1Unless otherwise indicated, all section references are to

the Internal Revenue Code (Code) in effect for the years at

issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

T.C. Memo. 2007-166

UNITED STATES TAX COURT

STEPHEN S. ZIEGLER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23638-04. Filed June 27, 2007.

Michael J. Grace, for petitioner.

Roger W. Bracken, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined the following deficiencies in, additions under section 6651(a)(1)1 to, and

accuracy-related penalties under section 6662(a) on petitioner’s
- 2 -

2In violation of Rule 143(b), petitioner alleges on brief

various facts (petitioner’s alleged facts) not stipulated by the

parties and not otherwise supported by the record in this case. 

In further violation of that Rule, petitioner attached to his

opening brief various documents (petitioner’s documents) that are

not part of the record and that the Court had returned to petitioner. We shall not rely on petitioner’s alleged facts or

petitioner’s documents.

Federal income tax (tax):

Year Deficiency Addition to Tax

Accuracy-Related

 Penalty 

1995 $12,112 $0.00 $2,308.60

1996 12,050 602.35 2,410.00

1997 28,819 2,881.40 5,763.80

1998 16,671 0.00 3,334.20

1999 19,665 0.00 3,933.00

The only issue remaining for decision is whether the application of section 469 to petitioner’s claimed partnership losses

for the respective years at issue violates the Due Process Clause

of the Fifth Amendment to the Constitution of the United States.

FINDINGS OF FACT

All of the facts in this case, which the parties submitted

under Rule 122, have been stipulated by the parties and are so

found.2

Petitioner resided in Jericho, New York, at the time he

filed the petition in this case.

Petitioner practiced law as a tax attorney for decades,

specializing in providing legal services to developers of real

property, including low-income apartment complexes similar to

those purchased and operated by the partnership in which peti-
- 3 -

tioner invested, as discussed below. During 1995 through 1999,

the years at issue, petitioner practiced law full time with the

law firm of Ziegler, Sagal & Winters, PC, in New York, New York. 

During the years at issue, petitioner was a limited partner

of Aldus Green Company (Aldus Green), a limited partnership

formed under the laws of the State of New York. As a limited

partner of Aldus Green, petitioner owned two percent of Aldus

Green’s capital, profits, and losses. 

In 1984, Aldus Green purchased and operated certain lowincome rental apartment buildings located in Bronx, New York. 

Aldus Green rented apartments in those buildings to low-income

individuals, who received rent subsidies under section 8 of the

United States Housing Act, as amended.

Petitioner filed Form 1040, U.S. Individual Income Tax

Return, for each of his taxable years 1995 through 1999 (petitioner’s returns). In each such return, petitioner claimed in

Schedule E, Supplemental Income and Loss (Schedule E), a loss

attributable to his investment in Aldus Green (petitioner’s

claimed Aldus Green loss) in arriving at “Total partnership and S

corporation income or (loss)” in each such schedule. As a

result, in Schedule E for each of the years at issue, petitioner

claimed a total partnership and S corporation loss. In each of

petitioner’s returns for the years at issue, petitioner offset

the total partnership and S corporation loss claimed in Schedule
- 4 -

3Petitioner also concedes that he is liable for additions to

tax under sec. 6651(a)(1) for the taxable years 1996 and 1997 and

for accuracy-related penalties under sec. 6662(a) for all the

taxable years at issue. 

E against income from other sources in arriving at total income

for each such year.

Respondent issued to petitioner a notice of deficiency

(notice) with respect to his taxable years 1995 through 1999. In

that notice, respondent determined petitioner’s claimed Aldus

Green loss for each of those years to be a passive activity loss

under section 469, allowed each such loss to the extent of income

from passive activities for each such year, and disallowed the

following amount of petitioner’s claimed Aldus Green loss for

each such year: 

Year Amount

1995 $44,108

1996 52,415

1997 44,495

1998 41,317

1999 48,773

OPINION

Petitioner concedes that petitioner’s claimed Aldus Green

loss for each of the years at issue is a passive activity loss as

defined in section 469(d)(1) and that section 469(a) disallows

each such loss.3 It is petitioner’s position, however, that the

application of section 469 to petitioner’s claimed Aldus Green
- 5 -

loss for each of the years at issue violates the Due Process

Clause of the Fifth Amendment (Due Process Clause) to the United

States Constitution (Constitution) and that therefore he should

be allowed to offset each such loss against his income from

sources other than passive activities for each such year. (We

shall refer to income from sources other than passive activities

as other income.) 

In support of his position under the Due Process Clause,

petitioner argues that section 469 is retroactive and that the

retroactive application of section 469 to petitioner’s claimed

Aldus Green loss for each of the years at issue is unconstitutional. In further support of his position, petitioner argues

that the transitional rule that Congress provided in enacting

section 469 into the Code (transitional rule) violates his equal

protection rights under the Due Process Clause because it treats

him differently than certain other taxpayers.

The Due Process Clause provides that “No person shall be 

* * * deprived of life, liberty, or property, without due process

of law”. The Due Process Clause provides protection against 

Federal discriminatory action “so unjustifiable as to be

violative of due process”. Shapiro v. Thompson, 394 U.S. 618,

642 (1969); see Nicholas v. Tucker, 114 F.3d 17, 19 (2d Cir.

1997). The Due Process Clause also has been held to incorporate

the Equal Protection Clause of the Fourteenth Amendment to the
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Constitution. Johnson v. Robison, 415 U.S. 361, 364-365 n.4

(1974); Hammond v. Lenfest, 398 F.2d 705, 709 n.6 (2d Cir. 1968).

Before considering petitioner’s constitutional arguments, we

shall summarize in pertinent part the legislative history and

provisions of section 469. On October 22, 1986, Congress enacted

section 469 into the Code in the Tax Reform Act of 1986, Pub. L.

99-514 (1986 Act or TRA 1986), sec. 501(a), 100 Stat. 2233. In

the report of the Senate Committee on Finance (Senate Finance

Committee Report) with respect to the 1986 Act, that committee

set forth the following reasons for enacting section 469:

In recent years, it has become increasingly clear

that taxpayers are losing faith in the Federal income

tax system. This loss of confidence has resulted in

large part from the interaction of two of the system’s

principal features: its high marginal rates * * *, and

the opportunities it provides for taxpayers to offset

income from one source with tax shelter deductions and

credits from another.

The prevalence of tax shelters in recent years 

* * * has been well documented. * * *

Such patterns give rise to a number of undesirable

consequences, even aside from their effect in reducing

Federal tax revenues. Extensive shelter activity

contributes to public concerns that the tax system is

unfair, and to the belief that tax is paid only by the

naive and the unsophisticated. This, in turn, not only

undermines compliance, but encourages further expansion

of the tax shelter market, in many cases diverting

investment capital from productive activities to those

principally or exclusively serving tax avoidance goals.

The committee believes that the most important

sources of support for the Federal income tax system

are the average citizens who simply report their income

(typically consisting predominantly of items such as

salaries, wages, pensions, interest, and dividends) and
- 7 -

pay tax under the general rules. To the extent that

these citizens feel that they are bearing a disproportionate burden with regard to the costs of government

because of their unwillingness or inability to engage

in tax-oriented investment activity, the tax system

itself is threatened.

Under these circumstances, the committee believes

that decisive action is needed to curb the expansion of

tax sheltering and to restore to the tax system the

degree of equity that is a necessary precondition to a

beneficial and widely desired reduction in rates. So

long as tax shelters are permitted to erode the Federal

tax base, a low-rate system can provide neither sufficient revenues, nor sufficient progressivity, to satisfy the general public that tax liability bears a fair

relationship to the ability to pay. In particular, a

provision significantly limiting the use of tax shelter

losses is unavoidable if substantial rate reductions

are to be provided to high-income taxpayers without

disproportionately reducing the share of total liability under the individual income tax that is borne by

high-income taxpayers as a group.

S. Rept. 99-313, at 713-714 (1986), 1986-3 C.B. (Vol. 3) 713-714. 

In the Senate Finance Committee Report, the Senate Committee

on Finance focused specifically on the use of rental activities

for tax shelter purposes, such as the use by Aldus Green of

rental activities for such purposes. That report stated in

pertinent part:

The extensive use of rental activities for tax shelter

purposes under present law, combined with the reduced

level of personal involvement necessary to conduct such

activities, make clear that the effectiveness of the

basic passive loss provision could be seriously compromised if material participation were sufficient to

avoid the limitations in the case of rental activities.

Id. at 718.
- 8 -

Having summarized the concerns of Congress in enacting

section 469 into the Code, we shall now summarize certain provisions of that section that are pertinent here. Pursuant to

section 469(a), a taxpayer is not allowed to offset a passive

activity loss for the taxable year against other income for such

year. For purposes of section 469, a passive activity loss for

the taxable year is the amount, if any, by which the aggregate

losses from all passive activities for the taxable year exceed

the aggregate income from all passive activities for such year. 

Sec. 469(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax Regs.,

53 Fed. Reg. 5711 (Feb. 25, 1988). The term “passive activity”

is defined in pertinent part as any activity in which the taxpayer does not materially participate. Sec. 469(c)(1). Any

rental activity is a passive activity, regardless whether the

taxpayer materially participates in the activity. See sec.

469(c)(2).

Under section 469(b), a passive activity loss is treated as

a deduction allocable to the passive activity giving rise to such

loss for the succeeding taxable year. Under that section, a

passive activity loss may be carried forward indefinitely. In

addition, section 469(g)(1) provides in pertinent part:

SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

* * * * * * *

(g) Dispositions of Entire Interest in Passive

Activity.--If during the taxable year a taxpayer dis-
- 9 -

poses of his entire interest in any passive activity

(or former passive activity), the following rules shall

apply:

(1) Fully taxable transaction.--

(A) In general.--If all gain or loss

realized on such disposition is recognized,

the excess of–- 

(i) any loss from such activity for such

taxable year (determined after the application of subsection (b)), over 

(ii) any net income or gain for such

taxable year from all other passive activities (determined after the application of

subsection (b)), 

shall be treated as a loss which is not from a passive

activity. 

We now turn to petitioner’s arguments. We first address his

argument that section 469 is retroactive. Petitioner maintains

that section 469 is retroactive because:

The effect of the 1986 Act passive loss provisions

is to deny a current deduction for depreciation (i.e.,

a segment of the expenditure) for a property already

purchased, and for interest on a mortgage loan already

committed, to the extent that said deductions exceed

the net operating income from the property. In this

case, the expenditures were made by the Partnership

[Aldus Green] - and the taxpayer made his investment in

the Partnership - before the law was enacted or proposed and the passive loss rule is disallowing the

deduction for the expenditure.

In support of his argument that section 469 is retroactive,

petitioner contends that he decided to invest in Aldus Green in
- 10 -

4With respect to petitioner’s contention that he made his

investment in Aldus Green in 1984, respondent states on brief:

“We note that petitioner offered no evidence that his investment

in AGC [Aldus Green] actually was made two years before the

enactment of sec. 469, nor was the date of his investment in AGC

contained in the Stipulation of Facts filed in this case.”

1984.4 According to petitioner, “Based on the tax incentives in

place at that time, Petitioner reasonably expected that he would

be allowed to deduct tax losses from the Partnership” and “would

not have made the investment if he knew that the losses from the

project could not be offset against his compensation and portfolio income, since in that case, there would be no economic return

from the investment.” Petitioner maintains that he was “induced

to make an investment based upon the prior set of tax rules

deliberately enacted by Congress to induce such investment.” 

From those premises, petitioner argues that section 469 is

retroactive and that such retroactivity is unconstitutional

because it violates the Due Process Clause.

Before considering petitioner’s argument that section 469 is

unconstitutionally retroactive, we note that the grounds on which

petitioner relies to support that argument are similar to the

grounds on which the taxpayer relied in United States v. Carlton,

512 U.S. 26 (1994), to support his argument that the tax statute

involved there was unconstitutionally retroactive. In Carlton,

the taxpayer, the executor of an estate, maintained that the

retroactive amendment of a Federal estate tax provision (section
- 11 -

2057) violated the Due Process Clause because he “specifically

and detrimentally relied on the preamendment version”, id. at 33,

of that provision when he engaged in a transaction prior to its

amendment by Congress. Id. In rejecting the taxpayer’s position, the Supreme Court of the United States observed that the

taxpayer’s

reliance alone is insufficient to establish a constitutional violation. Tax legislation is not a promise,

and a taxpayer has no vested right in the Internal

Revenue Code. Justice Stone explained in Welch v.

Henry, 305 U.S., at 146-147:

“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 ....”

Moreover, the detrimental reliance principle is not

limited to retroactive legislation. An entirely prospective change in the law may disturb the relied-upon

expectations of individuals, but such a change would

not be deemed therefore to be violative of due process.

Id. at 33-34.

We consider now whether, as petitioner argues, section 469

is retroactive. As pertinent here, section 469(a) applies only

to a passive activity loss as defined in section 469(d)(1) for a

taxable year that began after December 31, 1986. See TRA 1986

sec. 501(c), 100 Stat. 2241. Section 469(a) does not apply to

any loss for any taxable year that began prior to January 1,
- 12 -

5See Polone v. Commissioner, T.C. Memo. 2003-339, affd. 479

F.3d 1019 (9th Cir. 2007); cf. United States v. Carlton, 512 U.S.

26, 33-34 (1994).

6The investors qualifying under the transitional rule are

so-called qualified investors. The term “qualified investor” is

defined to mean, in general:

any natural person who holds (directly or through 1 or

more entities) an interest in a qualified low-income

housing project--

(A) if–-

(i) in the case of a project placed in service before August 16, 1986, such person held an

interest in such project on August 16, 1986, and

the taxpayer made his initial investment after

December 31, 1983, or

(ii) in the case of a project not described

in subparagraph (A), such investor held an interest in such project on December 31, 1986, and

(B) if such investor is required to make payments

after December 31, 1986, of 50 percent or more of the

total original obligated investment for such interest.

TRA 1986 sec. 502(d), 100 Stat. 2242.

1987. See id. We hold that section 469 is not retroactive.5

We next address petitioner’s argument that the transitional

rule that Congress provided in enacting section 469 into the Code

violates his equal protection rights under the Due Process

Clause. We first describe the transitional rule that Congress

provided, TRA 1986 sec. 502, 100 Stat. 2241, when it enacted

section 469 into the Code. That transitional rule provides that

any loss sustained by certain investors6 with respect to inter-
- 13 -

7The low-income housing projects qualifying under the transitional rule are so-called qualified low-income housing projects. The term “qualified low-income housing project” is

defined to mean:

any project if--

(1) such project meets the requirements of clause

(i), (ii), (iii), or (iv) of section 1250(a)(1)(B) as

of the date placed in service and for each taxable year

thereafter which begins after 1986 and for which a

passive loss may be allowable with respect to such

project,

(2) the operator certifies to the Secretary of the

Treasury or his delegate that such project met the

requirements of paragraph (1) on the date of the enactment of this Act [October 22, 1986] (or, if later, when

placed in service) and annually thereafter,

(3) such project is constructed or acquired pursuant to a binding written contract entered into on or

before August 16, 1986, and

(4) such project is placed in service before

January 1, 1989.

TRA 1986 sec. 502(c), 100 Stat. 2242.

8The period prescribed under the transitional rule is a socalled relief period. The term “relief period” is defined to

mean:

the period beginning with the taxable year in which the

investor made his initial investment in the qualified

low-income housing project and ending with whichever of

the following is the earliest--

(1) the 6th taxable year after the taxable

year in which the investor made his initial investment,

(continued...)

ests in certain low-income housing projects7 for any taxable year

in a prescribed period8 is not to be treated as a loss from a
- 14 -

8(...continued)

(2) the 1st taxable year after the taxable

year in which the investor is obligated to make

his last investment, or

(3) the taxable year preceding the 1st taxable year for which such project ceased to be a

qualified low-income housing project.

TRA 1986 sec. 502(b), 100 Stat. 2241.

passive activity for purposes of section 469. TRA 1986 sec.

502(a), 100 Stat. 2241.

In support of his argument that the transitional rule

violates his equal protection rights under the Due Process

Clause, petitioner contends that, because he is not entitled to

the relief provided by the transitional rule, Congress treated

him differently than certain other taxpayers entitled to such

relief. According to petitioner, the provisions of the transitional rule are “arbitrary, capricious and unreasonable”. In

support of that claim, petitioner asserts:

In this case, the conditions for the 1986 Act

exemptions for low and moderate income housing are

worse than unreasonable, that is, worse than conditions

without any reasonable basis. The conditions evidence,

and indeed were meant to evidence, an intention by the

opponents of any exemption to take private property

without compensation.

The exemption is conditional upon the taxpayer not

having yet paid in over 50% of the taxpayer’s investment commitment. It is obvious - and beyond dispute -

that the purpose of this condition was to encourage the

taxpayer to pay in the balance of his investment - and

this was the very purpose of the tax incentives for

subsidized housing in the first place. However, there

is no exemption for the investor who has already paid
- 15 -

9Congress also decided to provide in sec. 469(m) certain

(continued...)

in his investment, even if he is an investor in the

same project as a taxpayer who has not yet paid in his

investment.

Hence, limiting the exemption to investors who 

have not yet paid in over 50% of their investments

reflects a purpose antithetical to our system of jurisprudence, that is, perpetuating a fraud by having the

government pay a further portion of the consideration

it promised to persons who had not yet completed their

performance in reliance on the government’s promised

consideration to the persons who had already fully

performed in reliance upon the government promise.

[Reproduced literally.]

In order to prevail on his equal protection argument,

petitioner must show that the transitional rule was not premised

upon a rational basis, see Regan v. Taxation With Representation,

461 U.S. 540, 547-548 (1983), and instead was premised upon an

impermissible basis such as race, religion, or the desire to

prevent the exercise of petitioner’s constitutional rights, see

United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir. 1974). 

We reject petitioner’s argument that the transitional rule

violates his equal protection rights under the Due Process

Clause. In enacting section 469, Congress considered whether any

relief from the application of section 469(a) was appropriate. 

After giving consideration to that question, Congress decided to

provide in the transitional rule certain relief, but only for

certain taxable years, to certain taxpayers in certain circumstances.9
- 16 -

9(...continued)

other relief, but only for certain taxable years, to taxpayers

who were not entitled to the relief provided by the transitional

rule and who therefore were subject to sec. 469. Sec. 469(m)

provides in pertinent part:

SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

* * * * * * *

(m) Phase-in of Disallowance of Losses and Credits

for Interest Held Before Date of Enactment.--

(1) In general.--In the case of any passive

activity loss or passive activity credit for any

taxable year beginning in calendar years 1987

through 1990, subsection (a) shall not apply to

the applicable percentage of that portion of such

loss (or such credit) which is attributable to

preenactment interests. 

(2) Applicable percentage.--For purposes of

this subsection, the applicable percentage shall

be determined in accordance with the following

table:

In the case of taxable

years beginning in:

The applicable

percentage is:

 1987...............................65

 1988...............................40

 1989...............................20

 1990...............................10

Sec. 469(m)(3)(B)(i) defines the term “pre-enactment interest” to

mean, in general, “any interest in a passive activity held by a

taxpayer on the date of the enactment of the Tax Reform Act of

1986, and at all times thereafter.” Petitioner appears to have

qualified for the relief from the application of sec. 469(a) that

Congress provided in sec. 469(m).

On the instant record, we find that petitioner has failed to

carry his burden of establishing that the transitional rule was

not premised upon a rational basis and instead was based upon a
- 17 -

constitutionally impermissible standard. We hold that the

transitional rule does not violate petitioner’s equal protection

rights under the Due Process Clause.

We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

To reflect the foregoing and the concessions of petitioner,

Decision will be entered for

respondent.