A Phoenix attorney challenging a state income tax refund as an unconstitutional giveaway will have his day in court.

The Arizona Court of Appeals will hear oral argument in Kamman v. Ladewig at 11 a.m. Feb. 25 in Courtroom Two of the State Courts Building, 1501 W. Washington St., Phoenix.

The appeal, filed July 7 on behalf of tax attorney Bob Kamman, argues that the settlement approved in December 2002 cannot give refunds to people who don’t deserve them. Mr. Kamman on Oct. 28 filed a request for oral argument in the appeal, which the court granted in a minute entry dated Dec. 29.

Arizona Tax Court Judge Paul Katz approved the settlement in the so-called Ladewig case, named for the plaintiff in the original case, the estate of Helen H. Ladewig. The Ladewig estate sued the state over its differing treatment of corporate dividends from 1986 to 1989 – dividends from companies doing more than 50 per cent of their business in Arizona were not taxed, while dividends from those companies with more business outside Arizona were taxed.

The court ruled that the dividends have to be treated to the same. The settlement that Judge Katz approved calls for capping the refunds on the illegal taxes at $350 million, which will be paid over three years beginning in mid-2004. The state has notified some 649,000 individuals or their estates that they will be receiving the settlement. About $45 million will be reserved for administration costs of the settlement and attorney fees.

Formula Questioned

Mr. Kamman, who is a member of the class-action settlement, noted in his opening brief that Arizona Department of Revenue officials acknowledged in the settlement proceedings that some taxpayers might get refunds to which they are not entitled.

“The underlying problem with the formulas and methods proposed for the settlement is that in many cases there is no way in 2003 to determine whether ‘dividends’ received in 1986-89 were actually distributions from corporate profits, or were instead something entirely different,” states the brief, filed on Mr. Kamman’s behalf by Mesa attorney John W. Rasmussen. “For example, the Arizona Department of Revenue’s witness, Steve Shiffrin, testified that mutual-fund distributions could include out-of-state dividends, Arizona dividends, interest and short-term capital gains; and that brokerage-account tax reports on Form 1099-DIV do not identify the source of such payments. For purposes of the settlement, [Mr. Shiffrin] explained that the assumption was made that only half of the dividends from brokerage accounts and mutual funds were true non-Arizona corporate dividends.

“The result of this assumption is that many class members are penalized for having invested in mutual funds and placed their assets in brokerage accounts, even if they maintained adequate records to show eligibility for a greater refund,” the brief states. “The reductions in their refunds would be offset, however, by payments to individuals who may not even be members of the class, but who happened to have interest, short-term capital gains, or Arizona-source dividends that were correctly reported to them on the federal Form 1099-DIV. The penalty is twofold: First, it is assumed that every class member has non-qualifying dividends [that is, dividends from Arizona companies], even when that is incorrect. Second, because of the cap on the total settlement paid, the refunds to no-class members may reduce the funds available to class members.”

The appeal cites Article IX, Section 7 of the Arizona Constitution, which reads:

“Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.”

The brief notes that the Arizona Supreme Court in 1984 devised a two-part test to determine whether a transaction violated the anti-gift clause. No violation occurs if the money is used for a public purpose and the value of the public money is not disproportionate to the value of the benefit received.

“In this case, while the money is being used for a public purpose, the value of the public money is disproportionate to the value of the benefit received,” the brief states. “Non-class members will receive refunds to which they are not entitled.”

Refunds should be “paid to individuals who are not members of the class simply for administrative convenience,” the brief states.

Briefs Filed Say There’s No Basis For Appeal

Attorneys for both the Ladewig estate and the Department of Revenue filed briefs that contend Mr. Kamman has no basis for appeal, for a number of reasons:

• Mr. Kamman asked the Tax Court to amend the settlement agreement, when the court had only the authority to accept or reject the proposed settlement.

• Anyone who asserts that public funds are being illegally spent must meet the provisions of ARS 35-213(A), which requires that a written claim must be first made with the attorney general to bring suit. “The Arizona Supreme Court has unequivocally held that the provisions of 35-213(A) are a jurisdictional requirement. The record lacks any evidence Kamman made a written request on the Attorney General… Similarly, ARS 35-213(B) requires a person instituting the action to executive a bond to cover all damages and costs incurred by the defendant. No bond appears in the record. Consequently, Kamman’s appeal must be dismissed.”

• Only members of a class may object or seek an appeal to a class action settlement. While Mr. Kamman appeared at the hearing to approve the settlement, “at the very end of the approval hearing, he admitted that he was objecting as a ‘taxpayer of Arizona….’ This admission constituted the assertion of a separate cause of action. Because Kamman sought only to advance an interest of a non-class member, he was required to move for intervention to be heard in that distinct capacity. Having failed to do so, he cannot now be heard.”

• “The settlement resolved the dispute between the parties about what dividends were subject to discrimination. Class counsel [representing the Ladewig estate and ‘similarly situated persons’] asserted a broader view than the narrower view asserted by ADOR. This dispute was one of the areas of compromise reflected in the formula. Kamman’s assertion ignores the compromise. Thus, the premise underlying Kamman’s objection – that payment of public monies will be made to non-class members because a formula was used to automate the refund process – is incorrect. Kamman offered no evidence to support his objections. He did not call any witnesses. He did not introduce any exhibits into evidence. He did not submit any expert witness reports. All he offered the court was argument.”

Each side in the case will have 20 minutes to state their cases. The case number is 1 CA-TX030003 —