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APPENDRODT v. UNITED STATES

June 11, 1980

ANN J. APPENDRODT, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.



The opinion of the court was delivered by: ZIEGLER

MEMORANDUM ORDER

I. History of Case

 This is a civil action for refund of $ 1,253.12, plus interest, in federal income taxes paid for 1976. Jurisdiction is conferred by 28 U.S.C. § 1346(a) (1) and 26 U.S.C. § 7422.

 The facts are not in dispute. On September 8 and 16, 1976, Ann J. Appendrodt sold stock which resulted in a net long term capital gain of $ 35,704.28. One-half of this sum or $ 17,852.14 was treated as a capital gain on her tax return for that year. The sum of $ 17,852.14 is a tax preference item as defined in Section 57 of the Internal Revenue Code. 26 U.S.C. § 57 (1978).

 On October 20, 1976, Congress enacted the Tax Reform Act of 1976. The Act amended Section 56 of the Code and increased the rate of minimum taxation on tax preference items from 10 to 15 percent. It also reduced, insofar as here pertinent, the exemption on tax preferences from $ 30,000 to $ 10,000. For individuals, the revision of the minimum tax provisions set forth in the Tax Reform Act of 1976 was made applicable to taxable years commencing after December 31, 1975.

 The Internal Revenue Service audited the taxpayer's return for 1976. In determining whether plaintiff owed any minimum tax on preference items, the Revenue Service applied the revised exemption provisions of Section 56 which established a 15 percent minimum tax on preference items in excess of $ 10,000. In so doing, the Service determined that plaintiff was subject to the revised minimum tax of Section 56, which resulted in a tax deficiency of $ 1,253.12. *fn1"

 The taxpayer paid the deficiency and instituted the instant action contending that the retroactive application of the amendment to Section 56 of the Internal Revenue Code violates the due process clause of the Fifth Amendment to the Constitution. In particular the taxpayer asserts that, if she had known of the potential retroactive pronouncement by Congress, she would have deferred the sale of her stock.

 Both parties have moved for summary judgment. We hold that the amendment to Section 56 merely increases the tax on preference items and lowers the statutory exemption. It does not create a wholly new tax. As a result, the statute is constitutionally sound notwithstanding its application to transactions which predated the Act within the same tax year. The motion of defendant for summary judgment will be granted, and the cross-motion of plaintiff for judgment will be denied.

 II. Discussion

 Section 56 of the Internal Revenue Code of 1954 imposes an income tax on items referred to as tax preferences. 26 U.S.C. § 56. *fn2" Tax preferences are defined in Section 57 of the Code and, during 1976, included within Section 57(a)(9) an amount equal to one-half of the net capital gain for the taxable year. *fn3"

 Section 56 was enacted as part of the Internal Revenue Code of 1954 by Section 301(a) of the Tax Reform Act of 1969. P.L. 91-172, 83 Stat. 487, 580. The tax rate imposed at that time was 10 percent of the amount by which the sum of the items of tax preference exceeded the sum of $ 30,000 plus the amount of taxes otherwise imposed, with certain adjustments. This provision, which has been subject to numerous amendments, *fn4" was also amended by the Tax Reform Act of 1976. P.L. 94-455, 90 Stat. 1520, 1549, 1550, 1552, Section 301(a). As amended in 1976, Section 56 increased the rate of tax and decreased the exemption by imposing tax equal to 15 percent on the amount by which the sum of the items of tax preference exceeds the greater of $ 10,000 or the amount of tax otherwise imposed for the taxable year, with certain adjustments. For individuals, this amendment applies to the taxable years subsequent to December 31, 1975.

 The explanation of the Joint Committee of Congress with respect to the amendment states as follows:

 
The minimum tax was enacted in the Tax Reform Act of 1969 in order to make sure that at least some minimum tax was paid on tax preference items, especially in the case of high-income persons who were not paying their fair share of taxes. However, the previous minimum tax did not adequately accomplish these goals, so the Act contains ...

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