Retroactivity is an endemic problem in the state tax world.  In this year alone, we have seen retroactive repeal of the Multistate Tax Compact (MTC) in Michigan, as well as significant retroactivity issues in New York, New Jersey and Virginia.  But after decades of states changing the rules on taxpayers after-the-fact, relief may be on the way if the Supreme Court of the United States grants certiorari in a Washington estate tax case, Hambleton v. Washington, with retroactivity that makes you say “What the heck?”.

The taxpayers filed a petition for certiorari on June 5, 2015.  The Court requested a response, which is now due by September 9, 2015.  The Tax Executives Institute filed an amicus brief on July 6, 2015.

The case involves two widows’ estates.  As stated in the petition:

Helen Hambleton died in 2006, and Jessie Macbride died in 2007.  Each was the passive lifetime beneficiary of a trust established in her deceased husband’s estate, and neither possessed a power under the trust instrument to dispose of the trust assets.  Under the Washington estate tax law at the time of their deaths, the tax did not apply to the value of those trust assets.  In 2013, however, the Washington Legislature amended the estate tax statutes retroactively back to 2005, exposing their estates to nearly two million dollars of back taxes.

In 2005, Washington state enacted an estate tax that was intended to operate on a standalone basis, separate from the federal estate tax.  In interpreting the new law, the Department of Revenue issued regulations that the transfer of property from the petitioners’ husbands to the petitioners through a Qualified Terminable Interest Property (QTIP) trust was not subject to the Washington estate tax.  The Department then reversed its position and assessed tax.  Petitioners, along with other estates, challenged the Department’s position and won in Washington Supreme Court (In re Estate of Bracken, 290 P.3d 99 (Wash. 2012)).  Then in 2013, the Washington legislature amended the estate tax to retroactively adopt the Department’s position, going back to 2005.  The petitioners challenged this law up to the Washington Supreme Court, which held in favor of the Department and concluded that the retroactive change satisfied the due process clause under a rational basis standard.

The petition urges the Supreme Court to take the case to resolve the uncertainty as to “how long is too long” when it comes to retroactive taxes, citing multiple examples of past and ongoing litigation in which lower courts have taken divergent approaches to the length of retroactivity that is permissible.  Of particular interest, one of the cases cited is International Business Machines Corp. v. Michigan Department of Treasury, 852 N.W.2d 865 (Mich. 2014).  The retroactive repeal of the MTC election in Michigan is a central issue in that ongoing litigation. If the Supreme Court takes Hambleton, its decision would likely impact the Michigan MTC litigation. The recent decision by the New York Court of Appeals, allowing [...]

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