Apache Bend Apartments, Ltd. v. US

• Decision Date: 08 September 1988
• Docket Number: Civ. A. No. 4-86-815-E.
• Citation: Apache Bend Apartments, Ltd. v. US, 702 F. Supp. 1285 (N.D. Tex. 1988)
• Parties: APACHE BEND APARTMENTS, LTD., et al. v. UNITED STATES of America, et al.
• Court: U.S. District Court — Northern District of Texas

702 F. Supp. 1285

APACHE BEND APARTMENTS, LTD., et al. v. UNITED STATES of America, et al.

Civ. A. No. 4-86-815-E.

United States District Court, N.D. Texas, Fort Worth Division.

September 8, 1988.

Patrick A. Barbolla, Fort Worth, Tex., for Apache Bend Apartments, Ltd., et al.

Michael E. Greene, Atty., Tax Div., Louise P. Hitken, Dept. of Justice, Dallas, Tex., for U.S., et al.

MEMORANDUM OPINION AND ORDER

MAHON, District Judge.

Now before the Court are the cross motions for summary judgment of the parties in the above-styled case. The Court held a hearing in this case on August 6, 1987. After a thorough review of the motions, the briefs, the oral arguments, and the applicable law, the Court makes the following determinations.

FACTS

This action challenges the constitutionality of the Tax Reform Act of 1986. Plaintiffs seek a judicial determination that the 1986 Act violates both the Uniformity Clause of Article 1, section 8 of the United States Constitution and the equal protection component of the Due Process Clause of the Fifth Amendment of the United States Constitution. Plaintiffs also seek a permanent injunction preventing enforcement of the 1986 Tax Act.

Plaintiff Patrick A. Barbollo, P.C., is a Texas professional corporation which is subject to the provisions of the Internal Revenue Code that applies to corporations, including the corporate alternative minimum tax. This corporation has, and will in the future, purchase tangible personal property.

Section 701 of the 1986 Tax Act increased the alternative minimum tax for corporations by mandating that such tax be increased by 50% of the excess by which a corporation's "net book income exceeds the alternative minimum taxable income...." One exception to this rule is provided in section 703(b), which negates the book income increase for a corporation "incorporated in Delaware on May 31, 1912." Control Data Corporation is the sole entity to which this exclusion applies, and the benefit to Control Data is $25,000,000.00. 132 Cong.Rec. S13,912 (daily ed. Sept. 27, 1986) & 132 Cong.Rec. S13,884 (daily ed. Sept. 27, 1986) (Remarks by Senator DeConcini). While Control Data Corporation receives a benefit of $25,000,000.00, other corporations will have their alternative minimum taxes increased by an aggregate of $22,000,000,000.00. II, Conference Report to Accompany H.R. 3838: Tax Reform Act of 1986. H.R. Doc. 99-841, 99th Cong. 2d Sess. II-883 (1986) herein after cited as "Conference Report". Plaintiff Corporation is one of the corporations that will be affected by the provisions for adjustments for book income in the 1986 Act. Plaintiff Corporation will be taxed at a different rate than Control Data Corporation since Control Data is not subject to the same alternative minimum tax rules.

In addition, Plaintiff Patrick A. Barbolla, P.C., has in the past and will in the future, purchase items of tangible personal property which were subject to Investment Tax Credits under prior tax laws but will not be eligible for Investment Tax Credit under the Tax Reform Act of 1986. Section 211 of the Tax Reform Act repeals the regular investment tax credit. However, Section 211(e)(4) exempts two companies from the repeal of Investment Tax Credits, one of which is the General Motors Corporation. It will receive $70 million in tax credit for its Saturn plant. 132 Cong.Rec. S13,914 (daily ed. Sept. 27, 1986). The other company cannot be identified from the Tax Act or the legislative history.¹

Plaintiff Western Oaks Apartments, Ltd. is a limited partnership formed under the laws of the State of Texas. Plaintiff Western Oaks intends to construct an apartment complex in the City of Red Oak. To that end and prior to October 22, 1986, it has incurred contractual obligations for architectural fees, executed a land option contract to purchase realty and will be owning depreciable property placed in service subsequent to December 31, 1986. The depreciation schedule for the apartment complex which Western Oaks will own has been extended under the 1986 Act. However, sections 204 and 251 have exempted several taxpayers from the new depreciation schedules, such entities will be able to use the favorable schedules which existed under the old tax laws.

Plaintiff Western is also subject to the "at risk" rules under section 503 since these rules were extended to all real estate property under the 1986 Act. However, the "at risk" rules were not extended to one real estate project under section 503(c)(2) — Three River Stadium in Pittsburgh, Pennsylvania.

Plaintiff Apache Bend Apartments, Ltd. is a limited partnership formed under the laws of the State of Texas. In July 1986, Plaintiff Apache Bend placed in service its apartment complex for lower income families in Sweetwater, Texas. This apartment complex was financed by means of a long term loan from the Farmers Home Administration, United States Department of Agriculture. The 1986 Act does not allow Plaintiff Apache Bend to obtain the low income housing tax credit. However, Section 252(f)(3) of the Act allows seven other low income housing complexes in Texas, which were placed in service prior to January 1, 1987, to receive the low income housing tax credit.

As the owner of the apartment complex, Apache Bend is also subject to the "at risk" rules under section 503 since these rules were extended to all real estate property under the 1986 Act. As stated above, the "at risk" rules do not apply to one real estate project — Three River Stadium.

Lastly, Patrick A. Barbolla, individually, sold an interest in a partnership ("capital asset") in 1984. Barbolla purchased the capital asset more than one year prior to the sale. The sale required periodic payments for the years 1985 through 1990. The maximum tax for which Barbolla could be liable under the old capital gains rules is far less than the maximum tax that Barbolla could be liable for under the new capital gains rules. Barbolla objects that the two limited partners of a limited partnership which owned Cimarron Coal Company are exempt from the new capital gains rules under section 302(c) of the new Act. These are the only taxpayers who are exempt from the new capital gains rules.

LEGISLATIVE HISTORY OF THE 1986 TAX ACT

The special exceptions to the new tax law are labeled "transition rules." The legislative history of the new act contains a plethora of discussions by the members of Congress about the transition rules.

Members of the House of Representatives stated that the new Act did not effect similarly situated people in the same manner. For example, Representative Kolbe stated:

There are literally hundreds of special transition rules included in this bill which are really nothing more than gifts of immunity from the adverse changes brought on by the bill given to individuals and corporations who were fortunate to have an ear in Congress. To tell my constituents that they are going to lose the benefits of the rental property investment or retirement plans they made, while other individuals or corporations will receive special consideration flies in the face of fairness.

132 Cong.Rec. H8,389-90 (daily ed. Sept. 25, 1986).

Members of the Senate shared the same concern, namely, that similarly situated taxpayers were not treated equally because of the transition rules. For instance, Senator Levin of Michigan stated:

A transition rule is nothing less than a tax break for a special company; the rule prevents some specific provisions of the legislation from applying to it. Some of these tax breaks are justified; they soften the blow of the new law on businesses that undertook projects under the current tax law, only to be told the rules would be changed in the middle of the game. However, what concerns me is that many individuals and businesses are in the same sort of position and are subject to the same change in the rules, yet only a few of them were able to get a special exception in the law to take into account their particular case.

132 Cong.Rec. S8,128 (daily ed. June 23, 1986).

The Senate Finance Committee was the senatorial committee responsible for drafting the new tax law. Members of the committee used their position on the committee to obtain special exceptions or "transition rules" for their constituents. For instance, only a few taxpayers in the whole country escaped the repeal of capital gain exclusion for individuals for sale proceeds of a capital asset. The individuals who received this exclusion were limited partners in a partnership which owns Cimarron Coal Company.

Cimarron got taken care of because they came to the distinguished Senator from Colorado (Senator Armstrong), a member of that committee. They made their case. He took it to the committee. Many others lacked access to the committee and they were left out in the cold.

Cong.Rec. S7,654 (daily ed. June 17, 1986) (Remarks of Senator Metzenbaum). One member of the Senate Finance Committee, Senator Durenberger, admitted using his position on the committee to obtain special treatment for his constituents.

I do not mind saying to my colleagues that I have used my position on the Finance Committee to the advantage of the people of Minnesota.... I have used my position to get special rules for my people....

132 Cong.Rec. S8,221 (daily ed. June 24, 1986).

The question arises as to how it was determined which taxpayers receive transition rules. After the House-Senate Conference reached agreement on the bill, Senators Packwood and Representative Rostenkowski selected specific projects for the transition rules. The Senate and House Committees gave these congressmen authority to allocate special exceptions or transition rules to taxpayers whose names were presented to the congressmen from members of Congress. Senator Packwood explained the process by which he and Representative Rostenkowski selected the taxpayers who would receive transition rules.

First, the Chairman of the Ways and Means Committee and I

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