Demos v. Commissioner

EMANUEL G. DEMOS AND HELEN K. DEMOS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Demos v. Commissioner

Docket No. 26453-89

United States Tax Court

T.C. Memo 1994-347; 1994 Tax Ct. Memo LEXIS 357; 68 T.C.M. (CCH) 209;

July 26, 1994, Filed

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Decision will be entered for respondent.

Emanuel G. Demos and Helen K. Demos, pro se.

For respondent: Carol Bingham McClure.

TANNENWALD

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TANNENWALD

MEMORANDUM OPINION

TANNENWALD, Judge: Respondent determined a deficiency of $ 34,668 in petitioners' 1981 Federal income tax and that the increased rate of interest under section 6621(c) applied to the deficiency. ^{Due Process Clause of the U.S. Constitution and/or is an unconstitutional bill of attainder.}

Petitioners resided in New York, New York, at the time they filed their petition.

The foundation of petitioners' due process claim is that the increased rate of interest is applied to a tax liability based on a transaction that occurred in 1981, some 3 years prior to the enactment of section 6621(c) *359 clear that the 20-percent additional interest specified in that section applied only to interest accruing after December 31, 1984. See Solowiejczyk v. Commissioner, 85 T.C. 552">85 T.C. 552, 555 (1985), affd. without published opinion 795 F.2d 1005">795 F.2d 1005 (2d Cir. 1986). Respondent therefore could not, and indeed makes clear on brief that she does not, claim such interest for any period prior to that date. Thus, the issue of retroactivity involved herein stems solely from the fact that the transaction arose prior to the enactment of section 6621(c).

Very recently, in United States v. Carlton, 512 U.S.    , 114 S.Ct. 2018 (1994), the Supreme Court had occasion, in upholding the constitutionality under the Due Process Clause of a retroactive disallowance of an estate tax deduction, to articulate a reaffirmation of the principles which have historically been applied in such situations:

This Court repeatedly has upheld retroactive tax legislation against a due process challenge. Some of its decisions have stated that the validity of a retroactive tax provision under the Due Process Clause depends upon whether "retroactive application is so harsh and oppressive as to transgress the constitutional limitation." The "harsh and oppressive" formulation, however, "does not differ from the prohibition against arbitrary and irrational legislation" that applies generally to enactments in the sphere of economic policy. The due process standard to be applied to tax statutes with retroactive effect, therefore, is the same as that generally applicable to retroactive economic legislation:

"Provided that the retroactive application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches * * *

"To be sure, * * * retroactive legislation does have to meet a burden not faced by legislation that has only future effects. '* * * The retroactive aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former.' * * * But that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.

[Id. at 2021-2022; citations omitted.]

These principles have been applied by this Court and the Court of Appeals for the Second Circuit to reject specifically petitioners' claim that the retroactive feature of section 6621(c) violates the Due Process Clause of the U.S. Constitution. DeMartino v. Commissioner, 862 F.2d 400">862 F.2d 400, 408-409 (2d Cir. 1988), affg. 88 T.C. 583">88 T.C. 583 (1987); Solowiejczyk v. Commissioner, supra; ^{Kennedy v. Commissioner, 876 F.2d 1251">876 F.2d 1251, 1256 (6th Cir. 1989), affg. Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306 (1987). The increased rate of interest was also applied retroactively, without reference to the constitutional issue, in Hunt v. Commissioner, 938 F.2d 466">938 F.2d 466, 473-474 (4th Cir. 1991), affg. T.C. Memo. 1989-660; Estate of Carberry v. Commissioner, 933 F.2d 1124">933 F.2d 1124, 1129-1130 (2d Cir. 1991), affg. 95 T.C. 65">95 T.C. 65 (1990); Sundstrand Corp. v. Commissioner, 96 T.C. 226">96 T.C. 226, 407 (1991).League v. Texas, 184 U.S. 156">184 U.S. 156 (1902) (delinquent real estate taxes); Licari v. Commissioner, 946 F.2d 690">946 F.2d 690, 693-695 (9th Cir. 1991), affg. T.C. Memo. 1990-4 (25-percent addition to tax under sec. 6661); Estate of Papson v. Commissioner, 81 T.C. 105">81 T.C. 105 (1983) (installment payment of estate tax under sec. 6166).}

In light of the foregoing authorities overwhelmingly supporting the constitutionality of a retroactive change in interest rate and the clearly understandable and reasonable legislative purpose in enacting section 6621(c), i.e., to facilitate the handling of situations involving tax shelter transactions, ^{Communist Party of the United States v. Subversive Activities Control Bd., 367 U.S. 1">367 U.S. 1, 86-87 (1961). The constitutional impact of a statute imposing a penalty turns upon whether it is criminal or civil in nature. United States v. Ward, 448 U.S. 242">448 U.S. 242, 248-249 (1980).The Court of Appeals for the Second Circuit, in Matter of Extradition of McMullen, 989 F.2d 603">989 F.2d 603, 607 (2d Cir. 1993), has articulated the modern definition of "punishment" as having been established in the following terms by the Supreme Court in Nixon v. Administrator of General Services, 433 U.S. 425">433 U.S. 425, 475 (1977):}

the Court applied three tests to determine whether legislative punishment of the type contemplated by the Bill of Attainder Clauses was imposed: the "historical" test, involving "punishment traditionally judged to be prohibited by the Bill of Attainder Clause," including death, imprisonment, banishment, punitive confiscation of property by the sovereign and, in more recent times, laws "barring designated individuals or groups from participation in specified employments or vocations," the "functional" test, which "analyz[es] whether the law under challenge, viewed in terms of the type and severity of burdens imposed, reasonably can be said to further nonpunitive legislative purposes," and the "motivational" test, which "inquire[s] whether the legislative record evinces a congressional intent to punish," [Citations omitted.]

See also Selective Serv. Sys. v. Minnesota Public Int. Res. Gp., 468 U.S. 841">468 U.S. 841, 851-852 (1984).

In Miller v. Commissioner, T.C. Memo. 1994-249, we exhaustively analyzed the thrust of section 6621(c) and concluded that the increased rate of interest provided for therein does not rise to the level of punishment but constitutes a civil sanction having a remedial purpose. Cf. Helvering v. Mitchell, 303 U.S. 391">303 U.S. 391 (1938) (50-percent addition to tax for fraud civil and not penal); McNichols v. Commissioner, 13 F.3d 432">13 F.3d 432 (1st Cir. 1993), affg. T.C. Memo. 1993-61 (same); Ianniello v. Commissioner, 98 T.C. 165">98 T.C. 165, 177-180 (1992) (same); see also United States v. Ward, supra.^{*366 whether section 6621(c) is directed at a sufficiently circumscribed class, a further requirement for finding that legislation constitutes a bill of attainder. See Nixon v. Administrator of General Services, 433 U.S. at 468-471.}

In view of the foregoing,

Decision will be entered for respondent.

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Footnotes

• 1. All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩

• 2. Petitioners have also conceded the inclusion of $ 78 in interest income.↩

• 3. Sec. 6621(c) was originally enacted as sec. 6621(d) by the Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 144, 98 Stat. 494, 682. It was repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, 2399. The repeal applies to tax returns due after Dec. 31, 1989 (sec. 7721(d) of the Act), and so does not affect the instant case.↩

• 4. An appeal of our decision herein will be to the Court of Appeals for the Second Circuit. See Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 756-758 (1970), affd. on other issues 445 F.2d 985">445 F.2d 985↩ (10th Cir. 1971).

• 5. See also Feldman v. Commissioner, T.C. Memo. 1990-532; Weiss v. Commissioner, T.C. Memo. 1987-505↩.

• 6. For a detailed discussion of the legislative history of sec. 6621(c), see Miller v. Commissioner, T.C. Memo. 1994-249↩.

• 7. Despite its revenue-raising nature, a tax can be found to be a punishment for double jeopardy purposes, and presumptively also for purposes of determining a bill of attainder. See Dept. of Revenue v. Kurth Ranch, 511 U.S.    , 114 S.Ct. 1937 (1994); cf. Austin v. United States, 509 U.S.    , 113 S.Ct. 2801 (1993), dealing with excessive fines under the Eighth Amendment to the U.S. Constitution↩.