Kitt v. U.S.

• Decision Date: 10 January 2002
• Docket Number: No. 01-5002,01-5002
• Citation: 277 F.3d 1330
• Parties: (Fed. Cir. 2002) DOUGLAS Q. KITT and NANCY C. KITT, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

Page 1330

277 F.3d 1330 (Fed. Cir. 2002)

DOUGLAS Q. KITT and NANCY C. KITT, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 01-5002

United States Court of Appeals for the Federal Circuit

JANUARY 10, 2002

Appealed from: United States Court of Federal Claims, Judge Diane G. Weinstein

Roger J. Marzulla, Defenders of Property Rights, of Washington, DC, argued for plaintiffs-appellants. With him on the brief was Nancie G. Marzulla.

Steven W. Parks, Attorney, Tax Division, Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief was Kenneth L. Greene, Attorney.

Before MICHEL, Circuit Judge, FRIEDMAN, Senior Circuit Judge, and RADER, Circuit Judge.

FRIEDMAN, Senior Circuit Judge.

For many years the Internal Revenue Code has provided that if the owner of an Individual Retirement Account ("IRA") withdraws all or part of it for an impermissible (non-retirement related) purpose or before reaching a certain age, there will be a ten percent tax on the withdrawal. In the summer of 1997 Congress created a second kind of IRA (effective January 1, 1998) -- the so-called Roth IRA -- and provided that ordinary IRAs could be "rolled over" into Roth IRAs. The form that the legislation took, however, meant that if funds from a regular IRA were rolled over into a Roth IRA and then immediately withdrawn, the ten percent tax would not apply. After Congress discovered this situation, in July 1998 it subjected such withdrawals to the ten percent tax, effective January 1, 1998 (the effective date of the basic legislation).

In the interval the appellant Mr. Kitt rolled over his regular IRA into a Roth IRA, and then withdrew most of the money in the latter for a non-permissible purpose and before reaching the specified age. Mr. and Mrs. Kitt challenged the application of the ten percent tax to the withdrawal as unconstitutional because it is: (1) a retroactive imposition of a penalty that denies them due process, in violation of the Fifth Amendment, (2) a taking of their property, for which they are entitled to just compensation under that amendment, and (3) the imposition of an excessive fine, in violation of the Eighth Amendment. The United States Court of Federal Claims rejected these contentions. We affirm.

I

A. In the early 1970s, Congress' concern with the low national savings rate led it to create certain savings incentives, particularly for individuals in anticipation of retirement. The Employee Retirement Income Security Act ("ERISA"), Pub. L. No. 93-406, 88 Stat. 829 (1974), allowed individuals ineligible for participation in employee pension plans to create their own Individual Retirement Accounts ("IRAs") so that they obtained similar benefits to those eligible for employee pensions. H.R. Rep. No. 93-779, at 8 (1974); see also 120 Cong. Rec. 8702 (1974) (statement of Rep. Ullman), reprinted in 1974 U.S.C.C.A.N. 5166, 5166 (noting Congress' continued efforts at "encouraging the growth and development of voluntary private pension plans").

Under ERISA, individuals could make tax deductible contributions to their IRAs. The payment of tax on those funds would be deferred until the funds were withdrawn, at which time the distributions would be included in gross income, and be taxable.

Congress also determined, however, that such tax incentives were inappropriate if the savings were diverted to non-retirement uses. S. Rep. No. 99-313, at 613 (1986); see also S. Rep. No. 93-383 (1974) , reprinted in 1974 U.S.C.C.A.N. 4889, 5015-17 ("The bill also contains a number of other provisions designed to ensure that the accounts will be used for retirement savings . . . . Premature distributions frustrate the intention of saving for retirement, and the committee bill, to prevent this from happening, imposes a penalty tax."). As such, "in order to discourage withdrawals and to recapture a measure of the tax benefits that have been provided," an additional tax of ten percent was imposed on such early withdrawals. H.R. Rep. No. 99-426, at 728-29 (1985). The statute provides:

If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

26 U.S.C. 72(t)(1) (1994).

The national savings rate remained a subject of concern, however, and in 1997 Congress provided for a different kind of IRA, the so-called Roth IRA. Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788 (1997); see also H.R. Rep. 106-753; H.R. Rep. 105-148, at 337 (1997), reprinted in 1997 U.S.C.C.A.N. 678, 731. Unlike traditional IRAs, contributions to Roth IRAs were not tax deductible. Once the fund was established, however, the money accumulated tax free, and "qualified distributions," i.e., those made after the age of fifty-nine and one-half or for a qualified purpose, were not taxable. 26 U.S.C. 408A(d)(1) (Supp. III 1997). If, however, funds from Roth IRAs were withdrawn either early or for a non-retirement purpose, they, too, were subject to the ten percent additional tax. In order to encourage taxpayers to take advantage of the new Roth IRAs, Congress provided special favorable tax treatment for individuals who converted (or "rolled over") funds from their traditional IRAs into newly-formed Roth IRAs. Id. 408A(d)(3)(C). The tax on the rolled-over amount also would be spread over four years. Id. 408A (d)(3)(A)(iii), amended by 26 U.S.C. 408A (d)(3)(A) (Supp. V 1999).

The way in which these complex statutory provisions were worded meant that a key element in determining whether the ten percent additional tax would apply would be whether the amount withdrawn was "includable in gross income." The provisions produced the following anomalous result: IRA withdrawals made prematurely or made for an impermissible purpose were subject to the ten percent additional tax if made from traditional or Roth IRAs, but not if made from a Roth IRA created by rolling over a traditional IRA.

Shortly after enacting the Taxpayer Relief Act of 1997, Congress became aware of this situation, and sought to change it. In 1998, the Internal Revenue Service Restructuring and Reform Act, Pub. L. No. 105-206, 112 Stat. 685 (1998), provided that distributions from Roth IRAs made within five years of rollover that are allocable to the funds rolled over, are subject to the ten percent additional tax. It did this by providing that such distributions were to be included in gross income. 26 U.S.C. 408A(d)(3)(F)(i) (Supp. V 1999); see also id. 408A(d)(3)(A). The Act became effective on July 22, 1998, and applied retrospectively to transactions since January 1, 1998, the effective date of the 1997 Act that provided for the Roth IRAs.

B. The appellant Mr. Kitt converted his traditional IRA, which contained $69,059, into a newly-created Roth IRA on March 6, 1998. On April 27, 1998, Kitt withdrew $53,000 from his Roth IRA, and used the money to pay the mortgage on his residence. This was a "non-qualified" withdrawal, both because it was for a non-retirement purpose and because Kitt was forty-four years old and had not reached the permissible withdrawal age of fifty-nine and one-half years. Therefore, his withdrawal was taxed.

In their 1998 joint income tax return, the Kitts treated the $69,059 rolled over into the Roth IRA as part of their gross income, on which they paid tax. They also paid the ten percent additional tax of $5,300 on the $53,000 Kitt had withdrawn from his Roth IRA. They then filed an amended return seeking a refund of that additional tax. When the Internal Revenue Service denied the refund, the Kitts filed the present suit in the Court of Federal Claims challenging the imposition of the additional tax. They contended that the application of the tax was a retroactive penalty that denied them due process and constituted a taking of their property, both under the Fifth Amendment, and an excessive fine in violation of the Eighth Amendment.

On cross-motions for summary judgment, the court granted the government's motion and dismissed the complaint. The court summarized its conclusions as follows:

Retroactive imposition of the section 72(t) 10-percent additional tax on plaintiffs' early and non-qualified withdrawal from their Roth IRA does not offend due process. The retroactive aspects of the provision are rationally related to the legitimate governmental purposes of curing Congress' mistake and recouping tax benefits conferred, and the retroactivity was confined to the seven month period necessary to enact the legislation and to prevent taxpayers from taking advantage of the period of enactment. Nor is it a taking. Imposition of liability in this case does not take plaintiffs' property, as that term is used in the Takings Clause. Even if the money paid were property, the failure of plaintiffs' due process argument, the moderate retroactivity of the statute, plaintiffs' ability to anticipate the tax imposition, and plaintiffs' expectations regarding taxation of traditional IRAs, all demonstrate that there has been no taking. Because imposition of the 72(t) tax is not "punishment", it is not an excessive fine that violates the Excessive Fines Clause.

II

A. "[T]he validity of a retroactive tax provision under the Due Process Clause depends upon whether . . . [such application] is itself justified by a rational legislative purpose." United States v. Carlton, 512 U.S. 26, 30-31 (1994) (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-30 (1984), in turn quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16-17 (1976)). The Supreme Court "repeatedly has upheld retroactive tax legislation against a due process challenge." Carlton, 512 U.S. at 30. We conclude that the retroactive application of the ten percent additional tax to Kitt's transaction...