Court Opinion

ID: 9460900
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:02:13.611926+00
Date Added: 2024-06-11T17:36:49.265415
License: Public Domain

WALLACE, Circuit Judge
(dissenting) :
I respectfully dissent.
The majority threads a delicate course in discussing case authority as it upholds the retroactive application of the Interest Equalization Tax Act of 1964. In doing so, it brushes aside too lightly the obvious distinctions between the present case and the prior cases it cites which upheld retroactive taxation. The majority rejects the taxpayer’s argument “that retroactivity can be sanctioned only if the tax is not imposed upon a voluntary act, or if the taxpayer is forewarned of retroactivity by the statute books themselves or by previous practices of Congress.” The majority draws comfort from the Court of Claims which, when faced with the same issue as we have before us found that the Supreme Court in Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87 (1938), had not established such a “rigid standard of constitutionality” and upheld the tax. First Nat’l Bank v. United States, 420 F.2d 725, 730, 190 Ct.Cl. 400, cert. denied, 398 US. 950, 90 S.Ct. 1868, 26 L.Ed.2d 289 (1970). The correct test as established by the Supreme Court, the majority asserts, is “to consider the nature of the tax and the circumstances in which it is laid” before determining its constitutionality. The majority and the Court of Claims both ignore the fact that in Welch, the Court reaffirmed its prior holding declaring retroactive taxes unconstitutional where the taxpayer might well have refrained from the conduct creating the tax liability, “had anticipated the tax . . . .” 305 U.S. at 147, 59 S.Ct. 121. In addition, the Welch Court distinguished Coolidge v. Long, 282 U.S. 582, 51 S.Ct. 306, 75 L.Ed. 562 (1931); Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645 (1928), and Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184 (1927), which held retroactive taxes unconstitutional, from the case before it on the ground that it could not assume that the taxpayer would have refused to receive the income even if he had known that it “would later be subject to a new tax or to the increase of an old one.” 305 U.S. at 148, 59 S.Ct. at 126. The tax upheld in Welch was an income tax on corporate dividends. Prior to the enactment of the tax this source of income had essentially been free from taxation. The law became effective in 1935 but imposed a tax upon income earned in 1933 and 1934. The law specifically declared “that the levy was an emergency tax to provide revenue for relief purposes . . . .” 305 U.S. at 142, 59 S.Ct. at 123.
By comparison, the interest equalization tax is primarily regulatory. As the majority states, its purpose was “to restrict long term capital outflow from the United States by , making it more expensive to borrow in the American market.” The raising of revenue was only an incidental benefit. Given this statement of purpose, the retroactive application of the tax cannot be justified on the ground that the taxpayer would have conducted his affairs exactly the same even if he had absolute knowledge the tax would be retroactively applied. From a realistic point of view, if the taxpayer were sure of taxation, he may well have not continued to invest in the foreign market since the tax was so substantial as practically to eliminate the likelihood of a profit.1 Because of this, *316the retroactive application of the tax can be upheld only if the taxpayer had sufficient notice that his conduct would be subject to a regulatory tax.
The majority concludes that the taxpayer had ample notice because the President’s request for the tax was well publicized and known generally among investors. In addition, the President had specifically requested that the tax be retroactive. Nevertheless, the majority slides over the fact that many Presidents have requested a great deal of legislation which has never seen the light of day; to do so, it rationalizes that Congress, ratified the executive action when it made the tax retroactive, citing United States v. Heinszen & Co., 206 U.S. 370, 27 S.Ct. 742, 51 L.Ed. 1098 (1907), and Mattingly v. District of Columbia, 97 U.S. 687, 24 L.Ed. 1098 (1878).
Ratification, however, is not involved in this case and the majority’s authority is, therefore, of no assistance on the issue of adequate notice. In Heinszen, the Supreme Court articulated the principle of ratification as follows:
That where an agent, without precedent authority, has exercised, in the name of a principal, a power which the principal had the capacity to bestow, the principal may ratify and affirm the unauthorized act, and thus retroactively give it validity when rights of third persons have not intervened, is so elementary as to need but statement. That the power of ratification as to matters within their authority may be exercised by Congress, state governments, or municipal corporations, is also elementary.
206 U.S. at 382, 27 S.Ct. at 745. The Heinszen Court held that Congress had the power to ratify a system of tariff duties imposed by the President upon goods coming into the Philippine Islands. The Court stated that the President had imposed and collected the tariffs without authority but concluded that the action was valid because of the subsequent ratification by Congress. Similarly in Mattingly, the Court upheld assessments laid, without authority, by a board of public works where Congress subsequently ratified the action.
These cases would be persuasive authority in the present case if the President had actually levied and collected the interest equalization tax. But he did not take such drastic action; he merely requested Congress to enact the tax. This distinction is significant because of the effect the two different courses of conduct have upon the manner in which a taxpayer conducts his business affairs. Where the President takes action, even without authority, the effect is immediate and certain. The taxpayer is required either to alter his course of conduct or to pay the tax. If the President’s action is subsequently ratified, the taxpayer has at least had the benefit of certainty in arranging his affairs. If the action is held tó be illegal he can recover the tax he has paid.
On the other hand, where the President merely requests Congress to take action, regardless of how well publicized the request is, the effect is postponed and uncertain. The Congress may reject the request altogether or may modify it to the extent that it only faintly resembles the President’s original pro*317posal. It would be harsh and arbitrary to expect a person to arrange his affairs on the basis of such a request. If he declines to invest because of a Presidential request for legislation which is not forthcoming, he has no conceivable remedy for the loss he may have suffered.
The present case is almost identical to Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645 (1928). The Revenue Act of 1924, 43 Stat. 313, imposed a tax on all 'gifts made any time during the calendar year of 1924, but did not become effective until June 2, 1924. Prior to its decision in Unter-myer, the Court held the tax unconstitutional as applied to a gift made in January, 1924, on the ground that it was so arbitrary as to be a denial of due process. Blodgett v. Holden, 275 U.S. 142, 48 S.Ct. 105, 72 L.Ed. 206 (1927). In that case, the Court stated that “[i]t seems wholly unreasonable that one who, in entire good faith and without the slightest premonition of such consequence, made absolute disposition of his property by gifts should thereafter be required to pay a charge for so doing.” 275 U.S. at 147, 48 S.Ct. at 106. In Un-termyer, the Court considered the constitutionality of the same tax as applied to a gift made on May 23, 1924, just 12 days before the Act was approved by the President. The government argued that as retroactively applied to this gift the tax was not unconstitutional because the taxpayer had ample notice of the proposed tax and, in all likelihood, had made the gift at that particular time to avoid tax liability. The government pointed out that the gift was made three months after the proposed tax had been presented and while the conference report was still pending. The Court rejected the argument, holding the retroactive application of the tax unconstitutional. The Court stated:
The mere fact that a gift was made while the bill containing the questioned provisions was in the last stage of progress through Congress we think is not enough to differentiate this cause from the former one and to relieve the legislation of the arbitrary character there ascribed to it. To accept the contrary view would produce insuperable difficulties touching interpretation and practical application of the statute, and render impossible proper understanding of the burden intended to be imposed. The taxpayer may justly demand to know when and how he becomes liable for taxes — -he cannot foresee and ought not to be required to guess the outcome of pending measures. The future of every bill while before Congress is necessarily uncertain. The will of the lawmakers is not definitely expressed until final action thereon has been taken.
276 U.S. at 445-446, 48 S.Ct. at 354.
The taxpayer in the present case, like the taxpayer in Untermyer, may have had ample notice of the proposed tax. But as the Court stated, he should not be required to guess on what the legislative outcome would be. This holding seems particularly appropriate in the present case because the taxpayer was required to guess the legislative outcome of the tax through the entire legislative procese, whereas in Untermyer the tax had already passed both houses of Congress and awaited only the conference report, final congressional approval and the signature of the President.
I would hold the tax as applied to the transactions involved in this case unconstitutional.

. The tax imposed range from 15% to 22.5% of the value of the foreign stocks acquired. The relevant language of the statute reads:
(a) In general. — There is hereby imposed, on each acquisition by a United States person ... of stock of a for*316eign issuer ... a tax determined under subsection (b).
(b) Amount of tax.—
(1) Rates of tax. — Except as provided in paragraphs (2) and (3)—
(A) Stock. — The tax imposed by subsection (a) on the acquisition of stock shall be equal to 15 percent of the actual value of the stock.
(3) Rates during interim period. — In the ease of acquisitions of stock made after January 25, 1967, and before the thirtieth day after the date of the enactment of this paragraph, the tax imposed by subsection (a) shall be 22.5 percent in the case of acquisition of stock
26 U.S.C. § 4911.