MACPA's Statement January 2011 - 9

Also, the court found that Congress had acted “promptly” providing only for a modest period of retroactivity. In this case, Congress acted on Dec. 22, 1987, a little more than a year after original enactment on Oct. 22, 1986. The court in dicta went on to point out that it has upheld retroactive application of tax laws for as much as two years following original enactment. How could the 9th Circuit have reached a different conclusion? The Court of Appeals relied on several cases from the 1920s where economic legislation had been passed and the taxpayer specifically and detrimentally relied on the pre-amendment version of the statute. That is exactly what happened in the Day estate. In fact, the Day estate lost money when selling to the ESOP. Carlton, however, rejected the same cases the 9th Circuit relied on, stating that “Those cases were decided during an era characterized by exacting review of economic legislation under an approach that has long since been discarded.” (112 U.S. at 34, 114 S. Ct. at 2023.) Those early cases have essentially been limited to situations involving “the creation of a wholly new tax.” (Ibid. 114 S. Ct. at 2023.) The “legitimate purpose” test applied in Carlton provides a high hurdle for taxpayers who attempt to challenge the constitutionality of federal estate tax law applied retroactively to 2010. In a period when the importance of tax

revenue is arguably critical, retroactive application of the estate tax laws on its face serves a legitimate legislative purpose. Furthermore, to apply the rule retroactively avoids a number of knotty clean up issues in the law. Is it reasonable for Congress to wait this long or even into 2011 to apply the law retroactively? Congress could be argued to have had more weighty measures on its plate (i.e., the economy, bank failures, etc.). They acted as fast as they could. What about those 1920s cases? The year of repeal in 2010 had been consciously enacted by Congress. A new law applicable in 2010 might qualify as enactment of a new tax law in its entirety. Yes, it would be the old law for the most part that had traditionally been the law. But, except for gift taxes, it is not a law that existed in 2010. Application of the 1920s cases, however, only opens the door. Even under that line of cases, the taxpayer must still show that the taxpayer had no actual or constructive notice that retroactivity would be applied. You must also show the taxpayer relied to his detriment on pre-amendment law. Do we have notice today that the estate tax may be re-enacted and that it might be retroactively applied to 2010? You be the judge. Furthermore, what detrimental reliance exists for people who died in 2010? Except for those

who may have committed suicide to take advantage of the law or for people who may have changed their wills in the light of the law existing in 2010 and in fact died in 2010, I dare say most, if not all, other decedents just happened to die in what turned out to be a tax-fortuitous year. Most decedents simply gratuitously benefited from the fact that no law existed in 2010. Of course, it is not that simple. What about taxpayers who make gifts relying on a 35 percent gift tax rate applicable in 2010? What about taxpayers who make generation skipping transfers in a year for which generation skipping tax does not exist? Should they be retroactively taxed? Could it be that re-enactment applied retroactively is constitutional as to some parts of the law but not others? I do not know what the constitutional result will be as to retroactive application of the federal estate tax. I do believe whatever arguments are raised must deal with Carlton. It should be interesting. Lesson learned: You have an opportunity, but it will take nerve on the part of the client – and the client should be made aware of the risks. Michael P. Donnelly is a member of Offit Kurman, P.A., and concentrates his practice in estate and business planning.

JAnuAry 2011

MACPA's Statement January 2011

Table of Contents for the Digital Edition of MACPA's Statement January 2011