Jerry W. Carlton, of the Will of Willametta K. Day v. United States

We consider whether retroactive application of an amendment to the federal estate tax portion of the Internal Revenue Code violates due process.

I

On October 22,1986, the Tax Reform Act of 1986 (“TRA”) became law. One provision of the TRA allowed an estate to deduct half of the proceeds of a sale of securities to an Employee Stock Ownership Plan (“ESOP”) from a decedent’s gross estate (“the ESOP proceeds deduction”). See 26 U.S.C. § 2057 1 (repealed 1989). The result of the ESOP proceeds deduction was to remove half of the estate from the reach of the federal estate tax, to the extent the estate was comprised of money received from the sale of stock to an ESOP. This deduction, codified at section 2057 of the Internal Revenue Code, was available to any estate that could timely file its return after the enactment date of the TRA, irrespective of the date of death of the decedent. See 26 U.S.C. § 2057 (c)(1).

The 99th Congress adjourned on October 18,1986. Between passage by Congress of the TRA on September 27, 1986 and adjournment, Congress considered hundreds of potential technical and clerical amendments to the TRA, but only one proposed amendment related to section 2057:…

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

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)…

972 F.2d 1051 70 A.F.T.R.2d 92 -6199, 61 USLW 2124 , 92-2 USTC P 60,116 , 15 Employee Benefits Cas. 2067 Jerry W. CARLTON, Executor of the Will of Willametta K. Day, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. No. 91-55590. United States Court of Appeals, Ninth Circuit. Argued and Submitted May 4, 1992. Decided Aug. 10, 1992. Russell G. Allen, O'Melveny & Myers, Newport Beach, Cal., for plaintiff-appellant. Teresa E. McLaughlin, U.S. Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellee. Appeal from the United States District Court for the Central District of California. Before: ALARCON, NORRIS, and O'SCANNLAIN, Circuit Judges. O'SCANNLAIN, Circuit Judge: 1 We consider whether retroactive application of an amendment to the federal estate tax portion of the Internal Revenue Code violates due process. 2 * On October 22, 1986, the Tax Reform Act of 1986 ("TRA") became law. One provision of the TRA allowed an estate to deduct half of the proceeds of a sale of securities to an Employee Stock Ownership Plan ("ESOP") from a decedent's gross estate ("the ESOP proceeds deduction"). See 26 U.S.C. § 2057 1 (repealed 1989). The result of the…