In the United States District Court for the District of Columbia

James M. Banner, Jr., et al., Plaintiffs v. The United States of America, et al., Defendants
Civil Action No. 03-01587 (ESH) [Filed 12/16/03]

Note: The views expressed herein represent only those of the D.C. Affairs Section of the D.C. Bar and the individual past presidents and not those of the D.C. Bar or of its Board of Governors.

Table of Contents

Motion for Leave to File a Memorandum of Amici Curiae in Support of Plaintiffs’ Opposition to Defendants’: Motions to Dismiss

Memorandum of Amici Curiae in Support of Plaintiffs’ Opposition to Defendants’ Motions to Dismiss: Introduction

• Statement of the Interest of Amici Curiae
• Argument
1. The Prohibition is the Only Law of its Kind in the United States
1. The Universal Rule of Taxation Is That Income Is Taxed at its Source
2. The Rule Is Followed By the United States and Every State That Imposes an Income Tax
2. The Prohibition Has a Severe Detrimental Effect on the District’s Fiscal Health
• Conclusion

Footnotes

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Motion for Leave to File a Memorandum of Amici Curiae in Support of Plaintiffs’ Opposition to Defendants’: Motions to Dismiss

The District of Columbia Affairs Section of the District of Columbia Bar (the “D.C. Affairs Section”) and the former presidents of the District of Columbia Bar listed below respectfully move for leave to file the memorandum submitted herewith as amici curiae in support of the Plaintiffs’ Opposition to Defendants’ Motion to Dismiss.1 In support of this motion, the amici state the following:

1. Amici support the Plaintiffs’ challenge to the authority of the United States Congress to impose a discriminatory taxation scheme on the District of Columbia. Congress has prohibited the District from imposing “any tax on the whole or any portion of the personal income … of any individual not a resident of the District … .” D.C. Official Code § 1-206.02(a)(5) (the “Prohibition”). The Prohibition seriously impedes the ability of the District to maintain its fiscal health. The General Accounting Office recently concluded that the Prohibition has resulted in a “structural imbalance” in the District’s fiscal system of up to $1.1 billion per year. The Prohibition prevents the District from raising the funds needed to provide normal levels of services, forcing over-taxation of District residents who have no representation in the legislative body that mandated the Prohibition.
2. The D.C. Affairs Section is the section of the D.C. Bar concerned with issues relating to the laws and government of the District of Columbia. The section has had a longstanding interest in a strong, economically viable home rule in the District.
3. The former presidents of the D.C. Bar who support Plaintiffs in this action are:
   
   E. Barrett Prettyman, Jr.
   Charles T. Duncan
   John W. Douglas
   Daniel R. Rezneck
   Charles R. Work
   Robert L. Weinberg
   John H. Pickering
   Stephen J. Pollak
   Jacob A. Stein
   David Isbell
   Marna S. Tucker
   Robert E. Jordan III
   Philip Allen Lacovara
   Sara-Ann Determan
   Jamie S. Gorelick
   Mark H. Tuohey III
   Pauline A. Schneider
   Robert N. Weiner
   Myles V. Lynk
   Andrew H. Marks
   Joan H. Strand
   John Payton
   
   
4. Amici have a vested interest in the District’s economic stability and growth. A key factor in promoting such economic stability and growth is assuring that the residents of the District of Columbia, through their local government, have resources sufficient to provide an adequate level of government services, including such basic services as educating its young people (and future work force), assuring the public safety of its residents and visitors, and providing well-maintained (and, particularly this time of year, well-plowed and salted) streets and roads.
5. Amici believe that the continued federal imposition of a ban on the District’s ability to collect revenue in the same manner as all other jurisdictions in the United States jeopardizes the District’s economic future and the economic viability of home rule. Therefore, amici urge the Court to consider the merits of the case brought by the Plaintiffs.
6. The Court has clear authority to receive the memorandum submitted herewith. Acceptance of an amicus curiae brief is within the Court’s discretion. Cobell v. Norton, 246 F. Supp. 2d 59, 61 (D.D.C. 2003) (citing United States v. Microsoft Corp., 2002 WL 319366 at *2 (D.D.C. 2002)). Courts generally allow an amicus curiae brief when the amicus has a unique perspective on the case. See Cobell, 246 F. Supp. 2d at 61 (citing Ryan v. Commodity Futures Trading Comm’n, 125 F.3d 1062, 1064 (7th Cir. 1997)). The D.C. Affairs Section has particular expertise in the interpretation of the District of Columbia Home Rule Act and the importance of an economically viable home rule government in the District of Columbia. Moreover, all Defendants have consented to the filing of this motion. Accordingly, this motion should be granted and amici curiae should be given leave to file the memorandum submitted herewith.

Respectfully Submitted,

____________________________
Joseph A. Rieser, Jr. (D.C. Bar No. 225318)
J. Marcus Meeks (D.C. Bar No. 472072)
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
(202) 857-6000

Attorneys for Amici Curiae

Of Counsel:
Jon S. Bouker (D.C. Bar No. 452984)
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
(202) 857-6000

James S. Bubar (D.C. Bar. No. 321125)
1776 K Street, NW, Suite 800
Washington, DC 20006
(202) 223-2060
Co-Chair, District of Columbia Affairs Section
of the District of Columbia Bar

Bell Clement (D.C. Bar. No. 366813)
1225 - 19th Street, N.W., Suite 825
Washington, D.C. 20036
(202) 331-0833
Co-Chair, District of Columbia Affairs Section
of the District of Columbia Bar

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Memorandum of Amici Curiae in Support of Plaintiffs’ Opposition to Defendants’ Motions to Dismiss

Introduction
The Plaintiffs have raised serious questions about the constitutionality of a discriminatory tax scheme imposed on the District of Columbia by the United States Congress. Congress has prohibited the District from imposing “any tax on the whole or any portion of the personal income … of any individual not a resident of the District … .” D.C. Official Code § 1-206.02(a)(5) (the “Prohibition”). The amici agree with the position set forth in Plaintiffs’ Opposition to Defendants’ Motions to Dismiss (“Plaintiffs’ Opposition”) that the Prohibition constitutes unconstitutional discrimination against the District and its residents. Amici also agree with the positions set forth in Plaintiffs’ Opposition that the Plaintiffs have standing and that the Complaint does not raise a non-reviewable political question. Amici therefore urge the court to entertain Plaintiffs’ claims and grant the relief they seek. In any case, as shown in Plaintiffs’ Opposition, the complaint adequately states a claim for relief and should not be dismissed.

The arguments advanced here by amici underscore the points regarding unconstitutional discrimination made in Plaintiffs’ Opposition and demonstrate the fundamental unfairness and unsoundness of the legislation at issue. Importantly, from the perspective of the amici, this case is about the fiscal health of the principal place where they have practiced their profession—the District of Columbia. The Prohibition has a severe detrimental effect on the District’s finances and ability to provide basic services. The importance of this case cannot be overstated. Nothing less than the future financial health of the District is at stake.

Statement of the Interest of Amici Curae
Amici are the District of Columbia Affairs Section of the District of Columbia Bar (the “D.C. Affairs Section”) and former presidents of the District of Columbia Bar.1 The amicus D.C. Affairs Section is the section of the D.C. Bar concerned with issues relating to the laws and government of the District of Columbia. The section has had a longstanding interest in the operation of the District under home rule.

Amici have a keen and deeply vested interest in the economic health and well being of the community in which they have practiced their profession. Amici are concerned that the continued federal ban on the District government’s ability to tax the income of those who work in the District but live elsewhere seriously threatens the economic vitality of the District of Columbia. Amici believe that the District is treated inconsistently and unfairly when compared to all other states and territories that choose to impose an income tax. Amici assert that unless the Prohibition is removed, the District’s future is in jeopardy.2

Less than a decade ago, the District became financially insolvent, precipitating the need for Congress to create a financial control board. Today, the District has enjoyed six years of balanced budgets with surpluses, the District’s bond rating is again at investment grade, the District’s accumulated deficit is eliminated, and the control board is dormant. However, troubling new data from Congress’ own investigative arm, the General Accounting Office (GAO), show that this recent fiscal success is not sustainable over the long term. The city, which was able to achieve its recent fiscal stability only by imposing above average taxes on its citizens, will soon not have sufficient revenue to fund basic city services. This would be so even if the District were to cut expenditures further, conduct operations as efficiently as possible, and impose even higher taxes on its citizenry.

The GAO concluded that this bleak outlook is the result of a “structural imbalance” in the District’s ability to raise revenue to provide basic services, a key aspect of which is the ban on nonresident taxation. See District of Columbia: Statistical Imbalance and Management Issues, GAO 03-666 (May 2003) at 8-9 (hereinafter “GAO Report,” available at the GAO’s website: www.gao.gov). Amici are deeply concerned the District will once again become fiscally insolvent or will be unable to provide an adequate level of basic governmental services, either of which would be detrimental to the city’s economy, including the legal profession.

Amici also are troubled by the unfairness and inequity associated with the ban on nonresident taxation. The federal government does not impose a similar ban on any other jurisdiction in the United States, including the territories. Every one of the 41 states that choose to collect an income tax taxes the incomes of individuals who work within the state’s borders but do not reside there. The Prohibition was enacted at the behest of the representatives of the Several States, which enjoy voting rights in the Congress of the United States, while the District does not. This ban on the District not only is unfair, but also puts District businesses at a competitive disadvantage with their competitors in other states who do not operate in an environment of uncertainty, inadequate services and decaying infrastructure caused by artificial constraints on city revenue.

Amici believe that the District’s economic future should not be jeopardized by the continued federal imposition of a ban on the District’s ability to collect revenue in the same manner as all other jurisdictions in the United States. For the reasons stated below and those stated in Plaintiffs’ Opposition, amici urge the Court to deny the Motions to Dismiss and proceed to consider the merits of Plaintiffs’ Complaint, which are so important to the economic viability and continued vitality of the nation’s capital.

Argument

I. The Prohibition is the Only Law of Its Kind in the United States

A. The Universal Rule of Taxation Is That Income Is Taxed at Its Source
It is a fundamental principle of law that a jurisdiction has the legal authority to tax income earned within its borders. See Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 462-63 n.11 (1995); Shaffer v. Carter, 252 U.S. 37, 52 (1920); J. Hellerstein & W. Hellerstein, STATE TAXATION 6.03 (3d ed. 1999). (“There are two fundamental, but alternative, predicates for state power to tax income: residence and source.”) This fundamental rule is rooted in the principle that persons should pay for the governmental services from which they benefit. See Oklahoma Tax Comm’n, 515 U.S. at 463; Shaffer, 252 U.S. at 52-53.
    For persons living within a state, the “enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government.” Oklahoma Tax Comm’n, 515 U.S. at 463 (quoting New York ex rel Cohn v. Graves, 300 U.S. 308, 312-313 (1937)). For persons living without the state, the “very fact that a citizen of one State has the right to hold property or carry on an occupation or business in another is a very reasonable ground for subjecting such nonresident … to the extent of his property held or his occupation or business carried on therein, to a duty to pay taxes . . . .” Shaffer, 252 U.S. at 53. In fact, taxing income according to source is such a bedrock concept in financing governmental activities that the leading commentators on state taxation have noted that, if for Constitutional reasons (such as to avoid double taxation under the Commerce Clause) a choice had to be made between taxing according to residence or according to where the income was earned, taxing according to where income was earned would trump taxing according to residence. See Hellerstein & Hellerstein, STATE TAXATION 6.03.
    The Supreme Court first recognized the right of a jurisdiction to tax the income of nonresidents in 1920 in Shaffer v. Carter. This right is rooted in the principle already noted—that a government may “resort to all reasonable forms of taxation in order to defray [ ] governmental expenses.” Shaffer, 252 U.S. at 50. “Income taxes are a recognized method of distributing the burdens of government, favored because requiring contributions from those who realize current pecuniary benefits under the protection of the government, and because the tax may be readily proportioned to their ability to pay.” Id. at 51. Applying these principles to taxation of nonresidents, the Court held that a nonresident who holds a job or operates a business in a state has an obligation to pay for the cost of that state’s government, from which the nonresident benefits. Id. at 52–53.

B. The Rule Is Followed By the United States and Every State That Imposes an Income Tax
As noted above, it is a fundamental principle of law that a jurisdiction has the legal authority to tax the income earned within its borders. Just as importantly—and what makes the federal prohibition at issue in this case so astonishingly unique—is that both the United States and every state that imposes an income tax exercise this authority and tax nonresidents on income earned within their borders.

Thus, the United States taxes the income of nonresidents earned within its borders. See 26 U.S.C. §§ 871(a) and 871(b) (taxation of nonresident individuals on interest, dividends, royalties, etc., and on trade or business income, respectively, derived from within the U.S.) and 26 U.S.C. §§ 881(a) and 881(b) (same for foreign corporations). Indeed, United States income tax statutes have provided for such taxation of nonresidents for more than 100 years, at least since 1894. See J. Isenbergh, U.S. TAXATION OF FOREIGN PERSONS AND FOREIGN INCOME 30.2 (2002 ed.).3 And, U.S. tax law specifically provides that (subject to some exceptions adopted for administrative and/or economic policy reasons and not relevant here) income derived by a nonresident from the performance of services within the United States is subject to its income tax. See 26 U.S.C. § 864(b)(1).

Similarly, in exercising its taxing authority, every state that has an income tax adopts the same approach which the United States has taken. That is, every state that has an income tax has exercised the authority which the Supreme Court in Shaffer affirmed it had and imposed that tax on the income earned by nonresidents within its borders. See CCH State Tax Guide 15-157. See also id. at 15-101 et seq. (listing state statutes authorizing taxation of all income earned within the state).4 Even Puerto Rico and the Virgin Islands follow the income source rule. See 13 P.R. Laws Ann. § 8605 (Puerto Rico); 33 V.I.Code Ann. § 541 (Virgin Islands). None—not a single one—gives nonresidents a “free pass.” 5

Indeed, the taxation of nonresidents on the income they earn within a jurisdiction is such a fundamental principle of public finance that it extends not just to those who commute every day from their home in one jurisdiction to their place of business in another but also to those who may have been in the jurisdiction only briefly. And taxing authorities can be, and historically have been, quite vigorous in assuring that the tax is collected on income earned during such brief stays, at least if the amount is enough to warrant the effort.

This is true with respect to U.S. income taxation. See, e.g., Ingram v. Bowers, 47 F.2d 925 (S.D.N.Y. 1931) (involving the royalties which the famed Italian singer Enrico Caruso received for recording a few songs at the New Jersey studio of The Victor Company pursuant to a 1909 agreement, which were subject to U.S. tax in full as payments for services performed in the U.S. even though derived in part from foreign record sales). See also Johansson v. United States, 336 F.2d 809 (5th Cir. 1964) (U.S. income taxation of the Swedish heavyweight boxer Ingemar Johansson on the purses he received from his celebrated prize fights in 1960 and 1961 with Floyd Patterson). And it is equally true with respect to state taxation. For example, the Commonwealth of Virginia has imposed its income tax on Tennessee residents who work at a hospital that straddles the Tennessee/Virginia border. See Op. Atty. Gen., Opinion No. 84–193 (Tenn. 1984). The mere fact that the Tennessee residents, who do not pay income tax in their own state, walked across the state line while working at the hospital was sufficient for Virginia to tax their incomes. See id.6

Congress has denied only the District, alone among all U.S. jurisdictions, the benefit of taxing all income earned within its borders. Congress has not denied itself the right to tax income earned within U.S. borders, nor has it denied any other jurisdiction the right to tax income earned within its particular borders. The Prohibition contained at D.C. Official Code § 1-206.02(a)(5) is truly one of a kind. This exclusive focus on the District is what makes the Prohibition suspect and requires judicial scrutiny.

II. The Prohibition Has a Severe Detrimental Effect on the District’s Fiscal Health

Because the District is prohibited from taxing the income of nonresidents, it must attempt to make up for this lost revenue by “over-taxing” D.C. residents. Recently, the GAO concluded that the District’s finances are constrained by a “substantial structural imbalance” that ensures the District’s expenditures will constantly outpace the city’s ability to raise revenue. GAO Report at 4, 12. As a result, the District over-taxes its residents in an attempt to provide a basic level of public services. Id. at 12.

The annual structural deficit, which is beyond the control of the District’s elected officials, amounts to between $470 million and $1.1 billion each year. GAO Report at 8, 15. Even if the District were to cut expenditures further, conduct operations as efficiently as possible, and impose even higher taxes on its citizenry, the structural imbalance would remain. Id. at 15. Delegate Eleanor Holmes Norton has stated that the situation is nothing short of a crisis. 148 CONG. REC. E311 (daily ed. Mar. 11, 2002) (statement of Del. Norton).

The GAO report illustrates that a key constraint on revenue driving the structural imbalance is the congressional ban on the District’s ability to tax nonresidents.7 GAO Report at 43. The District is unable to tax two-thirds of the income earned in the city, which amounts to over $20 billion annually. See 148 CONG. REC. E312 (noting that a 2 percent tax on the income of nonresidents who work in the District would yield $412 million in annual revenue). Removal of the Prohibition would permit a significant reduction in the structural imbalance, and would place the District in the same position as other taxing jurisdictions that can tax income at its source. Nonresidents who work in the District benefit from public safety and public works related services provided by the District. As an example, approximately eighty percent of all of the cars that benefit from the District’s infrastructure are from Maryland and Virginia, yet the District cannot tax the income of car owners who work in the District to help pay for road maintenance. 148 CONG. REC. at E311. That nonresidents do not pay for services from which they benefit violates the principle that nonresidents who earn a living in a jurisdiction and benefit from the services in that jurisdiction should contribute to the costs of those services.

Conclusion
The Prohibition constitutes a unique departure from the rule which is otherwise generally applied that income may be, should be, and will be taxed at its source. That very uniqueness makes that Prohibition suspect. Furthermore, as outlined in the GAO Report, the Prohibition jeopardizes the District’s financial health. For these reasons, and for those stated in Plaintiffs’ Opposition to Defendants’ Motions to Dismiss, amici urge the Court to adjudicate the merits of Plaintiffs’ claims in this case and deny Defendants’ Motions to Dismiss.

Respectfully Submitted

____________________________
Joseph A. Rieser, Jr. (D.C. Bar No. 225318)
J. Marcus Meeks (D.C. Bar No. 472072)
ARENT FOX KINTNER PLOTKIN & KAHN
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
(202) 857-6000

Attorneys for Amici Curiae

Of Counsel:
Jon S. Bouker (D.C. Bar No. 452984)
Arent Fox Kintner Plotkin & Kahn
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5339
(202) 857-6000

James S. Bubar (D.C. Bar. No. 321125)
1776 K Street, NW, Suite 800
Washington, DC 20006
(202) 223-2060
Co-Chair, District of Columbia Affairs Section
of the District of Columbia Bar

Bell Clement (D.C. Bar. No. 366813)
1225 - 19th Street, N.W., Suite 825
Washington, D.C. 20036
(202) 331-0833
Co-Chair, District of Columbia Affairs Section
of the District of Columbia Bar

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Footnotes

1. The views expressed herein represent only those of the D.C. Affairs Section of the D.C. Bar and the individual past presidents and not those of the D.C. Bar or of its Board of Governors.
2. Significantly, although some of the individual amici both live and work in the District, others work in the District but live elsewhere. Still others, by virtue of retirement or relocation, neither work nor live in the District. Consequently, the elimination of the federal prohibition on the District’s taxation of nonresidents will most likely affect them differently in their separate roles as individual taxpayers. Amici all share a common interest in the continued vitality of the District of Columbia, however, and join in submitting this Memorandum.
3. Prof. Isenbergh, like Professors Hellerstein, is a leading authority in his field, and his treatise, like theirs, was cited by the Supreme Court in Chickasaw Nation.
4. To avoid overtaxing residents who work in other states, states typically provide their residents with a credit for the income tax they paid the state where the income was earned, up to the amount of tax such residents would otherwise have owed to their home state on such income. In this regard, the states have followed the lead of the United States, which allows a credit against U.S. income tax for foreign income taxes paid or accrued. See 26 U.S.C. § 901. Maryland and Virginia are no different in this regard, since each would allow a credit against its income tax for income taxes paid to the District. See Roach v. Comptroller of the Currency, 610 A.2d 754 (Md. 1992); Mathy v. Department of Taxation, 483 S.E.2d 802 (Va. 1997).
5. To be sure, some states choose to enter into a treaty (known as a reciprocal agreement) with some of their neighboring states whereby each agrees not to tax the wages or salaries earned by residents of the other. See CCH 15-157. States are free to decide whether or not to enter into a reciprocal agreement and presumably do so when it does not harm them economically and is to their administrative or other benefit.
6. For other examples of the lengths to which states are willing to go to tax nonresidents, see R. Hawkins, T. Slay and S. Wallace, “Play Here, Pay Here: An Analysis of the State Income Tax on Athletes,” TAX ANALYSTS STATE TAX TODAY (November 25, 2002) (reporting on a survey the authors conducted of state income taxation of visiting professional athletes and indicating that each of the 25 states which completed the survey stated that they taxed the income such visiting athletes earned when playing the state’s home team(s)). See also Speno v. Gallman, 35 N.Y.2d 256 (1974) (nonresident employee of a New York business required to pay New York income tax on portion of salary attributable to days he worked from his home in New Jersey where employee’s business activities were for his convenience, rather than for the convenience of the employer).
7. Other constraints include: (1) the District’s inability to tax 42% of the real property in the city because that property is owned by the federal government, foreign governments or international institutions; and (2) the limitation on the District’s ability to tax high-density real property resulting from the federally imposed height restrictions on D.C. structures. GAO Report at 43.