Advertisement
 

Supreme Court OKs Retroactive Tax Collection

June 14, 1994|DAVID G. SAVAGE | TIMES STAFF WRITER

WASHINGTON — The Supreme Court on Monday gave Congress and state lawmakers virtually unlimited power to collect taxes retroactively, even when a taxpayer is penalized for taking a legal deduction that is later repealed.

The 9-0 ruling upholds a 1987 move by Congress to apply tax changes retroactively to returns that were filed in 1986. It is a defeat for a Newport Beach estate tax lawyer who lost $630,000 in estate money when he sold stocks in 1986 to take advantage of a newly created tax deduction.

A year later, when Congress repealed the new deduction, the Internal Revenue Service demanded that the estate pay an extra $2.5 million in taxes. The case came to the high court as a test of how far the government could go in imposing tax changes retroactively.

"Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code," said Justice Harry A. Blackmun for the court. So long as Congress acts with "a legitimate legislative purpose" in mind, its tax laws, even retroactive ones, are constitutional, he said.

In a concurring opinion, Justice Antonin Scalia derided the government for "bait-and-switch taxation," but he nonetheless voted to uphold the law.

The Constitution itself bars ex post facto laws. Since 1798, the Supreme Court has said that limit applies only to criminal laws, not civil measures.

Indeed, since the 1930s, the high court repeatedly has upheld retroactive tax changes. But some tax experts had hoped that a conservative-dominated court would be more protective of the rights of taxpayers. Instead, Monday's ruling (United States vs. Carlton, 92-1941) offers another stark example of a conservative court handing down a defeat to a cause championed by political conservatives.

The decision probably deals a fatal blow to a similar lawsuit challenging retroactive tax increases in the 1993 Clinton tax bill.

Last year, Republicans in Congress argued that the Democratic majority was acting unconstitutionally when it raised tax rates on the estates of people who died in the months before the new tax bill became law. On Aug. 10, 1993, President Clinton signed into law the higher tax rates for estates and for upper-income people. Those new rates were applied retroactively to Jan. 1, 1993.

Lawyers for the National Taxpayers Union and the Landmark Legal Foundation filed a lawsuit in federal court here seeking to have those retroactive changes invalidated.

The conservative members of the high court, led by Scalia and Chief Justice William H. Rehnquist, long have insisted on giving wide latitude to elected lawmakers. Whether the issues are contraception and abortion or rent control and retroactive taxes, these two conservatives have largely voted to uphold federal and state laws.

In his concurring opinion, Scalia lectured the liberals for "picking and choosing among the various rights to be accorded (special) protection," citing the Roe vs. Wade decision that made abortion legal as an example. In his view, the court should uphold state laws banning abortion, just as it upheld a law Monday that imposed retroactive taxes. Justice Clarence Thomas joined Scalia's opinion.

Jerry Carlton, the Newport Beach tax lawyer who lost in Monday's ruling, said that he found the decision "scary. As I read it, it says the government can say: 'I have a social goal. Help me accomplish it.' But after you do it, they can say: 'Sorry! Just kidding.' "

The social goal in this instance was encouraging employee stock ownership programs, or ESOPs. Former Sen. Russell Long (D-La.) believed that workers should own more of a company's stock and he wrote into law tax incentives to achieve that goal.

In the Tax Reform Act of 1986, he sponsored a change that gave a deduction to estate executors who sell stock to an employee stock ownership plan. The idea was that the deduction would encourage sales at a discount.

Carlton, the executor of the estate of oil heiress Willametta Keck Day, bought $11.2 million in MCI stock and sold it two days later to the company ESOP for $10.57 million. Though he lost $631,000 on the stock transaction, the estate got a tax deduction valued at $2.5 million when he filed her return on Dec. 29, 1986.

But IRS officials, alarmed at estimates that the new deduction could cost $7 billion over five years, announced in January, 1987, that they would seek a change in the law. In December, 1987, Congress passed an amendment limiting the deduction to estates that owned the stock before death.

The IRS then sought a $2.5-million refund from the Day's estate. After the tax was paid, Carlton challenged the action as a violation of due process of law.

Advertisement
Los Angeles Times Articles
|
|
|