Quarty v. U.S.

• Decision Date: 30 March 1999
• Docket Number: No. 97-16942,97-16942
• Citation: 170 F.3d 961
• Parties: -1562, 99 Cal. Daily Op. Serv. 2283, 1999 Daily Journal D.A.R. 3012 John M. QUARTY, Personal representative of the Estate of Angele C. Quarty; Elizabeth B. Cherne, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 961

170 F.3d 961

83 A.F.T.R.2d 99-1562, 99 Cal. Daily Op. Serv. 2283,

1999 Daily Journal D.A.R. 3012

John M. QUARTY, Personal representative of the Estate of Angele C. Quarty; Elizabeth B. Cherne Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 97-16942.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 5, 1998.

Decided March 30, 1999.

Robert J. Rosepink, Rosepink & Estes, Scottsdale, Arizona, for the plaintiffs-appellants.

John A. Dudeck, Jr., Tax Division, United States Department of Justice, Washington, D.C., for the defendant-appellee.

Daniel J. Popeo, Washington Legal Foundation, Washington, D.C., and Joseph E. Schmitz, Patton Boggs, Washington, D.C., for amici curiae in support of appellants Allied Educational Foundation, Washington Legal Foundation, U.S. Senators Sam Brownback, Dan Coats, Paul D. Coverdell, Larry E. Craig, Rod Grams, Kay Bailey Hutchison, Connie Mack, John McCain, Olympia J. Snowe, and U.S. Representatives Dick Armey, Bob Barr, Gerald B.H. Solomon.

Appeal from the United States District Court for the District of Arizona Roger G. Strand, District Judge, Presiding. D.C. No. CV 96-02472 RGS.

Before: FLETCHER and TASHIMA, Circuit Judges, and BRYAN, District Judge. ^*

TASHIMA, Circuit Judge:

Section 13208 of the Omnibus Budget Reconciliation Act of 1993 ("Section 13208" of "OBRA 1993"), Pub.L. No. 103-66, 107 Stat. 312, 469 (1993), set the maximum federal estate and gift tax rates at 53 % and 55 %. Section 13208 was enacted on August 10, 1993, and provided that these rates apply to the estates of decedents dying and gifts made after December 31, 1992. See id. This case presents the question of whether the application of these tax rates during the eight-month period prior to the statute's enactment violates the Due Process Clause or Takings Clause of the Fifth Amendment of the United States Constitution, or the Constitution's prohibition on direct taxation without apportionment. See U.S. Const. art I, § 2, cl. 3 & § 9, cl. 4. The district court held that the retroactive application of these tax rates was constitutional; accordingly, it granted the government's motion to dismiss this tax refund suit. We have jurisdiction under 28 U.S.C. § 1291 and we affirm.

I.

For nine years prior to January 1, 1993, the maximum federal estate and gift tax rates were 53 % and 55 %. See National Taxpayers Union, Inc. v. United States, 68 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 which the top rate was to drop to 50 %." Id. at 1430 n. 1 (citing Economic Recovery Act of 1981, Pub.L. No. 97-34, § 402(a), (b), 95 Stat. 172, 300 (1981)). In 1984, however, Congress extended the 53 % and 55 % tax rates through 1987. See Deficit Reduction Act of 1984, Pub.L. No. 98-369, § 21, 98 Stat. 494, 506 (1984). In 1987, Congress again extended these rates through January 1, 1993. See Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100-203, § 10401, 101 Stat. 1330-430 (1987); National Taxpayers, 68 F.3d at 1430 n. 1 (noting same). Late in 1992, Congress attempted to extend the higher rates once more, but President Bush pocket vetoed the bill. See H.R. 11, § 3006, reported in H.R. Conf. Rep. No. 1034, 102d Cong., 2d Sess. 178-79 (1992). Thus, on January 1, 1993, the highest estate and gift tax rates fell to 50 %. See National Taxpayers, 68 F.3d at 1430 n. 1.

In February 1993, shortly after taking office, President Clinton proposed restoring the 53 % and 55 % tax rates, effective January 1, 1993. See id. On August 10, 1993, President Clinton signed OBRA 1993, which included this proposal. Specifically, Section 13208 of OBRA 1993 increased the highest federal estate and gift tax rates to 53 % for transfers over $ 2.5 million but less than $ 3 million, and 55 % for transfers over $ 3 million, retroactively effective January 1, 1993. See 26 U.S.C. § 2001(c)(1) (West Supp.1998).

The Report of the House Budget Committee provided the following reasons for enacting Section 13208: "To raise revenue to address the Federal deficit, to improve tax equity, and to make the tax system more progressive, the committee believes that the top two estate and gift tax rates which expired at the end of 1992 should be reinstated." H.R.Rep. No. 103-111, at 644 (1993), reprinted in 1993 U.S.C.C.A.N. 378, 875. The House Conference Report made no allusion to the provision's retroactive application and provided no commentary justifying it. See H.R. Conf. Rep. No. 103-213, at 581 (1993), reprinted in 1993 U.S.C.C.A.N. 1088, 1270.

The Third Circuit has upheld Section 13208's retroactive application from due process and Takings Clause challenges. See Kane v. United States, 942 F.Supp. 233, 234-35 (E.D.Pa.1996), aff'd, 118 F.3d 1576 (3d Cir.1997). The District of Columbia Circuit was presented with a constitutional challenge to Section 13208 as a direct tax, but the court did not reach the merits of the claim. See National Taxpayers, 68 F.3d at 1430 (affirming dismissal for lack of federal subject matter jurisdiction).

The tax liabilities of both the Estate of Angele C. Quarty and Elizabeth B. Cherne ("Taxpayers") were increased as a result of the retroactive application of Section 13208's increase in estate and gift tax rates. Mrs. Quarty died on January 12, 1993; her taxable estate was greater than $3 million. At the time of her death, the maximum federal estate tax rate imposed on such estates was 50 %. As a result of Section 13208's retroactive application, Mrs. Quarty's estate was assessed $228,682.98 more in estate taxes than it would have been under a 50 % tax rate. Similarly, as a result Section 13208's retroactivity, Mrs. Cherne was required to pay $110,000 more in gift taxes on gifts she made on January 8, 1993 than she would have paid if the 1992 tax rates had not been reinstated.

Taxpayers filed individual claims for refunds with the Internal Revenue Service ("IRS") to recover the additional taxes that they were required to pay as a result of the retroactive tax rate increases provided by Section 13208. In their respective refund claims, Taxpayers asserted that Section 13208's retroactivity was unconstitutional on the grounds that it violated the Fifth Amendment's Due Process and Takings Clauses, and constituted a direct tax without apportionment. ¹

After their refund claims were denied, Taxpayers filed separate complaints in district court. In their complaints, Taxpayers asserted the three constitutional challenges specified in their refund claims, plus a claim that Section 13208 violated the ex post facto prohibition in Article I, § 9, cl. 3. After the district court consolidated these cases, the government filed a motion to dismiss the complaints for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, and Taxpayers filed a joint motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The district court granted the government's motion to dismiss, and denied Taxpayers' motion for summary judgment. The district court held that Taxpayers' four constitutional challenges raised in their complaints failed to state a claim. The district court did not address whether Taxpayers' failure to include the ex post facto claim in their refund claim filed with the IRS deprived it of jurisdiction over that claim. This appeal ensued.

II.

Whether the district court properly granted the government's motion to dismiss Taxpayers' constitutional challenges to Section 13208 presents a question of law that we review de novo. See Licari v. Commissioner, 946 F.2d 690, 692 (9th Cir.1991) (constitutional challenge to retroactive tax legislation reviewed de novo); see also Pack v. United States, 992 F.2d 955, 957 (9th Cir.1993) (grant of dismissal for failure to state claim reviewed de novo).

III.

A.

The Supreme Court "repeatedly has upheld retroactive tax legislation against a due process challenge." United States v. Carlton, 512 U.S. 26, 30, 114 S.Ct. 2018, 129 L.Ed.2d 22 (1994) (citing United States v. Hemme, 476 U.S. 558, 106 S.Ct. 2071, 90 L.Ed.2d 538 (1986); United States v. Darusmont, 449 U.S. 292, 101 S.Ct. 549, 66 L.Ed.2d 513 (1981) (per curiam); Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87 (1938); United States v. Hudson, 299 U.S. 498, 57 S.Ct. 309, 81 L.Ed. 370 (1937); Milliken v. United States, 283 U.S. 15, 51 S.Ct. 324, 75 L.Ed. 809 (1931); Cooper v. United States, 280 U.S. 409, 50 S.Ct. 164, 74 L.Ed. 516 (1930)). The Court has noted on numerous occasions that Congress " 'almost without exception' has given general revenue statutes effective dates prior to the dates of actual enactment." Id. at 32-33, 114 S.Ct. 2018; see Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 731, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984) (noting congressional practice); Darusmont, 449 U.S. at 296-97, 101 S.Ct. 549 (same). This " 'customary congressional practice' generally has been 'confined to short and limited periods required by the practicalities of producing national legislation,' " Carlton, 512 U.S. at 33, 114 S.Ct. 2018 (quoting Darusmont, 449 U.S. at 296-97, 101 S.Ct. 549), and the Court is "loathe to reject such a common practice when conducting the limited judicial review accorded economic legislation under the Fifth Amendment's Due Process Clause." Gray, 467 U.S. at 731, 104 S.Ct. 2709.

In Carlton, the Supreme Court left no doubt as to the deferential due process standard applicable to challenges to retroactive tax legislation. "The due process standard to be applied to tax statutes with retroactive effect ... is the same as that generally applicable to retroactive economic legislation." Carlton, 512 U.S. at 30, 114 S.Ct. 2018. That standard is whether retroactive application itself serves a legitimate purpose by rational means:

Provided that the retroactive application of a statute is supported by a legitimate...