United States v. Carlton

In United States v. Carlton (1994) 512 U.S. 26, Congress amended the federal estate tax law to close a perceived loophole by limiting the availability of a deduction. The executor of the estate engaged in a tax-motivated transaction to take advantage of the loophole and claimed the deduction in question before Congress passed the ameliorative amendment. However, the amendment applied retroactively to enactment of the original statute, with an actual retroactive effect of slightly more than a year. Therefore the Internal Revenue Service disallowed the deduction; the taxpayer paid the deficiency plus interest, then sued. Concluding that retroactive application of the amendment did not offend due process, the court first emphasized that Congress adopted the amendment as a curative measure, and its purpose was neither illegitimate nor arbitrary. Congress acted to rectify what it reasonably perceived as a mistake in the original tax law which, left unamended, would have resulted in a significant revenue loss while also allowing taxpayers to engage " 'in essentially sham transactions.' " (Carlton, supra, 512 U.S. at p. 32.) Further, the means of achieving this purpose was not unreasonable. Specifically, "Congress acted promptly and established only a modest period of retroactivity." (Ibid.) Discarding the executor's claims of detrimental reliance and lack of notice as not dispositive, the court stated that reliance alone is not enough to show a constitutional violation. "Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code." (Carlton, supra, 512 U.S. at p. 33.) Nor was the court impressed with the notice argument, noting that it had rejected similar arguments in other cases. (Id. at p. 34.) The lower court held Congress to "an unduly strict standard" by "focusing exclusively on the taxpayer's notice and reliance" concerns. (Id. at p. 35.) Because the retroactive application of the amendment "is rationally related to a legitimate legislative purpose," the court concluded the amendment, as applied, was consistent with the due process clause. (Carlton, supra, at p. 35.)