Sutherland v. Commissioner

T.C. Memo. 2001-8

UNITED STATES TAX COURT

PENNY J. SUTHERLAND, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15174-99. Filed January 19, 2001.

Daniel C. Ertel, for petitioner.

Robin L. Peacock, for respondent.

MEMORANDUM OPINION

JACOBS, Judge: This case is before the Court fully stipulated.

See Rule 122. Rule references are to the Tax Court Rules of

Practice and Procedure. Unless otherwise indicated, section

references are to the Internal Revenue Code in effect for the year

in issue.

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Respondent determined a $3,656 deficiency in petitioner’s 1997

Federal income tax; this determination is based on respondent’s

disallowance of petitioner’s claim for an earned income credit.

Thus, the ultimate issue we must decide is whether petitioner is

entitled to the claimed earned income credit, which in turn depends

upon whether the so-called tie-breaker rule under section

32(c)(1)(C) is applicable. In resolving this latter question, we

must decide whether the retroactive application of amended section

32(c)(3)(A) in 1998 is constitutional.

Background

The stipulation of facts and the attached exhibits are

incorporated herein. The stipulated facts are hereby found.

Petitioner resided in Saratoga, New York, at the time she filed

her petition.

During the entire year in issue (1997), petitioner was

unmarried and resided with: John Pancake, her boyfriend; Christina

and Mitchell Sutherland, her children from a prior marriage; and

Alyssa Pancake, the daughter of Mr. Pancake and petitioner. Each

child was under the age of 19.

Petitioner, Mr. Pancake, and the three children lived together

as a family unit. In fact, Mr. Pancake cared for Christina and

Mitchell as if they were his own children. Petitioner and Mr.

Pancake shared the costs of food and lodging for the entire

household.

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During the year in issue, petitioner was employed by Wesley

Health Care Center, Inc., in Saratoga Springs, New York. She

electronically filed her 1997 Federal income tax return on April 15,

1998, reporting wage income of $11,375. She reported her filing

status as single and claimed dependency exemptions for Christina and

Mitchell, identifying them as “qualifying children” for purposes of

claiming a $3,656 earned income credit. (For purposes of claiming

this credit, petitioner’s modified adjusted gross income for 1997

was $11,375.)

On his 1997 Federal income tax return, Mr. Pancake claimed an

earned income credit for Alyssa. For purposes of claiming this

credit, Mr. Pancake’s 1997 modified adjusted gross income was higher

than petitioner’s. (Mr. Pancake identified neither Christina nor

Mitchell as his qualifying children for purposes of claiming this

credit on his return.)

Respondent disallowed the earned income credit petitioner

claimed on her 1997 return, explaining in the notice of deficiency:

All the children qualify both Penny and John for the

earned income credit. Mitchell and Christina qualify as

foster children for John. They do not have to be related

to him to be qualifying children. They lived as a family

in the same home the entire year and therefore are his

qualifying children for the earned income credit.

Because Penny’s income is not the highest, we have not

allowed her earned income credit.

John may amend his return to list two qualifying children

for the earned income credit is [sic] he wishes.

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Discussion

Issue 1. Earned Income Credit

Section 32(a)(1) allows an “eligible individual” to claim an

earned income credit. Generally, an eligible individual is any

person who has a “qualifying child” for the taxable year or any

other person who does not have a qualifying child if that person

resided in the United States for more than one-half of the year, was

over age 25, but under age 65, before the end of the year, and was

not a dependent of another taxpayer for the year. Sec. 32(c)(1)(A).

Section 32(c)(3)(A) defines a qualifying child as an

individual:

(i) who bears a relationship to the taxpayer

described in subparagraph (B) [relationship test],

(ii) except as provided in subparagraph (B)(iii),

who has the same principal place of abode as the taxpayer

for more than one-half of such taxable year [residency

test, and]

(iii) who meets the age requirements of subparagraph

(C) [age test], * * *

An individual satisfies the relationship test with respect to

a particular taxpayer if the individual is:

(I) a son or daughter of the taxpayer,

or a descendant of either,

(II) a stepson or stepdaughter of the

taxpayer, or

(III) an eligible foster child of the

taxpayer.

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Sec. 32(c)(3)(B)(i). An eligible foster child1 is defined as an

individual who the taxpayer cares for as his or her own child and

who has the same principal place of abode as the taxpayer for the

entire taxable year in issue. See sec. 32(c)(3)(B)(iii).

An individual satisfies the age test if he or she is under age

19 at the end of the taxable year, is a full-time student under age

24 at the end of the taxable year, or is permanently and totally

disabled during the taxable year. See sec. 32(c)(3)(C).

On the basis of the stipulated record, we conclude that for

1997 Christina and Mitchell were both petitioner’s and Mr. Pancake’s

qualifying children for purposes of the earned income credit. Thus,

both petitioner and Mr. Pancake are eligible individuals (under

section 32(a)(1)) for purposes of claiming the earned income credit.

Section 32(c)(1)(C) provides a tie-breaker rule where there are

two or more eligible individuals with respect to the same qualifying

child for the same taxable year (as is the case here):

If 2 or more individuals would (but for this

subparagraph and after application of subparagraph (B))

be treated as eligible individuals with respect to the

same qualifying child for taxable years beginning in the

same calendar year, only the individual with the highest

modified adjusted gross income for such taxable years

shall be treated as an eligible individual with respect

to such qualifying child. [Emphasis added.]

1

Although Congress recently amended the definition of an

eligible foster child, see Ticket to Work and Work Incentives

Improvement Act of 1999, Pub. L. 106-170, sec. 412, 113 Stat.

1860, 1917, the amended definition does not apply herein because

it is effective only for tax years beginning after Dec. 31, 1999.

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For 1997, petitioner’s modified adjusted gross income was less

than that of Mr. Pancake. If we apply the section 32(c)(1)(C) tie-

breaker rule, Mr. Pancake, and not petitioner, is the individual

eligible to claim the earned income credit with respect to Christina

and Mitchell. See, e.g., Jackson v. Commissioner, T.C. Memo. 1996-

54.

Petitioner maintains that here the section 32(c)(1)(C) tie-

breaker rule is inapplicable on the basis that Mr. Pancake failed to

identify Christina and Mitchell as his qualifying children on his

1997 return. In this regard, as explained infra, petitioner

erroneously relies upon the definition of a qualifying child as it

existed before the 1998 amendment.

As originally enacted in 1990, section 32(c)(3)(A)2 defined a

2

Former sec. 32(c)(3)(A) provided as follows:

(A) In general.–-The term “qualifying child”

means, with respect to any taxpayer for any taxable

year, an individual–-

(i) who bears a relationship to the

taxpayer described in subparagraph (B),

(ii) except as provided in subparagraph

(B)(iii), who has the same principal place of

abode as the taxpayer for more than one-half

of such taxable year,

(iii) who meets the age requirements of

subparagraph (C), and

(iv) with respect to whom the taxpayer

meets the identification requirements of

subparagraph (D). [Emphasis added.]

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qualifying child as one who satisfied the relationship, residency,

and age tests (discussed supra), as well as the section

32(c)(3)(A)(iv) “identification test”. See Omnibus Budget

Reconciliation Act of 1990 (OBRA), Pub. L. 101-508, sec. 11111(a),

104 Stat. 1388, 1388-408 (amending sec. 32).

The identification test required a taxpayer to include on his

or her income tax return the name, age, and taxpayer identification

number of each qualifying child with respect to whom he or she

claimed the earned income credit. See sec. 32(c)(3)(D).3 The

section 32(c)(3)(A) definition of a qualifying child, however, was

amended in 1998 (the 1998 amendment), and amended section 32(c)(3)

no longer required the identification of a qualifying child on the

qualified individual’s income tax return. See Internal Revenue

3

Former sec. 32(c)(3)(D) provided:

(D) Identification requirements.--

(i) In general.-–The requirements of this

subparagraph are met if the taxpayer includes the name,

age, and TIN of each qualifying child (without regard

to this subparagraph) on the return of tax for the

taxable year.

(ii) Other methods.-–The Secretary may prescribe

other methods for providing the information described

in clause (i).

A Social Security number did not have to be furnished on a

return for the 1995 tax year, in the case of qualifying children

born after Oct. 1, 1995. For a return for the 1996 tax year, the

requirement is waived for qualifying children born after Nov. 30,

1996. See Uruguay Round Agreements Act, Pub. L. 103-465, sec.

742(c)(2), 108 Stat. 5010 (1994).

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Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.

105-206, sec. 6021(b)(3), 112 Stat. 823. As part of this amendment,

section 32(c)(3)(A)(iv) was stricken from the statute.

In addition to amending section 32(c)(3)(A), in 1998 Congress

enacted section 32(c)(1)(G),4 which provides that a taxpayer who has

one or more qualifying children, but does not identify any of them

in accordance with section 32(c)(3)(D), is not entitled to receive

the earned income credit. See RRA 1998 sec. 6021(b)(2), 112 Stat.

824 (adding sec. 32(c)(1)(G)). The 1998 regime emphasized that

although the identification requirement is no longer a specific

element of the definition of a qualifying child, a taxpayer must

nevertheless identify his or her qualifying child as a prerequisite

to receiving the earned income credit. “The bill clarifies that the

identification requirement is a requirement for claiming the EIC

[earned income credit], rather than an element of the definitions of

‘eligible individual’ and ‘qualifying child’.” S. Rept. 105-174, at

200 (1998). The 1998 amendment was effective retroactively as if it

were included in the provisions of OBRA section 11111.

4

Sec. 32(c)(1)(G) provides:

(G) Individuals who do not include TIN, etc., of

any qualifying child.–-No credit shall be allowed under

this section to any eligible individual who has one or

more qualifying children if no qualifying child of such

individual is taken into account under subsection (b)

by reason of paragraph (3)(D).

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To conclude this aspect of our opinion, the 1998 amendment

applies to 1997, the tax year before us. We dismiss petitioner’s

argument that because Mr. Pancake did not identify Christina and

Mitchell as his qualifying children on his 1997 return, he is not

eligible for the earned income credit for that year.

Issue 2. Constitutionality of 1998 Amendment

We now turn to whether the retroactive application of the 1998

amendment to petitioner’s 1997 tax year denies petitioner due

process of law under the Fifth Amendment to the Constitution. As

explained infra, we hold that it does not.

The Fifth Amendment to the Constitution provides: “No person

shall be * * * deprived of life, liberty, or property without due

process of law”. The Supreme Court has consistently upheld

retroactive tax legislation against due process challenges. See,

e.g., United States v. Carlton, 512 U.S. 26, 30-31 (1994); 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); Brushaber v. Union Pac. R. Co., 240 U.S. 1, 20

(1916). “Congress ‘almost without exception’ has given general

revenue statutes effective dates prior to the dates of actual

enactment.” United States v. Carlton, supra at 32-33 (quoting

United States v. Darusmont, supra at 296). The test of invalidity

of a retroactive tax law is whether the retroactive nature of the

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law “‘is itself justified by a rational legislative purpose.’” Id.

(quoting Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S.

717, 730 (1984)); see also Estate of Kunze v. Commissioner, ___

F.3d ___ (7th Cir., Nov. 16, 2000), affg. T.C. Memo. 1999-344;

DeMartino v. Commissioner, 862 F.2d 400 (2d Cir. 1988), affg. 88

T.C. 583 (1987).

In determining whether the retroactive application of an income

tax statute violates the Due Process Clause, we examine whether “the

nature of the tax and the circumstances in which it is laid * * * is

so harsh and oppressive as to transgress the constitutional

limitation.” Welch v. Henry, supra at 147. This “harsh and

oppressive” standard “does not differ from the prohibition against

arbitrary and irrational legislation” that applies generally to

economic legislation. Pension Benefit Guaranty Corp. v. R.A. Gray

& Co., supra at 733.

Courts have held retroactive tax amendments unconstitutional

only in those cases where the amendment imposes “a wholly new tax,

which could not reasonably have been anticipated by the taxpayer at

the time of the transaction.” Wiggins v. Commissioner, 904 F.2d

311, 314 (5th Cir. 1990), affg. 92 T.C. 869 (1989); see also

Blodgett v. Holden, 275 U.S. 142 (1927); Nichols v. Coolidge, 274

U.S. 531 (1927); Untermyer v. Anderson, 276 U.S. 440 (1928). On the

other hand, courts have held that Congress acts rationally when it

cures “what it reasonably viewed as a mistake”. United States v.

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Carlton, supra at 32. Where legislation is “curative”, courts

liberally construe the retroactive application of the law. See,

e.g., Temple University v. United States, 769 F.2d 126, 134 (3d Cir.

1985).

We do not believe the 1998 amendment is a “wholly new tax”. To

the contrary, it serves primarily as clarification to existing law,

as opposed to a change of existing law. It was a curative measure

that did not impose new tax liabilities or alter the substantive

rights of the parties. Congress’ purpose in enacting the 1998

amendment was rationally related to the legitimate Government

purpose of ensuring that only the most needy individuals receive the

earned income credit.5 See id.

Congress originally enacted the earned income credit

legislation to provide economic assistance to low-income working

taxpayers. See S. Rept. 94-36, at 11 (1975), 1975-1 C.B. 590, 595.

The program’s objectives included: (1) Offsetting social security

payments made by low-income workers; (2) providing a work incentive

for individuals who receive welfare benefits; (3) providing low-

income families with income security; and (4) attempting to “redress

the effects of regressive federal tax proposals.” 136 Cong. Rec.

S15632, S15684-S15685 (daily ed. Oct. 18, 1990) (Explanatory

5

This case involves the disallowance of a credit, which

provides further support to the constitutionality of the 1998

amendment. See, e.g., Fife v. Commissioner, 82 T.C. 1 (1984)

(Tax Court upheld the constitutionality of a retroactive

amendment to the investment tax credit provisions).

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Material Concerning Committee on Finance 1990 Reconciliation

Statement).

To achieve these objectives, Congress determined which

individuals are most appropriate to receive the earned income

credit. Before 1990, section 32 generally defined an eligible

individual as one who was (1) married and was entitled to a

dependency exemption under section 151 for a child, (2) a surviving

spouse, or (3) a head of household. See sec. 32(c)(1). In 1990,

Congress amended the definition of an eligible individual,

eliminating the language set forth above, but including in the

definition an individual who has a qualifying child. See OBRA sec.

11111(a). A qualifying child was defined as one who satisfies “a

relationship test, a residency test, and an age test.” H. Conf.

Rept. 101-964, at 1037 (1990), 1991-2 C.B. 560, 564. Congress

noted:

Solely for purposes of the EITC [earned income tax

credit], taxpayers are required to obtain and supply a

taxpayer identification number (TIN) for each qualifying

child who has attained the age of 1 as of the close of the

taxable year of the taxpayer.

In order to claim the EITC, the taxpayer must

complete and attach a separate schedule to his or her

income tax return. In addition to the TIN requirement

discussed above, this schedule is required to include the

name and age of any qualifying children.

Id. at 1038, 1991-2 B.C. at 565.

In response to this Court’s holding in Lestrange v.

Commissioner, T.C. Memo. 1997-428 (that before the enactment of the

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1998 amendment, the identification requirement was included within

the definition of a qualifying child), Congress enacted the 1998

amendment, reflecting its intent that the identification of the

child not be an element of the definition of a qualifying child.

This correction, in turn, made the tie-breaker rule apply not only

in the case of two or more individuals actually claiming the credit

with respect to the same child, but also in any case where two or

more individuals could claim the credit with respect to the same

child.

As the Joint Committee on Taxation explained:

Tie-breaker rule

If more than one taxpayer would be treated as an

eligible individual with respect to the same qualifying

child for a taxable year only the individual with the

highest modified adjusted gross income (“modified AGI”) is

treated as an eligible individual with respect to that

child. * * *

Historically, the Internal Revenue Service (“IRS”)

has interpreted this tie-breaker rule to deny the EIC to

other taxpayers meeting the definition of eligible

individual regardless of whether the taxpayer with the

highest modified AGI had claimed the EIC with respect to

the child on the taxpayer’s tax return. The Tax Court in

Lestrange v. Commissioner, T.C.M. 1997-428 (1997) held

that the tie-breaker rule does not apply to deny the EIC

to a taxpayer unless another taxpayer actually claimed the

EIC with respect to the child on the taxpayer’s return.

The Tax Court decision hinged on the determination that

the child was not a qualifying child with respect to the

taxpayer with the highest modified AGI because the

identification test was not met by that taxpayer with

respect to the child. Under this view, because the

taxpayer with the highest modified AGI did not satisfy the

qualifying child requirement, there was not more than one

eligible individual and the tie-breaker rule did not

apply.

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Description of Proposal

The proposal clarifies that the identification

requirement is a requirement for claiming the EIC [earned

income credit], rather than an element of the definition

of “qualifying child”. Thus, the tie-breaker rule would

apply where more than one individual otherwise could claim

the same child as a qualifying child on their respective

tax returns, regardless of whether the child is listed on

any tax return. * * *

* * * * * * *

Analysis

Proponents of the clarification believe that it is

necessary to provide the EIC efficiently and

appropriately. * * * They continue that the tie-breaker is

necessary in all cases where more than one taxpayer could

claim the same qualifying child, to ensure that only needy

taxpayers receive the EIC. For example, a taxpayer with

a qualifying child should not qualify for the EIC if that

taxpayer is sharing a household with the taxpayer’s own

higher-income parent. To allow these taxpayers to

essentially elect out of the tie-breaker rule by failing

to claim the child on the return of the higher-income

parent would undermine Congressional intent with regards

to the EIC.

Staff of Joint Comm. on Taxation, Description of Revenue Provisions

Contained in the President’s Fiscal Year 1999 Budget Proposal, at

217 (J. Comm. Print 1998). Thus, Congress was concerned that before

the 1998 amendment, taxpayers could structure their income tax

returns so that they would receive the earned income credit when

they would not have otherwise been eligible.

The legislative history of the 1998 amendment supports our

conclusion that respondent properly applied this amendment. The

1998 amendment is rationally related to a legitimate legislative

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purpose of providing the earned income credit to the most

appropriate individuals. See, e.g., Fein v. United States, 730 F.2d

1211, 1212 (8th Cir. 1984) (retroactive taxes are rational because

taxpayers otherwise could “order their affairs freely to avoid the

effect of the change”).

Petitioner contends that should we apply the 1998 amendment to

deny her entitlement to the earned income credit (which we do),

harsh and oppressive results would ensue to her. We disagree. The

earned income credit is a governmental subsidy aimed at providing

assistance to low-income taxpayers. Congress’ clarification of the

eligibility requirements to continue to provide the credit to the

most appropriate recipients is not the “harsh and oppressive” result

that would require us to strike down the amendment as

unconstitutional. Thus, petitioner has failed to convince us that

the denial of the earned income credit in this case is “so harsh and

oppressive” as to necessitate a finding that the retroactive

application of the 1998 amendment violates the due process clause of

the Constitution.

In determining whether a retroactive amendment is

constitutional, we must further consider the length of the period

affected by the amendment. See United States v. Carlton, 512 U.S.

at 32-33; Canisius College v. United States, 799 F.2d 18, 26 (2d

Cir. 1986). Congress frequently enacts tax legislation with an

effective date prior to the actual date of the enactment. See

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United States v. Darusmont, 449 U.S. at 296. “This ‘customary

congressional practice’ generally has been ‘confined to short and

limited periods required by the practicalities of producing national

legislation.’” United States v. Carlton, supra at 32-33 (quoting

United States v. Darusmont, supra at 296-297). The retroactive

period generally must be “modest” and not excessive. See United

States v. Carlton, supra; see also United States v. Hemme, 476 U.S.

558, 562 (1986). Nevertheless, neither the Supreme Court nor the

Courts of Appeals have applied “an absolute temporal limitation” on

the periods affected by retroactive legislation for the legislation

to withstand a constitutional challenge. See Temple University v.

United States, 769 F.2d at 135. “There is nothing intrinsic in the

‘harsh and oppressive’ test * * * that requires a one-year bench

mark as the constitutional limit of retroactivity.” Canisius

College v. United States, supra at 26; see also Wiggins v.

Commissioner, 904 F.2d at 316. Instead, we review tax legislation

case by case, considering “‘the nature of the tax and the

circumstances in which it is laid’”. Canisius College v. United

States, supra at 27 (quoting Welch v. Henry, 305 U.S. at 147).

Generally, in those cases where retroactive application was

allowed, courts have found the period of retroactivity to be modest.

See, e.g., United States v. Carlton, supra (upholding 14-month

retroactive application); United States v. Darusmont, supra

(upholding retroactive application within calendar year of 10

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months); United States v. Hudson, 299 U.S. 498 (1937) (upholding 1-

month retroactive application); Quarty v. United States, 170 F.3d

961 (9th Cir. 1999) (upholding 8-month retroactive application);

Kitt v. United States, ___ Fed. Cl. ___ (Oct. 6, 2000) (upholding 1-

year retroactive application); NationsBank v. United States, 44 Fed.

Cl. 661, 666 (1999) (upholding 5-month retroactive application). In

other instances, even a period of several years has passed muster.

See, e.g., Licari v. Commissioner, 946 F.2d 690 (9th Cir. 1991)

(upholding application of tax penalty passed in 1986 to returns

filed between 1982 and 1984), affg. T.C. Memo. 1990-4; Canisius

College v. United States, supra (upholding 4-year retroactive

application); Temple University v. United States, supra at 134-135

(upholding 4-year retroactive application); Rocanova v. United

States, 955 F. Supp. 27 (S.D.N.Y. 1996) (upholding retroactive

application of amendment extending statute of limitations on tax

collection actions from 6 to 10 years), affd. per curiam 109 F.3d

127 (2d Cir. 1997).

Clearly, some retroactivity is necessary as a practical matter.

Petitioner disputes the application of this amendment to her 1997

tax year, approximately a 1-year period. The 1-year period of

retroactivity as applicable to petitioner is reasonable, is within

precedential limits, and lends support to the constitutionality of

the 1998 amendment.

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Finally, in determining whether a retroactive amendment is

constitutional, we may consider whether the retroactive legislation

“abrogates vested rights” of the taxpayer, and whether the taxpayer

relied to his or her detriment on the law prior to the amendment, so

that had the taxpayer known of the legislative changes, he or she

could have avoided the tax imposed by the amendment. See, e.g.,

Rocanova v. United States, supra at 30. We dismiss petitioner’s

argument that the 1998 amendment violates due process because she

detrimentally relied upon the preamendment version of section

32(c)(3)(A).6 The 1998 amendment does not abrogate petitioner’s

rights. As the Supreme Court explained in United States v. Carlton,

supra at 33: “[a taxpayer’s] 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.” Moreover:

Taxation 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 * * *.

Welch v. Henry, supra at 146-147.

6

We note that before 1998, the Internal Revenue Service

had consistently applied sec. 32(c)(1)(C) without considering

whether the taxpayer with the highest modified adjusted gross

income identified the qualifying child on his or her return. See

IRS Publication 596, Earned Income Credit (1991-1999).

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In sum, we hold that the retroactive application of the 1998

amendment does not deny petitioner due process of the law; thus,

it is constitutional.

In reaching our conclusions, we have considered all of

petitioner’s arguments (namely, whether: (1) The doctrine of

estoppel applies; (2) the duty of consistency owed to petitioner was

violated; and (3) events that occurred before the issuance of the

notice of deficiency may be considered) for a result contrary to

that expressed herein, and to the extent not discussed above, find

them to be without merit.

To reflect the foregoing,

Decision will be

entered for respondent.