Apache Bend Apartments, Ltd. v. U.S. Through I.R.S. ( 1992 )

United States Court of Appeals,
Fifth Circuit.
No. 91–1083.
APACHE BEND APARTMENTS, LTD., et al. Plaintiffs–Appellants,
v.
UNITED STATES of America, Acting Through the INTERNAL REVENUE
SERVICE Defendant–Appellee.
June 25, 1992.
Appeal from the United States District Court for the Northern
District of Texas.
Before GOLDBERG, JOLLY, and WIENER, Circuit Judges.
GOLDBERG, Circuit Judge:
In an effort to dampen the impact of the radical changes
brought about by the Tax Reform Act of 1986, Congress provided
certain taxpayers exemptions from the new tax laws. In many
instances, Congress designed these exemptions, known as "transition
rules," to favor only one or a very few taxpayers. The method by
which Congress selected those taxpayers that would enjoy the
benefit of the transition rules is the subject of this lawsuit.
Plaintiffs are taxpayers that were not granted any relief
under the transition rules. Claiming that they are similarly
situated to those taxpayers to whom the transition rules do apply,
they brought this lawsuit to challenge the constitutionality of the
transition rules under the Uniformity Clause and equal protection
component of the Due Process Clause of the United States
Constitution. They argued that Congress exhibited favoritism to
those taxpayers with strong congressional lobbies, and thus
discriminated against those taxpayers, like plaintiffs, that "were
not fortunate to have an ear in Congress." 132 Cong.Rec. H
8,389–90 (daily ed. Sept. 25, 1986) (statement of Rep. Kolbe).
Plaintiffs sought declaratory and injunctive relief, requesting
that the court enjoin the enforcement of the transition rules so
that no taxpayer could benefit from them.
In a published opinion, the district court articulated the
relevant facts, parsed the legislative history of the Tax Reform
Act, studied the precedents germane to the issues raised, and
detailed the legal basis for its decision. 702 F. Supp. 1285
(N.D.Tex.1988). In the end, it concluded that although these
plaintiffs had standing to raise their claims, and although the
court otherwise had jurisdiction to award the requested relief, the
transition rules of the Tax Reform Act of 1986 were not
constitutionally infirm.1
Our task on appeal is simplified by the exemplary efforts of
the district court.2 We need not retrace all of its steps to
1
The court initially reserved ruling on the equal protection
claim in order to allow the parties to submit evidence on whether
there was a rational basis for the classification. 702 F. Supp.
at 1298. In an unpublished order, the court granted summary
judgment in favor of the government, finding nothing in the
evidence tendered to the court undermining the rationality of the
classification.
2
We are also assisted by the scholarly work of Professor
Lawrence Zelenak, whose law review article on the subject case
has facilitated our research and contributed to our analysis of
the issues. See Lawrence Zelenak, Are Rifle Shot Transition
Rules and Other Ad Hoc Legislation Constitutional?, 44 Tax L.Rev.
563 (1989).
affirm its judgment. Rather, we limit our discussion to two
issues: first, whether these plaintiffs have standing to enjoin
the application of the transition rules, and second, whether the
transition rules violate the equal protection component of the Due
Process Clause. In all other respects, we agree with the district
court's reasoning.3
I. STANDING
The district court concluded that plaintiffs have standing to
challenge the constitutionality of the transition rules. Under
what the district court described as general standing principles,
the court reasoned that plaintiffs suffered an injury, traceable to
the Tax Reform Act, which the court could redress by prohibiting
the enforcement of the transition rules. 702 F. Supp. at 1291.
3
We agree with the analysis of the district court, 702
F. Supp. at 1294–95, rejecting the government's contention that
this suit is barred by the Anti–Injunction Act and the
Declaratory Judgment Act insofar as plaintiffs seek to have the
court nullify the transition rules. See Zelenak, supra note 2,
44 Tax L.Rev. at 614–15 & n. 251. We do entertain serious doubts
as to whether the court would have jurisdiction to enjoin the
enforcement of the Tax Reform Act of 1986 as a whole, as
plaintiffs requested in their complaint. See id. at 615 n. 252.
Our concern need not detain us, however, because having
determined that the court has jurisdiction to enjoin the
enforcement of the transition rules, we must address their
constitutionality in any event. Cf. City of Los Angeles v.
Lyons, 461 U.S. 95, 103 S. Ct. 1660, 75 L. Ed. 2d 675 (1983)
(question whether a court has jurisdiction to award one form of
relief is to be determined independently of whether the court has
jurisdiction to award some other form of relief); Society of
Separationists v. Herman, 959 F.2d 1283 (5th Cir.1992) (en banc)
(same).
We also concur in the district court's rejection of
plaintiffs' constitutional challenge to the transition rules
under the Uniformity Clause of the Constitution, Art. I, §
8, clause 1. 702 F. Supp. at 1295–96 & n. 11.
The standing question is complicated in this case by the
nature of the relief sought by plaintiffs. They do not ask for the
benefit of the transition rules that favor only the select
taxpayers. Rather, they seek equality in treatment through the
nullification of the transition rules. That is, they merely wish
to have the court enjoin the government from providing the tax
breaks presently accorded the select taxpayers through the
transition rules so that all taxpayers will be treated alike.
Thus, plaintiffs do not expect to obtain any tangible benefit or
economic relief from their lawsuit, only the elimination of what
they perceive to be discriminatory treatment.
The requested relief raises concerns about redressibility.
It is well settled that a plaintiff has standing to bring a claim
in federal court only if he can show an actual or threatened
injury, attributable to the defendant, which the court can redress.
Heckler v. Mathews, 465 U.S. 728, 104 S. Ct. 1387, 1394, 79 L. Ed. 2d
646 (1984). If we view the injury suffered by plaintiffs in this
case as the increased tax liability attendant to the new tax laws,
then one might argue convincingly that nullifying the transition
rules will in no way redress plaintiffs' injury, for they will
continue to bear the increased tax liability even in the absence of
the transition rules. Indeed, the only impact of nullification
would be to impose that same tax liability upon those taxpayers
enjoying favorable treatment under the transition rules. Viewed in
that light, it would appear that plaintiffs have no standing
because the relief sought would not redress the economic injury
suffered. In essence, they would be litigating the tax liability
of third parties—the taxpayers favored by the transition rules.
But in fact, the injury alleged by plaintiffs is not
exclusively an economic one. Rather, plaintiffs contend that the
disparity in treatment is itself a judicially cognizable injury,
attributable to the government by virtue of its enforcement of the
transition rules, which the federal court can redress. The court
can redress this injury, in plaintiffs' view, either by making the
transition rules applicable to plaintiffs (insofar as they are
similarly situated), or by eliminating the transition rules
altogether so that no one gets a tax break. In their complaint, as
we have indicated, plaintiffs have pursued the latter course. They
seek the satisfaction of knowing that the Tax Reform Act treats no
one any better than them: If plaintiffs are not going to get the
tax break, then no other similarly situated taxpayer should receive
one, either.
We believe that the nullification of the transition rules so
as to abrogate the tax breaks accorded to the select few under the
transition rules would provide appropriate redress for the injuries
alleged by plaintiffs. With respect to plaintiffs' equal
protection claim, Heckler v. Mathews, 465 U.S. 728, 104 S. Ct. 1387,
79 L. Ed. 2d 646 (1984), is right on point. In that case, the
Supreme Court held that nondependent male retirees had standing to
bring an equal protection challenge to a law favoring nondependent
female retirees, even though the only redress available to him
would be the abrogation of benefits to the nondependent female
retirees: A severability clause in the statute provided that if
the statute were declared unconstitutional, the favorable treatment
accorded to female retirees would be eliminated. Thus, the male
plaintiff had no chance of obtaining the benefits afforded to
female retirees under the statute; the most he could hope for was
equality in treatment through the discontinuation of benefits to
females. Reasoning that the injury in an equal protection case is
not the denial of benefits alone but the denial of equal treatment
as well, the Court concluded that "the appropriate remedy is a
mandate of equal treatment, a result that can be accomplished by
withdrawal of benefits from the favored class as well as by
extension of benefits to the excluded class." Mathews, 104 S. Ct.
at 1395 (emphasis in original) (citing Iowa–Des Moines Nat'l Bank
v. Bennett, 284 U.S. 239, 52 S. Ct. 133, 76 L. Ed. 265 (1931)). The
Court explained:
[W]e have never suggested that the injuries caused by a
constitutionally underinclusive scheme can be remedied only by
extending the program's benefits to the excluded class. To
the contrary, we have noted that a court sustaining such a
claim faces "two remedial alternatives: it may either declare
the statute a nullity and order that its benefits not extend
to the class that the legislature intended to benefit, or it
may extend the coverage of the statute to include those who
are aggrieved by the exclusion."
Id. 104 S.Ct. at 1394–95 (quoting Welsh v. United States, 398 U.S.
333, 90 S. Ct. 1792, 1807, 26 L. Ed. 2d 308 (1970) (Harlan, J.,
concurring in result)).
The equal protection challenge levied by plaintiffs in this
case is, for standing purposes, identical to the equal protection
claim made in Mathews. Plaintiffs contest the classification as
"constitutionally underinclusive," attributable to plaintiffs'
political impotence, an inability to garner political favoritism
from members of Congress. Like Mathews, they ask the court to
strike down the scheme even though such a remedy would only strip
benefits from the favored class; it would not directly enlarge
their own pocketbooks.4 Of course, such a remedy would work to
eliminate the disparity in treatment and thus restore equality to
the statutory scheme. And
because [the taxpayer plaintiffs] personally [have] been
denied benefits that similarly situated [favored taxpayers]
receive, [theirs] is not a generalized claim of the right
possessed by every citizen, to require that the Government be
administered according to law.
Mathews, 104 S. Ct. at 1396 n. 9 (quotations and citations omitted).
Some might suggest that the rule of Mathews—conferring
standing in equal protection cases in which the only remedy
available to the disfavored class is the elimination of benefits to
the favored class—should be reserved for those cases involving
4
Even though eliminating the transition rules would not
affect plaintiffs' pocketbooks directly, it would do so
indirectly. The tax collector would garner more contributions
for the public purse from the entities exempted by the transition
rules. In theory, the additional tax revenue collected from
those taxpayers exempted from taxation by the transition rules
make it more likely that the budgetary requirements would be met
with lower taxation for every taxpayer. In other words,
eliminating preferences for the few would mean lower taxes for
the many. As the government concedes in this court: "In the
instant case, a very few taxpayers have received an extra
benefit, while the vast majority could be said to be extra
burdened. The burden is thus spread among the many." (R.163)
stigmatic injury of the "archaic" variety: discrimination based on
a characteristic of the person disfavored, such as race, alienage,
national origin, gender, residence, age, or legitimacy.5 We do not
share that view. As we explain in Part II.A. of this opinion, a
classification scheme violates equal protection even if the
classifications are not drawn along suspect or quasi-suspect lines;
classifications of any sort that are not rationally related to a
legitimate governmental interest are unconstitutional. Equal
protection is not concerned exclusively with archaic stigmas.6
When a plaintiff alleges that he has been "personally denied equal
treatment," Mathews, 104 S. Ct. at 1395 (emphasis added)—that he has
been denied a particular benefit accorded to others who are
similarly situated—he has alleged an equal protection injury,
regardless of the nature of the stigma that attaches to the
disfavored class. See Allegheny Pittsburgh Coal Co. v. County
5
Professor Zelenak observes that "[t]here is language in the
Mathews opinion suggesting that the "serious noneconomic injuries
to those persons who are personally denied equal treatment solely
because of their membership in a disfavored group,' are
essentially the injuries of being stereotyped or stigmatized."
Zelenak, supra note 2, 44 Tax L.Rev. at 619 (1989). He posits
that the Court could confine the reach of Mathews by limiting
equal protection standing to plaintiffs who have been stigmatized
or stereotyped by the classification, and that, unlike
classifications based on race or gender, the classification in
this case carries no stigma or stereotype. In the end, however,
Professor Zelenak concludes that the Court would not give such a
cramped reading to the Mathews opinion and would find standing in
this case. Id.
6
Interestingly, Mathews involved a challenge to a statutory
scheme favoring nondependent female retirees. The lawsuit was
brought by nondependent male retirees, hardly a class suffering
from the archaic stigma that would make them feel that they were
"less worthy participants in the political community." See also
Orr v. Orr, 440 U.S. 268, 99 S. Ct. 1102, 1111–1114, 59 L. Ed. 2d
306 (1979) (striking down state statute that authorized the
imposition of alimony obligations on husbands, but not wives).
Comm'n, 488 U.S. 336, 109 S. Ct. 633, 102 L. Ed. 2d 688 (1989)
(holding that formula used for property valuation was
unconstitutional because it valued comparable properties
differently); see also City of New Orleans v. Dukes, 427 U.S. 297,
96 S. Ct. 2513, 49 L. Ed. 2d 511 (1976) (entertaining but rejecting
equal protection challenge to city ordinance which contained a
"grandfather clause"); United States R.R. Retirement Bd. v. Fritz,
449 U.S. 166, 101 S. Ct. 453, 66 L. Ed. 2d 368 (1980) (entertaining
but rejecting equal protection challenge to statutory scheme which
provided select employees with windfall benefits).
Here, plaintiffs allege that they have been denied tax breaks
afforded to other similarly situated taxpayers by the transition
rules. Contrast Allen v. Wright, 468 U.S. 737, 104 S. Ct. 3315,
3326–27, 82 L. Ed. 2d 556 (1984) (no standing because plaintiffs
themselves had not been denied equal treatment). They say that
there is no rational basis for denying them the tax breaks. Were
we to agree with plaintiffs on the merits, we could redress that
injury either by extending to them the transitional relief accorded
to the select taxpayers or by nullifying the transition rules
altogether. Under either course, we could achieve the "mandate of
equal treatment." Mathews, 104 S. Ct. at 1395 (emphasis in
original).
We are also persuaded, for similar reasons, that these
plaintiffs have standing to bring a challenge to the classification
under the Uniformity Clause of the Constitution: "If being treated
unequally is itself sufficient injury to establish equal protection
standing, then being taxed nonuniformly should be itself sufficient
injury to establish uniformity clause standing." Zelenak, supra
note 2, 44 Tax L.Rev. at 620 (1989).7
In all, we conclude that plaintiffs have standing to press
their constitutional claims under the equal protection component of
the Due Process Clause and under the Uniformity Clause of the
Constitution.8 But for the reasons expressed by the district
7
Professor Zelenak notes that there is an argument against
extending the rationale of Mathews to the Uniformity Clause
context. He observes that the Uniformity Clause makes no
references to the rights of individuals but focuses instead on
the rights of states. See United States v. Ptasynski, 462 U.S.
74, 103 S. Ct. 2239, 76 L. Ed. 2d 427 (1983); Knowlton v. Moore,
178 U.S. 41, 89, 20 S. Ct. 747, 766, 44 L. Ed. 969 (1900).
Arguably, therefore, individuals have no standing to raise a
challenge under the Uniformity Clause. Professor Zelenak rejects
that argument because "[r]ights of States are, in the final
analysis, meaningful only inasmuch as they create rights in
persons within those States. The tax uniformity clause has
meaning only as a guarantee that persons will not be
discriminated against in taxation because of where they happen to
be located." Zelenak, supra note 2, 44 Tax L.Rev. at 621.
8
The district court held that plaintiffs had "taxpayer
standing" to bring their uniformity clause challenge. 702
F. Supp. at 1292 (applying the two-prong test of Flast v. Cohen,
392 U.S. 83, 88 S. Ct. 1942, 20 L. Ed. 2d 947 (1968) (taxpayer
standing to bring establishment clause challenge to federal
spending on parochial schools)).
It appears that these plaintiffs fit neatly within the
two-prong test for taxpayer standing set forth in Flast
insofar as their uniformity clause challenge is concerned:
They challenge the exercise "of congressional power under
the taxing and spending clause of Art. I, § 8, of the
Constitution," Valley Forge College v. Americans United for
Separation of Church and State, Inc., 454 U.S. 464, 478, 102
S. Ct. 752, 761, 70 L. Ed. 2d 700 (1982) (emphasis added), and
allege that the "challenged enactment exceeds specific
constitutional limitations upon the exercise of the taxing
and spending power" (that the tax is prohibited by the
Uniformity Clause of the Constitution, a limitation on
court, and as we shall elaborate with respect to the equal
protection claim, we do not find the classification scheme
constitutionally infirm.
II. EQUAL PROTECTION
As Congress debated the passage of the Tax Reform Act of 1986,
it became quite clear that the package of legislation would
necessarily include transition rules: exemptions from the new tax
laws designed to assist those taxpayers that had relied on the
previous tax laws in making significant investment decisions. For
the most part, these ad hoc tax provisions were not available to
all taxpayers, but only to those on behalf of whom particular
members of Congress had requested the exemptions. Members of
Congress appeased their requesting constituents by according them
transitional relief, yet avoided threatening the viability of the
tax package by evading the extension of transitional relief across
the board. A transition rule of general application, as opposed to
these "rifle shot" transition rules, would have been far more
Congress' taxing power). Id. at 479, 102 S.Ct. at 762
(emphasis added). Contra Zelenak, supra note 2, 44 Tax
L.Rev. at 623 & n. 278 ("The difficulty, in a case like
Apache Bend, is in identifying the spending necessary to
support taxpayer standing."). We note that the Supreme
Court has not yet identified a provision in the
Constitution, other than the Establishment Clause, which
operates as a limitation on the taxing and spending power so
as to vest plaintiffs with taxpayer standing. Zelenak,
supra note 2, 44 Tax L.Rev. at 624 ("It is unlikely that the
Supreme Court will ever recognize taxpayer standing in suits
based on any part of the Constitution other than the
Establishment Clause."). Because we conclude that these
plaintiffs have standing under traditional standing
principles, we need not decide, and express no opinion on,
whether these plaintiffs would otherwise have taxpayer
standing under Flast.
costly in terms of tax revenue, albeit eminently fairer.
This method of doling out tax breaks raised more than a few
eyebrows in Congress. Several members of Congress expressed
concern that similarly situated taxpayers were not being treated
equally. 702 F. Supp. at 1287–89 (quoting 132 Cong.Rec. S 8,128
(daily ed. June 23, 1986) (statement of Sen. Levin); id. at S
13,810 (daily ed. Sept. 26, 1986); 132 Cong.Rec. H 8,389–90 (daily
ed. Sept. 25, 1986) (statement of Rep. Kolbe); 132 Cong.Rec. S
7,654 (daily ed. June 17, 1986) (statement of Sen. Metzenbaum)).
Others conceded their use of raw political power to obtain
transition rules for favored constituents. Id. Even in this
court, the government acknowledges that "political considerations
definitely played a significant role in the selection process ...
[and] the focus of the debate was on subjective factors [as opposed
to objective factors]." (R.135)
Plaintiffs contend that no rational basis exists for Congress'
classification as between those taxpayers afforded relief under the
transition rules and those who were not. They maintain that but
for the fact that they did not have "the right people speaking for
[them]" in Congress, 132 Cong.Rec. S 13,874 (daily ed. Sept. 26,
1986) (statement of Sen. Metzenbaum), they are similarly situated
to those taxpayers who presently enjoy tax breaks accorded by the
transition rules. In plaintiffs' view, this
classification—providing benefits only to those taxpayers with
connections in Congress and the political savvy to exploit those
relationships—amounts to a violation of equal protection.
A.
In order to properly adjudge plaintiffs' claim, we first
establish the relevant legal framework. When a fundamental right
is at stake, or the classification at issue is inherently
suspect—classification based on race, national origin, and
alienage—the courts evaluate the legislation under the most
exacting standard: strict scrutiny. Town of Ball v. Rapides
Parish Police Jury, 746 F.2d 1049, 1059 (5th Cir.1984). Such a
classification "will almost never be based on legitimate
governmental reasons," and to survive judicial review, "must
further a compelling governmental interest which cannot be served
by alternative means less burdensome to the suspect class or
fundamental right or interest." Id. (footnotes omitted). Thus,
under strict scrutiny, legislative classifications must serve a
compelling governmental interest and be narrowly tailored to the
achievement of that interest.
The courts examine legislative classifications not involving
"suspect" classes but involving other classifications "giv[ing]
rise to recurring constitutional difficulties"—gender and
illegitimacy—under an "intermediate" or "heightened" scrutiny. Id.
at 1059–60. Although not as exacting as strict scrutiny, this
intermediate scrutiny nevertheless demands that the "quasi-suspect"
classification serve important governmental interests and be
substantially related to the achievement of those interests. Id.;
City of Cleburne, Tex. v. Cleburne Living Center, 473 U.S. 432, 105
S. Ct. 3249, 3255, 87 L. Ed. 2d 313 (1985).
The classifications at issue in this case are neither
"suspect" nor "quasi-suspect." This is an equal protection
challenge to tax legislation, a form of economic regulation. The
Supreme Court has exhibited special deference to legislative bodies
in this arena. Indeed, tax legislation carries with it a
"presumption of constitutionality," Regan v. Taxation With
Representation of Washington, 461 U.S. 540, 547, 103 S. Ct. 1997,
2002, 76 L. Ed. 2d 129 (1983) (quoting Madden v. Kentucky, 309 U.S.
83, 87–88, 60 S. Ct. 406, 407–08, 84 L. Ed. 590 (1940), and
"[l]egislatures have especially broad latitude in creating
classifications and distinctions in the tax statutes." Id.
Contrary to plaintiffs' argument, taxation does not implicate a
fundamental right and, thus, classifications in tax schemes are not
subject to strict scrutiny.9 Rather, the Court "presumes the
challenged statutory distinctions are constitutional and requires
only that they be rationally related to a legitimate [governmental]
interest." Town of Ball, 746 F.2d at 1058. To be sure, the
Supreme Court recently applied the rational relation test in a
case, like this one, involving an equal protection challenge to a
tax scheme. See Allegheny Pittsburgh Coal Co. v. County Comm'n,
9
Plaintiffs' reliance on Corfield v. Coryell, 6 F. Cas. 546
(No. 3,230) (CCED Pa.1825) is unavailing, for that case
delineated the scope of rights under the Privileges and
Immunities Clause of Article 4, § 2, Clause 1 of the
Constitution, not the equal protection component of the Due
Process Clause.
488 U.S. 336, 109 S. Ct. 633, 102 L. Ed. 2d 688 (1989). The Court
reiterated the principle that so long as "the selection or
classification is neither capricious nor arbitrary, and rests upon
some reasonable consideration of difference or policy, there is no
denial of equal protection of the law." Id. 109 S.Ct. at 638
(quoting Brown–Forman Co. v. Kentucky, 217 U.S. 563, 573, 30 S. Ct.
578, 580, 54 L. Ed. 883 (1910)).
That the Supreme Court has only in rare instances struck down
economic regulations is hardly surprising, for the rational basis
test is not nearly as rigorous as the strict or intermediate
scrutiny tests. Though not a tax case, the Court's decision in
City of New Orleans v. Dukes, 427 U.S. 297, 96 S. Ct. 2513, 49
L. Ed. 2d 511 (1976), provides an illustrative example of the Court's
application of the rational basis test. In Dukes the Court upheld
a "grandfather clause" that exempted two pushcart food vendors from
a law prohibiting the sale of food from pushcarts in the historic
French Quarter, the "Vieux Carre," of New Orleans. The government
asserted an interest in preserving "the appearance and custom
valued by the Quarter's residents" and maintaining the charm and
character that attracted tourists. Id. 96 S.Ct. at 2515. The
City's ban of pushcart food vendors from the French Quarter applied
to all vendors except for those who had "continuously operated the
same business within the Vieux Carre ... for eight or more years."
Only two vendors qualified for the exception. A panel of this
court found a "pivotal defect" in the City of New Orleans'
classification scheme. We found no foundation in the hypothesis
that the "favored class" was any more likely "to operate in a
manner more consistent with the traditions of the Quarter than
would any other operator" and "no reason to believe that length of
operation "instills in the [favored] licensed vendors (or their
likely transient operators) the kind of appreciation for the
conservation of the Quarter's tradition' that would cause their
operations to become or remain consistent with that tradition."
Id. (quoting 501 F.2d 706, 711–12 (5th Cir.1974)). We thus
concluded that the classification violated equal protection because
it did not bear a rational relation to the asserted government
interest.
The Supreme Court did not agree. It explained that
[l]egislatures may implement their program step by step in
such economic areas, adopting regulations that only partially
ameliorate a perceived evil and deferring complete elimination
of the evil to future regulations ... [R]ather than proceeding
by the immediate and absolute abolition of all pushcart food
vendors, the city could rationally choose initially to
eliminate vendors of more recent vintage. This gradual
approach to the problem is not constitutionally impermissible.
Id. 96 S.Ct. at 2517. Like the classification scheme at issue in
the instant case, "[t]he grandfather clause in Dukes was
legitimated by the purpose of protecting "substantial reliance
interests' " in the favored class. See Zelenak, supra note 2, 44
Tax L.Rev. at 582. The Supreme Court elucidated:
The city could reasonably decide that newer businesses were
less likely to have built up substantial reliance interests in
continued operation in Vieux Carre and that the two vendors
who qualified under the "grandfather clause"—both of whom had
operated in the area for over twenty years rather than
eight—had themselves become part of the distinctive character
and charm that distinguishes the Vieux Carre. We cannot say
that these judgments so lack rationality that they constitute
a constitutionally impermissible denial of equal protection.
Dukes, 96 S. Ct. at 2518.
Significantly, the Dukes Court overruled Morey v. Doud, 354
U.S. 457, 77 S. Ct. 1344, 1 L. Ed. 2d 1485 (1957), "the only case in
the last half century to invalidate wholly economic regulation
solely on equal protection grounds." 96 S. Ct. at 2518. Morey
involved a state statute regulating the issuance of money orders,
but exempting the American Express Company by name from all of the
statutory provisions. The government asserted an interest in
protecting consumers when transacting in money orders. The state
posited that because American Express was of "unquestionable
solvency and high financial standing," it was reasonable for the
state to exempt it from the regulations. The Supreme Court in
Morey did not buy the argument. Morey, 354 U.S. at 469, 77 S.Ct.
at 1352. It found that the classification bore only a "remote
relationship" to the asserted government interest of protecting the
public. The Court bluntly disapproved of "the creation of a closed
class by the singling out of ... a named company." Id.
By explicitly overruling Morey in Dukes, the Supreme Court has
opened the door to legislative classifications that single out
individuals for preferential treatment, so long as the grounds for
doing so have some conceivable foundation in reason. The
implication of Dukes to the case at bar is evident; as Professor
Zelenak explains:
The problem presented to a challenger of an ad hoc tax
revision by the overruling of Morey is apparent. In Morey,
the Court adopted the suggested attitude of suspicion to laws
which single out one person for special treatment. The
overruling thus would seem to indicate that the Court now
rejects the notion that such laws should be viewed with any
particular suspicion.
Zelenak, supra note 2, 44 Tax L.Rev. at 582. Under Dukes,
legislative classifications which amount to "the creation of a
closed class by the singling out of ... a named company," Morey,
354 U.S. at 469, 77 S.Ct. at 1352, can withstand scrutiny under the
rational basis test.
Another case that reaffirms the judicial deference accorded
economic regulation under the rational basis test and illustrates
the challenges faced by plaintiffs in this case is the Supreme
Court's decision in United States R.R. Retirement Bd. v. Fritz, 449
U.S. 166, 101 S. Ct. 453, 66 L. Ed. 2d 368 (1980). Fritz involved
classifications and transitional measures in the Railroad
Retirement Act of 1974. The Act, designed to restructure the
railroad retirement system, generally eliminated a windfall benefit
that inured to employees who had worked for both railroad and
nonrailroad employers: those employees qualified for both railroad
retirement and social security benefits. The Act eliminated those
dual benefits for all but a limited class of employees. One class
consisted of those employees who were unretired, had ten years of
railroad employment and sufficient nonrailroad employment to
qualify for social security benefits, and performed some railroad
service in the calendar year 1974 or had a current connection with
the railroad as of December 31, 1974. 449 U.S. at 172, 101 S.Ct.
at 458.
Employees who did not qualify for this exemption because they
were not employed by a railroad in 1974 and had no "current
connection" with it at the end of 1974 brought a class action suit
challenging the classification under the equal protection component
of the Due Process Clause. Id. at 173, 101 S.Ct. at 458. They
claimed to be similarly situated to those employees who continued
to receive the windfall of dual benefits. The district court
agreed and held that a legislative differentiation based solely on
whether an employee was active in the railroad business in 1974 was
not "rationally related to the congressional purposes of insuring
the solvency of the railroad retirement system and protecting
vested benefits." Id. at 174, 101 S.Ct. at 459.
The Supreme Court reversed, finding the classification scheme
constitutionally acceptable. It explained that "Congress could
properly conclude that persons who had actually acquired statutory
entitlement to windfall benefits while still employed in the
railroad industry had a greater equitable claim to those benefits
than the members of [plaintiff's] class who were no longer in
railroad employment when they became eligible for dual benefits."
Id. at 178, 101 S.Ct. at 461. Citing Dukes, the Court reasoned
that "[b]ecause Congress could have eliminated windfall benefits
for all classes of employees, it is not constitutionally
impermissible for Congress to have drawn lines between groups of
employees for the purpose of phasing out those benefits." Id. at
177, 101 S.Ct. at 460 (citing Dukes, 96 S. Ct. at 2517). "The "task
of classifying persons for ... benefits ... inevitably requires
that some persons who have an almost equally strong claim to
favored treatment be placed on different sides of the line,' and
the fact that the line might have been drawn differently at some
points is a matter for legislative, rather than judicial,
consideration." Id. at 179, 101 S.Ct. at 461 (quoting Mathews v.
Diaz, 426 U.S. 67, 83–84, 96 S. Ct. 1883, 1893, 48 L. Ed. 2d 478
(1976)).
B.
The Supreme Court's decision in Dukes (overruling Morey ) and
Fritz "suggest that the mode of analysis employed by the Court ...
virtually immunizes social and economic legislative classifications
from judicial review." Fritz, 449 U.S. at 183, 101 S.Ct. at 464
(Brennan, J., dissenting). Nevertheless, not all economic
regulations pass the rational relation test; some regulations fail
even this lenient examination. The Court has invalidated tax
classifications on equal protection grounds when it has found
absolutely no reasonable basis for the classifications. See, e.g.,
Allegheny Pittsburgh Coal Co. v. County Comm'n, 488 U.S. 336, 109
S. Ct. 633, 102 L. Ed. 2d 688 (1989) (formula for property valuation
based on most recent sale resulting in relative overvaluation, and
thus higher tax assessment, for comparable properties); Williams
v. Vermont, 472 U.S. 14, 105 S. Ct. 2465, 2472, 86 L. Ed. 2d 11 (1985)
(higher tax on purchase of out-of-state automobiles based on
out-of-state residency); Metropolitan Life Ins. v. Ward, 470 U.S.
869, 105 S. Ct. 1676, 84 L. Ed. 2d 751 (1985) (lower gross premiums
tax rate on domestic insurance companies); City of Cleburne, Texas
v. Cleburne Living Center, 473 U.S. 432, 105 S. Ct. 3249, 87 L. Ed. 2d
313 (1985) (zoning ordinance which excluded group homes for the
mentally retarded); Zobel v. Williams, 457 U.S. 55, 102 S. Ct.
2309, 72 L. Ed. 2d 672 (1982) (state dividend distribution plan
favoring established residents over new residents); United States
Dept. of Agriculture v. Moreno, 413 U.S. 528, 93 S. Ct. 2821, 37
L. Ed. 2d 782 (1973) (denial of food stamps to households containing
a non-relative).
Plaintiffs contend that Williams and Ward, supra, lend support
for striking down the transition rules. In Williams, the Court
struck down a state law that exempted the payment of state sales
taxes by state residents who bought cars out-of-state, but imposed
the tax on those moving into the state who had bought cars
out-of-state. The Court reasoned:
residence at the time of purchase is a wholly arbitrary basis
on which to distinguish among present Vermont registrants....
The purposes of the statute would be identically served, and
with an identical burden, by taxing each. The distinction
between them bears no relation to the statutory purpose.
105 S. Ct. at 2472.
Because Williams and Ward, another case striking down tax
classifications, involved discrimination based on residency, they
provide limited precedential value with respect to other
classifications. The Court's inclination to invalidate the
classifications in Williams and Ward is perhaps best explained by
the Court's distaste for "parochial discrimination." Ward, 105
S. Ct. at 1681. As the Court wrote in Ward:
The Equal Protection Clause forbids a State to discriminate in
favor of its own residents solely by burdening "the residents
of other state members of our federation." ... The validity
of the view that a State may not constitutionally favor its
own residents by taxing foreign corporations at a higher rate
solely because of their residence is confirmed by a long line
of this Court's cases so holding.
Id. at 1682 (quoting Allied Stores of Ohio, Inc. v. Bowers, 358
U.S. 522, 79 S. Ct. 437, 3 L. Ed. 2d 480 (1959)). In Williams, the
Court wrote:
"[E]qual treatment for in-state and out-of-state taxpayers
similarly situated is the condition precedent for a valid use
tax on goods imported from out of state." A State may not
treat those within its borders unequally solely on the basis
of their different residences or States of incorporation.
105 S. Ct. at 2471–72 (quoting Halliburton Oil Well Co. v. Reily,
373 U.S. 64, 70, 83 S. Ct. 1201, 1204, 10 L. Ed. 2d 202 (1963)). See
also Zobel, 102 S. Ct. at 2314–15 (duration of residency not
rationally related to state's interest).
Allegheny is the most apposite, and most recent, case wherein
the Court invalidated a tax classification scheme. The Court held
that assessments on real property based on most recent acquisition
price violated equal protection. The court reasoned that
acquisition price did not necessarily correlate with the market
value: recently sold property would be valued much higher than
identical property that had not been sold for a long time. The
Court concluded that the distinction was truly arbitrary and
capricious:
the fairness of one's allocable share of the total property
tax burden can only be meaningfully evaluated by comparison
with the share of others similarly situated relative to their
property holdings. The relative undervaluation of comparable
property in Webster County over time therefore denies
petitioner the equal protection of the law.
109 S. Ct. at 639. The Court emphasized that "[t]he Equal
Protection Clause "applies only to taxation which in fact bears
unequally on persons or property of the same class.' " Id. at 637
(quoting Charleston Fed. Sav. & Loan Ass'n v. Alderson, 324 U.S.
182, 190, 65 S. Ct. 624, 629, 89 L. Ed. 857 (1945) (collecting
cases)). But even Allegheny is of limited assistance to us because
it did not involve classifications which were a product of
legislative "line-drawing." Compare Fritz, 449 U.S. at 179, 101
S. Ct. at 461. Rather, it involved a formula for valuation found
fundamentally flawed insofar as the formula produced "a disparity
in assessed values of similar property." 109 S. Ct. at 639.
C.
We now apply these legal principles to the constitutional
challenge levied in this case to determine whether the transition
rules can withstand plaintiffs' attack. Under the rational basis
test, we must first consider whether the challenged legislation has
a legitimate government purpose. If so, we consider whether the
challenged classification promotes that legislative purpose. Town
of Ball, 746 F.2d at 1058–59 n. 36 (quoting Western & S. Life Ins.
Co. v. State Bd. of Equalization, 451 U.S. 648, 668, 101 S. Ct.
2070, 2083, 68 L. Ed. 2d 514 (1981)).
The district court concluded that Congress had a legitimate
governmental purpose in creating the transitional rules:
The Court finds that making adjustments under a new tax law
for those who would be unduly burdened is "a legitimate
governmental purpose' and does not violate the Constitution.
Such pervasive changes in the tax law have seldom been seen in
our country. Numerous taxpayers may have taken actions based
upon the old tax law. Some of these taxpayers may be unduly
burdened by the new Act. Congress certainly has the right to
draft legislation to protect a group of taxpayers who are so
affected.
702 F. Supp. at 1297. We agree that the legislature has a
legitimate governmental purpose in making exceptions from the
general application of the Tax Reform Act to protect "substantial
reliance interests." Dukes, 96 S. Ct. at 2518. We find nothing
inherently invidious in Congress wanting to "soften the blow of the
new law on businesses that undertook projects under the [old] tax
law, only to be told the rules would be changed in the middle of
the game." 132 Cong.Rec. S8,128 (daily ed. June 23, 1986)
(statement of Sen. Levin).
But that does not end our inquiry, for we must evaluate not
only the purpose of the legislation, but the purpose and legitimacy
of the classifications as well. To do that, we must first identify
the classification. Plaintiffs take the position that:
[w]hile assisting all taxpayers with general transition relief
would be a valid and appropriate governmental purpose, the
objective of providing selective exemptions to only a few,
based upon their access to politicians, is an illegitimate and
prohibited objective ... There can never be a legitimate
public purpose served by the arbitrary selection of a favored
few from the general applicability of a taxing statute.
Plaintiffs would have us define the "favored" class as those
taxpayers with "access to influential members of Congress."
Their argument is not without some foundation. The district
court catalogued the many references in the legislative history to
political favoritism exhibited by members of Congress. See 702
F. Supp. at 1287–89. For example, the Chairman of the Senate
Finance Committee confessed that
[i]t would be foolish of me to say that, on occasion, politics
did not enter those judgments. If the Speaker of the House
requested the chairman of the Ways and Means Committee a
transition rule, my hunch is that [he] would give it
reasonably high priority in his thinking.
If Senator Dole requested one of me, I would give it
reasonably high priority in my thinking.
132 Cong.Rec. S13,786 (daily ed. Sept. 26, 1986) (statement of Sen.
Packwood). Another Senator "admitted using his position on the
committee to obtain special treatment for his constituents." 702
F. Supp. at 1288.
I do not mind saying to my colleagues that I have used my
position on the Finance Committee to the advantage of the
people of Minnesota.... I have used my position to get
special rules for my people....
132 Cong.Rec. S8,221 (daily ed. June 24, 1986) (statement of Sen.
Durenberger).
Moreover, it is quite plain that absent "access to the
conference committee which enabled them to obtain a so-called
transition rule so their activity could continue to be taxed under
the old law," 132 Cong.Rec. S13,810 (daily ed. Sept. 26, 1986)
(statement of Sen. Levin), there was little, if any, chance that a
taxpayer would receive transitional relief. As one Senator asked:
"[W]hat about those who could not come to Washington and make their
case? What about those who could not hire the lobbyists to present
their appeal? Where is the fairness to them?" Id.
While we recognize that politics played a part in determining
to whom the transition rules would apply, we nevertheless believe
that, in view of the great deference accorded by the Supreme Court
to tax legislation, the classifications contain no constitutional
malady. Congress sought to give transitional relief to those
taxpayers who petitioned for relief and demonstrated, most
convincingly, that they relied substantially on the old tax laws in
making major investment decisions. Not every application for
transitional relief was granted, however, political clout
notwithstanding. Congressional staff members examined more than
one thousand requests for rifle shot transition relief before
recommending the inclusion of several hundred. As the Senate
Finance Committee Chairman explained:
I did not sit down and go through all 1,000–plus requests
one by one, nor did I try to hold the public hearing on all
1,000 of them. Even if I could give the witnesses 10 minutes
each, there would be 10,000 witnesses, and 100,000 minutes.
So what we did is to say to the staff, "Here are the
rules by which transitions are to be selected. Try to avoid
violating those rules." By and large they were successful.
We asked them to try to pass upon the merits of the rest.
132 Cong.Rec. S13,904 (daily ed. Sept. 27, 1986) (statement of Sen.
Packwood); see also id. 132 Cong.Rec. S13,786 (daily ed. Sept. 26,
1986) ("[A]s honestly as we could, we tried to be fair in the
transitions and we tried to make sure that they did not violate the
basic tenets of the bill."). Congress could not grant every
request for transitional relief, for that would have threatened the
success of the Act, which, by design of the President and Congress,
was to be revenue neutral, neither raising nor lowering the
aggregate level of federal revenue collections.
Of course, "a concern for the preservation of resources
standing alone can hardly justify the classification used in
allocating those resources." Plyler v. Doe, 457 U.S. 202, 227, 102
S. Ct. 2382, 2400, 72 L. Ed. 2d 786 (1982). But choices had to be
made: tough choices. And as far as we can tell from the
legislative history, Congress made their decisions based on the
merits of the applications for transitional relief made to the
Finance Committee. We realize that those taxpayers with political
connections had better access to the Committee than others.
Nevertheless, nothing suggests that Congress aimed to exclude
others or that Congress designed the classifications with such a
purpose in mind:
If the adverse impact on the disfavored class is an apparent
aim of the legislature, its impartiality would be suspect.
If, however, the adverse impact may reasonably be viewed as an
acceptable cost of achieving a larger goal, an impartial
lawmaker could rationally decide that that cost should be
incurred.
Fritz, 449 U.S. at 181, 101 S.Ct. at 462 (Stevens, J. concurring).
Moreover, it appears that Plaintiffs never sought transitional
relief from the Tax Reform Act. That places them in an especially
difficult position to challenge the rifle shot rules. They did not
ask for, and therefore did not receive, the congressional manna:
Congress cannot be expected to search out on its own those
taxpayers whose peculiar circumstances give them strong
equitable arguments for special relief from general tax
provisions; rather, such taxpayers must come to Congress.
Thus providing a special rule for one taxpayer, but not for
the other, is rationally related to the legitimate purpose of
providing relief for deserving taxpayers, to the extent that
can be done without the need for Congress to initiate a hunt
for those taxpayers.... [A] legislature should be able to
provide special relief for those deserving taxpayers it has
found, without providing relief for others it has not found.
Zelenak, supra note 2, 44 Tax L.Rev. at 575–76.
We hold that the classifications made by Congress were not
arbitrary. It accorded transitional relief to those deserving
taxpayers who applied for such relief and established most
convincingly that they relied substantially on the old tax laws in
making major investment decisions.
III. CONCLUSION
Even in a democratic government, preferences and inequalities
are inevitable. In the legislative arena, as demonstrated in this
case, lines must be drawn, and those lines often appear arbitrary.
That may mean that in some instances, two seemingly identical
persons will receive seemingly unequal treatment. Pure equity is
sometimes eschewed for the ultimate goal of adopting legislation.
Preferences also permeate the other two branches of
government, especially when discretion plays a role. The judicial
branch engages in the process of making decisions that appear to
favor some and disfavor others. Sentencing provides a prime
example. Similarly situated defendants rarely receive precisely
the same sentence, although Congress has endeavored to achieve
uniformity through the Sentencing Guidelines. The judiciary also
determines whether laws and rules are to be applied retroactively
or merely prospectively. Prisoners on death row tell of the
inequality they perceive from those judicial decisions. The
executive branch dispenses preferential treatment in the eyes of a
citizen charged with a crime when the government fails to prosecute
another citizen allegedly guilty of the same crime.
In all, our government, falling short of the utopia that we
might hope for, can only strive for equality in classifications.
But it would be unrealistic for us to expect perfect equality.
This is not to say that we are undisturbed by the methodology
employed by Congress in its dispensation of transitional relief.
We would be less than candid if we did not confess that we are
somewhat troubled, if not astonished, that political connections
played such a large role in the creation of this ad hoc tax
legislation. But as members of the judiciary, we "may not sit as
a superlegislature to judge the wisdom or desirability of
legislative policy determinations made in areas that neither affect
fundamental rights nor proceed along suspect lines." Dukes, 96
S. Ct. at 2517. Nor do we write on a clean jurisprudential slate.
We may not apply a more rigorous scrutiny to this ad hoc tax
legislation than the Supreme Court prescribes, even though "[t]he
very existence of such legislation suggests that the legislative
process has been subverted to serve purely private ends." Zelenak,
supra note 2, 44 Tax L.Rev. at 581.
We conclude that the Supreme Court would not likely condemn
the transition rules, but would find instead that these "statutory
classification are sufficiently justified as being the outcome of
a power struggle among competing private interests." Id. at 569
(citing Posner, The DeFunis Case and the Constitutionality of
Preferential Treatment of Racial Minorities, 1974 Sup.Ct.Rev. 1,
28).
The judgment of the district court is AFFIRMED.
E. Grady Jolly, Circuit Judge, Dissenting and Specially Concurring
in the Result:10
Despite the majority's resourceful efforts to find standing to
assert a claim for equal protection in this case, I am compelled to
dissent respectfully from the majority's conclusion that the
plaintiffs -- who claim no economic injury for themselves but seek
10
I concur in the result reached by the majority's opinion,
which determines that the plaintiffs' claim fails on the merits.
only to deny economic benefits to others -- have standing to bring
this case.
The majority holds that the plaintiffs have standing to pursue
their claims under the equal protection component of the Due
Process Clause of the Fifth Amendment. Standing to assert such a
claim requires that the plaintiff be harmed as a member of an
injured class that can be given a lawfully cognizable definition.
I fail to see that the transition rules created a "class" as the
term is applied to equal protection of the laws. A traditional
equal protection class is defined by some characteristic of the
persons disfavored, such as race, state residence, age, legitimacy,
or even holding later-acquiring property. See, e.g., Williams v.
Vermont, 472 U.S. 14 (1985). In each such case, the plaintiff
class is defined by the characteristics of the class that form the
basis of discrimination and injury, such as illegitimate persons
who are prevented from receiving an inheritance or qualified black
persons who are prevented from voting.
The plaintiff class as defined in the majority opinion appears
to be those taxpayers who were not afforded relief under the
transition rules. This class would even include those taxpayers
who have personal and political influence in Congress but, who, in
their lobbying efforts, were unsuccessful in securing a transition
rule for themselves. Thus, the disfavored plaintiff class is all
taxpayers in the United States except those successful in obtaining
a transition rule benefit. This alleged affected class is so
amorphous, so generalized, and so totally lacking in a common
identifiable grievance as to be legally non-cognizable.
The majority would argue that this view ignores the nature of
the equal protection injury that the plaintiffs assert -- the
"disparity in treatment" that can be remedied by the "satisfaction
of knowing that the Tax Reform Act treats no one any better than
them..." Apache Bend ___ F.2d ___, ___ [manuscript, p.6] This
injury is one that apparently every taxpayer in the country
suffered. If this is a constitutionally cognizable injury under
the equal protection requirement, then the taxpayers of this
country suffer a judicially redressible injury each time Congress
passes a bill granting benefits to some but not to all. No court
has ever gone to this extreme that the majority now pioneers.
Failing to recognize the limits of the case, the majority
cites Heckler v. Mathews, 465 U.S. 728 (1984). Although the case
supports the view that lost economic benefit is not required in
order to suffer an injury, and that unequal treatment alone may
constitute such an injury, the discriminatory effect described by
Justice Brennan in Mathews is not the character of discrimination
described by the plaintiffs in our case. The discriminatory
effect, i.e., the injury, that gives rise to a claim of equal
protection is discrimination that
by perpetuating `archaic and stereotypic notions' or by
stigmatizing members of the disfavored group as 'innately
inferior' and therefore as less worthy participants in
the political community, can cause serious noneconomic
injuries to those persons who are personally denied equal
treatment solely because of their membership in a
disfavored group.
Mathews, 465 U.S. at 739-740 quoting Mississippi University for
Women v. Hogan, 458 U.S. 718, 725 (1982).
The plaintiffs suggest that the noneconomic injury they suffer
as members of the disfavored class can be remedied with a judicial
order that the Tax Reform Act treat no one better than them. Thus,
their only injury is the burden of the knowledge that other people
are treated more favorably; in short, suffering envy is their
injury. The plaintiffs do not allege that their "burden" is widely
shared, or known, by other citizens, nor can they allege that this
burden perpetuates an "archaic" "stigma" that identifies the
plaintiffs as belonging to a class of "less worthy participants in
the political community." The plaintiffs do not and cannot claim
to be stigmatized by obscure tax laws. Simply, the injury
described by the plaintiffs is an injury beyond the scope of
allowable injury described by the Mathews court.11 See Biszko v.
RIHT Financial Corp., 758 F.2d 769, 773 (1st Cir. 1985).
Giving to it a dressed up face, the plaintiffs' injury is only
an "abstract injury in nonobservance of the Constitution" by the
government, or its failure to "be administered according to law."
Such injuries may not form the basis of standing in our courts.
See, e.g. Allen, 468 U.S. at 754; Valley Forge Christian College v.
Americans United for Separation of Church & State, Inc., 454 U.S.
464, 482, 485 (1982) citing Schelsinger v. Reservists Committee to
Stop the War, 418 U.S. 208 (1974). The plaintiffs have, at best,
alleged a "personal injury as a consequence of the alleged
11
The majority relies greatly upon the work of Professor
Lawrence Zelanak, in his article, Are Rifle Shot Rules and Other
Ad Hoc Legislation Constitutional?, 44 Tax L.Rev. 563 (1989).
Even Professor Zelanak, as the majority notes, does not consider
Mathews to extend noneconomic injury as far the majority would
have it reach for the purposes of standing. See Apache Bend
Apts. v. United States, ___ F.2d ___, ___, n. 5; Zelanak, Rifle
Shots, 44 Tax L.Rev. at 619.
constitutional error," which is not more than "the psychological
consequence presumably produced by the observation of conduct with
which one disagrees." Valley Forge, 454 U.S. at 486.
Because the plaintiffs have not alleged an injury under the
equal protection requirement, I respectfully dissent from the
majority's recognition of the plaintiffs' standing to maintain this
action.12
12
Because the majority does not reach the arguments
presented concerning taxpayer standing under Flast v. Cohen, 392
U.S. 83 (1968), and the uniformity clause, I find it unnecessary
to address these issues.