Rivers v. State

• Decision Date: 03 June 1997
• Docket Number: No. 24682,24682
• Citation: 327 S.C. 271,490 S.E.2d 261
• Parties: John M. RIVERS, Jr., and Kathleen H. Rivers, Respondents, v. STATE of South Carolina, Appellant. Thomas WARING, Trustee of the Legrand Elebash Irrevocable Trust, Respondent, v. STATE of South Carolina, Appellant. Thomas WARING, Trustee of the Alice Palmer Elebash Irrevocable Trust, Respondent, v. STATE of South Carolina, Appellant. John M. RIVERS, Jr., as Personal Representative of the Estates of Martha R. Rivers and John M. Rivers, Respondent, v. STATE of South Carolina, Appellant. . Heard
• Court: South Carolina Supreme Court

Page 261

490 S.E.2d 261

327 S.C. 271

John M. RIVERS, Jr., and Kathleen H. Rivers, Respondents, v. STATE of South Carolina, Appellant.

Thomas WARING, Trustee of the Legrand Elebash Irrevocable

Trust, Respondent, v. STATE of South Carolina, Appellant.

Thomas WARING, Trustee of the Alice Palmer Elebash

Irrevocable Trust, Respondent, v. STATE of South Carolina, Appellant.

John M. RIVERS, Jr., as Personal Representative of the

Estates of Martha R. Rivers and John M. Rivers, Respondent, v. STATE of South Carolina, Appellant.

No. 24682.

Supreme Court of South Carolina.

Heard June 3, 1997.

Decided Sept. 2, 1997.

[327 S.C. 272] General Counsel Harry T. Cooper, Jr., Chief Counsel for Revenue Litigation Ronald W. Urban, Counsel for Revenue Litigation Sarah G. Major, Columbia, for Appellant.

T. Heyward Carter, Jr., Edward G.R. Bennett, and Amy Morrison Fraser, all of Evans, Carter, Kunes & Bennett, P.A., Charleston; Henry E. Grimball, of Buist, Moore, Smythe & McGee, P.A., Charleston, all for Respondents.

TOAL, Justice.

This case concerns certain controversial state capital gains tax legislation enacted in 1988, 1989, and 1991. The circuit court The State of South Carolina, through the South Carolina Department of Revenue ("Department of Revenue"), has appealed the order of the circuit court. We affirm in part and reverse in part.

found Rivers and the other respondents ("Taxpayers") possessed a vested property interest in a capital gains tax refund scheduled to be distributed in 1992. The court held that because Taxpayers' property right was vested, any subsequent legislation taking away that right would effect a taking in violation of the United States and South Carolina Constitutions. It further held that even if the elimination of the refund constituted a retroactive tax rather than removal of a vested property right, the elimination of the refund violated the Due Process Clauses of the South Carolina and United States Constitutions.

FACTUAL/PROCEDURAL BACKGROUND

On June 8, 1988, the General Assembly enacted Act No. 658, 1988 S.C. Acts, Part II section 27 ("Act 658"). ¹ The Act provided for a retroactive decrease in the capital gains tax rate for capital gains realized between January 1, 1987 and January 31, 1988. Act 658 also provided refunds for overpayment of capital gains taxes paid for gains realized during 1987 through January 1988.

In 1989, the General Assembly amended Act 658 to change the dates for which a retroactive decrease would be available. Under the 1989 Amendment, only capital gains realized before June 22, 1987 ² would be eligible for the retroactive tax decrease. The 1989 Amendment also amended Act 658 to provide that the refund would be made "in two equal annual installments with the first refund due to be paid when refunds are paid for the 1990 taxable year." As provided for in the 1989 Amendment, refunds equal to one-half of the capital gains tax savings were issued to affected taxpayers when taxpayers received their 1990 tax refunds.

The primary statute at issue in this appeal, Act No. 171, 1991 S.C. Acts, Part II section 6 ("Act 171"), altered the 1989 Amendment by reducing by half the size of the refund each affected taxpayer would receive. The result of Act 171 was that affected taxpayers did not receive the second half of the refund provided for in Act 658 and the 1989 Amendment; rather, the refund the taxpayers had received at the time of the 1990 tax refunds comprised the entire refund the taxpayers would receive under Act 171.

Respondent Taxpayers had realized capital gains on property sold between January 1, 1987 and June 22, 1987. Accordingly, Act 658 and the 1989 Amendment provided for them to receive a refund, half of which was to be paid with the 1990 tax refunds and the other half the following year. Taxpayers received the first annual refund. However, the enactment of Act 171 prevented them from receiving the second annual refund as provided for in the earlier legislation.

Taxpayers filed suit against the State of South Carolina, arguing, among other things, that Act 171 effected a taking of property in which they had a vested interest. They advanced additional arguments why they were entitled to the second half of the refund. The circuit court accepted their arguments and found them entitled to the refund with interest as provided by statute.

Department of Revenue appeals, raising three questions:

1. Did the trial court err in determining Act 171 results in a taking without compensation, or, in the alternative, a violation of the Due Process Clauses of the United States and South Carolina Constitutions?

2. Did the trial court err in finding Act 171 violates S.C.Code Ann. § 12-7-2220?

3. Did the trial court err in finding S.C.Code Ann. § 34-31-20 entitles Taxpayers to interest on any refunds they were due?

LAW/ANALYSIS

A. CONSTITUTIONALITY OF ACT 171--TAKINGS LAW AND DUE PROCESS

Department of Revenue first argues the trial court erred in determining Act 171 violates the federal and state constitutions. We hold that although Act 171 did not effect a taking of property in which Taxpayers had a vested interest, the legislation violated due process because of its excessive retroactivity.

Under ordinary takings law, in order for Act 171 to have effected a taking, Taxpayers would have to have had a vested right to the money at issue. E.g., Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978). However, this rule does not apply in the context of taxing legislation. First, case law from the United States Supreme Court and courts throughout the country makes clear that taxpayers have no vested interest in tax laws remaining unchanged: "Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code." United States v. Carlton, 512 U.S. 26, 33, 114 S.Ct. 2018, 2023, 129 L.Ed.2d 22, 30 (1994); accord Canisius College v. United States, 799 F.2d 18, 25 (2d Cir.1986) (finding that retroactive legislation is not unconstitutional merely because it upsets settled expectations or effectively imposes a new liability on a past act), cert. denied, 481 U.S. 1014, 107 S.Ct. 1887, 95 L.Ed.2d 495 (1987); Varrington Corp. v. New York City Dep't of Fin., 85 N.Y.2d 28, 623 N.Y.S.2d 534, 536, 647 N.E.2d 746, 748 (1995) ("Since tax legislation is not a governmental promise, Varrington has no vested or actionable right in these circumstances to the benefit of a tax statute or regulation."); Fidelity Bank v. Commonwealth, 165 Pa.Cmwlth. 524, 645 A.2d 452, 460 n. 14 (1994) (citing Carlton for proposition that tax legislation is not a promise and taxpayer has no vested right in a particular treatment).

Second, "even though taxes ... indisputably 'take' money from individuals or businesses, assessments of that kind are not treated as per se takings under the Fifth Amendment." Branch v. United States, 69 F.3d 1571, 1576 (Fed.Cir.1995), cert. denied, --- U.S. ----, 117 S.Ct. 55, 136 L.Ed.2d 18 (1996); see also A. Magnano v. Hamilton, 292 U.S. 40, 54 S.Ct. 599, 78 L.Ed. 1109 (1934) (taxing power of state or federal government not considered a taking under the Fifth or Fourteenth Amendment); Kane v. United States, 942 F.Supp. 233, 234 (E.D.Pa.1996) (finding increase in tax rate did not effect taking where statute was not so "arbitrary as to amount to a confiscation of property rather than an exaction of tax").

To distinguish takings law concerning the government's power to tax, Taxpayers suggest Act 171 is not a tax statute at all, but simply a statute conferring a vested property right upon them. Taxpayers then cite certain cases suggesting tax refunds have been treated as property interests in other contexts. See, e.g., Chicago v. Michigan Beach Hous. Co-op., 242 Ill.App.3d 636, 182 Ill.Dec. 343, 609 N.E.2d 877 (1993) (finding expected income tax refunds are general intangible property interests under the Uniform Commercial Code).

In our view, there is little way to read Act 171 except as a taxing statute. As the Department of Revenue notes, Act 171 is part of Title 12 and directly concerns the payment of tax refunds. As a practical matter, by denying Taxpayers a refund, Act 171 in effect amounts to an increase in Taxpayers' capital gains tax rate. We conclude that takings law is inapplicable because Taxpayers had no vested interest in the receipt of the tax refund; as described in Canisius College, 799 F.2d 18, all Taxpayers may have had was a "settled expectation" they would receive the refund.

However, even if Act 171 did not effect a taking of Taxpayers' property, the Act violated substantive due process under both the state and federal constitutions. The United States Supreme Court has held that the government's power to impose taxes retroactively is not unlimited and that certain tax laws can violate the Due Process Clause.

In United States v. Carlton, 512 U.S. 26, 114 S.Ct. 2018, 129 L.Ed.2d 22, the Court defined the parameters of the government's retroactive taxation power. In that case, an executor of an estate purchased certain shares in a corporation and then sold them at a loss. Under the estate tax laws in effect at the time of his purchase and sale of the shares, the estate was entitled to a large deduction because of the sale of the shares. In fact, the executor purchased and then sold the shares at issue in order to receive the tax deduction. The executor filed the estate tax return claiming this allowed deduction. Id. at 28, 114 S.Ct. at 2021, 129 L.Ed.2d at 27.

Approximately one year after the executor filed the tax return, Congress amended the estate tax laws to exclude the estate at issue (and others like it) from eligibility for the deduction the executor had claimed. This new law was made retroactive to a period before the executor had filed the estate tax return. Accordingly, the Internal Revenue Service disallowed the deduction and the estate was forced to pay an estate tax deficiency,...