Prologue – Taxation, Fairness And “The Man On The Street”

Something I think is sometimes lost in tax policy debates: public perceptions do not equate fairness to diminishing inequalities. Not all tax inequality decreasing measures will be perceived as fair.

Tax policy is as much about political economy, as efficiency and equity.

— Rita de la Feria (@delaFeriaR) September 24, 2023

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

Moore and Retroactivity – The Readers Digest Version

"The Little Red Transition Tax Book" – Everything you need to know about the 965bmandatory repatriation tax but didn't know to ask. A horrific abuse of #Americansabroad in a @citizenshiptax and #FATCA world! https://t.co/j7v1Asreek

— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023

This history of the Moore case is described by Professors Brooks and Gamage as follows:

The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29

The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:

The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find[] expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.

First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional limitation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”

How “retroactivity” was considered by the District Court and the 9th Circuit

The District court specifically found that the transition tax was a retroactive tax, but ruled that the retroactivity did NOT violate the 5th Amendment. The 9th Circuit “assumed” (without considering) the retroactivity of the tax and like the District Court ruled that the retroactivity did NOT violate the 5th Amendment.

The Supreme Court granted the cert petition based only on the question of whether the 16th amendment requires income to be “realized”. The issue in Moore is whether 30 years of income realized by a CFC, never distributed to the US shareholder, and never previously taxable to the U.S. shareholder (under Subpart F) in that 30 year period, can be deemed to be “income” and taxed by the United States in 2017.

Can a current attribution to a shareholder, of income earned by a corporation 30 years ago, meet the constitutional requirement of “income” under the 16th Amendment?

A ruling that 30 years of retroactive income could not qualify as 16th Amendment income might allow the court to:

1. Provide relief to the Moores (and other individual shareholders of CFCs); and

2. Avoid ruling on the broader and more general issue of realization.

Arguably a finding of “retroactivity” could mean that (whether realized or not), income earned by the CFC in the past 30 years cannot be considered to be current “income” under the 16th Amendment.

The purpose of this post is to focus on the issue of retroactivity. I do not believe that “retroactivity” was properly analyzed by either the District Court or 9th Circuit.

This post is divided into the following parts:

Part A – Introduction – Thinking about taxation of income
Part B – What is it about the “transition tax” that raises the question of retroactivity?
Part C – Retroactivity and the “Carlton” standard
Part D – Discussion of retroactivity: District Court Decision Moore
Part E – Discussion of retroactivity – 9th Circuit – Moore
Part F – Concluding thoughts …
Appendixes – Excerpts from relevant cases and articles
Appendix A – Excerpt from Hank Adler interview discussing the retroactive nature of the transition tax
Appendix B – Moore District Court
Appendix C – Moore the 9th Circuit
Appendix D – Quarty
Appendix E – Justice Blackmun’s majority decision in Carlton
Appendix F – Justice O’Connor concurrence in Carlton
Appendix G – Justice Scalia and Justice Thomas in Carlton

Part A – Introduction – Thinking about taxation of income

The Moore transition tax appeal is generating a great deal of interest. Tax Notes recently released a podcast with Professor Hank Adler of Chapman University which featured a discussion of the transition tax. A direct link to the podcast (which I highly recommend) is here.

Professor Adler has been writing about the transition tax since as early as 2018. He submitted a brief in support of the Moore Cert petition to the Supreme Court. He submitted a second amicus brief in support of the Moores after the cert petition was granted. It is therefore not surprising that he is a wealth of knowledge and commentary about the tax.

What is the legal significance of the retroactivity of the transition tax? It is clear that the transition tax was retroactive as a matter of fact. The controversy is over whether the “retroactivity” was sufficient to invalidate the tax as a matter of law.

The question becomes:

“Under what circumstances does retroactivity of tax legislation as a matter of fact, become sufficiently egregious to violate 5th Amendment principles of due process?”

Although not considered in the cert petition, retroactivity was considered by both the District Court and the 9th Circuit. It can be reasonably argued that neither the District Court nor the 9th Circuit correctly analyzed the applicability of the Carlton decision to the facts in Moore. There is no overlap in the facts in Carlton and the facts in Moore. Carlton was about a short period of retroactivity to correct a mistake in legislative drafting to an existing law.

Moore is about:

1. The creation of a new tax in 2017

2. Applying the new tax retroactively for the period of 1986 to 2017

3. Applying the new tax on income that was received by a foreign corporation and NOT received by the taxpayer; and

4. Requiring the taxpayer to pay a new tax, based on retroactively created income, that was never actually received/realized by the taxpayer.

An analysis of the cases and legal principles suggest that neither Carlton nor any other case is analagous to Moore. Hence, “retroactivity” is appropriate for consideration by the Supreme Court as part of the Moore appeal. (For a particularly cogent analysis of how the taxation of past earnings distinguishes the Moore case from other circumstances which attribute the income of a corporation to a shareholder see the amicus brief filed by Mark E. Berg.)

Part B – What is it about the “transition tax” that raises the question of retroactivity?

The MRT has two important features:

1. An exceptionally long period of retroactivity: More than 30 years of past active business income, earned by a foreign corporation, never subject to any form of U.S. taxation, was deemed to be current “gross income” received by certain U.S. shareholders. The transition tax was a present tax on past earnings that were never previously subject to taxation or attribution to U.S. shareholders. Thirty years is a very very long look back period! (To add insult to injury the Moores did NOT realize/receive any of the income. Why is this not: “A Retroactive Tax On Fake Income?”)

2. The transition tax was a brand new kind of tax:

Various writers have advanced the view that because the MRT was not a new tax because it was added to the existing Subpart F section of the Internal Revenue Code.

There are at least two reasons supporting the view the the transition AKA MRT tax is a new tax.

(i) Exclusion of active business income from Subpart F income: The Subpart F rules enacted in 1962 specifically did NOT include the attribution of the active business income of foreign corporations to U.S. shareholders. To repeat: as a matter of law the Subpart F regime did NOT apply to active business income earned by CFCs. In addition, the US has no jurisdiction to directly tax income earned by a foreign corporation. Therefore, the 2017 TJCA inclusion of active business income earned by a CFC is a completely new form of income (whether included in Subpart F or not).

(ii) Subpart F income limited to “current earnings and profits”: Interestingly IRC sec. 952(c)(1)(A) includes a limiting provision to Subpart F income. It states that Subpart F income is limited to current earnings and profits. Restricting Subpart F to “current earnings and profits” supports the argument that the MRT is an entirely new tax. Accumulated earnings and profits were expressly excluded from Subpart F.

The 965 mandate requiring that the Subpart F income of a “deferred foreign income corporation” be increased by the “accumulated post-1986 deferred foreign income”, is NOT restricted (as per Subpart F) to “current earnings and profits”. Because the definition of Subpart F income has not been changed, it’s clear that 965 income cannot be Subpart income. IRC 965 created a new form of income based on a consolidation of earnings over a 30 year period. Therefore, the transition AKA MRT is a new kind of tax based on retroactively created income!

The fact that the MRT appears in the Subpart F section of the Internal Revenue Code is irrelevant and does NOT change the fact that the MRT was a new kind of tax!

(The discussion about whether the transition tax is a “new” kind of tax has (I believe) been influenced by the idea that undistributed profits of CFCs are “deferred” income. What the commentators describe as “deferred” income is income that (1) the U.S. has no right to tax directly and (2) could not be attributed under Subpart F to a U.S. shareholder indirectly. Furthermore, the undistributed profits of CFCs were never required to be distributed. Therefore, the untaxed profits of CFCs were not (in any legal sense) deferred. They were never guaranteed to be distributed. Only if distributed were they guaranteed to be income. Therefore, suggestions made by many, that the retained earnings of a CFC were “deferred” and just waiting to be taxed by the USA are simply incorrect.)

These two features are central to an analysis of the role of retroactivity. In addition, there is no instance (I could find) where a court has been invited to consider the retroactivity of tax legislation covering a period of 30 years. In other words, there really are no contextually relevant court decisions analagous to the facts in Moore.

Part C – Retroactivity and the “Carlton” standard

The starting point in any discussion about retroactive tax legislation is the 1994 decision in United States v. Carlton, 512 U.S. 26 (1994). The Carlton decision is composed of three separate opinions (the majority per Justice Blackmun, a concurring opinion per Justice O’Connor and a concurring (sort of) opinion written by Justice Scalia joined by Justice Thomas). Notably only Justice Thomas still sits on on the Supreme Court.
Carlton – Justice Blackmun’s majority decision

It’s reasonable to infer that Justice Blackmun (writing for the majority) established a presumption of the constitutionality of retroactive tax legislation. Paragraphs 8, 9 and 10 of the decision includes:

II

8

This Court repeatedly has upheld retroactive tax legislation against a due process challenge. See, e.g., 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); 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). 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.” Welch v. Henry, 305 U.S., at 147, 59 S.Ct., at 126, quoted in United States v. Hemme, 476 U.S., at 568-569, 106 S.Ct., at 2077-2078. 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. Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 733, 104 S.Ct. 2709, 2719-2720, 81 L.Ed.2d 601 (1984). 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:

9
“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. . . .

10
“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 729-730, 104 S.Ct., at 2718, quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16-17, 96 S.Ct. 2882, 2893, 49 L.Ed.2d 752 (1976).

What’s interesting is why the court ruled that the presumption of constitutionality was not rebutted. For this we refer to paragraphs 13 and 14 …

13
We conclude that the 1987 amendment’s retroactive application meets the requirements of due process.

First, Congress’ purpose in enacting the amendment was neither illegitimate nor arbitrary. Congress acted to correct what it reasonably viewed as a mistake in the original 1986 provision that would have created a significant and unanticipated revenue loss. There is no plausible contention that Congress acted with an improper motive, as by targeting estate representatives such as Carlton after deliberately inducing them to engage in ESOP transactions. Congress, of course, might have chosen to make up the unanticipated revenue loss through general prospective taxation, but that choice would have burdened equally “innocent” taxpayers. Instead, it decided to prevent the loss by denying the deduction to those who had made purely tax-motivated stock transfers. We cannot say that its decision was unreasonable.

14
Second, Congress acted promptly and established only a modest period of retroactivity. This Court noted in United States v. Darusmont, 449 U.S., at 296, 101 S.Ct., at 551-552, that Congress “almost without exception” has given general revenue statutes effective dates prior to the dates of actual enactment. This “customary congressional practice” generally has been “confined to short and limited periods required by the practicalities of producing national legislation.” Id., at 296-297, 101 S.Ct., at 552. In Welch v. Henry, 305 U.S. 134, 59 S.Ct. 121, 83 L.Ed. 87 (1938), the Court upheld a Wisconsin income tax adopted in 1935 on dividends received in 1933. The Court stated that the “recent transactions” to which a tax law may be retroactively applied “must be taken to include the receipt of income during the year of the legislative session preceding that of its enactment.” Id., at 150, 59 S.Ct., at 127. Here, the actual retroactive effect of the 1987 amendment extended for a period only slightly greater than one year. Moreover, the amendment was proposed by the IRS in January 1987 and by Congress in February 1987, within a few months of § 2057’s original enactment.

In conclusion:

1. Justice Blackmun appears to be saying that the length of retroactivity is a factor in determining whether retroactive tax legislation is constitutional. Thirty years of retroactive taxation is NOT a “modest period of retroactivity”. It is therefore reasonable to infer that the retroactive nature of the 965 transition tax is NOT entitled to the presumption of constitutionality articulated in Carlton. (There is no factual comparison between allowing the government to correct an error in tax legislation by going back one year (Carlton) and allowing the government to impose up to 30 years of retroactive taxation on income earned by a Foreign corporation that was NOT subject to U.S. taxation AND then deeming that income to be received by a US shareholder (Moore)!)

2. Significantly in paragraph 11 Justice Blackmun confirms he regards the issue to be the amendment of an existing tax and NOT a new tax. He writes: “There is little doubt that the 1987 amendment to § 2057 was adopted as a curative measure.” Justice Blackmun’s decision is in the context of an amendment to an “existing law” and NOT the creation of a new law!

Carlton – Justice O’Connor’s concurring decision

Of particular interest and significance is paragraph 31 where she clearly states that “it is arbitrary to tax transactions that were not subject to taxation at the time the taxpayer entered into them“. Prior to the TCJA, active BUSINESS earned by a CFC was NOT attributed to the U.S. shareholder!

While Justice Blackmun’s majority decision does NOT consider “retroactivity” in the context of new laws, Justice O’Connor’s concurring opinion strongly states that retroactive taxation should NOT be applied to new laws! This is confirmed in paragraph 31 of her decision …

31

But “the Court has never intimated that Congress possesses unlimited power to ‘readjust rights and burdens . . . and upset otherwise settled expectations.’ ” Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211, 229, 106 S.Ct. 1018, 1028, 89 L.Ed.2d 166 (1986) (concurring opinion) (brackets omitted), quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16, 96 S.Ct. 2882, 2893, 49 L.Ed.2d 752 (1976). The governmental interest in revising the tax laws must at some point give way to the taxpayer’s interest in finality and repose. For example, a “wholly new tax” cannot be imposed retroactively, United States v. Hemme, 476 U.S. 558, 568, 106 S.Ct. 2071, 2077-2078, 90 L.Ed.2d 538 (1986), even though such a tax would surely serve to raise money. Because the tax consequences of commercial transactions are a relevant, and sometimes dispositive, consideration in a taxpayer’s decisions regarding the use of his capital, it is arbitrary to tax transactions that were not subject to taxation at the time the taxpayer entered into them. See Welch v. Henry, supra, 305 U.S., at 147, 59 S.Ct., at 125-126.

In conclusion:

Justice O’Connor’s concurrence speaks directly to the issues of new taxes and retroactivity. Therefore, her decision has direct application to the Moore case.

Carlton – Justice Scalia’s decision (joined by Justice Thomas)

In paragraph 36 Justice Scalia refers to the difference between “new taxes” and “changes in tax rates”. He appears to find the retroactive nature of the tax to be offensive.

36

The Court seeks to distinguish our precedents invalidating retroactive taxes by pointing out that they involved the imposition of new taxes rather than a change in tax rates. See ante, at ____. But eliminating the specifically promised reward for costly action after the action has been taken, and refusing to reimburse the cost, is even more harsh and oppressive, it seems to me, than merely imposing a new tax on past actions. The Court also attempts to soften the impact of the amendment by noting that it involved only “a modest period of retroactivity.” Ante, at ____. But in the case of a tax-incentive provision, as opposed to a tax on a continuous activity (like the earning of income), the critical event is the taxpayer’s reliance on the incentive, and the key timing issue is whether the change occurs after the reliance; that it occurs immediately after rather than long after renders it no less harsh.

Justice Scalia is referring to much older Supreme Court decisions (described in paragraph 13) in: “Nichols v. Coolidge, 274 U.S. 531, 47 S.Ct. 710, 71 L.Ed. 1184 (1927), Blodgett v. Holden, 275 U.S. 142, 48 S.Ct. 105, 72 L.Ed. 206 (1927), and Untermyer v. Anderson, 276 U.S. 440, 48 S.Ct. 353, 72 L.Ed. 645 (1928).”

In paragraph 37, Justice Scalia warns that Justice Blackmun’s majority opinion appears to guarantee the validity of ALL retroactive tax legislation. Could this really have been intended? (Interestingly Professor Adler suggests that the Moore case might be an opportunity for the court to “rein in” the scope of Carlton.) Because, Justice Scalia would restrict “due process” analysis to process and not substance he is not prepared to rule that the legislation is unconstitutionally retroactive.

37

The reasoning the Court applies to uphold the statute in this case guarantees that all retroactive tax laws will henceforth be valid. To pass constitutional muster the retroactive aspects of the statute need only be “rationally related to a legitimate legislative purpose.” Ante, at ____. Revenue raising is certainly a legitimate legislative purpose, see U.S. Const., Art. I, § 8, cl. 1, and any law that retroactively adds a tax, removes a deduction, or increases a rate rationally furthers that goal. I welcome this recognition that the Due Process Clause does not prevent retroactive taxes, since I believe that the Due Process Clause guarantees no substantive rights, but only (as it says) process, see TXO Production Corp. v. Alliance Resources Corp., 509 U.S. —-, —-, 113 S.Ct. 2711, 2715, 125 L.Ed.2d 366 (1993) (SCALIA, J., concurring in judgment).

Justice Scalia is correct insofar as Carlton strengthens the presumption of the constitutionality of tax legislation that is NOT “new” tax legislation.

In conclusion:

Justice Thomas is the only Justice from Carlton who is still on the court. Justice Thomas and Justice Scalia, although opposed to the “retroactive” tax legislation in Carlton, restricted their “due process” analysis to process. Nevertheless, (see paragraph 36) both Justices found the retroactive nature of the tax to be offensive.

Part D – Discussion of retroactivity: District Court Decision Moore
The decision includes:

Even if a tax is retroactive, it does not violate the Due Process Clause if it (1) is supported by a legitimate legislative purpose and (2) is furthered by rational means. Carlton, 512 U.S. at 30-31. The Carlton standard represents the Court’s rearticulation of an earlier standard, providing that “the validity of a retroactive tax provision depends upon whether ‘retroactive application is so harsh and oppressive as to transgress the constitutional limitation.'” Id. (quoting Welch v. Henry, 305 U.S. 134, 147 (1938)). Absent the MRT, the TCJA’s changes would effectively eliminate U.S. tax on a CFC’s undistributed earnings and profits originating before 2018. See TCJA §§ 14101-14223. The MRT ensures that these amounts, at least to the extent they are apportionable to a U.S. shareholder, are subject to U.S. tax. See H.R. Rep. No. 115-466, at 595, 598-99, 606-07, 613-14 (2017); Ordower, supra at 1377. This is a legitimate legislative purpose.

Plaintiffs assert that the MRT is a “wholly new” tax and, as such, the Carlton standard should not apply. (Dkt. Nos. 29 at 25-28; 38 at 15-16.) The Court disagrees. The MRT is a component of the TCJA, which modified subpart F. Therefore, Carlton provides the relevant standard.

https://casetext.com/case/moore-v-united-states-2078

The justification offered for finding the 965 MRT was NOT a new tax appears to be:

1. Subpart F is not new taxation (having been enacted in 1962).

2. The MRT was inserted into Subpart F.
Therefore, because the MRT was inserted into Subpart F, and because Subpart F is not new tax legislation, the MRT is not new tax legislation.

This is a ridiculous justification. Based on this reasoning, there could never be a new tax if it was added to an existing part or subpart of the Internal Revenue Code! This would allow for Congress to create a new tax, add it to IRC 61 (which includes examples of “Gross Income”) and claim that because it was added to IRC 61 that it was not a new tax. Once again, we are left with the feeling that if the court had found the MRT was a new tax the outcome might have been different.

Part E – Discussion of retroactivity – 9th Circuit – Moore

The 9th Circuit decision includes:

The Moores cannot cite a bright-line rule regarding how long ago a retroactive tax can apply because courts deferentially review tax legislation’s purpose on a case-by-case basis. See Quarty, 170 F.3d at 965. Moreover, courts that have considered the retroactive nature of tax legislation often only view the period of retroactivity as one, non-dispositive consideration. See, e.g., GPX Int’l Tire Corp. v. United States, 780 F.3d 1136, 1142 (Fed. Cir. 2015) (discussing five “considerations,” of which retroactivity was only one).

Nor is the MRT a “wholly new tax,” a label applied to unconstitutionally retroactive taxes by early cases “under an approach that has long since been discarded.” Quarty, 170 F.3d at 966 (quoting Carlton, 512 U.S. at 34). We have very narrowly interpreted what qualifies as a “wholly new tax,” determining that a “a new tax is imposed only when the taxpayer has ‘no reason to suppose that any transactions of the sort will be taxed at all.’” See Quarty, 170 F.3d at 967 (quoting United States v. Darusmont, 449 U.S. 292, 298 (1981)). The MRT is not a “wholly new tax” because prior to the MRT, U.S. shareholders were taxed on CFC earnings when they were distributed. The Moores had reason to expect that such transactions would eventually be taxed. See id. This is especially true because as 11% shareholders of KisanKraft, the Moores were already subject to certain pre-MRT taxes that applied to shareholders who owned at least 10% of a CFC regardless of whether earnings were distributed. See 26 U.S.C. § 951(a)(1) (2007).

https://cdn.ca9.uscourts.gov/datastore/opinions/2022/06/07/20-36122.pdf

This reasoning is almost comical.

In holding that the MRT is not a “new tax” the court’s reasoning includes the following language:

1.

“prior to the MRT, U.S. shareholders were taxed on CFC earnings when they were distributed. The Moores had reason to expect that such transactions would eventually be taxed.”

JR Commentary: Although a true statement, this is irrelevant. The issue is NOT whether distributions would be taxed. Of course they would be taxed because actual distributions would clearly constitute income. The issue here is whether the Moore’s would expect that 30 years of active business income earned by a CFC, which had NEVER been included in the Subpart F regime, would be (1) retroactively added to the Subpart F income; AND (2) subjected to present day taxation.

2.

“This is especially true because as 11% shareholders of KisanKraft, the Moores were already subject to certain pre-MRT taxes that applied to shareholders who owned at least 10% of a CFC regardless of whether earnings were distributed. See 26 U.S.C. § 951(a)(1) (2007)”

JR Commentary: Since the advent of the Subpart F rules in 1962, the active business income of CFCs had been excluded from Subpart F. At most this might mean that the Moore’s had a concept that certain kinds of income (passive investment income, etc.) received by the CFC might be attributed to the shareholder under the Subpart F regime.

That said:

1. Active business income had always been excluded; and

2. There was absolutely no reason to imagine that a change in the law might include the attribution of 30 years of active business income to the shareholder. Nobody could have imagined this!

In short, the statements from the 9th circuit are fanciful and ridiculous.

It is reasonable to conclude that the MRT was a new tax.

Part F – Concluding thoughts …

It is reasonable to conclude that both the District Court and 9th Circuit incorrectly analyzed the issue of retroactivity. Therefore, the Supreme Court should consider retroactivity as part of its analysis.

Were the court to conclude that the MRT (at least as applied to individuals) violated the due process clause because of retroactivity, the court could:

Strike down the MRT (at least as applied to individuals) and avoid ruling on whether the 16th Amendment requirement of “income” requires the “realization” of income!

Interested in Moore about the § 965 transition tax?

Read “The Little Red Transition Tax Book“.

Appendixes

Appendix A – Excerpt from Hank Adler interview discussing the retroactive nature of the transition tax

Andrew Velarde: You mentioned 1986; I’m glad you brought that up. That the transition tax reaches back that far to the accumulated earnings since 1986. I have seen you have previously argued that the transition tax violated due process as it is improperly retroactive going back that far.

Is this a distinguishing feature the Court could rely on to limit any holding to just this tax? And if it is distinguishing, how do you differentiate it from the Supreme Court’s decision in United States v. Carlton, a 1994 case on the state tax deduction change, which held that retroactive changes do not violate due process?

Hank Adler: It’s such a good question. Let’s talk about Carlton for a second and what it said. And Carlton’s a local guy here. I met him, I don’t know him very well.

Carlton was a case where Jerry Carlton, the well-respected lawyer in Orange County, found a huge loophole in the tax law. And he was doing an estate tax return. He just drove a truck right through it. And what happened was Congress figured out there was a loophole, and they undid that loophole back, I think, less than 12 months, but let’s say 16 months. I can’t remember exactly. And so government, Treasury argues that we should be able to retroactively fix a bad law.
Washington, D.C. scenics

So now we have the Carlton case, and Jerry loses it at every level. And so it goes to the Supreme Court, and the Supreme Court says, “We have to have…” My words. “We have to have the right to fix things that are a mistake.”

And now we get two concurrent opinions, not dissenting opinions, but concurring decisions. One from Sandra Day O’Connor, [in] which she specifically says, “Look, we’re only going back a year. We’re not looking at more than a year.” And then we have Scalia, which was joined by Judge Thomas, and I think he’s got to be so excited about this opportunity. They say, “We read Carlton, which you guys wrote, and we agree with the ultimate decision. We read that to say just if you want to raise money, you should be able to go back as far as you want for retroactivity.” So I think, and there’s a big problem with this I’ll get to in a second. I think this is an opportunity for the Court to rein in Carlton.

Now what’s the problem with that is that wasn’t briefed by anybody. When Andrew Grossman, who’s done an incredibly good job on this, Baker Hofstetler, when he was making his decision on how to go for cert, he decided to isolate on a single issue. It’s hard to fault him because here we are at the Supreme Court and the world, everybody that I talked to as we were waiting for [if] we were going to get certiorari or not said, basically, “We have no chance.” So I wouldn’t fault Andrew for a second. He’s brilliant. He’s a good guy. But it hasn’t been briefed.

So now you have to look, maybe it’s Sebelius where Judge Roberts brought all of, not all of it, but a very important issue up at the last minute that the healthcare thing was really a tax. That was never briefed, either. So Court has that opportunity if they choose to. I’m writing another brief and my brief will say something to the effect of, “If for some reason the Court gets to unrealized income is OK, now it must deal with Carlton.”

Will the Court care what Hank Adler thinks? I have no idea. I doubt it, but I’m going to write it. I’m going to spend a lot of time writing it up because I think it’s another issue that the Court really should deal with.

Andrew Velarde: That’s interesting. Is there anything else that sets the transition tax apart from other taxes being discussed that could possibly be swept up in this controversy?

Hank Adler: Yeah, there’s one other issue, and I’m just going to call it Adler’s notion. Because nobody’s read it, including Adler. But the tax rate is just unique. As you know, we have two tax rates. We have an 8 percent rate to the extent that essentially the taxpayer had liquid assets. And then, if there’s more unrecognized income than the amount of liquid assets, everything else is taxed at 15.5 percent.

So at least that I can find, and I’m still looking, there has never been a tax in the United States, federal rate tax, where there was anything but a rate scale, a rate chart, or something like that. So here we have a situation where the tax is based upon liquidity of a foreign entity.

So you think about it, let’s assume that Andrew and Hank both have CFC interest in identical companies. And it’s the end of 2017, and Andrew makes a huge profitable sale, and before the end of the year, he puts that money into machinery equipment. Adler, exact same circumstances, I hold onto the cash. Do you know I pay a 15.5 percent tax? You pay an 8 percent tax. We have exactly the same amount of income.

So I keep fiddling with that notion that that shouldn’t be. And I don’t think for a second the Court will take it up, but I may write a few paragraphs.

Andrew Velarde: Well, that’s interesting. Hank, I want to thank you for taking the time and chatting with me today. This has been a terrific conversation.

Hank Adler: Oh, I’ve enjoyed it. This is super.

https://www.forbes.com/sites/taxnotes/2023/07/25/moore-money-more-tax-problems-analyzing-moore-v-united-states/?sh=437d6d79781d

Appendix B – Moore District Court

C. The MRT Does Not Violate Due Process

As a tax on income, the MRT must not violate Fifth Amendment Due Process protections. Nichols v. Coolidge, 274 U.S. 531, 542 (1927); see U.S. CONST. amend. V (“No person shall . . . be deprived of life, liberty, or property, without due process of law.”). At issue is whether the MRT is retroactive and, if so, whether retroactivity violates Due Process. U.S. v. Carlton, 512 U.S. 26, 30-31 (1994).

1. The MRT is a Retroactive Change

A law is retroactive if it “changes the legal consequences of acts completed before its effective date.” Landgraf v. USI Film Prod., 511 U.S. 244, 269 n.23 (quoting Miller v. Florida, 482 U.S. 423, 430 (1987)). The Government strains for arguments to explain how, based on this standard, the MRT is not retroactive. None have merit.

The Government first argues the MRT is not retroactive because it is imposed on current subpart F income. (Dkt. No. 26 at 20-26; Dkt. No. 33 at 21.) The argument borders on the absurd. The MRT redetermines the amount of current subpart F income by including a CFC’s undistributed earnings and profits “beginning after December 31, 1986” through either “November 2, 2017” or “December 31, 2017.” 26 U.S.C. § 965(d)(3); see also 26 U.S.C. §§ 951, 952, 956 (2016) (excluding undistributed earnings and profits from subpart F income). On its face, this represents a “different or more oppressive legal effect to conduct undertaken before enactment of the statute.” United States v. Hemme, 476 U.S. 558, 568 (1986). This argument is meritless.

The Government next argues that the MRT regime simply accelerates the tax already owing on undistributed CFC earnings and profits. (See Dkt. No. 33 at 19.) But indefinite deferrals of a foreign corporation’s earnings and profits often result in de facto permanent deferrals from U.S. tax—the very scenario the TCJA was established, in part, to combat. See H.R. Rep. No. 115-466, at 595-672, 675 (2017); Jerald David August, Tax Cuts and Jobs Act of 2017 Introduces Major Reforms to the International Taxation of U.S. Corporations, PRAC. TAX LAW., Winter 2018, at 43, 49. The MRT does more than simply accelerate tax already owing. It ensures that a ratable share of a CFC’s earnings and profits will be subject to U.S. tax. This argument is also meritless.

The Government’s final argument is based on Dougherty, 60 T.C. 917. (Dkt. No. 26 at 23.) The Government argues that the Tax Court previously held in Dougherty that current subpart F inclusions of prior year earnings and profits were not retroactive and the same should follow here. (Dkt. No. 26 at 23.) But the facts in Dougherty are distinct from those here. In Dougherty, the Tax Court held that a constructive dividend from a foreign corporation to a U.S. shareholder occurring after enactment of the statute, thereby triggering current inclusion of a foreign corporation’s prior year’s earnings and profits, did not make the statute retroactive. 60 T.C. at 928-30; see 26 U.S.C. §§ 951(a)(1)(B), 956 (1962). Imposition of the MRT is not dependent on actions occurring after adoption of the statute. Quite the opposite, it levies tax based upon actions taken before adoption of the statute—a CFC’s accumulation of earnings and profits. See generally 26 U.S.C. §§ 951, 965. This argument is also meritless.

By its very nature, the MRT is a retroactive tax.

2. The MRT Does Not Violate Due Process

Even if a tax is retroactive, it does not violate the Due Process Clause if it (1) is supported by a legitimate legislative purpose and (2) is furthered by rational means. Carlton, 512 U.S. at 30-31. The Carlton standard represents the Court’s rearticulation of an earlier standard, providing that “the validity of a retroactive tax provision depends upon whether ‘retroactive application is so harsh and oppressive as to transgress the constitutional limitation.'” Id. (quoting Welch v. Henry, 305 U.S. 134, 147 (1938)). Absent the MRT, the TCJA’s changes would effectively eliminate U.S. tax on a CFC’s undistributed earnings and profits originating before 2018. See TCJA §§ 14101-14223. The MRT ensures that these amounts, at least to the extent they are apportionable to a U.S. shareholder, are subject to U.S. tax. See H.R. Rep. No. 115-466, at 595, 598-99, 606-07, 613-14 (2017); Ordower, supra at 1377. This is a legitimate legislative purpose.

Plaintiffs assert that the MRT is a “wholly new” tax and, as such, the Carlton standard should not apply. (Dkt. Nos. 29 at 25-28; 38 at 15-16.) The Court disagrees. The MRT is a component of the TCJA, which modified subpart F. Therefore, Carlton provides the relevant standard.

Plaintiffs argue that the MRT’s retroactive period, thirty years, is too long, i.e., an irrational means to affect a legitimate legislative purpose. (See generally Dkt. Nos. 29 at 28-32; 38 at 16-19.) In Carlton, the effect of the estate tax statute at issue “extended for a period only slightly greater than one year.” 512 U.S. at 33. While Justice O’Connor indicated that a retroactive period “longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions,” this was not the view of the majority. Carlton, 512 U.S. at 38 (O’Connor, J., concurring). The majority provided no bright-line rule. See generally id. at 32-34. Nor is there any binding precedent establishing such a rule. Instead, the Court must fall back on “‘the nature of the tax and the circumstances in which it is laid.'” Purvis v. United States, 501 F.2d 311, 313 (9th Cir. 1974) (quoting Welch, 305 U.S. at 147).

Circumstances here favor finding the imposition of the MRT is a rational means of affecting a legitimate legislative purpose. The TCJA is a major shift in how U.S. taxpayers doing business overseas are taxed. Prior to the TCJA, taxpayers paid no U.S. tax on a CFC’s earnings and profits until those amounts were repatriated, thereby incentivizing U.S. taxpayers to offshore earnings and profits through the use of foreign subsidiaries. See 26 U.S.C. §§ 951, 952, 956 (2016); see generally Susan C. Morse, A Corporate Offshore Profits Transition Tax, 91 N.C. L. REV. 549, 550 (2013) (describing the incentive produced by the pre-TCJA scheme to retain foreign earnings and profits offshore). The TCJA attempts to cure this incentive by transitioning to a territorial tax model, which includes subjecting a U.S. shareholder’s ratable portion of a CFC’s earnings and profits to taxation regardless of whether the CFC distributes those funds. See TCJA §§ 14101-14223. However, absent a transition tax like the MRT, any earnings and profits undistributed upon the effective date of the TCJA would escape the imposition of U.S. taxation. Ordower, supra at 1377-80. As for the period of prior earnings subject to the transition tax, it was reasonable for Congress to select all dates after 1986 as the starting point, as this marks the last major overhaul of the Tax Code prior to the TCJA. See Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085.

Moreover, the duration of retroactivity is just one of the considerations relevant to whether there is a rational basis for the tax. See GPX Int’l Tire Corp. v. U.S., 780 F.3d 1136, 1142 (Fed. Cir. 2015). Remaining considerations are whether the MRT is a “wholly new tax,” whether it resolves uncertainty in the law, whether taxpayers received notice of the potential change in the law, and whether the provision is “remedial in nature.” Id. As previously discussed, the MRT is not a “wholly new tax.” And it is “remedial.” It is a change in subpart F to incentivize U.S. taxpayers to repatriate foreign earnings. The MRT also resolves uncertainty in the law. Under the prior regime, it was unclear when and if a CFC’s earnings attributable to U.S. shareholders would be subject to U.S. tax. The TCJA and MRT remove that uncertainty. Ratable portions of prior undistributed earnings and profits are now subject to U.S. taxation and future amounts are subject to U.S. taxation as earned. 26 U.S.C. § 965. While it is true that Plaintiffs received little notice that the taxation of KisanKraft, Ltd.’s undistributed earnings and profits would change, this consideration is “not dispositive of the due process analysis.” GPX Int’l Tire Corp., 780 F.3d at 1143. In Carlton, the tax “did not violate due process even through the challenger ‘specifically and detrimentally relied’ on the prior state of the law and . . . did not have prior notice of the change in the law.” Id. (quoting Carlton, 512 U.S. at 33-34).

Therefore, the MRT does not violate due process and, as a tax on income, it is constitutionally valid.

https://casetext.com/case/moore-v-united-states-2078

Appendix C – Moore the 9th Circuit

II. The MRT does not violate the Fifth Amendment’s Due Process Clause Retroactive legislation may violate the Fifth Amendment’s Due Process Clause. See Landgraf v. USI Film Prods., 511 U.S. 244, 266 (1994). “[T]he presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic.” Id. at 265. We assume, without deciding, that the MRT is retroactive. While there is a presumption against retroactive laws, retroactive tax legislation is often constitutional. See, e.g., United States v. Carlton, 512 U.S. 26, 30 (1994) (“[The Supreme Court] repeatedly has upheld retroactive tax legislation against a due process challenge.”); United States v. Hemme, 476 U.S. 558, 568 (1986) (“[The Supreme Court] has . . . made clear that some retrospective effect is not necessarily fatal to a revenue law.”). To analyze a due process challenge to retroactive tax legislation, we use the “deferential” standard of “whether [the] retroactive application itself serves a legitimate purpose by rational means.” Quarty v. United States, 170 F.3d 961, 965 (9th Cir. 1999) (citing Carlton, 512 U.S. at 30–31). 16 M OORE V . U NITED STATES The MRT passes muster under Carlton. The TCJA was a significant change in the U.S. tax code, shifting from a worldwide toward a territorial tax system, at least in part because of companies offshoring roughly $2.6 trillion in profits. The MRT eliminated other taxes on CFCs’ undistributed earnings before 2018. So, if the MRT did not tax the undistributed earnings, shareholders would have been able to avoid taxation indefinitely on pre-2018 earnings. The MRT, then, serves a legitimate purpose: it prevents CFC shareholders who had not yet received distributions from obtaining a windfall by never having to pay taxes on their offshore earnings that have not yet been distributed.

The MRT accomplishes this legitimate purpose by rational means. The MRT accelerates the effective repatriation date of undistributed CFC earnings to a date following passage of the TCJA. Having a single date of repatriation is a rational administrative solution. The 30- year repatriation period also coincided with additional IRS reporting requirements, simplifying the calculation of taxes by both taxpayers and the IRS.2

The Moores’ counterarguments are unpersuasive.

Although the Moores may have expected their tax to remain deferred, their “reliance alone is insufficient to establish a constitutional violation. Tax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.” Carlton, 512 U.S. at 33. Further, while the MRT’s 2 The MRT also provided a lower tax rate than many shareholders would likely have paid otherwise: the MRT taxes CFC earnings at either 8% or 15.5%. And, taxpayers may also elect to pay the MRT in installments over an eight-year period. See Section 965 Transition Tax, The Internal Revenue Service, https://www.irs.gov/businesses/section-965-transition-tax.

The Moores cannot cite a bright-line rule regarding how long ago a retroactive tax can apply because courts deferentially review tax legislation’s purpose on a case-by-case basis. See Quarty, 170 F.3d at 965. Moreover, courts that have considered the retroactive nature of tax legislation often only view the period of retroactivity as one, non-dispositive consideration. See, e.g., GPX Int’l Tire Corp. v. United States, 780 F.3d 1136, 1142 (Fed. Cir. 2015) (discussing five “considerations,” of which retroactivity was only one).

Nor is the MRT a “wholly new tax,” a label applied to unconstitutionally retroactive taxes by early cases “under an approach that has long since been discarded.” Quarty, 170 F.3d at 966 (quoting Carlton, 512 U.S. at 34). We have very narrowly interpreted what qualifies as a “wholly new tax,” determining that a “a new tax is imposed only when the taxpayer has ‘no reason to suppose that any transactions of the sort will be taxed at all.’” See Quarty, 170 F.3d at 967 (quoting United States v. Darusmont, 449 U.S. 292, 298 (1981)). The MRT is not a “wholly new tax” because prior to the MRT, U.S. shareholders were taxed on CFC earnings when they were distributed. The Moores had reason to expect that such transactions would eventually be taxed. See id. This is especially true because as 11% shareholders of KisanKraft, the Moores were already subject to certain pre- MRT taxes that applied to shareholders who owned at least 10% of a CFC regardless of whether earnings were distributed. See 26 U.S.C. § 951(a)(1) (2007).

https://cdn.ca9.uscourts.gov/datastore/opinions/2022/06/07/20-36122.pdf

Appendix D – Quarty

Before we consider whether the retroactive application of the tax rates in Section 12308 is rationally related to a legitimate legislative purpose, we first address Taxpayers’ argument that this standard stated in Carlton does not govern the question of whether Section 13208’s retroactivity comports with due process because its tax rate change is tantamount to the enactment of a “wholly new tax.” This argument is an attempt to gain succor from whatever vitality remains in Blodgett v. Holden, 275 U.S. 142 (1927), and Untermyer v. Anderson, 276 U.S. 440 (1928). Both of these decisions considered the application of the first gift tax to gifts made before the statute was enacted, and both held that such retroactive application of the tax violated due process. See id., at 445-46; Blodgett, 275 U.S. at 147. In Carlton, the Supreme Court commented on these decisions (and on Nichols v. Coolidge, 274 U.S. 531 (1927)):

“Those cases were decided during an era characterized by exacting review of economic legislation under an approach that `has long since been discarded.’ Ferguson v. Skrupa, 372 U.S. 726, 730 (1963). To the extent that their authority survives, they do not control here. Blodgett and Untermyer, which involved the Nation’s first gift tax, essentially have been limited to situations involving `the creation of a wholly new tax,’ and their `authority is of limited value in assessing the constitutionality of subsequent amendments that bring about certain changes in the operation of the tax laws.’ United States v. Hemme, 476 U.S. [558, 568 (1986)].” Carlton, 512 U.S. at 34.

In this area, a new tax is imposed only when the taxpayer has “`no reason to suppose that any transactions of the sort will be taxed at all.'” Darusmont, 449 U.S. at 298, 300 (quoting Cohan v. Commissioner, 39 F.2d 540, 545 (2d Cir. 1930) (Learned Hand, J.)). Thus, a change in the tax rate, such as the change that Section 13208 effects, is an amendment to an existing tax, not the imposition of a wholly new tax. See id.; Estate of Ekins v. Commissioner, 797 F.2d 481, 484 (7th Cir. 1986) (change in tax rate distinguished from wholly new tax). We therefore reject Taxpayers’ suggestion that the change in tax rates in Section 13208 is tantamount to the imposition of a wholly new tax, and turn to the rationality review of this Section’s retroactivity.

https://casetext.com/case/quarty-v-us

Appendix E – Justice Blackmun’s majority decision in Carlton

This Court repeatedly has upheld retroactive tax legislation against a due process challenge. See, e. g., United States v. Hemme, 476 U. S. 558 (1986); United States v. Darusmont, 449 U. S. 292 (1981); Welch v. Henry, 305 U. S. 134 (1938); United States v. Hudson, 299 U. S. 498 (1937); Milliken v. United States, 283 U. S. 15 (1931); Cooper v. United States, 280 U. S. 409 (1930). 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.” Welch v. Henry, 305 U. S., at 147, quoted in United States v. Hemme, 476 U. S., at 568-569. 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. Pension Benefit Guaranty Corporation v. R. A. Gray & Co., 467 U. S. 717, 733 (1984). 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 729-730, quoting Usery v. Turner Elkhorn Mining Co., 428 U. S. 1, 16-17 (1976).

There is little doubt that the 1987 amendment to § 2057 was adopted as a curative measure. As enacted in October 1986, § 2057 contained no requirement that the decedent have owned the stock in question to qualify for the ESOP proceeds deduction. As a result, any estate could claim the deduction simply by buying stock in the market and immediately reselling it to an ESOP, thereby obtaining a potentially dramatic reduction in (or even elimination of) the estate tax obligation.

It seems clear that Congress did not contemplate such broad applicability of the deduction when it originally adopted § 2057. That provision was intended to create an “incentive for stockholders to sell their companies to their employees who helped them build the company rather than liquidate, sell to outsiders or have the corporation redeem their shares on behalf of existing shareholders.” Joint Committee on Taxation, Tax Reform Proposals: Tax Treatment of Employee Stock Ownership Plans (ESOPs), 99th Cong., 2d Sess., 37 (Joint Comm. Print 1985); see also 132 Congo Rec. 14507 (1986) (statement of Sen. Long) (§ 2057 “allow[s] … an executor to reduce taxes on an estate by one-half by selling the decedent’s company to an ESOP”). When Congress initially enacted § 2057, it estimated a revenue loss from the deduction of approximately $300 million over a 5-year period. See 133 Congo Rec. 4145 (1987) (statement of Rep. Rostenkowski); id., at 4293 (statement of Sen. Bentsen). It became evident shortly after passage of the 1986 Act, however, that the expected revenue loss under § 2057 could be as much as $7 billion-over 20 times greater than anticipated-because the deduction was not limited to situations in which the decedent owned the securities immediately before death. Ibid. In introducing the amendment in February 1987, Senator Bentsen observed: “Congress did not intend for estates to be able to claim the deduction by virtue of purchasing stock in the market and simply reselling the stock to an ESOP … and Congress certainly did not anticipate a $7 billion revenue loss.” Id., at 4294. Without the amendment, Senator Bentsen stated, “taxpayers could qualify for the deductions by engaging in essentially sham transactions.” Ibid.

We conclude that the 1987 amendment’s retroactive application meets the requirements of due process. First, Congress’ purpose in enacting the amendment was neither illegitimate nor arbitrary. Congress acted to correct what it reasonably viewed as a mistake in the original 1986 provision that would have created a significant and unanticipated revenue loss. There is no plausible contention that Congress acted with an improper motive, as by targeting estate representatives such as Carlton after deliberately inducing them to engage in ESOP transactions. Congress, of course, might have chosen to make up the unanticipated revenue loss through general prospective taxation, but that choice would have burdened equally “innocent” taxpayers. Instead, it decided to prevent the loss by denying the deduction to those who had made purely tax-motivated stock transfers. We cannot say that its decision was unreasonable.

Second, Congress acted promptly and established only a modest period of retroactivity. This Court noted in United States v. Darusmont, 449 U. S., at 296, that Congress “almost without exception” has given general revenue statutes effective dates prior to the dates of actual enactment. This “customary congressional practice” generally has been “confined to short and limited periods required by the practicalities of producing national legislation.” Id., at 296-297. In Welch v. Henry, 305 U. S. 134 (1938), the Court upheld a Wisconsin income tax adopted in 1935 on dividends received in 1933. The Court stated that the” ‘recent transactions’ ” to which a tax law may be retroactively applied “must be taken to include the receipt of income during the year of the legislative session preceding that of its enactment.” Id., at 150. Here, the actual retroactive effect of the 1987 amendment extended for a period only slightly greater than one year. Moreover, the amendment was proposed by the IRS in January 1987 and by Congress in February 1987, within a few months of § 2057’s original enactment.

Appendix F – Justice O’Connor concurrence in Carlton

But “the Court has never intimated that Congress possesses unlimited power to ‘readjust rights and burdens … and upset otherwise settled expectations.”’ Connolly v. Pension Benefit Guaranty Corporation, 475 U. S. 211, 229 (1986) (O’CONNOR, J., concurring) (brackets omitted), quoting Usery v. Turner Elkhorn Mining Co., 428 U. S. 1, 16 (1976). The governmental interest in revising the tax laws must at some point give way to the taxpayer’s interest in finality and repose. For example, a “wholly new tax” cannot be imposed retroactively, United States v. Hemme, 476 U. S. 558, 568 (1986), even though such a tax would surely serve to raise money. Because the tax consequences of commercial transactions are a relevant, and sometimes dispositive, consideration in a taxpayer’s decisions regarding the use of his capital, it is arbitrary to tax transactions that were not subject to taxation at the time the taxpayer entered into them. See Welch v. Henry, supra, at 147.

Although there is also an element of arbitrariness in retroactively changing the rate of tax to which the transaction is subject, or the availability of a deduction for engaging in that transaction, our cases have recognized that Congress must be able to make such adjustments in an attempt to equalize actual revenue and projected budgetary requirements. In every case in which we have upheld a retroactive federal tax statute against due process challenge, however, the law applied retroactively for only a relatively short period prior to enactment. See United States v. Hemme, supra, at 562 (1 month); United States v. Darusmont, supra, at 294-295 (10 months); United States v. Hudson, 299 U. S. 498, 501 (1937) (1 month). In Welch v. Henry, supra, the tax was enacted in 1935 to reach transactions completed in 1933; but we emphasized that the state legislature met only biannually and it made the revision “at the first opportunity after the tax year in which the income was received.” 305 U. S., at 151. A period of retroactivity longer than the year preceding the legislative session in which the law was enacted would raise, in my view, serious constitutional questions. But in keeping with Congress’ practice of limiting the retroactive effect of revenue measures (a practice that may reflect Congress’ sensitivity to the due process problems that would be raised by overreaching), the December 1987 amendment to § 2057 was made retroactive only to October 1986. Given our precedents and the limited period of retroactivity, I concur in the judgment of the Court that applying the amended statute to respondent Carlton did not violate due process.

Appendix G – Justice Scalia and Justice Thomas in Carlton

The reasoning the Court applies to uphold the statute in this case guarantees that all retroactive tax laws will henceforth be valid. To pass constitutional muster the retroactive aspects of the statute need only be “rationally related to a legitimate legislative purpose.” Ante, at 35. Revenue raising is certainly a legitimate legislative purpose, see U. S. Const., Art. I, § 8, cl. 1, and any law that retroactively adds a tax, removes a deduction, or increases a rate rationally furthers that goal. I welcome this recognition that the Due Process Clause does not prevent retroactive taxes, since I believe that the Due Process Clause guarantees no substantive rights, but only (as it says) process, see TXO Production Corp. v. Alliance Resources Corp., 509 U. S. 443, 470-471 (1993) (SCALIA, J., concurring in judgment).

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