Dale W. Steager, State Tax Comm. v. James and Elaine Dawson, 16-0441

James and Elaine Dawson amended West Virginia tax returns for 2010–2011 to claim a full exemption under W.Va. Code § 11-21-12(c)(6) for James Dawson’s federal retirement (FERS); the Tax Commissioner denied the claim.
Section 12(c)(6) fully exempts pension income for beneficiaries of four small West Virginia plans (MPFRS, DSRS, Trooper Plan A, Trooper Plan B); it covers about 2% of state retirees during the years at issue.
West Virginia’s broader tax code also provides other, limited exemptions: $2,000 for federal retirees, up to $8,000 for taxpayers 65+, and larger exemptions for military retirees; many other state retirees receive different treatment.
The Dawsons argued Section 12(c)(6) unlawfully discriminates against federal retirees (like a U.S. Marshal) in violation of 4 U.S.C. § 111; the Office of Tax Appeals and the Tax Commissioner rejected that claim.
The Circuit Court of Mercer County reversed, holding Section 12(c)(6) violated 4 U.S.C. § 111; the West Virginia Supreme Court granted review and reversed the circuit court.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 11-21-12(c)(6) discriminates against federal retirees in violation of 4 U.S.C. § 111	Dawson: § 12(c)(6) treats state/local law enforcement retirees more favorably than federal marshals; no significant differences justify that disparity	Tax Commissioner: exemption targets a narrow, diverse class of state/local retirees, not a blanket preference; no intent to discriminate; view scheme in totality	Reversed circuit court; § 12(c)(6) does not violate § 111 because it benefits a narrow class and the overall tax scheme lacks discriminatory intent
Proper standard for analyzing § 111 challenge	Dawson: discrimination test from Davis applies — tax preference must be directly related to significant differences between classes	Tax Commissioner: apply totality-of-circumstances as in Brown to determine intent and substantial differences	Court applied Davis and Brown: examined totality and structural differences and found no discrimination

Davis v. Michigan Dept. of Treasury, 489 U.S. 803 (1989) (federal retirement benefits protected from state tax discrimination; invalidated a blanket exemption favoring state retirees)
Brown v. Mierke, 191 W. Va. 120, 443 S.E.2d 462 (1994) (West Virginia applied Davis; upheld § 12(c)(6) based on narrow class and totality-of-circumstances test)
McCulloch v. Maryland, 17 U.S. 316 (1819) (foundational intergovernmental tax immunity principle under Supremacy Clause)
Barker v. Kansas, 503 U.S. 594 (1992) (military retirement benefits protected under 4 U.S.C. § 111)
Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939) (addressed state taxation of federal employees in the Public Salary Tax Act era)