October 28, 2009
CHARLES J. DEMUTH, JR., PLAINTIFF-APPELLANT,
STATE OF NEW JERSEY, DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from the Tax Court of New Jersey, No. 8298-2007.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted September 30, 2009
Before Judges Wefing and Messano.
Plaintiff appeals from an order entered by the Tax Court granting defendant's motion for summary judgment. After reviewing the record in light of the contentions advanced on appeal, we affirm.
On three separate dates in May 2004, plaintiff sold a total of 110,000 shares of Hudson City Bancorp, which resulted in a net gain to him of $3,269,288.17. In June 2004, the New Jersey Legislature amended N.J.S.A. 54A:2-1 to increase the tax rate on income in excess of $500,000 from 6.37% to 8.97%. The amendment, however, was effective not on June 28, the date of passage, but for tax years commencing on or after January 1, 2004.
Plaintiff filed his New Jersey income tax return for the 2004 tax year in April 2005 and calculated his New Jersey income tax liability in accordance with the amended statute. He paid a total New Jersey income tax of $291,746. In August 2006, plaintiff filed an amended 2004 New Jersey income tax return, calculating his tax liability under the 6.37% rate in effect at the time he sold his shares of Hudson City Bancorp. Using this lower rate naturally resulted in a lower tax liability, and plaintiff requested a refund of $76,840.71. Plaintiff's request for a refund was denied, and he filed suit in the Tax Court, challenging the retroactive application of the higher rates implemented by the 2004 amendment to income received prior to the amendment's passage. The issue was presented to the Tax Court on cross-motions for summary judgment. The Tax Court denied plaintiff's motion and granted defendant's. This appeal followed.
Initially, we note that we agree with plaintiff that we review this matter on a de novo basis. The question presented is purely one of law: whether retroactive application of the amended statute to these transactions was unconstitutional or manifestly unjust. This is not an instance in which the Tax Court made factual findings; if it were, we would accord deference to the Tax Court's particular expertise. Yilmaz, Inc. v. Dir., Div. of Taxation, 390 N.J. Super. 435, 443 (App. Div.), certif. denied, 192 N.J. 69 (2007).
When a court is presented with the question of whether a particular statute should be applied retroactively, it must engage in a two-step analysis, the first step of which is to determine whether the Legislature intended the statute to apply retroactively. Twiss v. State, Dept. of Treasury, 124 N.J. 461, 467 (1991). Both parties concede here that the Legislature intended its June 2004 amendment to apply retroactively. We must then proceed to the second step, whether retroactive application would be unconstitutional or would result in a "manifest injustice." Ibid.
We take up first the question whether retroactive application of this statute is unconstitutional. We are satisfied that it is not. The appropriate test to measure this issue is whether retroactive application survives rational basis scrutiny. Nobrega v. Edison Glen Assocs., 167 N.J. 520, 543-44 (2001). This requires an evaluation of whether retroactive application supports a legitimate legislative purpose and is furthered by rational means. Id. at 544.
Rational basis review is deferential to the State. "[T]he burden is on the one complaining of a due process violation to establish that the legislature has acted in an arbitrary and irrational way." Ibid. The Supreme Court has continually held that retroactive application of income tax statutes is constitutional and does not offend due process. Klebanow v. Glaser, 80 N.J. 367, 370-71 (1979). We reject plaintiff's contention that it offends due process to apply the June 2004 amendment to his May 2004 stock sales.
The remaining question is whether it is manifestly unjust to subject plaintiff's gain to the higher tax rate incorporated in the June 2004 amendment. There is not one litmus test by which to measure whether it is manifestly unjust to apply a statute retroactively for a court must look to questions of overall fairness and equity. Oberhand v. Dir., Div. of Taxation, 193 N.J. 558, 572 (2008). The doctrine of manifest injustice is informed by issues raised by constitutional due process analysis, but such issues are not determinative. Ibid. A court should weigh "the public interest in the retroactive application of the statute against the affected party's reliance on previous law, and the consequences of that reliance." Ibid.
(quoting Nelson v. Bd. of Educ. of Old Bridge, 148 N.J. 358, 372 (1997)).
Oberhand illustrates these principles. That matter involved decedents who had structured their estate plans on the basis of the tax law then in effect. Oberhand, supra, 193 N.J. at 573. Subsequently, the law changed in a manner which created a tax liability where previously none had existed. Ibid. Specifically, the federal estate tax law was amended, effective on January 1, 2002, to increase the value of a decedent's assets that could pass free of that tax; part of the revision to the federal estate tax law included a phasing-out of the state death tax credit that had generated estate tax revenue for New Jersey. Id. at 562. At the time of this amendment, New Jersey's estate tax law mirrored the federal law. Ibid. New Jersey amended its estate tax law to prevent the revenue loss it would have otherwise incurred by providing that New Jersey's estate tax would continue to be calculated and collected as it had prior to the 2002 federal amendment. Ibid. The New Jersey Legislature passed this amendment in July 2002, retroactive to January 1, 2002. Ibid. It was this amendment that resulted in adverse tax consequences for the estates of those decedents who had died in the interval between January 2002 and July 2002 and thus had no opportunity to revise their estate plans in light of the change in law. Id. at 562.
The decedents' estates argued they should not be subject to such retroactive application, and the Court agreed.*fn1 Id. at 567. The Court considered the State's policy motivation in amending its estate tax law, to prevent the revenue loss it would have experienced absent such an amendment. Id. at 568-69. It gave substantial weight to the fact that the purpose of the amendment was not to increase revenues, concluding that a State's policy interest in amending its tax laws to prevent a tax loss is less than its interest in amending its tax laws to generate revenue. Id. at 573. This was evidenced by the fact that the State had not produced any estimates of revenue that would be collected through retroactive application of the amendment. Ibid.
We reject plaintiff's contention that the policy interests underlying the amendment in question here are comparable to the interests the Court discussed in Oberhand. Here, the June 2004 amendment was enacted as one element of the State's overall tax policy and was based on extensive planning and estimates to provide funds for increased homestead property tax rebates.
Further, at the time of its passage, the Office of Legislative Services specifically estimated the one-time revenue effect of retroactive application of the increase in tax rates.
S. Fiscal Note 1678, 211th Leg. (July 15, 2004); State to the Assembly Appropriations Comm.: Hearing on B. No. 100 (June 17, 2004).*fn2 In deciding whether to enact the amendment, the State weighed the revenue it would generate against the cost of homestead rebates. Ibid. This analysis was based in part upon retroactive application of the amendment.
In Oberhand, no tax would have been due but for the amendment. Here, plaintiff's sales of this stock were always taxable events. The only question is the amount of the tax to be paid.
Another factor to be considered is the length of the period in which the statute would be applied retroactively. Klebanow, supra, 80 N.J. at 373. Here, we are confronted with a relatively short period of six months. "[A] court should be especially loathe to invalidate a legislative judgment to apply a statute retroactively for a 'short and limited period.'" OFP, L.L.C. v. State, 395 N.J. Super. 571, 592 (App. Div. 2007), aff'd, 197 N.J. 418 (2008) (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 730, 104 S.Ct. 2709, 2718, 81 L.Ed. 2d 601, 611 (1984)).
Plaintiff, in his brief, addresses whether statutes may properly be classified as curative, clarifying, or remedial. That analysis, however, is misdirected in this appeal. Such distinction comes into play when a court is considering whether the Legislature intended the statute in question to be applied retroactively. As we noted earlier, however, there is no question here of the Legislature's intent.
Nobody has a vested right in the rate of taxation, which may be retroactively changed at the will of Congress at least for periods of less than twelve months; Congress has done so from the outset.... The injustice is no greater than if a man chance to make a profitable sale in the months before the general rates are retroactively changed. Such a one may indeed complain that, could he have foreseen the increase, he would have kept the transaction unliquidated, but it will not avail him; he must be prepared for such possibilities, the system being already in operation. His is a different case from that of one who, when he takes action, has no reason to suppose that any transactions of the sort will be taxed at all. [United States v. Darusmont, 449 U.S. 292, 298, 101 S.Ct. 549, 552-53, 66 L.Ed. 2d 513, 518-19 (citing Cohan v. Commissioner, 39 F.2d 540, 545 (2d Cir. 1930)).] The order under review is affirmed.