Opinion ID: 1330401
Heading Depth: 1
Heading Rank: 3

Heading: constitutionality of act 171-takings law and due process

Text: Department of Revenue first argues the trial court erred in determining Act 171 violates the federal and state constitutions. We hold that although Act 171 did not effect a taking of property in which Taxpayers had a vested interest, the legislation violated due process because of its excessive retroactivity. Under ordinary takings law, in order for Act 171 to have effected a taking, Taxpayers would have to have had a vested right to the money at issue. E.g., Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978). However, this rule does not apply in the context of taxing legislation. First, case law from the United States Supreme Court and courts throughout the country makes clear that taxpayers have no vested interest in tax laws remaining unchanged: Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code. United States v. Carlton, 512 U.S. 26, 33, 114 S.Ct. 2018, 2023, 129 L.Ed.2d 22, 30 (1994); accord Canisius College v. United States, 799 F.2d 18, 25 (2d Cir.1986) (finding that retroactive legislation is not unconstitutional merely because it upsets settled expectations or effectively imposes a new liability on a past act), cert. denied, 481 U.S. 1014, 107 S.Ct. 1887, 95 L.Ed.2d 495 (1987); Varrington Corp. v. New York City Dep't of Fin., 85 N.Y.2d 28, 623 N.Y.S.2d 534, 536, 647 N.E.2d 746, 748 (1995) (Since tax legislation is not a governmental promise, Varrington has no vested or actionable right in these circumstances to the benefit of a tax statute or regulation.); Fidelity Bank v. Commonwealth, 165 Pa.Cmwlth. 524, 645 A.2d 452, 460 n. 14 (1994) (citing Carlton for proposition that tax legislation is not a promise and taxpayer has no vested right in a particular treatment). Second, even though taxes ... indisputably `take' money from individuals or businesses, assessments of that kind are not treated as per se takings under the Fifth Amendment. Branch v. United States, 69 F.3d 1571, 1576 (Fed.Cir.1995), cert. denied, ___ U.S.___, 117 S.Ct. 55, 136 L.Ed.2d 18 (1996); see also A. Magnano v. Hamilton, 292 U.S. 40, 54 S.Ct. 599, 78 L.Ed. 1109 (1934) (taxing power of state or federal government not considered a taking under the Fifth or Fourteenth Amendment); Kane v. United States, 942 F.Supp. 233, 234 (E.D.Pa.1996) (finding increase in tax rate did not effect taking where statute was not so arbitrary as to amount to a confiscation of property rather than an exaction of tax). To distinguish takings law concerning the government's power to tax, Taxpayers suggest Act 171 is not a tax statute at all, but simply a statute conferring a vested property right upon them. Taxpayers then cite certain cases suggesting tax refunds have been treated as property interests in other contexts. See, e.g., Chicago v. Michigan Beach Hous. Co-op., 242 Ill.App.3d 636, 182 Ill.Dec. 343, 609 N.E.2d 877 (1993) (finding expected income tax refunds are general intangible property interests under the Uniform Commercial Code). In our view, there is little way to read Act 171 except as a taxing statute. As the Department of Revenue notes, Act 171 is part of Title 12 and directly concerns the payment of tax refunds. As a practical matter, by denying Taxpayers a refund, Act 171 in effect amounts to an increase in Taxpayers' capital gains tax rate. We conclude that takings law is inapplicable because Taxpayers had no vested interest in the receipt of the tax refund; as described in Canisius College, 799 F.2d 18, all Taxpayers may have had was a settled expectation they would receive the refund. However, even if Act 171 did not effect a taking of Taxpayers' property, the Act violated substantive due process under both the state and federal constitutions. The United States Supreme Court has held that the government's power to impose taxes retroactively is not unlimited and that certain tax laws can violate the Due Process Clause. In United States v. Carlton, 512 U.S. 26, 114 S.Ct. 2018, 129 L.Ed.2d 22, the Court defined the parameters of the government's retroactive taxation power. In that case, an executor of an estate purchased certain shares in a corporation and then sold them at a loss. Under the estate tax laws in effect at the time of his purchase and sale of the shares, the estate was entitled to a large deduction because of the sale of the shares. In fact, the executor purchased and then sold the shares at issue in order to receive the tax deduction. The executor filed the estate tax return claiming this allowed deduction. Id. at 28, 114 S.Ct. at 2021, 129 L.Ed.2d at 27. Approximately one year after the executor filed the tax return, Congress amended the estate tax laws to exclude the estate at issue (and others like it) from eligibility for the deduction the executor had claimed. This new law was made retroactive to a period before the executor had filed the estate tax return. Accordingly, the Internal Revenue Service disallowed the deduction and the estate was forced to pay an estate tax deficiency, with interest. The executor then brought suit claiming retroactive application of the statute violated the Due Process Clause of the Fifth Amendment. Id. at 29, 114 S.Ct. at 2021, 129 L.Ed.2d at 27. The United States Supreme Court held the law did not violate due process. Observing that [t]his Court repeatedly has upheld retroactive tax legislation against a due process challenge, the Court clarified the test to apply in determining whether retroactive tax legislation violates due process. First, the legislation must be supported by a legitimate legislative purpose furthered by rational means. Id. at 30-31, 114 S.Ct. at 2022, 129 L.Ed.2d at 28 (quoting Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 2718, 81 L.Ed.2d 601, 611 (1984)). Second, the period of retroactivity must be modest. Id. at 32, 114 S.Ct. at 2023, 129 L.Ed.2d at 29. The retroactivity period in Carlton was approximately one year, and the legislation had actually been proposed only a few months after the executor filed the estate tax return. The Court found such a period of time permissible under the Due Process Clause. Id. at 32, 114 S.Ct. at 2023, 129 L.Ed.2d at 29. However, in concurrence, Justice O'Connor expressed her skepticism with retroactivity periods exceeding one year: In every case in which we have upheld a retroactive federal tax statute against due process challenge ... the law applied retroactively for only a relatively short period prior to enactment.... A period of retroactivity longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions. But in keeping with Congress' practice of limiting the retroactive effect of revenue measures ... the December 1987 amendment to § 2057 was made retroactive only to October 1986. Given our precedents and the limited period of retroactivity, I concur in the judgment of the Court that applying the amended statute to respondent Carlton did not violate due process. Id. at 38, 114 S.Ct. at 2026, 129 L.Ed.2d at 33 (O'Connor, J., concurring) (emphasis added) (citations omitted). See also, e.g., Furlong v. Comm'r of Internal Revenue, 36 F.3d 25 (7th Cir.1994) (noting retroactive tax legislation will be upheld if supported by rational purpose and if period of retroactivity is short; Seventh Circuit upheld tax law with retroactivity period of approximately one month); Kane v. United States, 942 F.Supp. 233 (E.D.Pa.1996) (holding estate tax law with eight-month retroactivity period did not violate due process; citing Carlton for the proposition that approximately one year is a permissible period of retroactivity, but that greater periods were suspect). But see Tate & Lyle v. Comm'r of Internal Revenue, 87 F.3d 99 (3d Cir.1996) (upholding under Due Process Clause treasury regulation with six-year retroactivity period; distinguished Carlton by stating Carlton concerned permissible retroactivity periods for statutes, not regulations); Montana Rail Link, Inc. v. United States, 76 F.3d 991 (9th Cir.1996) (upholding against due process challenge tax legislation with approximately four-year retroactivity period; noting that Carlton requires only that the particular period of retroactivity bear a rational relation to [the statute's] underlying legislative purpose). In the present case, the retroactivity period [3] of Act 171 far exceeds one year. In fact, depending on whether one calculates the retroactivity period back to the 1989 Amendment or to Act 658 of 1988, the period at issue is at least two years and possibly as long as three years. We find Act 171 violates due process under both the state and federal constitutions. To be sure, the government possesses considerable power to tax and to collect taxes from its citizenry, and retroactive tax legislation has long been accepted as an appropriate means for achieving certain revenue goals. At some point, however, the government's interest in meeting its revenue requirements must yield to taxpayers' interest in finality regarding tax liabilities and credits. That point has been reached in this case; under the facts and circumstances here, the retroactivity period is simply excessive. [4] In light of our conclusion that Act 171 violates the Due Process Clauses of the South Carolina and United States Constitutions, we need not reach the question whether the denial of the tax refunds violated S.C.Code Ann. § 12-7-2220. [5]