Legal News

On Congress, the Estate Tax and the Constitution

By Ashby Jones

The health care debate is one thing, but the current situation involving the federal estate tax really makes you question if the good folks in Congress have any idea what they’re doing. By failing to act on the estate tax, lawmakers have almost assuredly planted seeds for a good bit of litigation to kick off the next decade.

Let us explain: Back in 2001, Congress passed a strange half-a-loaf piece of legislation, signed by President Bush, concerning the tax. The bill provided that the tax would essentially be cut over the span of the decade — the exclusion would go up and the taxable rate down — through the end of 2009. In 2010, the federal estate tax would disappear entirely, and in 2011, the tax would return to the Clinton-era rate of 55 percent, with a $1 million exclusion.

This goofball arrangement was the product of congressional compromise: Republicans wanted to ditch the tax altogether, but didn’t have the votes to avoid a filibuster. So they agreed to this situation, thinking apparently, that once the tax disappeared in ‘10, there’d be no way Americans would stomach the tax snapping back in ‘11, especially at such a high rate.

Of course, Republicans are no longer in control in Congress. And for nearly a year, since taking power in early ‘09, congressional Democrats have intended to change the law to keep the tax through next year. But they didn’t get their act together, and now it looks like we really are going to spend at least a little time in ‘10 without a federal estate tax.

On its face, the arrangement seems to set up a perverse set of incentives, at least for those with wealthy and ailing mothers and fathers, grandmothers and grandfathers. We can just imagine comments made half in jest over after too much egg nog or mulled cider. “Here’s to hoping ol’ Nana makes it to watch most of the bowl games, then kicks it.”

Lots of people think that Congress will at some point prior to the mid-term election next year change the law and make the tax apply to the whole of 2010.

But would a retroactive reinstatement of the law be legal? Doesn’t the Constitution’s Ex Post Facto clause (or something?) prohibit such kinds of shenanigans?

At least some would likely sue to find out. According to this Bloomberg article, [Dick Patten, president of the American Family Business Foundation, a Washington group that has campaigned against the estate tax], said: “I can guarantee this: if they succeed in getting retroactive in hiking the death tax from zero to 45%, there are going to be lawsuits. It's going to be messy, it's going to be noisy.”

But Paul Caron, the writer of the TaxProf Blog suspects that such challenges may fall short.

Writes Caron, a law prof at Cincinnati:

[T]he two-part doctrine that emerges from [the Supreme Court's 1994 ruling, Carlton v. U.S.] upholds the constitutionality of retroactive tax legislation if (1) the legislation has a rational legislative purpose and is not arbitrary; and (2) the period of retroactivity is not excessive. This is a very low constitutional threshold, as the Court noted that “[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code." The Court approved a 14-month period of retroactivity in Carlton.

However, Caron notes that not everyone’s enamored with the Carlton decision. He cites a 2001 case from the Federal Circuit which upheld the retroactive application of a 1993 change to the estate tax. Wrote Judge Jay Plager, in dissent:

[T]here are times when the gap between law and justice is too stark to be ignored. This is one of them. It is simply unfair, and I believe it should be unconstitutional, in these circumstances to enact a statute that imposes a tax on a citizen based on an event that occurred before the tax was enacted. Retroactive legislation is inherently offensive to the natural law of decency, to the principles of the social compact set out in the Declaration of Independence, and to the underlying tenets of the Constitution. . . .

And then there’s Justice Scalia’s concurrence in Carlton:

If I thought that “substantive due process” were a constitutional right rather than an oxymoron, I would think it violated by bait-and-switch taxation. . . . The reasoning the Court applies . . . guarantees that all retroactive tax laws will henceforth be valid.

In any event, the law is the law, Caron concludes. In other words, no reason to wish Nana anything but goodwill this holiday season.

Full post as published by Law Blog - WSJ.com on December 18, 2009 (boomark / email).