Introduction and purpose

In an earlier post I argued that in the Moore appeal the Supreme Court should consider the retroactive nature of the MRT AKA transition tax. My argument was based my interpreting the law to be that retroactive legislation might be unconstitutional if it:

1. Was retroactive for an extensive period of time (in this case the period of retroactivity was 31 years); and

2. Was new legislation

After writing that post, I came across this 2012 Congressional Research Report which suggests that tax legislation could be unconstitutionally retroactive based on the same two principles.

A relevant excerpt from the report follows.

The 2012 Congressional Research Report: CRS Report for Congress Prepared for Members and Committees of Congress Constitutionality of Retroactive Tax Legislation

2012 US Gov report suggests that a retroactive tax may be unconstitutional when increasing tax: 1. Covers an extensive period of retroactivity – 2. Where there is a lack of notice of a wholly new tax. The @USTransitionTax was a new 35 year retroactive tax.https://t.co/QGiQer4Gs6 pic.twitter.com/hLh4wztmGW

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) October 30, 2023

The following excerpt is of interest and relevance to the Moore appeal

Period of Retroactivity

The most common potential concern with respect to substantive due process is the length of the retroactivity. The Supreme Court has made clear that a modest retroactive application of tax laws is permissible, describing it as a “customary congressional practice” required by “the practicalities of producing national legislation.”9 As a result, tax legislation that is retroactive to the beginning of the year of enactment has routinely been upheld against due process challenges.10 There does not seem to be any serious question as to whether such a period of retroactivity is constitutional.

What then happens with periods of application that go beyond the year of enactment? The Court has upheld several tax laws where the period of retroactivity extended into the preceding calendar year.11 For example, in United States v. Carlton, the Court upheld the retroactive application of a federal estate tax provision that limited the availability of a recently added deduction for the proceeds of sales of stock to employee stock ownership plans. The deduction was added by the Tax Reform Act of 1986, which had not included a requirement that the taxpayer own the stock immediately prior to death. The lack of such a requirement essentially created a loophole that Congress fixed with the 1987 amendment. The Tax Reform Act of 1986 was enacted in October 1986, and the amendment was enacted in December 1987, to apply as if incorporated in the 1986 law. In upholding the 1987 law, the Court explained that the period of retroactivity was permissible since it was only slightly more than one year, as well as noting that the IRS had announced its concern with the original law as early as January 1987 and a bill to make the correction was introduced in Congress the very next month.12

However, it does appear that due process concerns may be raised by a more extended period of retroactivity. In Nichols v. Coolidge (one of the few cases where the Supreme Court struck down a retroactive tax on due process grounds),13 the Court disallowed the retroactive application of an estate tax provision that changed the tax treatment of a transfer 12 years after the transfer had occurred.14 The Court later unfavorably compared the 12-year period with periods where the “retroactive effect is limited.”15 This suggests that due process concerns are raised by an extended period of retroactivity. However, it is not clear how long a period might be constitutionally problematic. The Court has recognized retroactive liability for periods beyond one or two years in non-taxation contexts,16 but it is not clear how a similar situation arising under the tax laws would be addressed.

Reliance and Lack of Notice

One issue often raised is that it may seem unfair to change the tax laws once a taxpayer has done something based on the law as it existed at the time. The fact that taxpayers may have concluded a transaction in reliance on prior law is generally not important to the analysis as “reliance alone is insufficient to establish a constitutional violation.”17 As the Court has made clear, “[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.”18 In other words,

Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process….19

Additionally, lack of notice of the retroactive effect of a tax law is not dispositive of whether due process has been violated.20 Lack of notice may, nonetheless, be a concern when the retroactive legislation enacts a wholly new tax. This was the issue in two cases where the Court struck down retroactive tax legislation on due process grounds—Blodgett v. Holden and Untermyer v. Anderson.21 Both dealt with the constitutionality of retroactive application of the Revenue Act of 1924, which enacted the gift tax. The legislation was introduced in February 1924, enacted that June, and applied to gifts made after January 1, 1924. The taxpayer in Blodgett made a gift in January 1924, and the taxpayer in Untermyer made a gift in May 1924, while the bill was in conference. The plurality in Blodgett and the majority in Untermyer held the retroactive application was unconstitutional because it was arbitrary as the taxpayers made gifts without knowing they would subsequently be subject to tax.22 In such a situation, a taxpayer has “no reason to suppose that any transactions of the sort will be taxed at all.”23

The Court in later cases has clearly distinguished the two cases on the basis that they dealt with the “creation of a wholly new tax” and therefore “their authority is of limited value in assessing the constitutionality of subsequent amendments that bring about certain changes in operation of the tax laws.”24 Thus, while lack of notice is not dispositive, the Court has suggested that lack of notice may violate due process if the retroactive law creates a “wholly new tax.”

Since the two cases dealing with the creation of the gift tax, it does not appear the Court has found any other situations where lack of notice was an issue.25 In some instances, the Court determined the retroactive tax provision was not a wholly new tax, as with the provision in Carlton, which amended a new estate tax deduction that was enacted 14 months prior as part of a major overhaul of the tax code.26 Even in a case with what looked like a brand new tax—a tax on silver under the Silver Purchase Act—the Court upheld a 35-day period of retroactivity.27 In that case, the law was enacted on June 19, 1934, retroactive back to May 15, 1934. In upholding the law’s retroactive application, the Court suggested that taxpayers had sufficient notice since there had been pressure for legislation for months, the President had sent a message to Congress encouraging such a tax on May 15, and the bill that became the act was introduced on May 23. This suggests that it would be rare for a tax provision to be characterized as a “wholly new tax” so long as taxpayers were on some kind of notice that a tax might be imposed.

The full report is available here:

https://sgp.fas.org/crs/misc/R42791.pdf

A pdf of the full report is here:

Retroactive Tax R42791

Interested in Moore about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

John Richardson – Follow me on Twitter @Expatriationlaw