The opinion
T.C. Memo. 2007-166
UNITED STATES TAX COURT
STEPHEN S. ZIEGLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23638-04. Filed June 27, 2007.
Michael J. Grace, for petitioner.
Roger W. Bracken, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following defi-
ciencies in, additions under section 6651(a)(1)1 to, and
accuracy-related penalties under section 6662(a) on petitioner’s
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue. All Rule references are to the Tax Court Rules of Prac-
tice and Procedure.
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Federal income tax (tax):
Accuracy-Related
Year Deficiency Addition to Tax Penalty
1995 $12,112 $0.00 $2,308.60
1996 12,050 602.35 2,410.00
1997 28,819 2,881.40 5,763.80
1998 16,671 0.00 3,334.20
1999 19,665 0.00 3,933.00
The only issue remaining for decision is whether the appli-
cation of section 469 to petitioner’s claimed partnership losses
for the respective years at issue violates the Due Process Clause
of the Fifth Amendment to the Constitution of the United States.
FINDINGS OF FACT
All of the facts in this case, which the parties submitted
under Rule 122, have been stipulated by the parties and are so
found.2
Petitioner resided in Jericho, New York, at the time he
filed the petition in this case.
Petitioner practiced law as a tax attorney for decades,
specializing in providing legal services to developers of real
property, including low-income apartment complexes similar to
those purchased and operated by the partnership in which peti-
2
In violation of Rule 143(b), petitioner alleges on brief
various facts (petitioner’s alleged facts) not stipulated by the
parties and not otherwise supported by the record in this case.
In further violation of that Rule, petitioner attached to his
opening brief various documents (petitioner’s documents) that are
not part of the record and that the Court had returned to peti-
tioner. We shall not rely on petitioner’s alleged facts or
petitioner’s documents.
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tioner invested, as discussed below. During 1995 through 1999,
the years at issue, petitioner practiced law full time with the
law firm of Ziegler, Sagal & Winters, PC, in New York, New York.
During the years at issue, petitioner was a limited partner
of Aldus Green Company (Aldus Green), a limited partnership
formed under the laws of the State of New York. As a limited
partner of Aldus Green, petitioner owned two percent of Aldus
Green’s capital, profits, and losses.
In 1984, Aldus Green purchased and operated certain low-
income rental apartment buildings located in Bronx, New York.
Aldus Green rented apartments in those buildings to low-income
individuals, who received rent subsidies under section 8 of the
United States Housing Act, as amended.
Petitioner filed Form 1040, U.S. Individual Income Tax
Return, for each of his taxable years 1995 through 1999 (peti-
tioner’s returns). In each such return, petitioner claimed in
Schedule E, Supplemental Income and Loss (Schedule E), a loss
attributable to his investment in Aldus Green (petitioner’s
claimed Aldus Green loss) in arriving at “Total partnership and S
corporation income or (loss)” in each such schedule. As a
result, in Schedule E for each of the years at issue, petitioner
claimed a total partnership and S corporation loss. In each of
petitioner’s returns for the years at issue, petitioner offset
the total partnership and S corporation loss claimed in Schedule
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E against income from other sources in arriving at total income
for each such year.
Respondent issued to petitioner a notice of deficiency
(notice) with respect to his taxable years 1995 through 1999. In
that notice, respondent determined petitioner’s claimed Aldus
Green loss for each of those years to be a passive activity loss
under section 469, allowed each such loss to the extent of income
from passive activities for each such year, and disallowed the
following amount of petitioner’s claimed Aldus Green loss for
each such year:
Year Amount
1995 $44,108
1996 52,415
1997 44,495
1998 41,317
1999 48,773
OPINION
Petitioner concedes that petitioner’s claimed Aldus Green
loss for each of the years at issue is a passive activity loss as
defined in section 469(d)(1) and that section 469(a) disallows
each such loss.3 It is petitioner’s position, however, that the
application of section 469 to petitioner’s claimed Aldus Green
3
Petitioner also concedes that he is liable for additions to
tax under sec. 6651(a)(1) for the taxable years 1996 and 1997 and
for accuracy-related penalties under sec. 6662(a) for all the
taxable years at issue.
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loss for each of the years at issue violates the Due Process
Clause of the Fifth Amendment (Due Process Clause) to the United
States Constitution (Constitution) and that therefore he should
be allowed to offset each such loss against his income from
sources other than passive activities for each such year. (We
shall refer to income from sources other than passive activities
as other income.)
In support of his position under the Due Process Clause,
petitioner argues that section 469 is retroactive and that the
retroactive application of section 469 to petitioner’s claimed
Aldus Green loss for each of the years at issue is unconstitu-
tional. In further support of his position, petitioner argues
that the transitional rule that Congress provided in enacting
section 469 into the Code (transitional rule) violates his equal
protection rights under the Due Process Clause because it treats
him differently than certain other taxpayers.
The Due Process Clause provides that “No person shall be
* * * deprived of life, liberty, or property, without due process
of law”. The Due Process Clause provides protection against
Federal discriminatory action “so unjustifiable as to be
violative of due process”. Shapiro v. Thompson, 394 U.S. 618,
642 (1969); see Nicholas v. Tucker, 114 F.3d 17, 19 (2d Cir.
1997). The Due Process Clause also has been held to incorporate
the Equal Protection Clause of the Fourteenth Amendment to the
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Constitution. Johnson v. Robison, 415 U.S. 361, 364-365 n.4
(1974); Hammond v. Lenfest, 398 F.2d 705, 709 n.6 (2d Cir. 1968).
Before considering petitioner’s constitutional arguments, we
shall summarize in pertinent part the legislative history and
provisions of section 469. On October 22, 1986, Congress enacted
section 469 into the Code in the Tax Reform Act of 1986, Pub. L.
99-514 (1986 Act or TRA 1986), sec. 501(a), 100 Stat. 2233. In
the report of the Senate Committee on Finance (Senate Finance
Committee Report) with respect to the 1986 Act, that committee
set forth the following reasons for enacting section 469:
In recent years, it has become increasingly clear
that taxpayers are losing faith in the Federal income
tax system. This loss of confidence has resulted in
large part from the interaction of two of the system’s
principal features: its high marginal rates * * *, and
the opportunities it provides for taxpayers to offset
income from one source with tax shelter deductions and
credits from another.
The prevalence of tax shelters in recent years
* * * has been well documented. * * *
Such patterns give rise to a number of undesirable
consequences, even aside from their effect in reducing
Federal tax revenues. Extensive shelter activity
contributes to public concerns that the tax system is
unfair, and to the belief that tax is paid only by the
naive and the unsophisticated. This, in turn, not only
undermines compliance, but encourages further expansion
of the tax shelter market, in many cases diverting
investment capital from productive activities to those
principally or exclusively serving tax avoidance goals.
The committee believes that the most important
sources of support for the Federal income tax system
are the average citizens who simply report their income
(typically consisting predominantly of items such as
salaries, wages, pensions, interest, and dividends) and
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pay tax under the general rules. To the extent that
these citizens feel that they are bearing a dispropor-
tionate burden with regard to the costs of government
because of their unwillingness or inability to engage
in tax-oriented investment activity, the tax system
itself is threatened.
Under these circumstances, the committee believes
that decisive action is needed to curb the expansion of
tax sheltering and to restore to the tax system the
degree of equity that is a necessary precondition to a
beneficial and widely desired reduction in rates. So
long as tax shelters are permitted to erode the Federal
tax base, a low-rate system can provide neither suffi-
cient revenues, nor sufficient progressivity, to sat-
isfy the general public that tax liability bears a fair
relationship to the ability to pay. In particular, a
provision significantly limiting the use of tax shelter
losses is unavoidable if substantial rate reductions
are to be provided to high-income taxpayers without
disproportionately reducing the share of total liabil-
ity under the individual income tax that is borne by
high-income taxpayers as a group.
S. Rept. 99-313, at 713-714 (1986), 1986-3 C.B. (Vol. 3) 713-714.
In the Senate Finance Committee Report, the Senate Committee
on Finance focused specifically on the use of rental activities
for tax shelter purposes, such as the use by Aldus Green of
rental activities for such purposes. That report stated in
pertinent part:
The extensive use of rental activities for tax shelter
purposes under present law, combined with the reduced
level of personal involvement necessary to conduct such
activities, make clear that the effectiveness of the
basic passive loss provision could be seriously compro-
mised if material participation were sufficient to
avoid the limitations in the case of rental activities.
Id. at 718.
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Having summarized the concerns of Congress in enacting
section 469 into the Code, we shall now summarize certain provi-
sions of that section that are pertinent here. Pursuant to
section 469(a), a taxpayer is not allowed to offset a passive
activity loss for the taxable year against other income for such
year. For purposes of section 469, a passive activity loss for
the taxable year is the amount, if any, by which the aggregate
losses from all passive activities for the taxable year exceed
the aggregate income from all passive activities for such year.
Sec. 469(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax Regs.,
53 Fed. Reg. 5711 (Feb. 25, 1988). The term “passive activity”
is defined in pertinent part as any activity in which the tax-
payer does not materially participate. Sec. 469(c)(1). Any
rental activity is a passive activity, regardless whether the
taxpayer materially participates in the activity. See sec.
469(c)(2).
Under section 469(b), a passive activity loss is treated as
a deduction allocable to the passive activity giving rise to such
loss for the succeeding taxable year. Under that section, a
passive activity loss may be carried forward indefinitely. In
addition, section 469(g)(1) provides in pertinent part:
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
* * * * * * *
(g) Dispositions of Entire Interest in Passive
Activity.--If during the taxable year a taxpayer dis-
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poses of his entire interest in any passive activity
(or former passive activity), the following rules shall
apply:
(1) Fully taxable transaction.--
(A) In general.--If all gain or loss
realized on such disposition is recognized,
the excess of–-
(i) any loss from such activity for such
taxable year (determined after the applica-
tion of subsection (b)), over
(ii) any net income or gain for such
taxable year from all other passive activi-
ties (determined after the application of
subsection (b)),
shall be treated as a loss which is not from a passive
activity.
We now turn to petitioner’s arguments. We first address his
argument that section 469 is retroactive. Petitioner maintains
that section 469 is retroactive because:
The effect of the 1986 Act passive loss provisions
is to deny a current deduction for depreciation (i.e.,
a segment of the expenditure) for a property already
purchased, and for interest on a mortgage loan already
committed, to the extent that said deductions exceed
the net operating income from the property. In this
case, the expenditures were made by the Partnership
[Aldus Green] - and the taxpayer made his investment in
the Partnership - before the law was enacted or pro-
posed and the passive loss rule is disallowing the
deduction for the expenditure.
In support of his argument that section 469 is retroactive,
petitioner contends that he decided to invest in Aldus Green in
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1984.4 According to petitioner, “Based on the tax incentives in
place at that time, Petitioner reasonably expected that he would
be allowed to deduct tax losses from the Partnership” and “would
not have made the investment if he knew that the losses from the
project could not be offset against his compensation and portfo-
lio income, since in that case, there would be no economic return
from the investment.” Petitioner maintains that he was “induced
to make an investment based upon the prior set of tax rules
deliberately enacted by Congress to induce such investment.”
From those premises, petitioner argues that section 469 is
retroactive and that such retroactivity is unconstitutional
because it violates the Due Process Clause.
Before considering petitioner’s argument that section 469 is
unconstitutionally retroactive, we note that the grounds on which
petitioner relies to support that argument are similar to the
grounds on which the taxpayer relied in United States v. Carlton,
512 U.S. 26 (1994), to support his argument that the tax statute
involved there was unconstitutionally retroactive. In Carlton,
the taxpayer, the executor of an estate, maintained that the
retroactive amendment of a Federal estate tax provision (section
4
With respect to petitioner’s contention that he made his
investment in Aldus Green in 1984, respondent states on brief:
“We note that petitioner offered no evidence that his investment
in AGC [Aldus Green] actually was made two years before the
enactment of sec. 469, nor was the date of his investment in AGC
contained in the Stipulation of Facts filed in this case.”
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2057) violated the Due Process Clause because he “specifically
and detrimentally relied on the preamendment version”, id. at 33,
of that provision when he engaged in a transaction prior to its
amendment by Congress. Id. In rejecting the taxpayer’s posi-
tion, the Supreme Court of the United States observed that the
taxpayer’s
reliance alone is insufficient to establish a constitu-
tional violation. Tax legislation is not a promise,
and a taxpayer has no vested right in the Internal
Revenue Code. Justice Stone explained in Welch v.
Henry, 305 U.S., at 146-147:
“Taxation is neither a penalty imposed on the
taxpayer nor a liability which he assumes by con-
tract. 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 ....”
Moreover, the detrimental reliance principle is not
limited to retroactive legislation. An entirely pro-
spective change in the law may disturb the relied-upon
expectations of individuals, but such a change would
not be deemed therefore to be violative of due process.
Id. at 33-34.
We consider now whether, as petitioner argues, section 469
is retroactive. As pertinent here, section 469(a) applies only
to a passive activity loss as defined in section 469(d)(1) for a
taxable year that began after December 31, 1986. See TRA 1986
sec. 501(c), 100 Stat. 2241. Section 469(a) does not apply to
any loss for any taxable year that began prior to January 1,
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1987. See id. We hold that section 469 is not retroactive.5
We next address petitioner’s argument that the transitional
rule that Congress provided in enacting section 469 into the Code
violates his equal protection rights under the Due Process
Clause. We first describe the transitional rule that Congress
provided, TRA 1986 sec. 502, 100 Stat. 2241, when it enacted
section 469 into the Code. That transitional rule provides that
any loss sustained by certain investors6 with respect to inter-
5
See Polone v. Commissioner, T.C. Memo. 2003-339, affd. 479
F.3d 1019 (9th Cir. 2007); cf. United States v. Carlton, 512 U.S.
26, 33-34 (1994).
6
The investors qualifying under the transitional rule are
so-called qualified investors. The term “qualified investor” is
defined to mean, in general:
any natural person who holds (directly or through 1 or
more entities) an interest in a qualified low-income
housing project--
(A) if–-
(i) in the case of a project placed in ser-
vice before August 16, 1986, such person held an
interest in such project on August 16, 1986, and
the taxpayer made his initial investment after
December 31, 1983, or
(ii) in the case of a project not described
in subparagraph (A), such investor held an inter-
est in such project on December 31, 1986, and
(B) if such investor is required to make payments
after December 31, 1986, of 50 percent or more of the
total original obligated investment for such interest.
TRA 1986 sec. 502(d), 100 Stat. 2242.
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ests in certain low-income housing projects7 for any taxable year
in a prescribed period8 is not to be treated as a loss from a
7
The low-income housing projects qualifying under the tran-
sitional rule are so-called qualified low-income housing pro-
jects. The term “qualified low-income housing project” is
defined to mean:
any project if--
(1) such project meets the requirements of clause
(i), (ii), (iii), or (iv) of section 1250(a)(1)(B) as
of the date placed in service and for each taxable year
thereafter which begins after 1986 and for which a
passive loss may be allowable with respect to such
project,
(2) the operator certifies to the Secretary of the
Treasury or his delegate that such project met the
requirements of paragraph (1) on the date of the enact-
ment of this Act [October 22, 1986] (or, if later, when
placed in service) and annually thereafter,
(3) such project is constructed or acquired pursu-
ant to a binding written contract entered into on or
before August 16, 1986, and
(4) such project is placed in service before
January 1, 1989.
TRA 1986 sec. 502(c), 100 Stat. 2242.
8
The period prescribed under the transitional rule is a so-
called relief period. The term “relief period” is defined to
mean:
the period beginning with the taxable year in which the
investor made his initial investment in the qualified
low-income housing project and ending with whichever of
the following is the earliest--
(1) the 6th taxable year after the taxable
year in which the investor made his initial in-
vestment,
(continued...)
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passive activity for purposes of section 469. TRA 1986 sec.
502(a), 100 Stat. 2241.
In support of his argument that the transitional rule
violates his equal protection rights under the Due Process
Clause, petitioner contends that, because he is not entitled to
the relief provided by the transitional rule, Congress treated
him differently than certain other taxpayers entitled to such
relief. According to petitioner, the provisions of the transi-
tional rule are “arbitrary, capricious and unreasonable”. In
support of that claim, petitioner asserts:
In this case, the conditions for the 1986 Act
exemptions for low and moderate income housing are
worse than unreasonable, that is, worse than conditions
without any reasonable basis. The conditions evidence,
and indeed were meant to evidence, an intention by the
opponents of any exemption to take private property
without compensation.
The exemption is conditional upon the taxpayer not
having yet paid in over 50% of the taxpayer’s invest-
ment commitment. It is obvious - and beyond dispute -
that the purpose of this condition was to encourage the
taxpayer to pay in the balance of his investment - and
this was the very purpose of the tax incentives for
subsidized housing in the first place. However, there
is no exemption for the investor who has already paid
8
(...continued)
(2) the 1st taxable year after the taxable
year in which the investor is obligated to make
his last investment, or
(3) the taxable year preceding the 1st tax-
able year for which such project ceased to be a
qualified low-income housing project.
TRA 1986 sec. 502(b), 100 Stat. 2241.
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in his investment, even if he is an investor in the
same project as a taxpayer who has not yet paid in his
investment.
Hence, limiting the exemption to investors who
have not yet paid in over 50% of their investments
reflects a purpose antithetical to our system of juris-
prudence, that is, perpetuating a fraud by having the
government pay a further portion of the consideration
it promised to persons who had not yet completed their
performance in reliance on the government’s promised
consideration to the persons who had already fully
performed in reliance upon the government promise.
[Reproduced literally.]
In order to prevail on his equal protection argument,
petitioner must show that the transitional rule was not premised
upon a rational basis, see Regan v. Taxation With Representation,
461 U.S. 540, 547-548 (1983), and instead was premised upon an
impermissible basis such as race, religion, or the desire to
prevent the exercise of petitioner’s constitutional rights, see
United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir. 1974).
We reject petitioner’s argument that the transitional rule
violates his equal protection rights under the Due Process
Clause. In enacting section 469, Congress considered whether any
relief from the application of section 469(a) was appropriate.
After giving consideration to that question, Congress decided to
provide in the transitional rule certain relief, but only for
certain taxable years, to certain taxpayers in certain circum-
stances.9
9
Congress also decided to provide in sec. 469(m) certain
(continued...)
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On the instant record, we find that petitioner has failed to
carry his burden of establishing that the transitional rule was
not premised upon a rational basis and instead was based upon a
9
(...continued)
other relief, but only for certain taxable years, to taxpayers
who were not entitled to the relief provided by the transitional
rule and who therefore were subject to sec. 469. Sec. 469(m)
provides in pertinent part:
SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.
* * * * * * *
(m) Phase-in of Disallowance of Losses and Credits
for Interest Held Before Date of Enactment.--
(1) In general.--In the case of any passive
activity loss or passive activity credit for any
taxable year beginning in calendar years 1987
through 1990, subsection (a) shall not apply to
the applicable percentage of that portion of such
loss (or such credit) which is attributable to
preenactment interests.
(2) Applicable percentage.--For purposes of
this subsection, the applicable percentage shall
be determined in accordance with the following
table:
In the case of taxable The applicable
years beginning in: percentage is:
1987...............................65
1988...............................40
1989...............................20
1990...............................10
Sec. 469(m)(3)(B)(i) defines the term “pre-enactment interest” to
mean, in general, “any interest in a passive activity held by a
taxpayer on the date of the enactment of the Tax Reform Act of
1986, and at all times thereafter.” Petitioner appears to have
qualified for the relief from the application of sec. 469(a) that
Congress provided in sec. 469(m).
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constitutionally impermissible standard. We hold that the
transitional rule does not violate petitioner’s equal protection
rights under the Due Process Clause.
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of petitioner,
Decision will be entered for
respondent.