United States v. Darusmont

Background

E. M. Darusmont and his wife sold their Houston triplex on July 15, 1976, after a job transfer. The sale produced long-term capital gain, and after a 50% capital-gain deduction the taxpayer recognized $51,332 of gain on two rented units. Because he bought a replacement residence, part of the gain was deferred under the tax code. The couple filed their 1976 return, paid tax, and also paid $2,280 attributed to the minimum tax under §§56 and 57. The Tax Reform Act of 1976, signed October 4, 1976, reduced the minimum-tax exemption and raised the rate, stating the changes applied to taxable years beginning after 1975, which reached back to affect the July sale. The taxpayers sued for a refund and the district court ruled in their favor.

Reasoning

The Court considered whether applying the October 1976 amendments to a sale completed in July violated the Fifth Amendment’s Due Process Clause. It relied on the long-standing congressional practice of making revenue laws effective for part of the year of enactment and on prior decisions upholding that practice. The Court found the 1976 changes were not a wholly new tax but adjustments to an existing minimum tax first imposed in 1969, and noted public discussion of the change gave taxpayers notice. Concluding the retroactive application was not arbitrary or oppressive, the Court reversed the district court and directed judgment for the United States.

Real world impact

The decision permits the IRS to apply the 1976 minimum-tax changes to transactions earlier in the same tax year, meaning taxpayers who completed sales before the law was signed may still owe the higher minimum tax. It underscores that Congress commonly sets tax effective dates covering part of the year in which a law is enacted.