Papson v. Comm'r of Internal Revenue (In re Estate of Papson) , Docket No. 10249–76.

Decision Date17 August 1983
Docket NumberDocket No. 10249–76.
Citation81 T.C. No. 9,81 T.C. 105
PartiesESTATE OF LEONIDAS C. PAPSON, Deceased, COSTA L. PAPSON, Executor, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Decedent died in 1973 owning, inter alia, as a closely held business, a shopping center. In 1974, petitioner elected, pursuant to sec. 6166, I.R.C. 1954, to pay its outstanding estate tax liability on the installment method. In 1975, Congress changed the interest rate from 4 percent to a higher variable rate, effective July 1, 1975. Held the higher variable rate applies to the installments due from petitioner from and after that day. Held further, the rate change did not violate any of petitioner's constitutional rights. Costa L. Papson, for the petitioner.

Julius A. Jove and Jo-Ann W. Fox, for the respondent.

SUPPLEMENTAL OPINION*

TANNENWALD, Judge:

This case is before us on a Rule 1551 computation to determine the amount of interest to be allowed as an administration expense pursuant to section 2053(a)(2).2 The sole issue for decision is whether petitioner, which elected under section 6166 to pay its estate tax on the installment method, is constitutionally protected from paying interest on the amount outstanding after June 30, 1975, at the variable rate enacted by Congress in 1975 (section 6621). This issue is one of first impression as far as the constitutional issue raised by petitioner is concerned.3

The decedent died on July 2, 1973, owning, inter alia, as a closely held business, a shopping center. Because the value of the shopping center exceeded 35 percent of the value of the gross estate and 50 percent of the taxable estate, petitioner was eligible, pursuant to section 6166, to pay its estate tax liability in equal installments, with interest, over 10 years. Petitioner's executor timely elected the installment method in March 1974, at which time interest was charged, pursuant to section 6601(b), at a rate of 4 percent.

In 1975, Congress amended the statute, via section 6621 and the repeal of section 6601(b), to raise the existing interest rate from 4 percent for estate tax liabilities payable under section 6166 (6 percent for most other tax liabilities) to 9 percent and authorized the Secretary of the Treasury periodically thereafter to make adjustments to that rate based upon the adjusted prime rate charged by banks. Pub. L. 93–625, sec. 7, 88 Stat. 2114 (1975).4 The Senate Finance Committee, where the provision making the change originated, explained the purpose of increasing the interest rate as follows:

Historically the 6 percent tax interest rate has been higher than the prevailing money market interest rate. * * * The purpose for this differential was to provide an incentive for the taxpayer to pay his tax promptly and for the Government to credit or refund overpayments promptly. However, money market rates are currently (and for several years have been) at significantly higher levels than 6 percent. * * * As a result, the present statutory interest rate no longer serves the purposes for which it was originally intended.

* * *

In those cases where the 4-percent interest rate applies, although an extension of time to pay a tax may be appropriate in certain cases in order to avoid unnecessary hardship, the committee sees no sound reason to permit some taxpayers to pay interest at a lower rate than other taxpayers are required to pay on underpayments of tax. Relief from the hardship of paying taxes in a lump sum should not also mean that the interest rate should be reduced if payments are made in installments. This is particularly so if a closely held business owned by an estate, or a business which has recovered an expropriation loss, is or can be earning a significantly higher return on the tax money which it presently can, in effect, borrow from the Government at 4 percent.

S. Rept. 93–1357 (1974) 19, 20, 1975–1 C.B. 517, 528.

Petitioner maintains that “retroactive” application of the 9-percent and the variable rate to it would violate constitutional due process guarantees. 5 In effect, petitioner contends that it had a vested right to pay 4-percent interest on its estate tax liability and that Congress retroactively, and therefore unconstitutionally, changed that rate. Respondent contends that petitioner merely elected, pursuant to section 6166(b), a “modifiable” payment schedule, that such schedule was subsequently modified, and that such modification was constitutional as to future installment payments required from petitioner.

Initially, we note that, in terms of both the applicable statutory language and the relevant legislative history, the change in interest rate was made applicable to installment payments required to be made by petitioner from and after July 1, 1975. Section 7(e) of Pub. L. 93–625 specifically provides:

(a) Effective Date.—The amendments made by this section shall take effect on July 1, 1975, and apply to amounts outstanding on such date or arising thereafter. [Emphasis added.]

And the Senate Finance Committee report refers to cases where the time for payment of an estate tax * * * has been extended” and states that the amendment is to take effect on July 1, 1975, and apply “to a liability which arose before that date and continues outstanding in part or whole thereafter (but only on the portion which remains outstanding after July 1, 1975).” S. Rept. 93–1357, supra at 20–21, 1975–1 C.B. at 529. Thus, petitioner's obligation as originally constituted was changed (see Estate of Adams v. United States, 550 F.Supp. 175 (N.D. Okla., 1981)), and, to that extent, the statutory provision in question had a retroactive effect. The question before us is whether such legislative action was constitutionally permissible. We hold that it was.

The parties have devoted a considerable portion of their briefs to an argument as to whether or not the change in the interest rate constituted a retroactive tax. We think that such argument is irrelevant. We have held that interest on estate taxes is not a tax. Estate of Bahr v. Commissioner, 68 T.C. 74 (1977). Moreover, even if interest, in the context of this case, is a tax, the change in the rate of interest would constitute no more than a change in the rate of tax and would clearly be constitutional. United States v. Darusmont, 449 U.S. 292 (1981); Welch v. Henry, 305 U.S. 134 (1938); Milliken v. United States, 283 U.S. 15 (1931). See also Estate of Ceppi v. Commissioner, 698 F.2d 17 (1st Cir. 1983), affg. on a different ground 78 T.C. 320 (1982). Petitioner's reliance on Nichols v. Coolidge, 274 U.S. 531 (1927), and Coolidge v. Long, 282 U.S. 582 (1931), is totally misplaced. Those cases involved the retroactive application of an estate tax to transfers of property completed before a tax on such transfers was imposed. The same is true of Untermyer v. Anderson, 276 U.S. 440 (1928), and Blodgett v. Holden, 275 U.S. 142 (1927), modified 276 U.S. 594 (1928), involving the gift tax; the continued vitality of those cases is, in any event, open to question. See Estate of Ceppi v. Commissioner, supra, and cases cited therein; Rose v. Commissioner, 55 T.C. 28, 30 (1970). Petitioner's reliance on Page v. Skinner, 298 F. 731 (8th Cir. 1924), is likewise misplaced. That case merely involved a question of statutory interpretation as to the applicability of the rates of tax established by the Revenue Act of 1918 to the estate of a decedent dying before the effective date of that act; no constitutional issue was discussed.

As we view this case, the critical constitutional issue is whether petitioner's rights in a 4-percent interest rate with respect of future installment payments were so vested that the change in those rights was violative of the due process requirement of the Fifth Amendment to the Constitution. We posit our analysis on two observations by the Supreme Court. In Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976), in which an employer was held liable for providing benefits to coal miners who suffered from black lung disease and to survivors of such miners even though employment of the miners terminated before the applicable statutory provision was passed, the Court stated (428 U.S. at 15–16)

It is by now well established that legislative Acts adjusting the burdens and benefits of economic life come to the Court with a presumption of constitutionality, and that the burden is on one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way. * * *

To be sure, insofar as the Act requires compensation for disabilities bred during employment terminated before the date of enactment, the Act has some retroactive effect — although, as we have noted, the Act imposed no liability on operators until 1974. And it may be that the liability imposed by the Act for disabilities suffered by former employees was not anticipated at the time of actual employment. But our cases are clear that legislation readjusting rights and burdens is not unlawful solely because it upsets otherwise settled expectations. * * * This is true even though the effect of the legislation is to impose a new duty or liability based on past acts. [Citations omitted. Footnote omitted.]

And in Lynch v. United States, 292 U.S. 571 (1934), which held that renewable term war risk insurance constituted a contract of the United States which the United States could not constitutionally abrogate, the Court observed (292 U.S. at 577)

Pensions, compensation allowances and privileges are gratuities. They involve no agreement of parties; and the grant of them creates no vested right. The benefits conferred by gratuities may be redistributed or withdrawn at any time in the discretion of Congress. On the other hand War Risk policies, being contracts, are property and create vested rights. The terms of these contracts are to be found in part in the policy, in part in the statutes under which th...

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