Constitutional analysis of retroactive federal estate tax reenactment

Tax Law Memo

Re: The constitutionality of the reenactment and retroactive implementation of the estate tax to January 1, 2010.

The highly controversial estate tax imposed on property in excess of three-and-a-half million dollars transferred after an individuals death was repealed effective January 1, 2010, due to a failure of Congress to act in regards to the automatic tables and adjustments for the tax set in the current law.

The estate tax is automatically due to be reinstated effective January 1, 2011 with a higher percentage and a limit of only one million dollars of property transfer after death before the tax takes effect.

It is likely, however, that Congress will address this issue through further legislation prior to January 1, 2011, and there is a great deal of speculation that a newly created and restructured estate tax will be implemented retroactively to January 1, 2010, effectively closing the gap in the estate tax.

This memo examines the constitutionality of this retroactive application of estate tax law in anticipation of what many analysts conclude is a highly likely move by the next Congress. There is some disagreement amongst tax and constitutional scholars in regards to this issue, but a clear answer emerges from an examination of essentially straightforward documents that make up the tax codes, the relevant articles of the United States Constitution, and case law that has direct bearing on the constitutionality of retroactive taxes.

Article I, section 10 of the United States Constitution prohibits any state from enacting any "ex post facto law," and this has been interpreted by some tax and constitutional scholars as prohibitive to retroactive taxes.

There are several problems with this interpretation, however, not the least of which is the direct and explicit application of this constitutional provision to state governments. An application of the same restrictions imposed on the states to the federal government is not an unheard-of result of Constitutional interpretation, it is true, but there are other significant interpretive precedents that also have a bearing on the issue.

In 1798, the Supreme Court determined that the "ex post facto law" clause of Article I, section 10 applied only to criminal matters, preventing retroactive punishment for an act that had been legal when performed but refraining from restraint in civil matters.

The case had nothing to do with taxes but rather with changes in a state probate law, but the outcome was still the decision that ex post facto laws affecting solely civil matters meet constitutional muster under Article I section 10. Subsequent rulings have reaffirmed this position of the Court and made it clear that retroactive taxation would be considered constitutionally permissible despite other objections.

Specifically, in United States v Carlton (1994) the Court determined that such retroactive tax laws do not necessarily violate the Fifth Amendment right to due process so long as there is legitimate process involved in its enactment, according to a concurring opinion written by Justice Scalia, with the majority opinion (of the unanimous vote upholding the retroactive tax in this case) creating an even broader guideline of being "rationally related to a legitimate legislative purpose."

This essentially renders and retroactive taxation, which will necessarily result from the due process of legislative consideration and action for the legitimate purpose of creating revenue for the government, within the bounds of constitutional law under the current and long-standing interpretation of the relevant clauses.

In conclusion, the passage of an estate tax retroactive to January 1, 2010 will likely not meet a constitutional challenge given the degree and breadth of the precedents set in this matter -- it is unlikely that the Supreme Court will hear a case brought on similar grounds. Other constitutional objections to retroactive taxation may arise, however, and may provide grounds for a renewed interest of the Court on the matter, making Court composition a much greater factor in determining law than might be desired.