Kansas Attorney General Opinion 2012-027

November 2, 2012
ATTORNEY GENERAL OPINION NO. 2012-27
The Honorable Jean Schodorf
State Senator, 25th District
3039 Benjamin Ct.
Wichita, KS 67204
Re: Constitution of the United States—Amendments to the U.S. Constitution—
Due Process of Law; Retroactive Tax Legislation
Taxation–Income Tax–Kansas Adjusted Gross Income of an Individual;
Tax Basis of a Partner’s Interest in a Partnership
Synopsis: Retroactive tax legislation proposed during the 2013 legislative session
and affecting tax year 2013 is constitutional if the legislation is justified by
a rational legislative purpose. The non-wage business income tax
exemption provisions of Senate Substitute for House Bill 2117, passed
during the 2012 legislative session, can be implemented in their current
form. Cited herein: K.S.A. 2011 Supp. 79-32,117; U.S. Const., Amend. 5.
* * *
Dear Senator Schodorf:
You ask for our opinion on three questions regarding Senate Substitute for House Bill
21171 (S Sub HB 2117), passed during the 2012 legislative session, which amends
various tax statutes. In your letter, you state that questions have been raised regarding
certain provisions of the bill, and whether the bill can be implemented on January 1,
2013, its effective date. Specifically, you state that the bill is silent on how the gain or
loss on a sale of full or partial ownership of a business will be treated in determining the
tax basis. You further state that there has been some discussion about further
1 L. 2012, Ch. 135.

Senator Jean Schodorf
Page 2
amending tax statutes for the 2013 tax year during the 2013 legislative session, which
has raised questions regarding the constitutionality of retroactive tax legislation.
We will address your specific questions in order.
1. Could passing legislation to define the tax basis for the sale of business interests
or shares during the 2013 legislative session result in an unconstitutional
retroactive tax increase?
In your letter, you specifically question whether S Sub HB 2117 adequately defines the
tax basis of partnership interests. The tax basis of an asset determines how much tax a
person will owe if the asset is sold. If the sale price of an asset exceeds its tax basis,
the taxpayer is taxed on the gain from the sale. If the sale price of an asset is less than
its tax basis, the loss on the sale is tax-deductible.
Your question relates to section 37(a) of S Sub HB 2117, which reads as follows:
For Kansas income tax purposes: (1) The basis of a partner's interest in a
partnership formed prior to January 1, 2013, shall be determined by
computing the basis as of January 1, 2013, in accordance with section
7052 of the federal internal revenue code as in effect on January 1, 2013,
and amendments thereto, and making any subsequent adjustments to the
partner's interest as provided in section 7333 of the federal internal
revenue code as in effect on January 1, 2013, and amendments thereto.
(2) The basis of a partner's interest in a partnership formed on or after
January 1, 2013, shall be determined by computing the basis as of the
date of formation of the partnership in accordance with section 705 of the
federal internal revenue code as in effect on January 1, 2013, and
amendments thereto, and making any subsequent adjustments to the
partners' interest as provided in section 733 of the federal internal revenue
code as in effect on January 1, 2013, and amendments thereto.4
Section 37(b) of S Sub HB 2117 defines the tax basis for S corporations in a similar
fashion.5 Thus, the following analysis applies to the bill’s definition of the tax basis for
both partnerships and S corporations.
2 26 U.S.C. § 705.
3 26 U.S.C. § 733.
4 Footnotes added.
5 Section 37(b) of S Sub HB 2117 states that the basis of each shareholder’s stock and indebtedness in
an S corporation shall be computed in accordance with section 1367 of the federal internal revenue code
as in effect on January 1, 2013, and amendments thereto. Any subsequent adjustments to the
shareholder’s stock and indebtedness shall be made in accordance with section 1367(a)(2)(A) of the
federal internal revenue code as in effect on January 1, 2013, and amendments thereto.

Senator Jean Schodorf
Page 3
We note at the outset that this section 37(a) of the bill does provide a definition of the
tax basis for a sale of a partnership interest: the basis of such interest as of January 1,
2013, with subsequent adjustments in accordance with Internal Revenue Code § 733.
That section of the Internal Revenue Code provides that the basis of a partner’s interest
shall be decreased by the amount of money or property distributed to such partner.6
Section 37(a) limits adjustments to a partner’s basis to those provided in Internal
Revenue Code § 733, and thus does not include provisions by which to increase the tax
basis of a partner’s interest in a partnership if the partner contributes additional assets
to the partnership or assumes more partnership liability.
The Kansas Department of Revenue (KDOR) advises us that any legislation proposed
during the 2013 legislative session to amend S Sub HB 2117 would likely decrease
affected taxpayers’ tax liability, not increase it.7 However, for the reasons discussed
below, we believe that any such legislation would be constitutional, even if the
legislation resulted in increased income tax liability.
2. Would eliminating tax credits and exemptions on 2013 taxes, or adjusting 2013
Kansas income tax rates upward during the 2013 legislature be an
unconstitutional retroactive tax increase?
The United States Supreme Court addressed the issue of retroactive tax increases in
United States v. Carlton.8 In Carlton, the executor of an estate filed a refund action after
the IRS disallowed a deduction claimed on the decedent’s estate tax return, which was
filed in December 1986, based on retroactive legislation passed in December 1987.
The executor in Carlton argued that the 1987 legislation’s retroactivity provision violated
the due process clause of the Fifth Amendment of the United States Constitution, which
states in relevant part: ―nor shall any person . . . be deprived of life, liberty, or property,
without due process of law . . . .‖9 The crux of the executor’s due process argument was
that he had no notice that § 2057 would be retroactively amended, and that he had
specifically and detrimentally relied on the pre-amendment version of § 2057.10
The Court stated that ―the due process standard to be applied to tax statutes with
retroactive effect . . . is the same as that generally applicable to retroactive economic
legislation.‖11 A retroactive tax statute’s due process burden ―is met simply by showing
that the retroactive application of the legislation is itself justified by a rational legislative
purpose.‖12 Applying this standard, the Court found that the 1987 amendment was
designed to cure a mistake in the 1986 provision that would have resulted in
unanticipated revenue loss, and therefore was neither illegitimate nor arbitrary.13 The
6 26 U.S.C. § 733.
7 Richard Cram, Director of Policy & Research, Kansas Department of Revenue, Correspondence,
September 27, 2012.
8 512 U.S. 26 (1994).
9 U.S. Const., Am. 5.
10 512 U.S. at 33-34.
11 Id. at 30.
12 Id. at 31 (quoting Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717, 729-30 (1984)).
13 Id. at 30.

Senator Jean Schodorf
Page 4
Court also found that Congress acted rationally and promptly to cure the mistake in the
1986 provision, creating only a brief retroactivity period. Thus, the retroactivity period
was not ―so harsh and oppressive as to transgress the constitutional limitation.‖14
Finally, the Court noted that neither the executor’s detrimental reliance on the 1986
version of § 2057 nor his lack of notice of retroactive legislation were sufficient to
establish a due process violation.15 Accordingly, the Court held that the 1987
amendment’s retroactive application to the 1986 estate tax return did not violate due
process because Congress reasonably acted to correct a mistake in the original
provision.16
We assume that any constitutional challenge to curative legislation proposed in 2013
and affecting the 2013 tax year would be based upon the due process arguments
advanced unsuccessfully in Carlton, namely, that the affected taxpayers lacked notice
of retroactive legislation and that such taxpayers relied to their detriment on the
language of S Sub HB 2117 as passed in 2012. In our opinion, those arguments would
fail for the reasons outlined in Carlton. A legislative proposal during the 2013 session to
amend the provisions of S Sub HB 2117 would likely be curative in nature and therefore
serve a legitimate legislative purpose. Such proposed legislation, if passed, would
create a limited retroactivity period that is neither harsh nor oppressive, and thus would
not violate due process.17
3. Is the absence of detail on the tax basis for the sale of business interests or
shares a significant enough defect such that the provisions of S Sub HB 2117
that exempt non-wage business income from taxation cannot be implemented?
The answer to this question is no. As background, we have been advised by KDOR that
some tax professionals have questioned whether the partnership interest tax basis
definition in section 37(a) of S Sub HB 2117 may result in the taxation of some
partnership income intended to be excluded from Kansas income tax.18
This question concerns the effect of the partnership interest tax basis definition in
section 37(a) of S Sub HB 2117 on section 12(c)(xx) of the bill.19 Section 12(c)(xx)
states in relevant part that ―net income . . . from . . . partnerships . . . as determined
under the federal revenue code and reported on schedule E . . .‖ shall be excluded
when calculating Kansas adjusted gross income. The question is whether income from
14 Id. (quoting Welch v. Henry, 305 U.S. 134, 147 (1938)).
15 Id. at 33-34.
16 Id. at 26.
17 But see id. at 38 (O’Connor, J., concurring) (―A period of retroactivity longer than the year preceding the
legislative session in which the law was enacted would raise, in my view, serious constitutional
questions.‖); id. at 39-41 (Scalia, J., concurring) (―Retroactively disallowing the tax benefit that the earlier
law offered, without compensating those who incurred expenses in accepting that offer, seems to me
harsh and oppressive by any normal measure.‖).
18 Richard Cram, Director of Policy & Research, Kansas Department of Revenue, Correspondence,
September 27, 2012.
19 L. 2012, Ch. 135, Sec. 12(c)(xx), which amends K.S.A. 2011 Supp. 79-32,117.

Senator Jean Schodorf
Page 5
the sale or liquidation of a partnership interest is intended to be excluded from state
income tax.
Under the statutory scheme of S Sub HB 2117, if a partner sells her partnership
interest, that partner’s tax basis will be reduced by her income distributions, which
include the net profit on the sale. If the sale price exceeds the partner’s basis, then the
amount in excess of the basis is taxable as gain income. It appears that this effect was
intentional because section 12(c)(xx) of S Sub HB 2117 only allows income reported on
IRS Schedule E to be excluded from Kansas adjusted gross income, and gains resulting
from the sale of a partnership interest in excess of the partner’s basis are not reported
on Schedule E.
Section 37(a) of S Sub HB 2117 defines the tax basis for a partner’s interest in a
partnership as the basis as of January 1, 2013, computed in accordance with Internal
Revenue Code § 705, with subsequent adjustments to the basis made in accordance
with Internal Revenue Code § 733. Such definition may exclude other means of
increasing or decreasing the tax basis of a partnership, but it does not lack sufficient
detail to determine a partner’s tax basis. Thus, the language of S Sub HB 2117 is
sufficient to implement non-wage business income tax exemptions.
Conclusion
The Carlton court noted that ―[t]ax legislation is not a promise, and a taxpayer has no
vested right in the Internal Revenue Code.‖20 In our opinion, the Court’s analysis in
Carlton is applicable to any legislation passed during the 2013 legislative session that is
made retroactive to January 1, 2013.
Sincerely,
Derek Schmidt
Kansas Attorney General
Sarah Fertig
Assistant Attorney General
DS:AA:SF:sb
20 512 U.S. at 33.