{"database": "openregs", "table": "crs_reports", "rows": [["IF13234", "Retroactive Federal Tax Legislation and Due Process", "2026-05-26T04:00:00Z", "2026-05-27T16:23:12Z", "Active", "Resources", "Milan N. Ball", null, "Federal tax statutes routinely have effective dates that precede their dates of enactment. The Supreme Court has stated that this \u201ccustomary congressional practice\u201d generally \u201chas been confined to short and limited periods required by the practicalities of producing national legislation.\u201d Some taxpayers have challenged the retroactive application of federal tax legislation based on the Fifth Amendment\u2019s Due Process Clause. \nCourts generally rely on the Supreme Court\u2019s seminal decision from 1994, United States v. Carlton, to determine whether the retroactive application of tax legislation violates the Fifth Amendment\u2019s Due Process Clause. In Carlton, the Court upheld a tax statute with a retroactive period slightly more than a year. Applying a two-part test, the Court held that the retroactive tax statute was consistent with the Due Process Clause because it (1) was \u201crationally related to a legitimate legislative purpose\u201d and (2) had \u201conly a modest period of retroactivity.\u201d While courts continue to apply the rational basis standard in the first part of the test, it is unclear whether the second part of the test, the \u201cmodest period\u201d limitation, is a dispositive factor.\nThis In Focus provides an overview of due process, summarizes Carlton, discusses due process arguments based on notice and reliance and the length of a retroactive period, and concludes with considerations for Congress. \nDue Process\nThe Fifth Amendment\u2019s Due Process Clause provides that \u201cno person\u201d shall \u201cbe deprived of life, liberty, or property, without due process of law.\u201d The Supreme Court has long recognized that a statute that claims to tax can be \u201cso arbitrary . . . that it was not the exertion of taxation but a confiscation of property.\u201d The Court has established that the due process standard that applies to retroactive tax legislation does not focus \u201cexclusively on\u201d notice and reliance\u2014whether a taxpayer had adequate notice of a tax statute\u2019s retroactive application and whether a taxpayer detrimentally relied on federal tax laws prior to amendment. The same deferential rational basis review that is \u201cgenerally applicable to retroactive economic legislation\u201d applies to retroactive tax legislation. Accordingly, the Court \u201crepeatedly has upheld\u201d federal retroactive tax legislation against due process claims.\nUnited States v. Carlton\nIn October 1986, Congress amended an estate tax provision, Internal Revenue Code (IRC) Section 2057, to allow estates to deduct half the proceeds from securities sales made by an executor to an Employee Stock Ownership Plan (ESOP). Under the 1986 statute, \u201cany estate\u201d could reduce, or potentially eliminate, its estate tax liability by buying securities and \u201cimmediately reselling [them] to an ESOP\u201d before the estate tax return due date. By January 1987, the Internal Revenue Service (IRS) issued a notice announcing that, pending legislation, the ESOP deduction would only be available to \u201cestates of decedents who owned the securities in question immediately before death.\u201d In February 1987, Members of Congress introduced bills restricting the ESOP deduction to that effect. Then, in December 1987, an amendment to the ESOP deduction was enacted to limit the deduction to securities sold to an ESOP that were \u201cdirectly owned\u201d by the decedent \u201cimmediately before death.\u201d The 1987 amendment was retroactive to the date the ESOP deduction was originally enacted in October 1986. \nIn Carlton, an executor of an estate sought to take advantage of the new ESOP deduction. He bought 1.5 million shares of MCI Communications Corporation stock on December 10, 1986, for $11,206,000 and sold the stock two days later to MCI\u2019s ESOP for $10,575,000. The estate then claimed a $5,287,000 deduction on its estate tax return, which reduced its estate tax by $2,501,161. The IRS disallowed the estate\u2019s deduction based on the 1987 amendment. The estate paid the tax and filed an action challenging the retroactive application of the 1987 amendment on due process grounds. \nWhen the case reached the Supreme Court, the Court held that the retroactive application of the 1987 amendment to the executor\u2019s 1986 transaction was \u201cconsistent with the Due Process Clause\u201d because it was \u201crationally related to a legitimate legislative purpose.\u201d There were two main reasons why the Court upheld the 1987 amendment. First, the Court determined that \u201cCongress\u2019 purpose in enacting the amendment was neither illegitimate nor arbitrary.\u201d The Court concluded that Congress was \u201ccorrect[ing] what it reasonably viewed as a mistake in the original 1986 provision that would have created a significant and unanticipated revenue loss.\u201d In the Court\u2019s view, there was \u201cno plausible contention\u201d that Congress\u2019s motive was \u201cimproper.\u201d Congress\u2019s choice to \u201ctarget[] estate representatives\u201d that engaged in \u201cpurely tax-motivated\u201d transactions was not \u201cunreasonable.\u201d Second, shortly after Congress learned of the tax savings strategy, there was a legislative fix with \u201conly a modest period of retroactivity.\u201d The Court highlighted that the 1987 amendment\u2019s retroactive period was \u201cslightly\u201d more than one year and an amendment to the ESOP deduction was proposed by Congress a few months after the deduction\u2019s enactment. \nNotice and Reliance Arguments\nIn Carlton, the Supreme Court rejected a stricter due process standard for retroactive tax legislation that focuses \u201cexclusively on . . . notice and reliance.\u201d Persons with due process claims have argued that retroactive tax legislation should be invalidated if (1) they do not have \u201cactual or constructive notice that [a] tax statute would be retroactively amended\u201d or (2) they \u201creasonably relied\u201d on tax laws pre-amendment to their \u201cdetriment.\u201d The Court has explained that these notice and detrimental reliance arguments are not dispositive in many tax contexts. \nThe Court has concluded that persons challenging retroactive tax legislation had received notice when legislative proposals debated by Congress included a retroactive effective date. In Milliken v. United States, a 1931 case concerning a due process challenge to a federal gift tax increase, the Supreme Court stated that a taxpayer \u201cshould be regarded as taking his chances of any increase in the tax burden which might result from carrying out the established policy of taxation.\u201d The Court in Carlton stated that \u201c[t]ax legislation is not a promise, and a taxpayer has no vested right in the Internal Revenue Code.\u201d In Fifth Amendment due process challenges, the Court has also looked to its reasoning in Welch v. Henry, a 1938 case addressing a Fourteenth Amendment due process challenge to state tax legislation. The Welch Court declared, \nTaxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe due process. \nMultiple Supreme Court cases suggest that taxpayers challenging a \u201cwholly new tax\u201d that is applied retroactively may have stronger due process claims. In the late 1920s, in Blodgett v. Holden and Untermyer v. Anderson, the Court held that the retroactive application of the first gift tax was invalid under the Due Process Clause. In Untermyer, the Court concluded that \u201c[t]he taxpayer may justly demand to know when and how he becomes liable for taxes\u2014he cannot foresee.\u201d The Court has since limited the reach of Untermyer and Blodgett because they were decided around the early twentieth century during the era in which the Court applied a heightened level of review to economic legislation. \nLength of Retroactive Period Arguments\nRetroactive tax statutes typically address a person\u2019s current tax period or a tax period immediately preceding the current period. Taxpayers with due process claims have long contended that the length of a retroactive period can invalidate a tax statute. The Supreme Court has \u201cconsistently\u201d held that an income tax statute that is retroactive to a date earlier in the current calendar year \u201cdoes not per se violate the Due Process Clause of the Fifth Amendment.\u201d In Carlton, the Court applied a two-part test to conclude that a tax statute with a retroactive period slightly over a year satisfied the Due Process Clause. The Court upheld the retroactive tax statute in Carlton due to, in part, the statute\u2019s \u201cmodest period of retroactivity.\u201d It is unclear if or when the length of a retroactive period alone can trigger a due process violation.\nIn 2022, in Moore v. United States, taxpayers challenged the Mandatory Repatriation Tax (MRT) on the grounds that it violated the Constitution\u2019s Apportionment Clause and the Fifth Amendment\u2019s Due Process Clause in the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit). In 2017, P.L. 115-97 (commonly referred to as the Tax Cuts and Jobs Act [TCJA]) added the \u201cone-time, backward-looking\u201d tax. The MRT required U.S. shareholders of \u201cspecified foreign corporations\u201d to pay a tax on their pro-rata share of the corporation\u2019s post-1986 untaxed foreign earnings as if the earnings were repatriated to the United States. Taxpayers paid the MRT when they filed their 2017 tax returns or elected to pay the tax in installments over eight years.\nAfter \u201cassum[ing]\u201d the MRT was retroactive, the Ninth Circuit held that the MRT did not violate either the Apportionment Clause or the Due Process Clause. Applying the rational basis standard, the court upheld the MRT\u2019s 30-year repatriation period on due process grounds because it fulfilled a \u201clegitimate purpose by rational means.\u201d The court observed that the TCJA made \u201csignificant change[s]\u201d to the IRC\u2019s international tax provisions. Based on those changes, U.S. shareholders of specified foreign corporations \u201cwould have been able to avoid taxation indefinitely on [their pro-rata share of] pre-2018 earnings.\u201d The court concluded that the MRT served the legitimate purpose of preventing U.S. shareholders \u201cfrom obtaining a windfall by never having to pay taxes on their offshore earnings.\u201d The court decided that this legitimate purpose was achieved by rational means because the MRT \u201caccelerat[ed] the effective repatriation date . . . to a [single repatriation] date following passage of the TCJA.\u201d \nIn reaching its holding, the Ninth Circuit reasoned that the length of the retroactive period was not determinative. It explained that the taxpayers could not \u201ccite a bright-line rule regarding how long ago a retroactive tax can apply because courts deferentially review tax legislation\u2019s purpose on a case-by-case basis.\u201d In the Ninth Circuit\u2019s view, courts have regarded the period of retroactivity as \u201cone, non-dispositive consideration.\u201d The Ninth Circuit cited the 2015 decision of the U.S. Court of Appeals for the Federal Circuit in GPX International Tire Corporation v. United States, as an example. In GPX, the Federal Circuit considered the length of retroactivity as one of \u201cfive considerations\u201d in determining whether retroactive countervailing duties violated the Due Process Clause. \nConsiderations for Congress\nOn appeal, in Moore, the Supreme Court upheld the Ninth Circuit\u2019s ruling that the MRT did not violate the Apportionment Clause, but declined to address the Due Process Clause ruling because the taxpayers had not sought review on that issue. Absent further instruction from the Court, Fifth Amendment Due Process Clause challenges to federal retroactive tax legislation may have viability, specifically in the context of new taxes and tax legislation with extended periods of retroactivity. When drafting retroactive federal tax legislation, Congress might consider ensuring that the legislation is rationally related to a legitimate legislative purpose and reviewing whether a court has upheld analogous tax legislation with a similar retroactive period.", "https://www.congress.gov/crs_external_products/IF/PDF/IF13234/IF13234.1.pdf", "https://www.congress.gov/crs_external_products/IF/HTML/IF13234.html"]], "columns": ["id", "title", "publish_date", "update_date", "status", "content_type", "authors", "topics", "summary", "pdf_url", "html_url"], "primary_keys": ["id"], "primary_key_values": ["IF13234"], "units": {}, "query_ms": 0.391624984331429, "source": "Federal Register API & Regulations.gov API", "source_url": "https://www.federalregister.gov/developers/api/v1", "license": "Public Domain (U.S. Government data)", "license_url": "https://www.regulations.gov/faq"}