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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, March 21, 2009

Law Profs: Courts Unlikely to Overturn AIG Tax

Bloomberg: AIG Tax-Measure Suits Likely to Come, Less Likely to Succeed, by Greg Stohr:

Congress is inviting legal challenges by moving to tax AIG employee bonuses. That doesn’t mean those challenges will succeed, legal experts say. ...

The legislation raises a number of legal questions, and New Hampshire Republican Senator Judd Gregg said it was unconstitutional. Still, any legal challenge will meet a significant obstacle in the historic reluctance of the Supreme Court to second-guess Congress on tax issues.

“Given the state of the law, it will be unlikely that the Supreme Court will strike down this legislation,” said Edward McCaffery, a University of Southern California tax-law professor who says he questions the wisdom of the proposal....

Gregg said the legislation would violate the constitutional ban on bills of attainder, or laws that single out individuals for punishment. “It’s basically targeted on a small group of people,” he said.

The House took several steps to shield the measure from that argument, said Laurence Tribe, a constitutional law professor at Harvard Law School.
The measure doesn’t single out employees at AIG and instead uses general language affecting all companies receiving more than $5 billion in federal bailout money. ...   Tribe also pointed to a provision in the House measure exempting executives at companies that repay enough bailout funds to reduce the government’s investment below $5 billion. That provision “makes it clear that the goal is not to punish corporate executives generally, but is simply to ensure the appropriate use of government funds,” Tribe said in an e- mail

The bill leaves employees with little ability to avoid being covered by the measure. The taxpayers “don’t have control over whether their employer gives back the money,” said tax law professor Charlotte Crane of Northwestern Law School in Chicago. The Supreme Court has said the bill-of-attainder clause is more likely to apply when people can’t escape the impact of a law. ...

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said he believed the legislation would pass constitutional muster. “We’ve pushed the constitutional question pretty hard with constitutional experts and we think it’s okay,” he said.

McCaffery, who teaches at USC’s Gould School of Law, said opponents would be able to press legitimate -- if not ultimately successful -- arguments against the measure based on the Constitution’s due process, takings and equal protection clauses.

The due process argument would bear similarities to those based on the bill-of-attainder clause. Opponents would have to show that Congress imposed punishment, bypassing the criminal court system. That argument would pass the “laugh test,” McCaffery said. Even so, he said, “you’re swimming upstream because of the general tendency of the courts to stay out of tax legislation.”

The takings clause bars government bodies from seizing private property without “just compensation.” Courts have been reluctant to apply that clause to tax questions, McCaffery said.

An equal protection challenge probably would require a showing that Congress lacked any rational basis for distinguishing between the people covered by the law and other taxpayers. That’s a high hurdle, Crane said. “Rarely do people have the right to complain when it’s economic legislation generally that somebody’s getting a better deal than they are,” she said. Still, the issues that would surround a challenge are largely untested ones, leaving the outcome in at least some doubt, Crane said. “I don’t think that people would be wasting their money if they hired lawyers to challenge it,” she said. “On the other hand, I don’t think the government would be wasting its money to defend it.

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