Do Practitioners Have a Duty to Predict Retroactive Tax Legislation?
Switzer, Ralph V., Quiring, Diane E., The National Public Accountant
"Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code."
On June 13, 1994, U.S. v. Carlton, _____ U.S. _____ (1994), 62 U.S.L.W 4472, 1994 U.S. Lexis 4449, one of the year's most closely-watched tax cases, was handed down by the United States Supreme Court. At issue was a 1987 congressional amendment retroactively limiting the availability of an estate tax deduction for sales of employer securities to employee stock ownership plans. The case received intense scrutiny because of the Omnibus Budget Reconciliation Act of 1993 (1993 Tax Compromise) enacted in August 1993, which raised estate and income taxes retroactively back to January 1, 1993. The passage of the 1993 Tax Compromise renewed the public outrage and the interminable debate surrounding the constitutionality of retroactive taxes.
Congress has passed 14 laws that included retroactive tax increases since 1917, including the 1993 Tax Compromise. The U.S. Supreme Court has been surprisingly receptive to the retroactive applications of tax statutes, citing various rationales to justify its positions.
Historical Roots of Retroactive
Generally, retroactive means to make something effective as of a date prior to enactment. Specifically applicable to legislation, "...retroactive laws apply to prior acts, events, or occurrences, and seek to impose new consequences on such past conduct." (Weiler, 1993). Retroactive statutes, then, are valid for a period of time before the laws' effective enactment dates.
Ex Post Facto Clauses of the
United States Constitution
Retroactive laws are not expressly prohibited by the United States Constitution, although ex post facto literally means "after the fact." For example, Article I, Section 9 of the Constitution states that "[n]o ... ex post facto Law shall be passed." Likewise, Article I, Section 10 declares that "[n]o State shall...pass any Bill of Attainder, ex post facto Law, or law impairing the Obligation of Contracts."
A case in the late 18th century narrowed the constitution's express prohibition against ex post facto laws. In Calder v. Bull, 3 U.S. 386 (1798), the U.S. Supreme Court held that prohibitions against ex post facto laws applied only to criminal laws. Although the validity of this view is continually questioned,(1) the United States Supreme Court has continued to limit the ex post facto clauses to criminal statutes.
Due Process issues
The validity of retroactive statutes has been tested by the U.S. Supreme Court not by utilizing the ex post facto clauses of the Constitution, but under the Due Process Clause of the Fifth Amendment which provides that "[n]o person shall be...deprived of life, liberty, or property, without due process of law." Procedural due process requires that any decision by the government to take life, liberty or property must be made fairly; thus, procedural due process is a right that requires notice and the opportunity to be heard before rights or properties are taken away from an individual or business.
Substantive due process is a right to have laws that do not deprive individuals or businesses of property or other rights without justification or reason. Generally, a law that is incompatible with the Constitution violates substantive due process. "If a law or other governmental action limits a fundamental right, it will be held to violate substantive due process unless it promotes a compelling or overriding interest. A law or action does not violate substantive due process if it rationally relates to any legitimate governmental end." (Clarkson, et. al. 1992)
Judicial History of Retroactive
Applications of Taxes
"Arbitrary and irrational" Standard
One must distinguish between retroactive tax and non-tax legislation. …