Retroactivity of New Estate Tax Law is Not a Sure Thing

Members of Congress have suggested that a new estate tax law now under debate could be applied retroactively to January 1.  Although the Federal Courts have generally agreed with retroactive application of such laws, retroactivity is not a sure thing.

There are legal and practical barriers to a retroactive application, and neither should be underestimated.

The most likely basis for a constitutional challenge to retroactivity is the due process clause of the Fifth Amendment of the Constitution.  Over the years, federal courts have recognized that taxpayers’ substantive economic rights may be violated if retroactivity is not a “rational means” of furthering “a legitimate legislative purpose.”

The Supreme Court’s most recent consideration of retroactivity was in 1987.  In approving the retroactive application of an amendment to the estate tax, the Court found that the amendment had a reasonable and legitimate purpose and was retroactive only for a modest period of time, which was slightly more than a year.

The courts have denied the retroactive application of the gift and estate tax law in other cases, including in 1927, when the gift tax was enacted.  The Supreme Court invalidated the retroactive application of the tax, citing an absence of notice to the taxpayer.

Given all of the discussion in the past few months, it would certainly be awkward to argue a lack of notice on reinstating the estate tax.  On the other hand, the leaders of the Congressional tax-writing committees were unable to agree before the end of 2009 on a letter of intent, a technique often used to reassure the public about legislative plans.

Most people who watch this sort of thing think Congress will retroactively reinstate the estate tax in 2010, at the 2009 rates and exemptions.  Those same folks agree that someone will challenge almost any period of retroactivity, calling the new tax law into question while litigation and appeals are ongoing, probably all the way to the Supreme Court. 

I believe lawmakers are well aware of the uncertainty they will create with a retroactive application of a new estate tax law. They also understand that, if they rely on a retroactive date and do not agree quickly on the estate tax, they will invite a constitutional fight.

John Pogue can be reached at jpogue@hhmlaw.com or at (330) 392-1541.