                         T.C. Memo. 2007-166



                       UNITED STATES TAX COURT



                STEPHEN S. ZIEGLER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23638-04.                 Filed June 27, 2007.



     Michael J. Grace, for petitioner.

     Roger W. Bracken, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, additions under section 6651(a)(1)1 to, and

accuracy-related penalties under section 6662(a) on petitioner’s


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue. All Rule references are to the Tax Court Rules of Prac-
tice and Procedure.
                                  - 2 -

Federal income tax (tax):

                                                Accuracy-Related
         Year   Deficiency   Addition to Tax         Penalty
         1995     $12,112           $0.00           $2,308.60
         1996      12,050          602.35            2,410.00
         1997      28,819        2,881.40            5,763.80
         1998      16,671            0.00            3,334.20
         1999      19,665            0.00            3,933.00

     The only issue remaining for decision is whether the appli-

cation of section 469 to petitioner’s claimed partnership losses

for the respective years at issue violates the Due Process Clause

of the Fifth Amendment to the Constitution of the United States.

                             FINDINGS OF FACT

     All of the facts in this case, which the parties submitted

under Rule 122, have been stipulated by the parties and are so

found.2

     Petitioner resided in Jericho, New York, at the time he

filed the petition in this case.

     Petitioner practiced law as a tax attorney for decades,

specializing in providing legal services to developers of real

property, including low-income apartment complexes similar to

those purchased and operated by the partnership in which peti-


     2
      In violation of Rule 143(b), petitioner alleges on brief
various facts (petitioner’s alleged facts) not stipulated by the
parties and not otherwise supported by the record in this case.
In further violation of that Rule, petitioner attached to his
opening brief various documents (petitioner’s documents) that are
not part of the record and that the Court had returned to peti-
tioner. We shall not rely on petitioner’s alleged facts or
petitioner’s documents.
                               - 3 -

tioner invested, as discussed below.    During 1995 through 1999,

the years at issue, petitioner practiced law full time with the

law firm of Ziegler, Sagal & Winters, PC, in New York, New York.

     During the years at issue, petitioner was a limited partner

of Aldus Green Company (Aldus Green), a limited partnership

formed under the laws of the State of New York.   As a limited

partner of Aldus Green, petitioner owned two percent of Aldus

Green’s capital, profits, and losses.

     In 1984, Aldus Green purchased and operated certain low-

income rental apartment buildings located in Bronx, New York.

Aldus Green rented apartments in those buildings to low-income

individuals, who received rent subsidies under section 8 of the

United States Housing Act, as amended.

     Petitioner filed Form 1040, U.S. Individual Income Tax

Return, for each of his taxable years 1995 through 1999 (peti-

tioner’s returns).   In each such return, petitioner claimed in

Schedule E, Supplemental Income and Loss (Schedule E), a loss

attributable to his investment in Aldus Green (petitioner’s

claimed Aldus Green loss) in arriving at “Total partnership and S

corporation income or (loss)” in each such schedule.   As a

result, in Schedule E for each of the years at issue, petitioner

claimed a total partnership and S corporation loss.    In each of

petitioner’s returns for the years at issue, petitioner offset

the total partnership and S corporation loss claimed in Schedule
                                - 4 -

E against income from other sources in arriving at total income

for each such year.

     Respondent issued to petitioner a notice of deficiency

(notice) with respect to his taxable years 1995 through 1999.    In

that notice, respondent determined petitioner’s claimed Aldus

Green loss for each of those years to be a passive activity loss

under section 469, allowed each such loss to the extent of income

from passive activities for each such year, and disallowed the

following amount of petitioner’s claimed Aldus Green loss for

each such year:

                        Year             Amount
                        1995             $44,108
                        1996              52,415
                        1997              44,495
                        1998              41,317
                        1999              48,773

                               OPINION

     Petitioner concedes that petitioner’s claimed Aldus Green

loss for each of the years at issue is a passive activity loss as

defined in section 469(d)(1) and that section 469(a) disallows

each such loss.3   It is petitioner’s position, however, that the

application of section 469 to petitioner’s claimed Aldus Green

     3
      Petitioner also concedes that he is liable for additions to
tax under sec. 6651(a)(1) for the taxable years 1996 and 1997 and
for accuracy-related penalties under sec. 6662(a) for all the
taxable years at issue.
                                - 5 -

loss for each of the years at issue violates the Due Process

Clause of the Fifth Amendment (Due Process Clause) to the United

States Constitution (Constitution) and that therefore he should

be allowed to offset each such loss against his income from

sources other than passive activities for each such year.    (We

shall refer to income from sources other than passive activities

as other income.)

     In support of his position under the Due Process Clause,

petitioner argues that section 469 is retroactive and that the

retroactive application of section 469 to petitioner’s claimed

Aldus Green loss for each of the years at issue is unconstitu-

tional.    In further support of his position, petitioner argues

that the transitional rule that Congress provided in enacting

section 469 into the Code (transitional rule) violates his equal

protection rights under the Due Process Clause because it treats

him differently than certain other taxpayers.

     The Due Process Clause provides that “No person shall be

* * * deprived of life, liberty, or property, without due process

of law”.    The Due Process Clause provides protection against

Federal discriminatory action “so unjustifiable as to be

violative of due process”.    Shapiro v. Thompson, 394 U.S. 618,

642 (1969); see Nicholas v. Tucker, 114 F.3d 17, 19 (2d Cir.

1997).    The Due Process Clause also has been held to incorporate

the Equal Protection Clause of the Fourteenth Amendment to the
                               - 6 -

Constitution.   Johnson v. Robison, 415 U.S. 361, 364-365 n.4

(1974); Hammond v. Lenfest, 398 F.2d 705, 709 n.6 (2d Cir. 1968).

     Before considering petitioner’s constitutional arguments, we

shall summarize in pertinent part the legislative history and

provisions of section 469.   On October 22, 1986, Congress enacted

section 469 into the Code in the Tax Reform Act of 1986, Pub. L.

99-514 (1986 Act or TRA 1986), sec. 501(a), 100 Stat. 2233.     In

the report of the Senate Committee on Finance (Senate Finance

Committee Report) with respect to the 1986 Act, that committee

set forth the following reasons for enacting section 469:

          In recent years, it has become increasingly clear
     that taxpayers are losing faith in the Federal income
     tax system. This loss of confidence has resulted in
     large part from the interaction of two of the system’s
     principal features: its high marginal rates * * *, and
     the opportunities it provides for taxpayers to offset
     income from one source with tax shelter deductions and
     credits from another.

          The prevalence of tax shelters in recent years
     * * * has been well documented. * * *

          Such patterns give rise to a number of undesirable
     consequences, even aside from their effect in reducing
     Federal tax revenues. Extensive shelter activity
     contributes to public concerns that the tax system is
     unfair, and to the belief that tax is paid only by the
     naive and the unsophisticated. This, in turn, not only
     undermines compliance, but encourages further expansion
     of the tax shelter market, in many cases diverting
     investment capital from productive activities to those
     principally or exclusively serving tax avoidance goals.

          The committee believes that the most important
     sources of support for the Federal income tax system
     are the average citizens who simply report their income
     (typically consisting predominantly of items such as
     salaries, wages, pensions, interest, and dividends) and
                              - 7 -

     pay tax under the general rules. To the extent that
     these citizens feel that they are bearing a dispropor-
     tionate burden with regard to the costs of government
     because of their unwillingness or inability to engage
     in tax-oriented investment activity, the tax system
     itself is threatened.

          Under these circumstances, the committee believes
     that decisive action is needed to curb the expansion of
     tax sheltering and to restore to the tax system the
     degree of equity that is a necessary precondition to a
     beneficial and widely desired reduction in rates. So
     long as tax shelters are permitted to erode the Federal
     tax base, a low-rate system can provide neither suffi-
     cient revenues, nor sufficient progressivity, to sat-
     isfy the general public that tax liability bears a fair
     relationship to the ability to pay. In particular, a
     provision significantly limiting the use of tax shelter
     losses is unavoidable if substantial rate reductions
     are to be provided to high-income taxpayers without
     disproportionately reducing the share of total liabil-
     ity under the individual income tax that is borne by
     high-income taxpayers as a group.

S. Rept. 99-313, at 713-714 (1986), 1986-3 C.B. (Vol. 3) 713-714.

     In the Senate Finance Committee Report, the Senate Committee

on Finance focused specifically on the use of rental activities

for tax shelter purposes, such as the use by Aldus Green of

rental activities for such purposes.   That report stated in

pertinent part:

     The extensive use of rental activities for tax shelter
     purposes under present law, combined with the reduced
     level of personal involvement necessary to conduct such
     activities, make clear that the effectiveness of the
     basic passive loss provision could be seriously compro-
     mised if material participation were sufficient to
     avoid the limitations in the case of rental activities.

Id. at 718.
                               - 8 -

     Having summarized the concerns of Congress in enacting

section 469 into the Code, we shall now summarize certain provi-

sions of that section that are pertinent here.    Pursuant to

section 469(a), a taxpayer is not allowed to offset a passive

activity loss for the taxable year against other income for such

year.   For purposes of section 469, a passive activity loss for

the taxable year is the amount, if any, by which the aggregate

losses from all passive activities for the taxable year exceed

the aggregate income from all passive activities for such year.

Sec. 469(d)(1); sec. 1.469-2T(b)(1), Temporary Income Tax Regs.,

53 Fed. Reg. 5711 (Feb. 25, 1988).     The term “passive activity”

is defined in pertinent part as any activity in which the tax-

payer does not materially participate.    Sec. 469(c)(1).    Any

rental activity is a passive activity, regardless whether the

taxpayer materially participates in the activity.     See sec.

469(c)(2).

     Under section 469(b), a passive activity loss is treated as

a deduction allocable to the passive activity giving rise to such

loss for the succeeding taxable year.    Under that section, a

passive activity loss may be carried forward indefinitely.       In

addition, section 469(g)(1) provides in pertinent part:

     SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

        *       *       *       *         *       *         *

          (g) Dispositions of Entire Interest in Passive
     Activity.--If during the taxable year a taxpayer dis-
                              - 9 -

     poses of his entire interest in any passive activity
     (or former passive activity), the following rules shall
     apply:

               (1) Fully taxable transaction.--

                    (A) In general.--If all gain or loss
               realized on such disposition is recognized,
               the excess of–-

                         (i) any loss from such activity for such
                    taxable year (determined after the applica-
                    tion of subsection (b)), over

                         (ii) any net income or gain for such
                    taxable year from all other passive activi-
                    ties (determined after the application of
                    subsection (b)),

     shall be treated as a loss which is not from a passive
     activity.

     We now turn to petitioner’s arguments.   We first address his

argument that section 469 is retroactive.   Petitioner maintains

that section 469 is retroactive because:

          The effect of the 1986 Act passive loss provisions
     is to deny a current deduction for depreciation (i.e.,
     a segment of the expenditure) for a property already
     purchased, and for interest on a mortgage loan already
     committed, to the extent that said deductions exceed
     the net operating income from the property. In this
     case, the expenditures were made by the Partnership
     [Aldus Green] - and the taxpayer made his investment in
     the Partnership - before the law was enacted or pro-
     posed and the passive loss rule is disallowing the
     deduction for the expenditure.

     In support of his argument that section 469 is retroactive,

petitioner contends that he decided to invest in Aldus Green in
                              - 10 -

1984.4   According to petitioner, “Based on the tax incentives in

place at that time, Petitioner reasonably expected that he would

be allowed to deduct tax losses from the Partnership” and “would

not have made the investment if he knew that the losses from the

project could not be offset against his compensation and portfo-

lio income, since in that case, there would be no economic return

from the investment.”   Petitioner maintains that he was “induced

to make an investment based upon the prior set of tax rules

deliberately enacted by Congress to induce such investment.”

From those premises, petitioner argues that section 469 is

retroactive and that such retroactivity is unconstitutional

because it violates the Due Process Clause.

     Before considering petitioner’s argument that section 469 is

unconstitutionally retroactive, we note that the grounds on which

petitioner relies to support that argument are similar to the

grounds on which the taxpayer relied in United States v. Carlton,

512 U.S. 26 (1994), to support his argument that the tax statute

involved there was unconstitutionally retroactive.   In Carlton,

the taxpayer, the executor of an estate, maintained that the

retroactive amendment of a Federal estate tax provision (section



     4
      With respect to petitioner’s contention that he made his
investment in Aldus Green in 1984, respondent states on brief:
“We note that petitioner offered no evidence that his investment
in AGC [Aldus Green] actually was made two years before the
enactment of sec. 469, nor was the date of his investment in AGC
contained in the Stipulation of Facts filed in this case.”
                                 - 11 -

2057) violated the Due Process Clause because he “specifically

and detrimentally relied on the preamendment version”, id. at 33,

of that provision when he engaged in a transaction prior to its

amendment by Congress.     Id.   In rejecting the taxpayer’s posi-

tion, the Supreme Court of the United States observed that the

taxpayer’s

     reliance alone is insufficient to establish a constitu-
     tional violation. Tax legislation is not a promise,
     and a taxpayer has no vested right in the Internal
     Revenue Code. Justice Stone explained in Welch v.
     Henry, 305 U.S., at 146-147:

             “Taxation is neither a penalty imposed on the
             taxpayer nor a liability which he assumes by con-
             tract. It is but a way of apportioning the cost
             of government among those who in some measure are
             privileged to enjoy its benefits and must bear its
             burdens. Since no citizen enjoys immunity from
             that burden, its retroactive imposition does not
             necessarily infringe due process ....”

     Moreover, the detrimental reliance principle is not
     limited to retroactive legislation. An entirely pro-
     spective change in the law may disturb the relied-upon
     expectations of individuals, but such a change would
     not be deemed therefore to be violative of due process.

Id. at 33-34.

     We consider now whether, as petitioner argues, section 469

is retroactive.     As pertinent here, section 469(a) applies only

to a passive activity loss as defined in section 469(d)(1) for a

taxable year that began after December 31, 1986.     See TRA 1986

sec. 501(c), 100 Stat. 2241.     Section 469(a) does not apply to

any loss for any taxable year that began prior to January 1,
                                - 12 -

1987.    See id.   We hold that section 469 is not retroactive.5

     We next address petitioner’s argument that the transitional

rule that Congress provided in enacting section 469 into the Code

violates his equal protection rights under the Due Process

Clause.    We first describe the transitional rule that Congress

provided, TRA 1986 sec. 502, 100 Stat. 2241, when it enacted

section 469 into the Code.     That transitional rule provides that

any loss sustained by certain investors6 with respect to inter-




     5
      See Polone v. Commissioner, T.C. Memo. 2003-339, affd. 479
F.3d 1019 (9th Cir. 2007); cf. United States v. Carlton, 512 U.S.
26, 33-34 (1994).
     6
      The investors qualifying under the transitional rule are
so-called qualified investors. The term “qualified investor” is
defined to mean, in general:

     any natural person who holds (directly or through 1 or
     more entities) an interest in a qualified low-income
     housing project--

            (A) if–-

                 (i) in the case of a project placed in ser-
            vice before August 16, 1986, such person held an
            interest in such project on August 16, 1986, and
            the taxpayer made his initial investment after
            December 31, 1983, or

                 (ii) in the case of a project not described
            in subparagraph (A), such investor held an inter-
            est in such project on December 31, 1986, and

          (B) if such investor is required to make payments
     after December 31, 1986, of 50 percent or more of the
     total original obligated investment for such interest.

TRA 1986 sec. 502(d), 100 Stat. 2242.
                             - 13 -

ests in certain low-income housing projects7 for any taxable year

in a prescribed period8 is not to be treated as a loss from a


     7
      The low-income housing projects qualifying under the tran-
sitional rule are so-called qualified low-income housing pro-
jects. The term “qualified low-income housing project” is
defined to mean:

     any project if--

          (1) such project meets the requirements of clause
     (i), (ii), (iii), or (iv) of section 1250(a)(1)(B) as
     of the date placed in service and for each taxable year
     thereafter which begins after 1986 and for which a
     passive loss may be allowable with respect to such
     project,

          (2) the operator certifies to the Secretary of the
     Treasury or his delegate that such project met the
     requirements of paragraph (1) on the date of the enact-
     ment of this Act [October 22, 1986] (or, if later, when
     placed in service) and annually thereafter,

          (3) such project is constructed or acquired pursu-
     ant to a binding written contract entered into on or
     before August 16, 1986, and

          (4) such project is placed in service before
     January 1, 1989.

TRA 1986 sec. 502(c), 100 Stat. 2242.
     8
      The period prescribed under the transitional rule is a so-
called relief period. The term “relief period” is defined to
mean:

     the period beginning with the taxable year in which the
     investor made his initial investment in the qualified
     low-income housing project and ending with whichever of
     the following is the earliest--

               (1) the 6th taxable year after the taxable
          year in which the investor made his initial in-
          vestment,

                                                   (continued...)
                              - 14 -

passive activity for purposes of section 469.   TRA 1986 sec.

502(a), 100 Stat. 2241.

     In support of his argument that the transitional rule

violates his equal protection rights under the Due Process

Clause, petitioner contends that, because he is not entitled to

the relief provided by the transitional rule, Congress treated

him differently than certain other taxpayers entitled to such

relief.   According to petitioner, the provisions of the transi-

tional rule are “arbitrary, capricious and unreasonable”.     In

support of that claim, petitioner asserts:

          In this case, the conditions for the 1986 Act
     exemptions for low and moderate income housing are
     worse than unreasonable, that is, worse than conditions
     without any reasonable basis. The conditions evidence,
     and indeed were meant to evidence, an intention by the
     opponents of any exemption to take private property
     without compensation.

          The exemption is conditional upon the taxpayer not
     having yet paid in over 50% of the taxpayer’s invest-
     ment commitment. It is obvious - and beyond dispute -
     that the purpose of this condition was to encourage the
     taxpayer to pay in the balance of his investment - and
     this was the very purpose of the tax incentives for
     subsidized housing in the first place. However, there
     is no exemption for the investor who has already paid


     8
      (...continued)
               (2) the 1st taxable year after the taxable
          year in which the investor is obligated to make
          his last investment, or

                (3) the taxable year preceding the 1st tax-
           able year for which such project ceased to be a
           qualified low-income housing project.

TRA 1986 sec. 502(b), 100 Stat. 2241.
                                - 15 -

     in his investment, even if he is an investor in the
     same project as a taxpayer who has not yet paid in his
     investment.

          Hence, limiting the exemption to investors who
     have not yet paid in over 50% of their investments
     reflects a purpose antithetical to our system of juris-
     prudence, that is, perpetuating a fraud by having the
     government pay a further portion of the consideration
     it promised to persons who had not yet completed their
     performance in reliance on the government’s promised
     consideration to the persons who had already fully
     performed in reliance upon the government promise.
     [Reproduced literally.]

     In order to prevail on his equal protection argument,

petitioner must show that the transitional rule was not premised

upon a rational basis, see Regan v. Taxation With Representation,

461 U.S. 540, 547-548 (1983), and instead was premised upon an

impermissible basis such as race, religion, or the desire to

prevent the exercise of petitioner’s constitutional rights, see

United States v. Berrios, 501 F.2d 1207, 1211 (2d Cir. 1974).

     We reject petitioner’s argument that the transitional rule

violates his equal protection rights under the Due Process

Clause.     In enacting section 469, Congress considered whether any

relief from the application of section 469(a) was appropriate.

After giving consideration to that question, Congress decided to

provide in the transitional rule certain relief, but only for

certain taxable years, to certain taxpayers in certain circum-

stances.9


     9
      Congress also decided to provide in sec. 469(m) certain
                                                   (continued...)
                                 - 16 -

     On the instant record, we find that petitioner has failed to

carry his burden of establishing that the transitional rule was

not premised upon a rational basis and instead was based upon a



     9
      (...continued)
other relief, but only for certain taxable years, to taxpayers
who were not entitled to the relief provided by the transitional
rule and who therefore were subject to sec. 469. Sec. 469(m)
provides in pertinent part:

     SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

          *        *       *        *       *       *       *

          (m) Phase-in of Disallowance of Losses and Credits
     for Interest Held Before Date of Enactment.--

                   (1) In general.--In the case of any passive
              activity loss or passive activity credit for any
              taxable year beginning in calendar years 1987
              through 1990, subsection (a) shall not apply to
              the applicable percentage of that portion of such
              loss (or such credit) which is attributable to
              preenactment interests.

                   (2) Applicable percentage.--For purposes of
              this subsection, the applicable percentage shall
              be determined in accordance with the following
              table:

         In the case of taxable                 The applicable
           years beginning in:                  percentage is:
                  1987...............................65
                  1988...............................40
                  1989...............................20
                  1990...............................10

Sec. 469(m)(3)(B)(i) defines the term “pre-enactment interest” to
mean, in general, “any interest in a passive activity held by a
taxpayer on the date of the enactment of the Tax Reform Act of
1986, and at all times thereafter.” Petitioner appears to have
qualified for the relief from the application of sec. 469(a) that
Congress provided in sec. 469(m).
                             - 17 -

constitutionally impermissible standard.    We hold that the

transitional rule does not violate petitioner’s equal protection

rights under the Due Process Clause.

     We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of petitioner,


                                   Decision will be entered for

                              respondent.
