TaxProf Blog

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

Thursday, December 17, 2009

The Constitutionality of a Retroactive Reenactment of the Estate Tax in 2010

Bloomberg, Estate Tax Expiration Sets Up Battle on Retroactive Restoration, by Ryan J. Donmoyer:

The imminent expiration of the federal tax on multimillion-dollar estates and a pledge by congressional Democrats to renew it retroactively next year marks a new phase in an ongoing battle over the levy. ...

The collapse of a last-ditch effort by Democrats to pass even a temporary extension surprised those on both sides of a debate that has raged for more than 15 years over whether to end what opponents term the “death tax”. ...

The pledge to renew an estate tax retroactively presents both a legislative and a legal challenge, [Dick Patten, president of the American Family Business Foundation, a Washington group that has campaigned against the estate tax], said. “I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45%, there are going to be lawsuits,” he said. “It’s going to be messy, it’s going to be noisy.”

Larry Richman, chair of the private wealth services practice group at the Chicago law firm Neal, Gerber & Eisenberg LLP, said the courts are likely to follow a 1994 Supreme Court case that concluded the Constitution’s ban on the enactment of ex-post facto laws doesn’t apply to tax legislation.

Although Mr. Richman misstates the Court's holding in United States v. Carlton, 512 U.S. 26 (1994), he is correct that the re-enactment of the estate tax in 2010, retroactive to Jan. 1, 2010, likely would pass constitutional muster.

As we discuss in our casebook, Federal Wealth Transfer Taxation54-64 (Foundation Press, 6th ed. 2009), the two-part doctrine that emerges from Carlton upholds the constitutionality of retroactive tax legislation if (1) the legislation has a rational legislative purpose and is not arbitrary; and (2) the period of retroactivity is not excessive.  This is a very low constitutional threshold, as the Court noted that "[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.” The Court approved a 14-month period of retroactivity in Carlton.

In NationsBank v. United States, 269 F.3d 1332 (Fed. Cir. 2001), the 55% top estate and gift tax rate lapsed on Jan. 1, 1993 and the decedent died in March 1993 with a $26.4 million estate when the top rate was 50%.  President Clinton signed OBRA on Aug. 10, 1993, raising the top rate to 55%, retroactive to Jan. 1, 1993.  The estate challenged the constitutionality of the retroactive tax legislation and sought a  $1.32 million refund ($26.4 million x 5%).  The Federal Circuit held that the retroactive rate increase was constitutional under the two-part Carltontest: (1) it had a rational legislative purpose (to apply the same rate to all decedents dying in 1993, regardless of the month of death); and (2) the 8-month period of retroactivity was not excessive (because the Supreme Court had approved a 14-month period of retroactivity in Carlton).

We quote the powerful dissent by Judge Plager in NationsBank:

I cannot dispute that the weight of judicial opinion, though not the weight of either history or logic, currently argues for affirming the judgment of the trial ct; the majority dutifully rounds up the usual judicial suspects. But there are times when the gap between law and justice is too stark to be ignored. This is one of them. It is simply unfair, and I believe it should be unconstitutional, in these circumstances to enact a statute that imposes a tax on a citizen based on an event that occurred before the tax was enacted. Retroactive leg is inherently offensive to the natural law of decency, to the principles of the social compact set out in the Declaration of Independence, and to the underlying tenets of the Constitution....

Yes, the majority has the law on its side, if following what other courts have said is the law. . . .

Congress is perfectly capable of raising all the revenue it needs without making its tax laws reach backward, taking property from citizens based on events that, at the time they occurred, were not subject to the new law.”

We conclude by asking the students whether subsequent events have vindicated Justice Scalia's concurrence in Carlton:

If I thought that "substantive due process" were a constitutional right rather than an oxymoron, I would think it violated by bait-and-switch taxation. ... The reasoning the Court applies ... guarantees that all retroactive tax laws will henceforth be valid.

Although we present in our Study Problems book an example of a retroactive tax bill that likely would fail constitutional muster under Carlton, a retroactive reenactment of the estate tax in 2011 would be well within the Carlton constitutional bounds.

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Comments

Isn't there a fundamental difference between retroactively modifying a tax rate, and retroactively adding a whole new tax?

Posted by: John | Dec 18, 2009 4:48:27 AM

Courts can rationalize it however they want, but both the plain words of the Constitution and common sense say that retroactive legislation is unfair.

If tax laws are not sufficiently important to deserve fairness on the part of Congress, then taxpayers will conclude that tax laws are not sufficiently important to obey. Respect for the law is not just a one-way street. I wish the courts were not so willing to bail Congress out from highly avoidable cases of incompetence like this one.

Posted by: AMTbuff | Dec 18, 2009 12:18:05 PM

In the situation we are now in, where there are bill that have passed the House to reimpose the tax, and if they are finally enacted before the end of the current Congress, I can't get worked up about retroactivity. If Congress cant get its act together in 2010, well that would probably be too late.

Posted by: Fat Man | Dec 19, 2009 6:53:13 PM