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Court Favors Government in Illinois Estate Tax Case

June 3, 1986

WASHINGTON (AP) _ The Supreme Court today made it easier for Congress to enact tax law amendments carrying temporary retroactive effects.

The justices ruled, 9-0, in favor of the government in a $6,000 estate tax dispute from Illinois that had its roots in 1976 amendments in federal tax laws.

Charles Hirschi in 1976 made gifts totaling $45,000 to five people. He reported the gifts on a federal gift tax return indicating no tax due.

Hirschi in part relied on a $30,000 lifetime gift-tax exemption then available to all taxpayers. At that time, taxpayers also were entitled to a $60,000 estate tax exemption for gifts made at death.

In tax law amendments that took effect later that year, Congress replaced the two exemptions with a ″unified credit.″ In a transitional rule, the amendments provided that a person who previously had claimed the $30,000 gift tax exemption could not later claim the full unified credit.

Instead, the unified credit in such circumstances was to be reduced by 20 percent to reflect the gift tax benefit a taxpayer like Hirschi already had obtained.

When Hirschi died in 1978 the trustee of his estate - the Farmers and Merchants Bank of Highland, Ill. - claimed the maximum unified credit then available, $34,000 for gifts given in contemplation of death.

The Internal Revenue Service, however, said that because Hirschi already had claimed a $30,000 gift tax exemption in 1976 the unified credit allowable to his estate had to be reduced by 20 percent, or $6,000.

The IRS billed the estate for the additional $6,000. The estate paid the bill, then sued for a refund.

U.S. District Judge William L. Beatty ruled that the IRS transititional rule was constitutionally impermissible.

Government lawyers said the ruling could threaten Congress’ practice of deterring strategic moves by taxpayers by backdating taxes to make them take effect before the president has signed a bill.

Writing for the high court today, Justice Thurgood Marshall removed the threat by saying Judge Beatty was wrong.

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