Furlong v. Commissioner
| Decision Date | 29 April 1993 |
| Docket Number | Docket No. 18586-90. |
| Citation | 65 T.C.M. 2536 |
| Parties | Ralph D. Furlong and Jacqueline L. Furlong v. Commissioner. |
| Court | U.S. Tax Court |
Patrick B. Mathis and Kevin J. Richter, 720 W. Main St., Belleville, Ill., for the petitioners. Michael W. Bitner, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in Ralph D. and Jacqueline L. Furlong's (petitioners) 1982 Federal income tax and additions to tax as follows:
Deficiency Additions to Tax
$89,369 Sec. 6651(a)(1) ........... $10,398
Sec. 6653(a)(1) ........... 12,890
Sec. 6653(a)(2)............ 1
Sec. 6659 ................. 26,095
Sec. 6661 ................. 30,071
1 50% of interest due on $115,951
Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the taxable year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, the sole issue for decision is whether retroactive application of section 72(p)(1)(A), enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982, violates the Due Process Clause of the U.S. Constitution.
This case was submitted fully stipulated under Rule 122. The stipulation and attached exhibits are incorporated by this reference.
Petitioners resided in Mt. Prospect, Illinois, at the time they filed their petition in this case. Petitioners filed their individual income tax return for the taxable year 1982 on August 18, 1983.
Throughout 1982, Mr. Furlong was the president and the sole shareholder of Wire Industries, Inc., a corporation doing business in Illinois. At all times during 1982, Mr. Furlong was a participant in the Wire Industries, Inc., Defined Benefit Plan. He was also a cotrustee under the plan. The Defined Benefit Plan was a qualified employer plan within the meaning of section 72(p)(4) (formerly section 72(p)(3)).
On August 25, 1982, Mr. Furlong received a $99,000 loan from the Wire Industries, Inc., Defined Benefit Plan. The loan was represented by a demand promissory note which bore an interest rate of 12 percent per annum. On that date, Mr. Furlong received a check in the amount of $99,000 drawn on the Wire Industries, Inc., Defined Benefit Plan bank account. The check was deposited in a bank account held in the name of Industrial Steel & Wire Co., a sole proprietorship owned and operated by Mr. Furlong. The check was duly paid on August 30, 1982. Petitioners did not include the proceeds from the loan in their 1982 taxable income.
OpinionThe parties in this case filed a stipulation of agreed adjustments with the Court resolving all but one issue raised in the notice of deficiency— the $99,000 which petitioners received from the Wire Industries, Inc., Defined Benefit Plan, which respondent determined was includable in petitioners' 1982 taxable income pursuant to section 72(p)(1)(A). Petitioners' only contention with respect to this issue is that the retroactive application of section 72(p)(1)(A) is unconstitutional.
Section 72(p)(1)(A) was enacted on September 3, 1982, as part of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 236(a), 96 Stat. 324, 509. Section 236(c)(1) of that Act provides that section 72(p)(1)(A) applies to any loan from a qualified employer plan which was made after August 13, 1982. 96 Stat. at 510-511. Thus, even though it was enacted on September 3, 1982, section 72(p)(1)(A) applies to loans made after August 13, 1982.
Section 72(p)(1)(A) provides that, "If during any taxable year a participant or beneficiary received (directly or indirectly) any amount as a loan from a qualified employer plan, such amount shall be treated as having been received by such individual as a distribution under such plan." Such distribution is includable in gross income during the year of receipt. Sec. 61(a). The parties have stipulated that the August 25, 1982, loan was a loan to petitioners from a qualified employer plan. Moreover, the record is clear that the $50,000 exception to the general rule of section 72(p)(1)(A) is not applicable in this case. Sec. 72(p)(2)(A)(i). Consequently, under the clear language of the statute, the $99,000 loan which Mr. Furlong received from the qualified employer plan constituted income to petitioners in 1982. Petitioners, nevertheless, contend that it is constitutionally impermissible to retroactively apply the amendment to them under these circumstances.
It is a well accepted maxim that . Wiggins v. Commissioner [Dec. 45,629], 92 T.C. 869, 871 (1989), affd. [90-2 USTC ¶ 50,362] 904 F.2d 311 (5th Cir. 1990). Moreover, there is a presumption of constitutionality, and courts have been very reluctant to invalidate retroactive tax legislation. See New England Baptist Hosp. v. United States [87-1 USTC ¶ 9113], 807 F.2d 280, 284 (1st Cir. 1986); Wildman v. Commissioner [Dec. 39,093], 78 T.C. 943, 955 (1982). The burden is on the taxpayer to establish that the legislature acted in an arbitrary and irrational way. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976); Reed v. United States [84-2 USTC ¶ 13,586], 743 F.2d 481, 484 (7th Cir. 1984).
Congress has many times given a revenue measure an effective date prior to the date of actual enactment. United States v. Darusmont, supra at 296; Wildman v. Commissioner, supra at 956. The Supreme Court has consistently held that this practice does not per se violate the due process clause of the Fifth Amendment. See United States v. Darusmont, supra at 297, and cases cited therein. As we explained in DeMartino v. Commissioner [Dec. 43,763], 88 T.C. 583, 587-588 (1987), affd. [88-2 USTC ¶ 9608] 862 F.2d 400 (2d Cir. 1988) (citing Welch v. Henry, 305 U.S. 134, 147 (1938)), affd. without published opinion sub nom. McDonnell v. Commissioner, 862 F.2d 308 (3d Cir. 1988):
The reasoning behind this principle is that taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract, but instead, it is a way of apportioning the cost of Government among those who enjoy its benefits and who must bear the resulting burdens. Since no citizen enjoys immunity from those burdens, retroactive application of the tax laws does not necessarily infringe on due process.
See Stockdale v. Insurance Cos., 87 U.S. (20 Wall.) 323, 331 (1873); Fife v. Commissioner [Dec. 40,901]; 82 T.C. 1, 12 (1984).
Remarkably, we are aware of no Federal income tax statute that has ever been invalidated by the Supreme Court for its retroactive applicability.1 The only cases in which the Supreme Court has held a revenue statute void for retroactivity involved either gift or estate taxation, and all of the cases were close decisions with vigorous dissenting opinions. See Untermyer v. Anderson [1 USTC ¶ 297], 276 U.S. 440 (1928) (gift tax); Blodgett v. Holden [1 USTC ¶ 261], 275 U.S. 142 (1927) (gift tax); Nichols v. Coolidge, 274 U.S. 531 (1927) (estate tax); Wiggins v. Commissioner [90-2 USTC ¶ 50,362], 904 F.2d 311, 314 (5th Cir. 1990), affg. [Dec. 45,629] 92 T.C. 869 (1989); see also Hochman, The Supreme Court and the Constitutionality of Retroactive Legislation, 73 Harv. L. Rev. 692 (1960).
Early Supreme Court cases invalidated the retroactive application of certain gift tax provisions on the basis that "the nature or amount of the tax could not reasonably have been anticipated by the taxpayer at the time of the particular voluntary act which the statute later made the taxable event." Welch v. Henry, supra at 147. More recent decisions have sharply limited the scope of the reasoning of the earlier Supreme Court cases and confined the reasoning to situations where a wholly new tax was created. See United States v. Hemme [86-1 USTC ¶ 13,671], 476 U.S. 558 (1986); United States v. Darusmont, supra; see, e.g., Wiggins v. Commissioner [90-2 USTC ¶ 50,362], 904 F.2d 311 (5th Cir. 1990) (); Estate of Ekins v. Commissioner [86-2 USTC ¶ 13,680], 797 F.2d 481 (7th Cir. 1986) (); Fein v. United States [84-1 USTC ¶ 13,567], 730 F.2d 1211 (8th Cir. 1984) (same as Estate of Ekins); Estate of Ceppi v. Commissioner [83-1 USTC ¶ 13,509], 698 F.2d 17 (1st Cir. 1983), modifying [Dec. 38,827] 78 T.C. 320 (1982) (); Reed v. United States, supra (same as Estate of Ceppi); but see Carlton v. United States, 972 F.2d 1051 (9th Cir. 1992). Notably, in three modern cases, the Supreme Court has rejected due process challenges to retroactive applications of income tax statutes. United States v. Hemme, supra; United States v. Darusmont, supra; Welch v. Henry, supra.
Petitioners cite Untermyer v. Anderson, 276 U.S. 440 (1928), and Blodgett v. Holden, supra, in support of their contention that the retroactive application of section 72(p)(1)(A) is unconstitutional. The cases, however, are gift tax cases, and the gifts in question were made and completely vested before the enactment of the tax statute. We do not consider them as controlling authority with respect to the retroactive application of section 72(p)(1)(A). United States v. Darusmont, supra at 299; see Shanahan v. United States [71-2 USTC ¶ 9606], 447 F.2d 1082 (10th Cir. 1971); Cohan v. Commissioner [2 USTC ¶ 489], 39 F.2d 540, 545 (2d Cir. 1930). As the Supreme Court stated in United States v. Hemme, supra at 568, Untermyer is of "limited value in assessing the constitutionality of...
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