Court Opinion

ID: 9483308
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:16:40.599445+00
Date Added: 2024-06-11T17:49:32.607531
License: Public Domain

NORRIS, Circuit Judge,
dissenting:
The majority recognizes that “the modern trend has been against successful challenges to retroactive applications of the tax statutes.” Majority at 1057. Indeed, in order to find Supreme Court precedent for striking down retroactive taxation, the majority opinion, like the petitioner’s brief, was forced to reach back to the Lochner era. My reading of contemporary case law leads me to a different conclusion: Congress did not offend the constitutional requirement of due process when it retroactively applied the “decedent ownership requirement” to an estate tax provision encouraging Employee Stock Ownership Plans (ESOPs). I accordingly dissent.
In regulating economic activity, Congress enjoys wide latitude to legislate retroactively. The Supreme Court explains that
the strong deference accorded legislation in the field of national economic policy is no less applicable when that legislation is applied retroactively. Provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational, means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches....
Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 2717-18, 81 L.Ed.2d 601 (1984). This principle applies with full force to the tax laws, where courts may step in only when “ ‘retroactive application is so harsh and oppressive as to transgress the constitutional limitation.’ ” United States v. Hemme, 476 U.S. 558, 568-69, 106 S.Ct. 2071, 2077, 90 L.Ed.2d 538 (1986) (quoting Welch v. Henry, 305 U.S. 134, 147, 59 S.Ct. 121, 125, 83 L.Ed. 87 (1938)). Measured against this high standard, the 1987 amendment to the Tax Reform Act of 1986 should be upheld.
*1063The facts of Welch v. Henry provide an appropriate starting point for interpreting the “harsh and oppressive” standard that the opinion articulates. The taxpayer’s income in that case derived mostly from dividends paid by corporations doing a majority of their business in Wisconsin. Welch, 305 U.S. at 141, 59 S.Ct. at 122. Wisconsin’s income tax statutes treated such dividend income extremely favorably until, in 1935, the state imposed additional taxes, to be applied retroactively to dividends paid in 1933 and 1934. Id. at 143, 59 S.Ct. at 124. Although the Court had previously struck down retroactive taxes on gifts, see Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184 (1927), Blodgett v. Holden, 275 U.S. 142, 48 S.Ct. 105, 72 L.Ed. 206 (1927), Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645 (1928), it upheld this statute on the basis that “a tax on the receipt of income is not comparable to a gift tax,” but more properly resembles property taxes and benefit assessments of real estate, where retroactivity had been found appropriate. Id. 305 U.S. at 147-48, 59 S.Ct. at 125-26. The Court reasoned that bestowing a gift is the “voluntary act of the taxpayer,” which it contrasted with receiving corporate dividends: “We can not assume that stockholders would refuse to receive corporate dividends even if they knew that their receipt would later be subjected to a new tax or to the increase of an old one.” Id. Because the decision to invest in stocks whose dividends receive favorable tax treatment is, of course, voluntary, the distinction between the taxpayer in Welch and those in Nichols, Blodgett, and Untermyer lies in the difference between Welch’s economic and the others’ eleemosynary motives for the acts that gave rise to tax liability. Welch’s dividends were a form of consideration in exchange for his investment in Wisconsin corporations, and receipt of consideration was, in the Court’s sense of the word, involuntary.
Carlton’s case closely resembles Welch’s. Carlton structured the financial affairs of Mrs. Day’s estate to take advantage of favorable tax treatment for sales of stock to ESOPs. Likewise, Welch’s portfolio had been structured to exploit the special treatment accorded dividends from Wisconsin corporations. In Carlton’s case, as in Welch’s, the taxing authority that had created the special tax benefits grew concerned about their drain on the public fisc and retroactively eliminated them. In Welch’s case, the retroactive law was a sharp departure from a long history of favorable treatment for investments in Wisconsin corporations. Welch, 305 U.S. at 142-43, 59 S.Ct. at 123. Carlton’s case is arguably less sympathetic because the retroactive law, in closing a loophole in the new ESOP deduction provision, merely restored the status quo that Carlton faced a year earlier.
Cases decided since Welch have upheld retroactive taxes on a variety of economic transactions, sharply limiting the scope of the Lochner-era cases. See, e.g., United States v. Hemme, 476 U.S. 558, 106 S.Ct. 2071, 90 L.Ed.2d 538 (1986) (retroactive application of the transitional rule for federal gift and estate taxes upheld); United States v. Darusmont, 449 U.S. 292, 101 S.Ct. 549, 66 L.Ed.2d 513 (1981) (per cu-riam) (retroactive increase in the minimum tax upheld); Wiggins v. Commissioner, 904 F.2d 311 (5th Cir.1990) (upheld retroactive exclusion of investment tax credit recapture when calculating alternative minimum tax); Estate of Ekins v. Commissioner, 797 F.2d 481 (7th Cir.1986) (retroactive repeal of an estate tax exclusion for life insurance policies upheld); Fein v. United States, 730 F.2d 1211 (8th Cir.), cert. denied, 469 U.S. 858, 105 S.Ct. 188, 83 L.Ed.2d 121 (1984) (same); Estate of Ceppi v. Commissioner, 698 F.2d 17 (1st Cir. 1983), cert. denied, 462 U.S. 1120, 103 S.Ct. 3088, 77 L.Ed.2d 1350 (1983) (retroactive repeal of estate tax exclusion upheld); Westwick v. Commissioner, 636 F.2d 291 (10th Cir.1980) (retroactive changes in the minimum tax upheld in spite of detrimental reliance); Purvis v. United States, 501 F.2d 311 (9th Cir.), cert. denied, 420 U.S. 947, 95 S.Ct. 1329, 43 L.Ed.2d 425 (1975) (interest equalization tax on foreign stock acquisitions may be retroactively applied); First National Bank in Dallas v. United *1064States, 420 F.2d 725, 190 Ct.Cl. 400 (1970) (same); Sidney v. Commissioner, 273 F.2d 928 (2d Cir.1960) (Friendly, J.) (retroactive taxation of gains realized from collapsible corporations upheld).
Most of these cases have limited Nichols, Blodgett, and Untermyer to their facts, or at least to retroactive imposition of a wholly new tax, as opposed to a change in the base or rate of an existing tax. Hemme, 476 U.S. at 568, 106 S.Ct. at 2077; Darusmont, 449 U.S. at 299, 101 S.Ct. at 553; Wiggins, 904 F.2d at 314; Estate of Ekins, 797 F.2d at 484; Fein, 730 F.2d at 1213; Estate of Ceppi, 698 F.2d at 21; Westwick, 636 F.2d at 292; First Nat'l Bank in Dallas, 420 F.2d at 730 n. 8; Sidney, 273 F.2d at 932. The Ninth Circuit decided Purvis v. United States on the narrower ground that a presidential speech proposing the retroactive tax had put the taxpayer on notice of the subsequent change, so that retroactive application was not “harsh and oppressive.” 501 F.2d at 314-15.
The Supreme Court and our sister circuits have made clear, however, that constructive notice to the taxpayer is usually implied for á change in the rate or basis of an existing tax. In the words of the Seventh Circuit, “a change in the tax rate is considered by its very nature to be reasonably foreseeable.” Estate of Ekins v. Commissioner, 797 F.2d 481, 484 (7th Cir.1986). “Legislative changes are to be expected, and the taxpayer assumes the risk that the tax burden on a particular transaction may increase pursuant, to Congress’ continual responsibility to carry out the necessary policies of taxation.” Id. at 483 (citing Milliken v. United States, 283 U.S. 15, 23, 51 S.Ct. 324, 327, 75 L.Ed. 809 (1931)). Accord Fein v. United States, 730 F.2d 1211, 1213 (8th Cir.), cert. denied, 469 U.S. 858, 105 S.Ct. 188, 83 L.Ed.2d 121 (1984). Our court once considered the point so obvious that it disposed of a challenge to retroactive repeal of an income tax loss carry-forward provision in a single paragraph. We called that tax provision “a matter of legislative grace ... within the power of Congress to revoke” retroactively. Miller v. Commissioner, 115 F.2d 479, 480 (9th Cir.1940). Under this analysis, we should imply constructive notice of the tax code amendment, which retroactively abolished the fifty percent deduction for proceeds from an ESOP stock sale but levied no wholly new taxes. The majority, in reaching a different conclusion, creates a split among the circuits, as well as a conflict with our own, older precedent.
In. addition to taxes that are wholly new and therefore completely unforeseeable, the Supreme Court has suggested that retroactive taxes that “attempt to reach events [too] far in the past” are harsh and oppressive. Welch v. Henry, 305 U.S. 134, 148, 59 S.Ct. 121, 126, 83 L.Ed. 87 (1938). Congress has long enacted revenue laws that retroactively tax income and assets from the entire year in which the new statute is passed, and in some instances from the calendar year preceding the year of the new legislation’s enactment. United States v. Darusmont, 449 U.S. 292, 296, 101 S.Ct. 549, 551, 66 L.Ed.2d 513 (1981) (per curiam). The courts have upheld this “customary congressional practice” as “required by the practicalities of producing national legislation.” Id. at 297, 101 S.Ct. at 552. The circuits have split on whether retroactive taxes may reach back before the calendar year that precedes the year of their enactment. Curative legislation, passed to effectuate the original intent of Congress, has been granted greater leeway. See, e.g. New England Baptist Hospital v. United States, 807 F.2d 280, 285 (1st Cir.1986) (four years of retroactive effect upheld for curative legislation); accord Canisius College v. United States, 799 F.2d 18, 26-27 (2d Cir.), cert. denied, 481 U.S. 1014, 107 S.Ct. 1887, 95 L.Ed.2d 495 (1987); accord Temple University v. United States, 769 F.2d 126, 135 (3d Cir.), cert. denied, 476 U.S: 1182, 106 S.Ct. 2914, 91 L.Ed.2d 544 (1986); cf. Wheeler v. Commissioner, 143 F.2d 162, 166 (9th Cir.), rev’d on other grounds, 324 U.S. 542, 65 S.Ct. 799, 89 L.Ed. 1166 (1945) (tax statute with two years’ retroactive application struck down). We need not reach that dispute here, however, where the period of retroactive application for the revenue measure includes the calendar year in which it *1065was passed and only a few months of the preceding year.1
The majority’s opinion substitutes a test much more sympathetic to the taxpayer than those that courts have used in the past. It asks (1) whether the taxpayer had actual or constructive notice of the specific retroactive provision, and (2) whether the taxpayer reasonably relied to his detriment on the tax code as written at the time of his transaction. While maximum fairness to taxpayers might argue that Congress should legislate according to this generous standard, the Supreme Court has declined to adopt it as a requirement of Due Process.
The taxpayer in Darusmont suggested two tests that resemble those the majority uses here. First he asked, could the taxpayer “have altered his behavior to avoid the tax if it could have been anticipated by him at the time the transaction was effected?” 449 U.S. at 299, 10Í S.Ct. at 553. The majority’s inquiry into detrimental reliance is the same test more elegantly stated, but the Supreme Court rejected it as based on the old gift tax cases, which had no precedential value for retroactive taxes on income. Id. Detrimental reliance is essentially a creature of contract law, where the theory of promissory estoppel vests rights in a party that reasonably relies on another’s promise. Restatement (Second) of Contracts § 90 (1981). Contractual analogies, the Supreme Court tells us, are inapposite in tax cases:
‘[tjaxation 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, and to challenge the present tax it is not enough to point out that the taxable event ... antedated the statute.’
United States v. Darusmont, 449 U.S. 292, 298, 101 S.Ct. 549, 552, 66 L.Ed.2d 513 (1981) (per curiam) (quoting Welch v. Henry, 305 U.S. 134, 146-47, 59 S.Ct. 121, 125, 83 L.Ed. 87 (1938)).
Darusmont’s second test was whether the taxpayer lacked “actual or constructive notice” of the retroactive legislation. The Court’s per curiam opinion did not directly address the appropriateness of this inquiry, as the facts of Darusmont’s case indicated notice aplenty. The Court did, however, cite approvingly a couple of its earlier cases upholding retroactive taxation where notice had not been demonstrated. Id. 449 U.S. at 299, 101 S.Ct. at 553 (citing Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87 (1938)), Id. 449 U.S. at 300, 101 S.Ct. at 553 (citing Cooper v. United States, 280 U.S. 409, 50 S.Ct. 164, 74 L.Ed. 516 (1930)). And two other circuits have interpreted an earlier Supreme Court case as inferring constructive notice whenever a tax code revision alters the rate or basis for an existing tax. Estate of Ekins v. Commissioner, 797 F.2d 481, 483 (7th Cir. 1986) (citing Milliken v. United States, 283 U.S. 15, 23, 51 S.Ct. 324, 327, 75 L.Ed. 809 (1931)); accord Fein v. United States, 730 F.2d 1211, 1213 (8th Cir.), cert. denied, 469 U.S. 858, 105 S.Ct. 188, 83 L.Ed.2d 121 (1984).
In any event, were I to apply the majority’s test to this case, I would be less willing to find that, at the time he arranged the purchase and sale of MCI stock, Carlton lacked constructive notice that a future retroactive amendment might render the Day estate ineligible for the ESOP deduction. Nor would I find his reliance on the statute as originally passed to have been reasonable. True, the plain language of the 1986 provision allowed Carlton to benefit from the transaction he arranged. But several factors indicated that Congress would not be satisfied with its original work and might act to curtail the benefit within a short time after its enactment.
First, the available legislative history indicates that the original intent of Congress *1066had been to allow “stockholders to sell their companies to their employees who helped them build the company.” Staff of the Joint Committee on Taxation, 99th Cong., 2d Sess., Tax Reform Proposals: Tax Treatment of Employee Stock Ownership Plans (ESOPs) at 37 (Comm. Print 1985). The majority correctly points out that this statement highlights a class of decedent owners, but does not limit the deduction to them. If, however, Congress had meant to allow any estate willing to undertake a relatively low-risk securities transaction to benefit from the ESOP proceeds deduction, then examples of decedent owners selling to their employees would be an infinitesimal proportion, not a prototypical example, of the beneficiaries of the rule. Any estate executor would have difficulty resisting the temptation to purchase securities on the open market and promptly resell them at below market to an ESOP in order to reduce estate taxes. Had Congress understood the scope of the provision it had drafted, the measure’s opponents would surely have raised more important concerns than the tracing problems for lifetime sales that the legislative history mentions as the chief argument against the deduction. Id. The estimated revenue loss from the estate tax provision as drafted— some $7 billion — was more than 20 times the $300 million loss Congress had contemplated. Appellee’s Brief at 26.
Second, the statute on its face offered a benefit that appeared “too good to be true.” Admittedly, a number of laws provide tax incentives to encourage the growth of ESOPs, in some cases subsidizing third parties for facilitating the transfer of employer securities to an ESOP. For example, a 1984 provision gives a taxpayer who sells an ESOP stock in a closely held corporation the right to roll over his or her capital gains by reinvesting in other securities. 26 U.S.C. § 1042. Although this provision gives the taxpayer an incentive to sell to an ESOP rather than on the open market, it offers those who sell to ESOPs no tax advantages over those who continue to hold their original investment, and thus should cost the U.S. Treasury little. Another provision that benefits ESOPs through subsidies to third parties allows a bank to exclude from taxation fifty percent of interest income for any loan made to an ESOP. 26 U.S.C. § 133. Note that the loss to the Treasury from this provision leverages tremendous funds: At a ten percent interest rate, every nickel of tax base the Treasury loses lands a dollar in the pocket of an ESOP. In contrast, the estate tax provision that Carlton employs saps fifty cents of estate tax base without guaranteeing any benefit for the ESOP. True, the ESOP’s bargaining leverage should enable it to shave off for itself a piece of the estate’s tax benefit. But the outcome of this case, where the ESOP saved $631,000 in purchasing employer stock, while the Treasury lost $2,501,161 in estate taxes, demonstrates that the deduction as drafted offered a subsidy of a wholly different magnitude from existing provisions. Congress could more providently have underwritten ESOP stock purchases directly from the U.S. Treasury without bringing in estate executors as middlemen!
I recognize that, if this case raised a question of statutory interpretation, neither the provision’s legislative history nor its unfortunate economic effects could detract from the plain meaning of the text. See Connecticut Nat’l Bank v. Germain, — U.S. -, at-, 112 S.Ct. 1146, at 1149, 117 L.Ed.2d 391 (1992). But this case does not require us to interpret the 1986 statute, only to inquire whether Congress, in amending it, acted in an arbitrary and capricious manner, or “so harsh[ly] and oppressively] as to transgress the constitutional limitation.” Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 733, 104 S.Ct. 2709, 2719, 81 L.Ed.2d 601 (1984). Because Congress’s retroactive legislation limited the scope of a loophole that had been in effect just over one year, it did not transgress that boundary.

. The amendment retroactively applying the decedent ownership requirement was introduced in the 100th Congress on February 26, 1987. It became law on December 22, 1987, and applied as of October 22, 1986, the day when the Tax Reform Act it modified was originally enacted.