Carlton, United States v.,

512 U.S. 26 (1994), argued 28 Feb. 1994, decided 13 June 1994 by vote of 9 to 0; Blackmun for the Court, O’Connor and Scalia (with Thomas) concurring. The United States sued the executor of an estate for tax liability imposed by dint of a retroactive amendment to the federal estate tax. While *ex post facto laws are prohibited by Article I, section 10, of the U.S. Constitution, *Calder v. Bull (1798) held the ban applicable only to the retroactive punishment of actions that were legal when carried out, or to the retrospective increase of punishment for past misconduct. In Carlton, the Court considered the extent to which retroactivity would be permitted in civil tax legislation.

A provision of the estate tax adopted in October 1986 granted a considerable deduction for the sale of stock in an employer corporation to an employee stock ownership plan (ESOP). In December 1986, Carlton purchased shares in a corporation on behalf of the estate, sold the stock to the company’s ESOP, and consequently claimed a large tax deduction. In December 1987, the tax provision was modified so that the deceased must have owned the stock “immediately before death.” Applying the amendment retrospectively, the Internal Revenue Service disallowed the deduction and imposed additional estate tax liability.

Justice Harry *Blackmun, writing for the Court, found that Congress intended the original deduction to create an incentive for employee ownership of corporations and had not contemplated that executors would procure tax deductions by buying corporate shares and reselling them to ESOPs. Thus, the intent of the amendment was to correct a “mistake” in the original legislation that would have resulted in significant and anticipated revenue losses through “essentially sham transactions” (p. 32). Blackmun concluded that the retroactive amendment comported with due process because its purpose was “neither illegitimate nor arbitrary” and because it “acted promptly and established only a modest period of retroactivity” (p. 32). Justice Blackmun also emphasized that limited retroactivity was customary and practically necessary in producing tax legislation, and that Carlton’s reliance on the original statute “is insufficient to establish a constitutional violation. Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code” (p. 33).

Carlton is broadly consistent with the Court’s earlier pronouncement in a tax case that the applicability of the *Due Process Clause depends upon whether “retroactive application is so harsh and oppressive as to transgress the constitutional limitation” (Welch v. Henry, 1938) (p. 147). It also is consistent with cases upholding retroactive legislation adopted to undo perceived overreaching, such as the opportunistic departure of firms from industry plans during the drafting of new regulations (Pension Benefit Guaranty Corporation v. R. A. Gray & Co., 1984). On the other hand, the Court has found retroactive liability unconstitutional if it imposes severe and unanticipated burdens on a limited group (*Eastern Enterprises v. Apfel, 1998). Reflecting this tension, Justice O’Connor’s concurrence in Carlton stressed that “[t]he governmental interest in revising the tax laws must at some point give way to the taxpayer’s interest in finality and repose” (pp. 37–38).

Steven J. Eagle