Licari v. C.I.R., 90-70258
Decision Date | 07 October 1991 |
Docket Number | No. 90-70258,90-70258 |
Citation | 946 F.2d 690 |
Parties | Anthony C. and Mildred M. LICARI, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
Court | U.S. Court of Appeals — Ninth Circuit |
J. Clancy Wilson, Branton & Wilson, San Diego, Cal., for petitioners-appellants.
Kenneth W. Rosenberg, Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.
Appeal from the Decision of the United States Tax Court.
Before FLETCHER and CANBY, Circuit Judges, and McNICHOLS, * District Judge.
OVERVIEW
Taxpayers, Anthony and Mildred Licari, appeal the Tax Court's application of a 25% penalty pursuant to 26 U.S.C. § 6661 to their undisputed understatement of tax liability. The Licaris contend that retroactive application of the 25% penalty, rather than the 10% penalty rate that applied at the time they filed their tax returns, violated their constitutional rights. 1 We affirm.
In a Notice of Deficiency dated April 11, 1986, the Internal Revenue Service ("IRS") determined that the Licaris had substantially understated their income in taxable years 1981 through 1984. According to the Notice of Deficiency, the Licaris' underpayments subjected them to the 10% penalty then applicable pursuant to section 6661 for substantial understatement of tax liability for taxable years 1982 through 1984. 2 Effective on October 21, 1986, Congress, in section 8002 of the Omnibus Budget Reconciliation Act of 1986 ("OBRA"), Pub.L. No. 99-509, 100 Stat. 1874, 1951 (1986), increased the penalty set by section 6661 from 10% of the underpayment of tax liability to 25% of the underpayment. 3 Congress specifically directed that the increased penalty established in section 8002 be applied to "penalties assessed after the date of the enactment of this Act." Id. § 8002(b). Thus, Congress provided for application of the increased penalty rate to returns filed before the date of the enactment, so long as no penalty had been assessed. At trial, over the Licaris' objection, the Tax Court granted the Commissioner's motion to assert the increased penalty against the Licaris pursuant to OBRA § 8002 for taxable years 1982 through 1984. The Licaris appeal this decision.
On appeal, the Licaris contend that retroactive application of the enhanced penalty violates their right to both equal protection and due process. Because the Licaris' challenges present solely legal issues, we review them de novo. United States v. McConney, 728 F.2d 1195, 1201 (9th Cir.) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984). We discuss each challenge in turn.
The Licaris first contend that the classifications made in OBRA section 8002 are "patently arbitrary and irrational and ... unrelated to any purpose articulated by Congress." Opening Brief, at 33. According to the Licaris, applying the enhanced penalty retroactively in no way furthers Congress' stated goal in passing section 6661 of attempting to deter taxpayers from playing the "audit lottery" by taking highly questionable positions on their returns in the hope of escaping close review. Accordingly, the Licaris maintain that retroactive application of section 8002 constitutes a violation of their right to equal protection.
In order to survive equal protection scrutiny, statutory classifications affecting economic interests must be rationally related to a legitimate government purpose. Regan v. Taxation With Representation, 461 U.S. 540, 547, 103 S.Ct. 1997, 2001, 76 L.Ed.2d 129 (1983). "Normally, a legislative classification will not be set aside if any state of facts rationally justifying it is demonstrated to or perceived by the courts." United States v. Maryland Savings-Share Ins. Corp., 400 U.S. 4, 6, 91 S.Ct. 16, 17, 27 L.Ed.2d 4 (1970). Moreover, "[o]ne who assails the classification in such a law must carry the burden of showing that it does not rest upon any reasonable basis, but is essentially arbitrary." Lindsley v. Natural Carbonic Gas Co., 220 U.S. 61, 78-79, 31 S.Ct. 337, 340, 55 L.Ed. 369 (1911).
As the Licaris contend, the legislative history of section 6661 indicates that its principal objective is to deter taxpayers from playing the "audit lottery." S.Rep. No. 494, 97th Cong., 2d Sess. 272-73 (1982), reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1019-20. 4 However, the Senate Report accompanying OBRA, which increased the penalty set out in section 6661, demonstrates that the amending legislation had another objective: the reduction of the budget deficit. S.Rep. No. 348, 99th Cong., 2d Sess. 3-4, 1986 U.S.Code Cong. & Admin.News 3607. Section 8002, the section that increased the tax penalty established in section 6661, is one of several measures intended to enhance the revenue. See also Karpa v. C.I.R., 909 F.2d 784, 786 (4th Cir.1990). The determination to apply the increased penalty retroactively to tax deficiencies not yet assessed would rationally further Congress' goal, by ensuring that higher revenues from fines would compensate the government for the cost of enforcing the tax laws. Congress rationally chose to impose this penalty retroactively only on those upon whom a penalty had not yet been assessed because only in those cases was the matter still open as between the taxpayer and the Commissioner. Lapin v. C.I.R., Tax Court Mem.Dec. (P-H), p 90,343 at 1631 (1990). Moreover, the Commissioner points out that retroactive imposition of an increased penalty would rationally further Congress' goal in section 6661 of deterring tax underpayments by encouraging those taxpayers who have already filed returns in which they took questionable positions to come forward before they are audited. See Treas.Reg. § 1.6661-6(c) (1990) ( ); see also Karpa v. C.I.R., 909 F.2d 784, 788 n. 7. Because the legislative classification here is supported by a rational basis, the Licaris' equal protection challenge fails.
The Licaris' due process challenge raises a thornier issue. Federal courts have long been hostile to legislation that interferes with settled expectations. See, e.g., Railroad Retirement Bd. v. Alton R.R. Co., 295 U.S. 330, 55 S.Ct. 758, 79 L.Ed. 1468 (1935). It is clear, however, that Congress may, without violating the due process clause, enact legislation imposing economic burdens retroactively if it is justified by a "legitimate legislative purpose furthered by rational means." Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S.Ct. 2709, 2717, 81 L.Ed.2d 601 (1984); see also DeMartino v. C.I.R., 862 F.2d 400, 409 (2d Cir.1988). An alternative expression of this test, which originated in the tax context but has been applied more generally, would find retroactive legislation constitutional unless its application is so "harsh and oppressive as to transgress the constitutional limitation." Welch v. Henry, 305 U.S. 134, 147, 59 S.Ct. 121, 126, 83 L.Ed. 87 (1938), (cited in Pension Benefit Guaranty, 467 U.S. at 733, 104 S.Ct. at 2720); see Pension Benefit Guaranty, 467 U.S. at 733, 104 S.Ct. at 2720. ("[A]lthough we have noted that retrospective civil legislation may offend due process if it is 'particularly "harsh and oppressive" ' ... that standard does not differ from the prohibition against arbitrary and irrational legislation."); Canisius College v. United States, 799 F.2d 18, 25 (2d Cir.1986) (, )cert. denied, 481 U.S. 1014, 107 S.Ct. 1887, 95 L.Ed.2d 495 (1987).
Both parties couch their arguments in terms of the extra deference paid to Congress when evaluating the retroactive application of increased tax rates. In United States v. Darusmont, 449 U.S. 292, 101 S.Ct. 549, 66 L.Ed.2d 513 (1981), the Supreme Court indicated that the mere fact that an increase in tax rates was made retroactive would rarely constitute a violation of the due process clause. According to the Court:
Darusmont, 449 U.S. at 298, 101 S.Ct. at 552 (quoting Welch v. Henry, 305 U.S. at 146-47, 59 S.Ct. at 125); see also Hochman, The Supreme Court and the Constitutionality of Retroactive Legislation, 73 Harv.L.Rev. 692, 706 (1960) ( )(footnote omitted). In fact, to the best of our knowledge, the Supreme Court has never sustained a due process challenge to the retroactive application of an income tax. Zelenak, Are Rifle Shot Transition Rules & Other Ad Hoc Legislation Constitutional?, 44 Tax L.Rev. 563, 608 (1989). Were this level of deference applied in evaluating the Licaris' claim, the failure of the Licaris' due process challenge would be almost certain.
Nevertheless, the great deference accorded the retroactive application of tax statutes is not fatal to the Licaris' claim because it is not automatically applied to the tax penalty at issue here. The Supreme Court has specifically linked the permissive standard for approving...
To continue reading
Request your trial-
Armendariz v. Penman, s. 93-55393
... ... Armendariz v. Penman, 31 F.3d 860 (9th Cir.1994). The panel also held that the plaintiffs had not created a genuine issue of fact as to ... denied, 506 U.S. 1070, 113 S.Ct. 1025, 122 L.Ed.2d 170 (1993); Licari v. Commissioner, 946 F.2d 690, 692 (9th Cir.1991) (classification not set aside "if any state of ... ...
-
Carlton v. U.S.
... ... Licari v. Commissioner, 946 F.2d 690, 692 (9th Cir.1991) ... Over the past half-century ... ...
-
Gen. Motors Corp.. v. Dep't of Treasury.
... ... with four-year retroactivity that ratified an IRS revenue ruling of doubtful validity); Licari v. Internal Revenue Comm'r, 946 F.2d 690, 695 (C.A.9, 1991) (approving the four-year retroactive ... ...
-
Quarty v. U.S.
... ... v. United States, 68 ... Page 964 ... F.3d 1428, 1430 n. 1 (D.C.Cir.1995). These rates were originally "enacted to be in effect only for calendar year 1984, after ... See Licari v. Commissioner, 946 F.2d 690, 692 (9th Cir.1991) (constitutional challenge to retroactive tax ... ...
-
Gambling With the Irs: the Enforcement of Retroactive Tax Statutes in United States v. Carlton - Stewart Haskins
...75. Id. 76. See, e.g., Williamson v. Lee Optical, 348 U.S. 483 (1955). 77. Pension Benefit Guaranty, 467 U.S. at 732. 78. Id. at 733. 79. 946 F.2d 690 (9th Cir. 1991). 80. Id. at 694-95. 81. Id. at 693. 82. Id. at 694. 83. Id. 84. Id. at 694-95. 85. Id. at 694. 86. Id. at 695. 87. 114 S. Ct......
-
California: letter to state Supreme Court argues that tax penalty violates federal due process.
...a legislature's purpose when the statute being applied retroactively is a tax than when it is a penalty. See e.g., Licari v. Commissioner, 946 F.2d 690 (9th Cir. 1991) (involving a due process challenge to the retroactive application of the substantial understatement penalty found in sectio......