Leroy v. Comm'r of Internal Revenue , Docket No. 13532-78.

• Decision Date: 16 July 1979
• Docket Number: Docket No. 13532-78.
• Citation: 72 T.C. 677
• Parties: LEROY and LEONA BUTTKE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

72 T.C. 677

LEROY and LEONA BUTTKE, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 13532-78.

United States Tax Court

Filed July 16, 1979.

The Tax Reform Act of 1976, enacted on Oct. 4, 1976, amended the minimum tax provisions, effective for all “taxable years beginning after December 31, 1975.” Prior to this amendment, the tax imposed was generally equal to 10 percent of the amount by which the sum of the items of tax preference exceeded $30,000. After the amendment, the tax imposed is 15 percent of the amount by which the sum of the items of tax preference exceed the greater of $10,000 or the “regular tax deductions.” Held, the provision of the Tax Reform Act of 1976, making the new base and rate for the application of the minimum tax provisions retroactive to taxable years beginning after Dec. 31, 1975, is not unconstitutional. Berentje C. M. Pohlman, for the petitioners.

Dale L. Newland, for the respondent.

OPINION

FEATHERSTON, Judge:

This motion for judgment on the pleadings was assigned to and heard by Special Trial Judge Lehman C. Aarons, pursuant to the provisions of section 7456(c) of the Internal Revenue Code of 1954, as amended. The Court agrees with and adopts his opinion which is set forth below.¹

OPINION OF SPECIAL TRIAL JUDGE

This matter is before the Court on respondent's motion for judgment on the pleadings. The issue herein is the constitutionality of the minimum tax for tax preferences particularly as it affects 1976 transactions prior to the enactment of the Tax Reform Act of 1976. The motion was argued by counsel for both parties at the May 16, 1979, trial session of this Court at St. Paul, Minn. The Court has given careful consideration to their arguments as well as to the memoranda, filed on behalf of both parties, setting forth their legal positions.

Petitioners resided in Enderlin, N. Dak., at the time of filing their petition herein.

Respondent determined a deficiency in petitioner's Federal income tax for 1976 in the amount of $11,606.55. The issue presented by the pleadings is a purely legal one. In March 1976, petitioners sold a piece of real estate for cash and reported long-term capital gain thereon in the amount of $174,760. Petitioners failed, on their 1976 return, to treat 50 percent of that gain ($87,380) as subject to the minimum tax.

The minimum tax for tax preferences (originally sections 56, 57, and 58 of the Internal Revenue Code) was first instituted by the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487. The tax imposed was generally equal to 10 percent of the amount by which the sum of the items of tax preference, as defined in section 57, exceeded $30,000. The Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, enacted on October 4, 1976, amended the minimum tax provisions, effective under section 301(g) of the act for all “taxable years beginning after December 31, 1975.” The new section 56 imposed the minimum tax at the rate of 15 percent of the amount by which the sum of the items of tax preference exceeded the greater of $10,000 or the “regular tax deduction.”

Petitioners raise several arguments in their memorandum in opposition to respondent's motion for judgment on the pleadings. They contend that the minimum tax provisions for 1976 were invalid because the Tax Reform Act of 1976 imposed a retroactive tax on them, with harsh and oppressive results. However, it has long been settled that an income tax can be retroactive without violating the Constitution. In Brushaber v. Union Pacific R. R. Co., 240 U.S. 1 (1916), the Supreme Court determined that an income tax enacted on October 3, 1913, could constitutionally tax income earned during the period from March 1 to December 31, 1913. In so holding, the Court quoted the following language from Stockdale v. Insurance Co., 87 U.S. (20 Wall.) 323, 331 (1873):

The right of Congress to have imposed this tax by a new statute, although the measure of it was governed by the income of the past year, cannot be doubted; much less can it be doubted that it could impose such a tax on the income of the current year, though part of that year had elapsed when the statute was passed.

In determining whether a retroactive tax violates the due process clause of the Fifth Amendment, we note the criteria delineated by the Supreme Court in Welch v. Henry, 305 U.S. 134, 147 (1938):

In each case it is necessary to consider the nature of the tax and the circumstances in which it is laid before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation.

Petitioners allege that the capital gain subject to the minimum tax here was a once-in-a-lifetime gain from the sale of a farm, that they are persons of modest means, and that under these circumstances the tax is harsh and oppressive. While we are sympathetic with petitioners' plight, in light of the cases in which retroactive taxes have been upheld, we cannot find the application of this tax “so harsh and oppressive as to transgress the constitutional limitation.” For example, in Welch v. Henry, supra, the Court upheld the constitutionality of a Wisconsin statute, enacted in 1935, imposing an emergency tax for relief purposes on dividends received from Wisconsin corporations in 1933 (at which time such dividends had been exempt from State income tax). Similarly, a retroactive interest equalization tax of 15 percent of the value of purchases of foreign equity securities by U.S. persons from foreign persons was upheld in First National Bank in Dallas v. United States, 190 Ct.Cl. 400, 420 F.2d 725 (1970).

When petitioners made the real estate sale and recognized a capital gain in 1976, the minimum tax had been in effect for over 5 years. Although petitioners may not have been aware of it,² the tax was a part of the Internal Revenue Code even in 1975, when, petitioners allege, the contract of sale was negotiated and signed. The made by the Tax Reform Act of 1976 merely increased the rate of the tax and reduced the amount of tax preferences which were exempt from it. As the court wrote in Cohan v. Commissioner, 39 F.2d 540, 545 (2d Cir. 1930), “Nobody has a vested right in the rate of taxation, which may be retroactively changed at the will of the Congress at least for periods of less than twelve months.” In that case, the court went on to say (at p. 545):

Such a one (as petitioners herein) may indeed complain that, could he have foreseen the increase, he would have kept the transaction unliquidated, but it will not avail him; he must be prepared for such possibilities, the system being already in operation. His is a different case from that of one who, when he takes action, has no reason to suppose that any transactions of the sort will be taxed at all.

Petitione...