Does Congress Have the Authority to Retroactively Shorten The Statute of Limitations to Contest a Tax Assessment?

Recently, Congress retroactively changed the statute of limitations contained in Section 7508A. This retractive change significantly reduced the amount of time taxpayers have to challenge a federal tax assessment. This article discusses the Constitutional issues this raises.  Section 7508A provides the authority for the Treasury secretary or their delegates to provide relief to any taxpayer determined by the secretary to be affected by a federally declared disaster by Section 165(i)(5)(A). Section 165(i)(5)(A) defines “federally declared disaster” to mean any disaster determined by the U.S. president to warrant government assistance under the Robert T. Strafford Disaster Relief and Emergency Assistance Act (Strafford Act).

Under Section 7508A(a), the secretary has discretion to specify a period of up to one year that may be disregarded in determining the following:

1. whether affected taxpayers performed any of the acts described in Section 7508(a) in a timely manner;
2. the amount of any interest, penalties, or additions to tax, and
3. the amount of any credit or refund.

During the COVID-19 pandemic, Section 7508A(d)(1) operated to extend the statute of limitations to petition the Tax Court and to file suit for tax refund litigation.  Internal Revenue Code Section 7508A(d)(1) enacted in 2019 postponed taxpayers’ deadline to petition the Tax Court or file suit for tax refund litigation until 60 days after the latest incident date so specified. This meant that under the Section 7508A(d)(1), taxpayers had an additional 60 days from the date the COVID-19 pandemic was officially declared over to petition the Tax Court or file suit to litigate a tax controversy. On November 15, 2021, Congress amended Section 7508A(d)(1) to state that the postponement date to file a Tax Court petition or file suit for refund litigation is 60 days after the later of such earliest incident date. Under this new amended version of Section 7508A(d)(1), affected by the COVID-19 pandemic, the postponement date to petition the Tax Court or file suit for tax refund litigation may potentially end no later than May 12, 2020 (60 days after the declaration date of March 13, 2020 (60 days after the COVID-19 disaster declaration date of March 13, 2020. The retroactive change in Section 7508A(d)(1) has certainly negatively impacted  a number of taxpayers’ ability to sue the government if they disagree with a tax assessment or ability. The next obvious question is does the Due Process Clauses contained in the U.S. Constitution provide a general limitation on retractive civil lawmaking similar to the 2021 amendment of Section 7508A(d)(1) in 2021.

Rules Governing Retroactive Statutes

The cases governing the application of the Due Process Cause and retractive lawmaking begins with Greene v. United States, 376 U.S. 149 (1964). In Greene, the issue was whether an older or newer regulation should govern the claim of restitution brought by a government contractor’s employee. The government had improperly revoked the employee’s security clearance, causing him to lose his job. In 1959, the employee sought restitution for lost earnings from the Department of Defense under a regulation issued in 1955. In 1960, however, the 1955 regulation was replaced with a new regulation that contained a provision that conditioned restitution on a claimant’s current eligibility for a security clearance. The Supreme Court determined that the 1955 regulation governed, because “retrospective operation will not be given to a statute which interferes with antecedent rights unless such be the unequivocal and inflexible import of the terms, and the manifest intention of the legislature.” Since the employee had asserted his rights while the 1955 regulations were still in effect, and the 1960 regulations were not explicitly retroactive, the 1955 regulation governed. The Court held in Greene that there is a presumption against a retroactive statute.

Several years later, the Court took a contrary position to Greene in Thorpe v. Housing Authority of City of Durham, 393 U.S. 268 (1969). Thorpe involved an eviction proceeding brought by a housing authority against a tenant in a federally assisted housing project. The housing authority initiated eviction proceedings without notifying the tenant for the reasons for the eviction or providing the tenant with an opportunity to respond. Such procedures were not required at the time the authority started the eviction. However, at a later date, the Housing and Urban Development Department promulgated a regulation imposing a requirement that the tenant be provided with reasons for eviction and provide the tenant with an opportunity to respond. The tenant took the position in litigation that these new procedures must apply to her case and the Court agreed. The Court stated that the general rule is that an appellate court must apply the law in effect at the time it renders its decision.

The Court then applied its reasoning in Greene and Thorpe to decide Bennett v. New Jersey, 470 U.S. 632 (1985). In Bennett, the then Office of Education had provided federal funds to states pursuant to the Elementary and Secondary Education Act of 1965, to be used in accordance with the statute’s eligibility criteria. In 1976, the Office of Education determined that New Jersey had spent its funds outside of those statutory criteria and demanded repayment of the funds. In 1978, Congress revised the statutory criteria. As a result of the changed statutory criteria, New Jersey took the position that the amended criteria should be retroactive and govern the question as to whether or not it had misspent its funds. The Supreme Court refused to apply the statutory criteria retroactively. Although the Court found that the “general principle that a court must apply the law in effect at the time of its decision,” it pointed out that it has refused to do so where it would “infringe upon . . . a right that had matured.” The Court ruled that “statutes affecting substantive rights and liabilities are prematured.” Instead, “statutes affecting substantive rights and liabilities are presumed to have only prospective effect.” Observing that the federal government’s “right to recover any misused funds preceded the 1978 Amendment,” the Court concluded that the retroactive application of the amended criteria would interfere with a “matured” right so that the original criteria governed the Office of Education’s claim of repayment.

Later in Bowen v. Georgetown University Hospital, the Court had to consider a different question. In Bowen, the Court had to decide whether a retroactive rule was rulemaking by a federal agency. The retroactive rule questioned was issued by the Secretary of Health and Human Services to change how Medicare reimbursements were calculated. The reimbursement calculations took into consideration the wage index, a figure that reflects the salary requirements of hospital employees in a geographical region. In 1981, the Secretary of Health and Human Services issued a prospective rule that had the effect of reducing the wage index and medicare reimbursements compared to the pre-1981 rule. In promulgating the rule, the Secretary did not comply with the Administrative Procedure Act’s notice-and-comment requirements and as a result, the rule was successfully challenged. Then in 1984, the Secretary reissued the 1981 rule with the required notice and comment. The Court held that the Medicare Act did not authorize the Secretary to issue the 1984 rule. The Court stated the principle that “retroactivity is not favored in the law. As a result, congressional enactments and administrative rules will not be construed to have retroactive effect unless their language requires this result. Bowen created a presumption against retroactivity.

Finally, the Court considered Landgraft v. USI Film Products, 511 U.S. 244 (1994). In Landgraft, a worker sued her former employer under Title VII of the Civil Rights Act of 1964. The worker claimed that she was forced to resign because of her co-worker’s sexual harassment. The district court determined at trial that, while the former employee had been harassed, the harassment had not caused the worker’s resignation. Because Title VII at the time authorized only equitable relief, no relief was available to her, and the court dismissed the worker’s lawsuit. The worker appealed the district court’s decision. While the appeal was pending, Congress amended Title VII to allow for compensatory and punitive damages, which the plaintiff asserted should be available to her. The circuit court affirmed the district court’s decision. The circuit court reasoned that it would be unjust to subject the employer to damages that were not authorized at the time the suit was filed.

In Landgraft, the Court had concluded that there is a presumption against retroactivity. Although the Court held that there is a presumption against retroactivity, one issue remains to be defined: What counts as retroactivity. In Landgraft, the Court distinguished between substantive and procedural provisions. According to the Court, circumstances that lack “genuinely retroactive effect” such as procedural issues do not affect the substantive rights, liabilities, or duties of the parties. But where a statute “takes away or impairs vested rights acquired under existing laws, or creates a new obligation, imposes a new duty, or attaches a new disability, in respect to transactions already past, this impacts a substantive right and there is true retroactive effect and there is a presumption against retroactivity.

Application of Retroactivity to Amended Section 7508A(d)(1)

The amendment of Section 7508A(d)(1) significantly shortens the statute of limitations in which a party may bring suit against the government to challenge a tax assessment. After Langraft, one would think that the application of a new or amended statute of limitations “takes away or impairs vested rights” of a party and impacts a substantive right and therefore has retroactive effect. However, a number of courts presented with this issue have recognized that the enactment of a new or amended statute of limitations arising out of events that predate its enactment generally is not a retroactive application of the statute. See Vernon v. Cassadaga Valley Cent. School Dist, 49 F.3d 886, 890 (2d Cir. 1995). At first glance, it appears that any retroactivity concerns do not bar the application of the changed statute of limitations of Section 7508A(d)(1).

Conclusion

It is premature to determine if a court will find Section 7508A(d)(1) or any other future statute that replaces a statute of limitations with a shorter one in the tax context will survive Constitutional scrutiny. A determination that a statute of limitations such as amended Section 7508A(d)(1) is procedural and not substantive could result in possible inequitable-application of that statute. Because statutes of limitations create important reliance interests, govern whether or not an individual can vindicate a right, they lie on the cusp of the procedural/substantive distinction. See Sun Oil Co. v. Wortman, 486 U.S. 717, 722-29, 108 S.Ct. 2117, 2121-25, 100 Ed. 2d 743 (1988)(holding that statutes of limitations were properly treated as “procedural” for choice-of-law purposes in context of Full Faith and Credit Clause while noting that Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945), treated statutes of limitations as “substantive” for Erie doctrine purposes. Words such as “substantive” and “procedural” should have little impact on whether the application of a new statute of limitations impacts a presumption against retroactivity. Instead, each case should be carefully examined by the examining court to determine if a shortened statute of limitations in a tax matter is Constitutionally impermissible.

Anthony Diosdi is one of several international tax attorneys at Diosdi & Liu, LLP. As an international tax attorney, Anthony Diosdi provides international tax advice to closely held entities and publicly traded corporations. Anthony Diosdi also represents closely held entities and publicly traded corporations in IRS examinations. Diosdi & Liu, LLP has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.