435TWP-MJD, 2011 WL 2446702, at *2 n.1 (US Dist. Ct., SD Ind. June 15, 2011).) The dct relied heavily on the unanimous decision in Allegheny Pittsburgh, which held that the Equal Protection Clause requires a rough equality in tax treatment of similarly situated property owners. Allegheny Pittsburgh Coal Co. v. Cty. Commn, 488 U.S. 336, 343. The justifications evoked by the City did not withstand rational-basis scrutiny and therefore violated the Equal Protection Clause. The Ind SCts decision therefore not only conflicts with the decisions of other state supreme courts, but also creates an intractable federal-state split within Indiana on the precise question presented in this case. [3] Accepting the justifications embraced by the Ind SCt to satisfy rational basis scrutiny such

5 as preservation of limited resources would allow any taxing authority to do whatever it wants just saying that it needs the money. The Ind SCts reliance on this Courts welfare-benefits cases claiming resource preservation is a constitutionally adequate justification for disparate taxation is unfounded. Furthermore, the administrative burdens justification is just as problematic. The Court below erred in upholding the plainly irrational tax in this case. [4] The Ind SCt decision conflicts with decisions of this Court striking down discriminatory

tax-forgiveness schemes that violate the equal protection clause. This Court should correct the erroneous, outlier interpretation of Allegheny Pittsburgh adopted by the court below. In Allegheny Pittsburgh Coal v. Webster County, 488 U.S. 336 (1989), a West Virginia county used a tax assessment method that produced dramatic valuation differences between recently purchased property and nearby older property. Id. at 338. There, the plaintiffs were assessed and taxed between 8-35 times higher than owners of similar property during a nine-year period. Id. at 342. The Court noted that while states have broad powers to impose taxes and divide different kinds of property into classes with different tax burdens, the classifications must be reasonable. Id. at 344. As such, the court held that the hugely disparate tax assessments between similar properties violated the plaintiffs Equal Protection rights. Id. at 346. The Ind SCt interpreted Allegheny Pittsburgh as contained to its facts effectively ignoring an important precedent set by the Court. [5] The question presented is of significant national importance and will recur with sufficient

regularity to justify review by this Court. This court should take the opportunity to restrict arbitrary and irrational state refund practices. The citys actions in this case are arbitrary and irrational. If allowed to stand, the decision of the court below will undermine business certainty, tax compliance, and respect for the law. Additionally, this case presents important legal issues that affect taxpayers across the country Amicus Brief of National Taxpayers Union in support of petn for cert: Allowing the City to

6 eliminate outstanding balances will not cause harm to taxpayers, but will ultimately limit the flexibility of taxing authorities. The National Taxpayers Union argues that by providing a choice between methods of payment, the government can raise some funds quickly without forcing all taxpayers to make a single, large expenditure. Further if the Citys conduct is upheld, it will discourage taxpayers from paying assessments in up front and ultimately cause the government to make politically impractical decisions that require all taxpayers to pay the amount in full. National Taxpayers Union also reiterates petrs arguments Amicus Brief of the Tax Foundation in support of petn for cert: The Ind SCt decision will

undermine business certainty and respect for the law. Businesses will face greater difficulty making reasonable predictions about the future tax climate when a city acts arbitrarily. Further, the Citys conduct will cause taxpayers to view tax policies as unfair, creating tension between citizens and government. Tax Foundation also reiterates petrs arguments. Resp: [1] The petrs claim that the Ind SCts holding conflicts with other state court holdings

is flawed. All of these cases are readily distinguishable because in those circumstances the tax was illegal or the taxpayers were in default. Here, the present forgiveness of long-term financed, subsequently owned payments did not imply impropriety in the underlying tax assessment. Moreover, unlike the present case, all of the cited state cases include patent unfairness. [2] Conflict with an interlocutory order from a district court does not merit cert. The conflict between the Ind SCt and the unpublished memorandum decision of the Southern District of Indiana in Cox v. Indianapolis, 2010 U.S. Dist. LEXIS 58876 (S.D. Ind. June 14, 2010) does not require intervention of this Court. The Cox judgment is only an interlocutory order that may be revisited before final judgment. The Court should await the development of a split before addressing this issue. Therefore this case provides a poor vehicle for this Court to review.

7 [3] The city properly considered fiscal responsibility in its legislative line drawing. As this

Court and the Ind SCt have both recognized, the governments limited resources are a necessary part of this decision making process. [4] The Resp point out that rational basis review determines whether a governments actions

were in violation of the Equal Protection Clause. Further, rational basis only requires that the challenged classification promote a legitimate state interest to be constitutional, and that the burden is up to the party challenging the legislation to overcome a strong presumption that the classification is valid. Moreover, this type of review is particularly deferential when the government action at issue relates to taxation. Therefore, in reviewing the circumstances of the classification of this case, it was reasonable for resps to eliminate any outstanding debt from the unpopular Barrett Law financing method. Doing so allows a clean break from the previously used method and avoids confusion regarding whether a transition from one financing regime to another has taken place. This facilitates a transition that has a lesser financial impact on lower-and middle-income residents, because they would not be subjected to any double payments arising out of the old and new financing methods. Furthermore, the elimination of prospective payment obligations makes administrative sense, for the City otherwise would be collecting Barrett payments for up to thirty years. Ultimately, simplifying the transition process serves an important purpose of ensuring a smooth regulatory transition. [5] The Ind Sct correctly interpreted previous Court precedents. Allegheny Pittsburgh was

severely circumscribed, and the state court rulings cited by the petr are inapposite. Norlinger v. Hahn, 505 U.S. 1 (1992), confirmed that the Allegheny Pittsburgh decision was a narrow, fact bound decision, not a revolution in Equal Protection jurisprudence. Further, the Allegheny Pittsburgh ruling was so limited, that the Indianapolis taxpayers did not even rely upon it in the lower courts. Moreover, Allegheny Pittsburgh is distinguishable because it dealt with assessments, not tax forgiveness.

8 [6] Finally, even if the petrs are successful, the only permissible remedy in this case would be to invalidate the forgiveness. All of the petrs payments have already been spent on sewer construction and petrs have no evidence indicating the resp would have spent millions of additional dollars to provide refunds if they knew forgiveness would otherwise violate equal protection. Petr Brief in Reply to Resp: [1] The Resps attempts to distinguish the state supreme court

cases that are in conflict with the Ind SCt decision fail. The differences such as the initial tax assessment in Armco was subsequently invalidated or that the three other decisions with conflict with the decision below State ex rel, Stephen v. Parrish, Perk v. City of Euclid, and Richey v. Wells involved government decisions to forgive the debts of delinquent taxpayers are not relevant. The salient comparison is the resps separate decision to withhold relief from petrs because they had already paid their tax bills in full. All four state supreme court cases dealt precisely with that government issue. Along the same sides, the resps claim that these cases differed because they dealt with patent unfairness misses the mark for the same reason. Further, the Ind SCt conceded that its decision created a conflict with decisions of other state supreme courts. Lastly, the decision of the U.S. District Court for the Southern District of Indiana in Cox v. City of Indianapolis, 2010 WL 2484620 (June 14, 2010) clearly establishes that a conflict exists. Applying the rule from other supreme court cases, the dct held that the City violated the Equal Protection Clause by withholding refunds from homeowners who had paid their Barrett Assessment in full. Additionally, it does matter that the Seventh Circuit has yet to weigh in on Cox. It will merely add one more voice to the preexisting conflict. [2] The resps contention that the sole justification of cost saving provides a rational basis for

disparate treatment of similarly situated taxpayers is clearly erroneous. Armco clearly rejected this justification and it should fail in this case as well. Armco, 358 N.W.2d at 841. Further, the resp argument that the cost-saving justification is unique to this case fails muster. If accepted, it would apply to every

9 case in which a state or municipal taxation authority imposes a discriminatory tax-forgiveness scheme. The result would lead to arbitrary taxation schemes with no constitutional check. [3] Resps efforts to rectify the decision below with Allegheny Pittsburgh and Nordlinger are unsuccessful. Resps contend that Nordlinger tacitly overruled Allegheny Pittsburgh. However, this has never been decided by the Court and other courts have continued to follow the decision in Allegheny Pittsburgh. Therefore, this case provides the Court with an opportunity to clarify the confusion these two precedents have caused in lower courts. [4] The Resps argue that the Indiana state law does not require continued equity in Barrett Law

taxation. However, the Ind SCt which they heavily support dictated that this equality in taxation exists in Barrett Law taxation. Therefore, equality in taxation, just as in Allegheny Pittsburgh, an express basis of the States taxation scheme. [5] The reasoning of Nordlinger actually provides support for petrs. Unlike in Nordlinger,

where the taxpayers lacked legitimate expectation and reliance interests, in this case the petrs legitimately expected that they were not risking unnecessary expenditure of thousands of dollars by paying their taxes in full. [6] The resps contention that refunds would not be the proper remedy completely ignores

Allegheny Pittsburgh. Additionally, even if refunds are not required, Heckler v. Matthews rejected the assertion that such remedial limitations are a barrier to review. Heckler, 465 U.S. at 739. The lack of refund would further support the need for review in this case because future litigants could be discouraged from challenging such patently unconstitutional schemes if authorities could so easily withhold monetary relief. 6. DISCUSSION: The ultimate issue in this case is whether the resps acted with rational a

legitimate purpose when they needed to implement a tax scheme that treated identical taxpayers

10 substantially different. Considerable portions of the petrs and resps briefs emphasize how important the Courts prior precedents are to the outcome. Basically whether Allegheny Pittsburgh is still good law or whether Nordlinger speaks more directly to tax classifications. I feel that the dispute in this case has a much different focus thus these precedents are not very helpful. Namely this is a novel important issue of whether tax forgiveness has to satisfy equal protection principles. It has broader implications as well to any form of tax forgiveness that results in gross disparities between like taxpayers. For example, amnesty programs could be implicated in the Courts decision. As to rational basis, the resps arguments are not persuasive. Resps offered more of an excuse, than a reason, for treating taxpayers differently. Further, the post hoc explanations by the resp to help lower income homeowners lack validity and support. The acute split with the Ind dct in Cox does not by itself support this Courts immediate review. However, in light of differing interpretations of Allegheny Pittsburgh and other state SCt holdings I believe Cox reinforces the Courts immediate review of this issue. In light of the division between state and federal courts over the identical issue, this Court guidance is required. Lastly, the amicus briefs for the petrs illustrate that the Ind SCT decision will have wide implications on the economy and government regulations. I find these briefs persuasive demonstrate the negative implications of the Ind SCt decision that will facilitate more unfair and arbitrary tax schemes.

7. RECOMMENDATION: There is a response.

GRANT

Name

946 N.E.2d 553