United States v. Carlton

512 U.S. 26 (1994)

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United States v. Carlton

United States Supreme Court
512 U.S. 26 (1994)

Facts

In October 1986, a federal tax law was enacted. Under this law, if an estate sold employer securities to an employee stock-ownership plan, the estate could claim an estate-tax deduction for half the sale proceeds. The law was designed to encourage employee stock-ownership plans and expected to result in a $300 million revenue loss for the federal government (defendant). Jerry Carlton (plaintiff) was the executor of Willametta Day’s estate. On behalf of the estate, Carlton bought employer securities worth $11.2 million in December 1986 and sold them to that company’s employee stock-ownership plan two days later for $10.6 million. Although this sale resulted in a $600,000 loss, under the new law, the estate could deduct half of the sale price, $5.3 million. This deduction saved the estate well over $600,000 in estate taxes, resulting in a large net gain. However, the next month, the federal government realized that the law contained a drafting error. As the law was written, transactions like the one made by Carlton were allowed and would cost the federal government approximately $7 billion instead of the anticipated $300 million. In February 1987, an amendment was introduced to limit the deduction to its originally intended target: stocks that a decedent owned at the time of death. This amendment was ultimately enacted in December 1987 but applied retroactively to all transactions since October 1986. Accordingly, Day’s estate was denied its $5.3 million deduction. Carlton petitioned for the deduction to be applied, arguing that the amendment violated the Due Process Clause of the Fifth Amendment to the United States Constitution because its retroactive nature meant that taxpayers had no notice of the new rule before acting. The district court ruled that the amendment’s retroactive application was constitutional. The appellate court found that the retroactive application was unduly harsh and oppressive and, therefore, that the amendment was unconstitutional. The United States Supreme Court agreed to review the issue.

Rule of Law

Issue

Holding and Reasoning (Blackmun, J.)

Concurrence (Scalia, J.)

Concurrence (O’Connor, J.)

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