The U.S. Supreme Court decided only one significant state tax case in its recently ended term, Armour v. City of Indianapolis, Sup. Ct. Dkt. 11-161 (U.S. 6/4/12), aff’g 946 N.E.2d 553 (Ind. 2011). This 6–3 decision is important for tax policy reasons, for taxpayers, and for state and local governments because 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.
The City of Indianapolis allowed 180 taxpayers the option of paying for a sewer improvement project either immediately in a lump sum ($9,278 each) or in smaller increments monthly over a period of up to 20 years. Soon after the project started and taxpayers made payments, the city abandoned this method of financing sewer improvements in favor of a new system that imposes less financial burden on property owners. To ease the transition, the city discharged all outstanding assessments owed as of Nov. 1, 2005, but did not give refunds to 38 property owners who had paid their assessments in full or in part. Most of these 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 the city’s distinction between those who had already paid and those who had not yet paid did not violate the Equal Protection Clause of the 14th Amendment because forgiving only the outstanding assessment balances was rationally related to a legitimate governmental interest: reducing administrative costs. The Court held that reducing administrative costs gave the city a rational basis for distinguishing between lot owners who had already paid their share of project costs upfront 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 it was permitted to forgive the remaining obligations of identically situated taxpayers who chose to pay over a multiyear installment plan.
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.
For further information, see the AICPA Tax Division’s resource webpage on the case.