United States v. Darusmont

• Decision Date: 12 January 1981
• Docket Number: No. 80-243,80-243
• Parties: UNITED STATES v. DARUSMONT et ux
• Court: U.S. Supreme Court

66 L.Ed.2d 513

101 S.Ct. 549

449 U.S. 292

UNITED STATES

v DARUSMONT et ux.

No. 80-243.

Jan. 12, 1981.

PER CURIAM.

Appellees instituted this federal income tax refund suit, claiming that the 1976 amendments of the minimum tax provisions contained in §§ 56 and 57 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 56 and 57, could not be applied to a transaction that had taken place in 1976, prior to the enactment of the amendments, without violating the Due Process Clause of the Fifth Amendment.

Appellees prevailed in the District Court. The United States has taken an appeal to this Court pursuant to 28 U.S.C. § 1252, which authorizes a direct appeal from the final judgment of a court of the United States holding an Act of Congress unconstitutional in any civil action to which the United States is a party. And a direct appeal may be taken when, as here, a federal statute has been held unconstitutional as applied to a particular circumstance. Fleming v. Rhodes, 331 U.S. 100, 67 S.Ct. 1140, 91 L.Ed. 1368 (1947). See United States v. Christian Echoes National Ministry, Inc., 404 U.S. 561, 563, 92 S.Ct. 663, 30 L.Ed.2d 716 (1972).

I

The appellees, E. M. Darusmont and B. L. Darusmont, are husband and wife. Mrs. Darusmont is a party to this action solely because she and her husband filed a joint federal income tax return for the calendar year 1976. We hereinafter sometimes refer to the appellees in the singular, either as "appellee" or as "taxpayer."

In April 1976, Mr. Darusmont was notified by his employer that he was to be transferred from Houston, Tex., to Bakersfield, Cal. Appellee, accordingly, undertook to dispose of his Houston home. That home was a triplex. One of the three units was occupied by the Darusmonts; taxpayer rented the other two. Appellee retained a real estate firm to list the property and to give him advice as to the most advantageous way to sell it. The firm suggested various alternatives (sale as separate condominium units, or as a whole, and either for cash or on the installment basis). The firm and appellee discussed the income tax consequences of each alternative, including the tax on capital gain, the installment method of reporting, and the possibility of deferring a portion of any capital gain by the timely purchase of a replacement home in California.

After considering the several possible methods of structuring the sale, and after computing the projected income tax consequences of each method, appellee decided on an outright sale. That sale was effected on July 15, 1976, for cash. This resulted in a long-term capital gain to the taxpayer. Because, however, appellee purchased a replacement residence in California, he was able, under § 1034 of the Code, 26 U.S.C. § 1034, to defer recognition of that portion of the gain attributable to the unit of the Texas house that the Darusmonts had occupied. Appellee's recognized gain on the sale of the other two units was $51,332. After taking into account the deduction of 50% of net capital gain then permitted by § 1202 of the Code, 26 U.S.C. § 1202, appellee included the remainder of the gain in his reported taxable income. The Darusmonts timely filed their joint federal income tax return for the calendar year 1976. That return showed a tax of $25,384, which was paid.

The present controversy concerns $2,280, the portion of appellee's 1976 income tax liability attributable to the minimum tax imposed by § 56 of the Code on items of tax preference as defined in § 57. These minimum tax provisions, which impose a tax in addition to the regular income tax, first appeared with the enactment of the Tax Reform Act of 1969, Pub. L. 91-172, § 301, 83 Stat. 580. Originally, the minimum tax equaled 10% of the amount by which the aggregate of enumerated items of tax preference exceeded the sum of a $30,000 exemption plus the taxpayer's regular income tax liability. For an individual, one of the items of tax preference was the deduction under § 1202 for net capital gain. See § 57(a)(9)(A). Thus, appellee's § 1202 deduction for 1976 for 50% of the capital gain recognized on the sale of the two units of the Texas triplex was an item of tax preference. If the statute's original formulation, with its base of $30,000 plus the regular income tax liability, had been retained in the statute for 1976, appellee would not have owed any minimum tax as a result of the sale of the Houston house.

On October 4, 1976, however, the President signed the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520. Section 301 of that Act, 90 Stat. 1549, amended § 56(a) of the Code so as to increase the rate of the minimum tax and to reduce the amount of the exemption to $10,000 or one-half of the taxpayer's regular income tax liability (with certain adjustments), whichever was the greater. Section 301(g)(1), 90 Stat. 1553, with exceptions not pertinent here, then provided that "the amendments made by this section shall apply to items of tax preference for taxable years beginning after December 31, 1975." It is this stated effective date that creates the issue now in controversy for, in a certain sense, the October 4, 1976, amendment of § 56 operated "retroactively" to cover the portion of 1976 prior to that date. A result of the statutory change of October 4 was that appellee was subjected to the now contested minimum tax of $2,280 on the sale of the Texas house the preceding July 15.

A proper claim for refund of the minimum tax so paid was duly filed with the Internal Revenue Service. Upon the denial of that claim, the Darusmonts instituted this refund suit in the United States District Court for the Eastern District of California. Taxpayer argued that the 1976 amendments could not be applied constitutionally to a transaction fully consummated prior to their enactment. He further argued that had he known that the sale of the house would have resulted in liability for the minimum tax, he could have structured the sale so as to avoid the tax. He has conceded, however, that when he was considering the various ways in which he could dispose of the Texas property, he was not aware of the existence of the minimum tax.

The District Court entered judgment in favor of appellee. It held that the application of the 1976 amendments to a transaction consummated in 1976 prior to October 4 subjected appellee "to a new, separate and distinct tax," and was "so arbitrary and oppressive as to be a denial of due process" guaranteed by the Fifth Amendment. App. to Juris. Statement 3a; 80-2 USTC ¶ 9671, p. 85,208, 47 AFTR 2d ¶ 81-366, p. 81-519. We note that the District Court's ruling is in conflict with the later decision of the United States Court of Ap- peals for the Eighth Circuit in Buttke v. Commissioner, 625 F.2d 202 (1980), aff'g 72 T.C. 677 (1979).¹

II

In enacting general revenue statutes, Congress almost without exception has given each such statute an effective date prior to the date of actual enactment. This was true with respect to the income tax provisions of the Tariff Act of Oct. 3, 1913, and the successive Revenue Acts of 1916 through 1938.² It was also true with respect to the Internal Revenue Codes of 1939 and 1954.³ Usually the "retroactive" feature has application only to that portion of the current calendar year preceding the date of enactment, but each of the Revenue Acts of 1918 and 1926 was applicable to an entire calendar year that had expired preceding enactment. This "retroactive" application apparently has been confined to short and limited periods required by the practicalities of producing national legislation. We may safely say that it is a customary congressional practice.

The Court consistently has held that the application of an income tax statute to the entire calendar year in which enactment took place does not per se violate the Due Process Clause of the Fifth Amendment. See Stockdale v. Insurance Companies, 20 Wall. 323, 331, 332, 22 L.Ed. 348 (1874); id., at 341 (dissenting opinion); Brushaber v. Union Pacific R. Co., 240 U.S. 1, 20, 365 S.Ct. 236, 242, 60 L.Ed. 493 (1916); Cooper v. United States, 280 U.S. 409, 411, 50 S.Ct. 164, 74 L.Ed. 516 (1930); Milliken v. United States, 283 U.S. 15, 21, 51 S.Ct. 324, 326, 75 L.Ed. 809 (1931); Reinecke v. Smith, 289 U.S. 172, 175, 53 S.Ct. 570, 572, 77 L.Ed. 1109 (1933); United States v. Hudson, 299 U.S. 498, 500-501, 57 S.Ct. 309, 310, 81 L.Ed. 370 (1937); Welch v. Henry, 305 U.S. 134, 146, 148-150, 59 S.Ct. 121, 125, 126-127, 83 L.Ed. 87 (1938); Fernandez v. Wiener, 326 U.S. 340, 355, 66 S.Ct. 178, 186, 90 L.Ed. 116 (1945). See also Ballard, Retroactive Federal Taxation, 48 Harv.L.Rev. 592 (1935); Hochman, The Supreme Court and the Constitutionality of Retroactive Legislation, 73 Harv.L.Rev. 692, 706-711 (1960).

Justice Miller succinctly stated the principle a century ago in writing for the Court in Stockdale, supra:

"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." 20 Wall., at 331.

Justice Van Devanter in writing for the Court in Hudson, supra, similarly approved the congressional practice:

"As respects income tax statutes it long has been the practice of Congress to make them retroactive for relatively short periods so as to include profits from transactions consummated while the statute was in process of enactment, or within so much of the calendar year as preceded the enactment; and repeated decisions of this Court have recognized this practice and sustained it as consistent with the due process clause of the Constitution." 299 U.S., at 500, 57 S.Ct., at 309.

The Court has stated the underlying rationale for allowing this "retroactivity":

"Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by...