As we approach Halloween, no topic could be more fitting than the horrifying aspects of retroactive tax legislation. A mere mention of the topic strikes fear into the hearts of CFOs and Tax Directors everywhere. Keeping with the Halloween theme, retroactive tax laws are much like zombies. They appear out of nowhere seeking to devour …. your bottom-line. Retroactive tax laws take many forms including retroactive tax rate changes, definitional changes and changes in the applicable statute of limitations for assessment.

What is the weapon of choice in fending off these “zombies”? The only weapon that has demonstrated any chance for success is the United States Supreme Court decision in United States v. Carlton, 512 U.S. 26 (1994). In Carlton, the Court stated that retroactive tax legislation violates the due process rights of a taxpayer unless it is enacted with a legitimate legislative purpose and has a “modest” period of retroactivity. Unfortunately, this “weapon” has been somewhat ineffective because the Court has yet to explain when a legislative purpose is illegitimate or when a period of retroactivity violates the modesty requirement.