Now that we’re past our busiest part of the year, HTW is happy to announce that we’ll be continuing our previous trend of bringing topical, high-quality material to our readers on a regular basis. HTW would like to continue examining the contours of the sixteenth amendment for a bit longer; the reason for this is because we believe firmly that an understanding of this exceedingly important political act is vital to gaining a full picture of our whole tax edifice. But after we explore the amendment in a bit more detail, we’re excited to say that we’ll be moving on to other issues which should be equally interesting to our audience. We will explore more real estate cases, current tax cases, international issues, and plenty of other exciting things.
Small Business Webcast
We’d also like to draw our readers’ attention to two upcoming webcasts which will be hosted from our site, smallbusinesswebcast.com. The first webcast — The Tax Benefits of Real Estate Ownership — will be given by our CPA, Jessica Chisholm. Jessica has given this presentation previously and is well familiar with this specialized area. The second webcast — Tax Reduction Strategies for Small Law Firms — will be presented by our CPA, Steven Lok. Assisting small law firms is one of Steven’s specializations.
As always, these presentations are entirely free to attend. We hope you enjoy these webcasts and the many more entertaining articles HTW has in store!
In early June of 1794, Congress passed a “carriage tax” aimed at carriages used for business purposes. The tax was to be collected annually for as long as the carriage owner maintained ownership of the carriage. The original Constitution of the U.S. recognized a distinction between direct taxes and indirect taxes, but it did not establish definitive guidelines for determining whether a new tax is direct or indirect. At the time of the adoption of the Constitution, it was established that poll taxes (or “capitation” taxes) and land taxes were direct taxes, but there was no formal mechanism for sorting a given tax into either category. Hence, though the authority of Congress to pass the carriage tax was never brought into question, what category the tax should be assigned was unclear.
In Hylton v. United States (1796), a suit was brought to collect a debt which was derived from the carriage tax. Hylton (the defendant in the original case) claimed that the carriage tax statute was unconstitutional. Hylton reasoned that the carriage tax was a direct tax and because the statute did not follow the rule of apportionment the tax had to be struck down under the Constitution. At the time of the suit, Hylton was in possession of 125 carriages.
The justices of the Supreme Court – who all wrote their own opinion of the case – determined that the carriage tax was an indirect tax and that, consequently, Hylton was liable for the debt. The justices decided that there was no compelling reason to suppose that the carriage tax fell within the meaning of a direct tax as understood by the framers of the Constitution. The framers understood that poll taxes and taxes on land were “direct” taxes; this classification had a basis in the conditions present among the states at that time. Although the carriage tax may have been superficially dissimilar from other indirect taxes in some ways, the justices could not find that this level of dissimilarity warranted classification as a direct tax.
Hylton entered the case with one critical disadvantage: the practical difficulties of apportioning the carriage tax by population were such that classifying the tax as a direct tax would have led to absurd results. Carriage ownership varied greatly from state to state, and so the carriage tax would have imposed an unfair burden on certain states if it were apportioned as a direct tax. The federal government would have been compelled to adopt new and unusual measures in order to artificially correct the unfair burden created by such a tax. The justices all concurred that the unfair results and practical difficulties of apportionment provided sufficient grounds for classification as an indirect tax.
Because the carriage tax was a tax on personal property, the Hylton decision came to the fore nearly one hundred years after it was made during the case of Pollock v. Farmers’ Loan & Trust Co. (1895). The Pollock case ruled that a tax on income from personal property (and real property) was a direct tax and must follow the rule of apportionment; this ruling effectively overturned the decision made in Hylton. Those who objected to the Pollock decision predicated their objection on the fact that the decision made the imposition of a federal income tax a near impossibility. Implementing a federal income tax which followed the apportionment rule would have been excessively burdensome for the federal government for a number of reasons. The sixteenth amendment was drafted in order to bypass the sort of practical difficulties associated with apportionment which was discussed in Hylton.
The phrase “the will of the people” has greater importance for Americans than it has for citizens of other states around the world. In large part, this stems from our deeply entrenched view of our system of government as a system which has developed entirely from the collective will of a free populace. The American public firmly believes that its governmental institutions are a direct extension of its collective will, a sort of living representation of its political voice. And to a good extent this view is accurate: our system has been informed by non-elite citizens to a considerably greater degree when compared with foreign systems across the globe. Though the history of these United States is much less egalitarian than most people care to appreciate, it is correct to say that the American project is more of a “popular” phenomenon than has been the case throughout most of history.
What most Americans do not realize, however, is that the will of the people can move society in any conceivable direction. Common perception tends to see the people’s collective will as an inherently benign force ceaselessly pushing our country in a way which maximizes our freedom and dispels injustice. But, as is often the case, common perception does not faithfully reflect reality. The will of the people is neither benign nor nefarious; it simply expresses whatever whims the people may have at a given moment. And if the people’s whims happen to push us toward less freedom or less justice – however that is defined – then that is precisely the direction we will be pushed in. Our constitution does not guarantee a certain quantum of freedom; as we learned in our prior installment, it provides that our lives may be encroached upon in any number of ways so long as the people’s will is expressed in the form of amendment.
This fact may come as a shock to many Americans. Our optimism tends to impart benevolent motives onto the public’s collective will in nearly every situation. What we have to understand, however, is that it makes little sense to ascribe any particular value to our collective will because our will can be shaped by just about any force imaginable – expediency, necessity, desire, passion. The sixteenth amendment did not simply address the practical difficulties associated with the apportionment requirement, it also expressed a public desire to ameliorate the widespread economic inequality which was present at the time of its passage. And it also enlarged the sovereignty of the federal government in relation to the states. It would be inaccurate to say that the results which followed the amendment were inherently just or proper; what is true is that these results were congruent with the collective sentiment of that era.
As we explore the sixteenth amendment in greater and greater detail, it is important for us to keep in mind that this amendment only represents the ability of our constitution to express the desires of the public, it is not an example of benevolent societal change.
In our next installment, we will discuss the case of Hylton v. United States (1796) and look at the impact that the ruling of this case had on the development of the sixteenth amendment.
In the next several installments of Huddleston Tax Weekly, we will discuss in great detail some of the controversies which were stirred by the sixteenth amendment. As we’ve noted in previous installments of HTC, the sixteenth amendment to the U.S. Constitution was an act of awesome importance. Through this amendment, the Congress was freed of the various constraints on its taxing power which had existed since the founding of the country. The original U.S. Constitution expressly gave Congress the power to tax, but it also set certain restrictions on this taxing power; excise (indirect) taxes had to be uniformly imposed, and direct taxes had to be properly apportioned among the several states. Prior to the sixteenth amendment, judicial opinions on tax law often dealt with determining whether a given tax should be classified as either direct or indirect. The sixteenth amendment removed the necessity of making such determinations.
The full text of the sixteenth amendment is as follows: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Clearly, this amendment was directly responsive to a number of judicial decisions which, through their treatment of certain forms of taxation, had curtailed the taxing function of Congress. For instance, the Pollock case ruled that taxes on income derived from real property and personal property (such as stocks and bonds) were direct and therefore subject to the apportionment requirement. Pollock and other judicial opinions made the imposition of a federal income tax a practical – though not theoretical – impossibility. By removing the apportionment requirement, the sixteenth amendment made the implementation of such a tax an exceedingly simple matter.
The potential impact of the sixteenth amendment on state sovereignty was an issue immediately recognized by both the legal profession and the political establishment. Since it allowed Congress to collect taxes on incomes from any conceivable source, it apparently encompassed state securities; and by taxing state securities the Congress would be effectively lessening the power of the states in relation to the federal government. In his 1919 essay entitled “Power of Congress to Tax State Securities Under the Sixteenth Amendment,” Albert Ritchie argued that the amendment did not actually extend to state securities because the amendment was never intended to grant any new taxing powers to the Congress; the amendment was merely designed to consolidate Congress’ existing taxing powers, and since the power to tax state securities had historically been considered unconstitutional, and the authors of the amendment were themselves wary of the taxing of state securities, it follows that the amendment could not have granted a new power to tax state securities.
At the time of its publication, this essay by Mr. Ritchie must’ve had a great appeal. If taken solely on its words, the sixteenth amendment undoubtedly encompassed state securities, and it certainly raised the sovereignty of the federal government in relation to the states. But Mr. Ritchie’s reasoning involves looking behind the plain text of the amendment and considering the larger historical context in which this amendment was birthed. Given the conclusions to which it led, this reasoning certainly would’ve found plenty of open ears in 1919.
But Mr. Ritchie’s argument had at least one major weakness: it failed to recognize that the limited nature of state sovereignty has always been an established constitutional principle. As Mr. Harry Hubbard pointed out in his Harvard Law Review article entitled “The Sixteenth Amendment” in 1920, there is no constitutional basis for the notion that either the states or the federal government must have a certain degree of sovereignty. The Constitution provides that state sovereignty may be reduced if the people so desire with the power of amendment. The only principle which cannot be amended is the right of each state to have equal political representation. Thus, if the states choose to enlarge the role of the federal government through a constitutional amendment there is no higher authority which can be invoked to bar such a choice.
Mr. Hubbard argued that, given this reality, the sixteenth amendment was intended to cover state securities. The text did not need to specifically mention state securities in order to address any sort of historical trend against this type of taxation; if the amendment reduced state sovereignty simultaneously at the time that it consolidated Congress’ taxing power then this would have been a natural extension of the will of the people. We may like to suppose that, past a certain point, state sovereignty may not be encroached upon. But there is actually no constitutional foundation for this supposition. State sovereignty may be an ideal, but it is not unassailable and is very much subject to transformation depending on the whims of the public. In the end, the authors must have been aware of the amendment’s impact on state sovereignty, and it follows that any reduction in state sovereignty was fully permissible because these authors were merely acting as instruments of the people.
Nearly every legal concept presently in use in these United States has an established pedigree. Very few of our concepts are recent inventions. This observation holds true not just in one or two areas of law but for quite literally our entire legal edifice. Section 1031 is no exception to this rule. Section 1031 is derived from a number of earlier tax acts which addressed the non-recognition of gains (or losses) when real property held for business or investment purposes is exchanged for like-kind property. Today, courts utilize the judicial opinions made in previous eras which were informed by one of these earlier tax acts. The case of Mercantile Trust Co. v. Commissioner (1935) is among the most significant of these opinions.
As we will see, Mercantile Trust Co. set an important precedent for viewing complex real property exchange transactions. Like the parties in Alderson v. Commissioner, the parties of Mercantile Trust Co. engaged in a complex transaction which involved multiple independent contracts, the use of an intermediary and a cash payment as “boot” on top of the exchange. In its opinion, the court emphasized that non-recognition depends primarily on what actually occurred, rather than on the various methods and motives which ultimately led to the transaction. Simply because a contingency could have given rise to a sale – and therefore would have created a taxable gain – does not necessarily bar non-recognition; the most important fact is whether an exchange of like-kind property actually transpired.
The representatives for Mercantile Trust Co. (the petitioners) appealed a judgment for a tax deficiency arising from a transaction involving Mercantile Trust Co., an intermediary (known as Title Guarantee & Trust Co.) and Emerson Hotel Co. The Commissioner of Internal Revenue (the respondents) claimed that the transaction amounted to a sale and that the petitioners had a recognized gain of $179,621 (approximately $2,521,070.02 when adjusted for inflation in 2016). The petitioners argued that the transaction had been an exchange of real property of like-kind within the scope of existing statutory provisions.
Title Guarantee & Trust Co., the intermediary, developed separate contracts with Mercantile and Emerson. To conclude certain of these contracts Title Guarantee made cash payments to the other party, and to conclude other contracts Title Guarantee accepted cash payments. Mercantile Trust Co. ultimately received the deed to the property (known as Lexington Street) originally held by Emerson Hotel Co. as well as a total of $24,426.90 in cash. Emerson Hotel Co. received the deed to the property originally held by Mercantile Trust Co. (known as Baltimore Street). Title Guarantee received commissions and title fees which added up to $8,573.10.
The respondents assessed the tax deficiency on the premise that Mercantile Trust Co. acquired the Lexington Street property in a separate transaction which should be considered a sale. The question before the court was whether the evidence on record supported this premise.
The statutory provisions which applied to the case arose from section 112 of the Revenue Act of 1928. Section 112 (of the act of 1928) is the predecessor of section 1031 and includes many of the same provisions as the current law.
The court (the U.S. Tax Court, known as the Board of Tax Appeals in 1935) ruled in favor of the petitioners and declared that the deficiency assessed by the Commissioner was without basis. The Commissioner argued that what had occurred was a “fictitious” exchange and that the Lexington Street property was acquired by Mercantile Trust Co. in an independent sales transaction. The tax court rejected this argument. The contract made between Mercantile Trust Co. and Title Guarantee included a contingency whereby Title Guarantee would pay $300,000 in cash in the event that the deed to the Lexington Street property could not be transferred. The court determined that this contingency did not negate non-recognition treatment given that an exchange of like-kind property did occur.
The reasoning employed by the tax court in Mercantile Trust Co. influenced later decisions, including the decision made in Alderson. The determination of non-recognition treatment depends heavily on the end result and not as much on the methods used to reach that result.
In our first essay on section 1031 we promised to explore other sections of the tax code – namely, 1033 and 121 – which may be of interest to our readers. As always with HTC, we are true to our word. In this essay we will discuss some of the basic facts of section 121.
Section 121 is referred to as the “principal residence exclusion” because it allows gains derived from the sale of one’s primary residence to be excluded from taxable income (up to certain limits). Under 121, real property owners are permitted to exclude up to $250,000 in capital gains from the sale of their principal residence; married couples intending to file jointly may exclude up to $500,000.
In order to qualify for section 121 treatment, property owners must prove that they have owned and lived in the property for at least 24 months during the last 60 month period. It is not necessary that these 24 months be consecutive. Hence, under current law, it is theoretically possible to utilize section 121 once every 2 years.
Real property owners who wish to take advantage of section 121 have to keep a close eye on the market trends which affect the value of their property. As we know, property values tend to fluctuate throughout the course of ownership, and if the value rises too high then the property owner may end up having a significant tax liability even after section 121 is invoked. If a property’s value rises too high, converting the residence into a rental property and then utilizing section 1031 after a certain period of time has passed may be an optimal strategy.
In later installments we will cover section 121 in greater detail by examining legal cases and viewing examples of how section 121 has been utilized in real-world scenarios.
*It is worth mentioning that section 121 is the successor to section 1034. Section 1034 allowed taxpayers to defer 100 percent of the capital gain derived from the sale of their primary residence provided that they subsequently acquired another residence of equal or greater value. This section was replaced with the provisions of section 121 in 1997.
In our previous installment, we learned that whether a transaction falls under section 1031 of the Internal Revenue Code is an extremely important determination. Section 1031 enables taxpayers to receive non-recognition of capital gains when they exchange their real property for another property of like-kind. Real estate transactions can often result in gains of many thousands – and even millions – of dollars, and so receiving non-recognition of this sort under section 1031 can potentially remove very large tax liabilities. For this reason, the qualifications of section 1031 are narrowly construed by courts and so real property owners must carefully observe these qualifications to receive non-recognition treatment.
As with other areas of law, tax law is shaped by judicial opinions. Though the provisions of section 1031 originally emanate from the language of the tax code, the precise contours of these provisions are nonetheless informed and guided by the opinions issued in cases. This is the main reason Huddleston Tax Weekly has focused so heavily on highlighting tax, contract and property cases: it is important that our readers be aware not only of the various laws which may affect them, but also of how these laws apply in real-world scenarios.
The case of Alderson v. Commissioner (1963) gives us a sense of the level of conscientiousness required from the parties of a real estate exchange. As we will explore in detail below, Alderson shows that whether a cash payment is included as a contingency within an agreement is immaterial; the critical factor in determining 1031 treatment is whether an exchange of property of like-kind actually occurred. Alderson also demonstrates that property may be acquired specifically for the purpose of exchanging it as part of a 1031 transaction.
Alderson (the appellant) agreed to sell his property – referred to as Buena Park in the opinion – to a company known as Alloy Die Casting Company. Before the sale was concluded, Alderson decided he would prefer to exchange his property for another property which he discovered after the original agreement was made. This newly discovered property – Salinas – was then acquired by Alloy and transferred to Alderson in exchange for Buena Park.
The amended agreement between Alderson and Alloy included a contingency clause which stated that Alloy would pay cash for the Buena Park property in event that it could not furnish the Salinas property by a specific date.
To receive section 1031 treatment, a transaction must involve the exchange of properties which are of like-kind. The transaction must also be reciprocal and involve a present transfer of ownership, the transfer cannot occur gradually or incrementally over a period of time.
The court (U.S. Court of Appeals for the Ninth Circuit) overturned the opinion of the Tax Court and ruled in favor of Alderson. As noted above, the transaction between Alderson and Alloy was a bit convoluted and involved a formal amendment to the original agreement; two escrow accounts were created as a consequence of the decision made by Alderson to acquire the Salinas property. The Commissioner of Internal Revenue (the respondent) argued that the contingency clause provided evidence for the classification of the transaction as a sale rather than an exchange; the Commissioner also felt that the separate accounts provided evidence for this same conclusion. These arguments ultimately failed to persuade the court.
When determining whether a given transaction falls within the 1031 statute, the court considers the transaction as a whole and bases its decision on the true “substance” of the transaction. Though Alderson did initially agree to a cash sale, and the exchange was complicated by the opening of separate accounts, the substance of the transaction clearly reveals an intention to make an exchange of properties of like-kind. The court does not opine on hypothetical scenarios; the critical fact of Alderson was that the deeds for Buena Park and Salinas were exchanged, not that such an exchange may not have occurred if Salinas were not acquired.
Every real estate owner and investor should take the time to become acquainted with the elements of section 1031 of the Internal Revenue Code. This section allows taxpayers to defer recognition of either gain or loss when they exchange property of like-kind with another party. For any number of reasons, it may be wise for an owner or investor to exchange their property for another. Sans 1031, an exchange of real property would necessarily involve the realization of either gains or losses, and the management of such realization would require substantial investments of time and money. Section 1031 promotes a more open and free marketplace by eliminating the burdens which traditionally follow real estate sales.
Because of the heavy benefits it confers, section 1031 has rigid qualifications which are narrowly construed by courts. One case which illustrates the narrow reading of section 1031 qualifications is Starker v. United States (1977). As we will see, the plaintiff in this well-known case attempted to expand the construction of section 1031 so as to include a complex, multiyear financial transaction in which he took part. The court rejected the plaintiff’s attempt and set a precedent for a narrow construction of 1031.
Before hearing Starker, the court had just settled an earlier case, known was Starker I, which was heard in 1975 and involved the son and daughter-in-law of the plaintiff of the 1977 Starker case. The plaintiff’s son and daughter-in-law had also taken part in the same transaction which formed the basis for the suit of 1977; like the plaintiff, they tried to receive non-recognition of their capital gain under section 1031. The judge in Starker I concluded that the son and daughter-in-law correctly invoked section 1031 and were therefore entitled to a refund for taxes paid on the transaction. The next Starker case was heard by the same judge; this judge reconsidered his earlier decision and ruled against the plaintiff. As we’ve noted before, sometimes no amount of preparation can account for the whims of our magistrates.
The plaintiff transferred a very large amount of land – approximately 1,843 acres – to a company known as Crown Zellerbach Corporation. In return, the company created an “exchange value” balance on its books. To reduce the balance, the company was supposed to transfer a number of parcels of land to the plaintiff; as part of the agreement, these parcels did not need to be transferred all at the same time, but could be transferred one by one over the course of several years. Collectively, these parcels were supposed to be equal in value to the land given to the company by the plaintiff. The plaintiff also received a “growth factor,” which was interpreted as a type of interest by both the company and the court.
The plaintiff invoked section 1031 when filing the income tax return which included this transaction. The IRS denied this invocation and assessed a tax deficiency of $300,930.31 plus interest. The plaintiff then brought a suit to receive a refund.
The question before the court was whether the plaintiff was in fact entitled to non-recognition under section 1031 given the peculiar characteristics of his exchange.
Under section 1031 of the Internal Revenue Code, taxpayers are entitled to non-recognition of capital gains or losses which arise from the exchange of property of like-kind. The exchange must be reciprocal and involve a present transfer of ownership; it cannot involve a promise to transfer property in the future.
The court disallowed section 1031 and ruled in favor of the government. The court rested its decision on a number of factors. One factor was the element of time: the parties did not simultaneously exchange property of like-kind, but instead created a balance which was to be paid off incrementally over a period of time. And in the event that the parcels of land given to the plaintiff did not settle the balance after a period of five years, the agreement between the plaintiff and company held that the company would then transfer cash to cover the remainder. What’s more, two properties transferred by the company were not actually given directly to the plaintiff; the properties were given to the plaintiff’s daughter. And on another occasion, the plaintiff did not specifically receive the title to a property, but was given cash equal to the purchase price of the property along with the company’s right to acquire the property. These and other factors combined to provide a foundation on which the court made its decision to deny non-recognition treatment.
More than anything, our readers should use the Starker case to see the limited availability of section 1031. Where Starker applies, it can be an incredibly useful tool, but know that it only applies in scenarios which explicitly fall under its requirements.
In our upcoming installments, we will look at sections 1033 and 121 and highlight how these sections can also be of use to taxpayers.
In the first half of this last December, Governor Jay Inslee proposed a new tax plan designed to generate funding for basic education. The plan is responsive to a recent state court opinion which held that funding for K-12 education in Washington must come from the state rather than local districts. Prior to this opinion – the McCleary opinion – local districts contributed a substantial part of the cost for education through local property taxes; now, the state must foot the entire bill, and Mr. Inslee’s new plan addresses the deficit created by the removal of this familiar source of funds.
Mr. Inslee’s plan would draw tax revenue from several sources. Let’s review these sources and then take a look at the political reaction to his proposal.
The tax plan of Mr. Inslee would draw revenue from four sources. The plan would implement a capital gains tax of 7.9 percent on the sale of a number of assets, including stocks, bonds and others. The capital gains tax of Inslee’s plan would not apply to retirement accounts, homes, farms and forestry. The tax would apply to earnings above $25,000 for single filers and $50,000 for joint filers. Approximately $821 million would be raised from this tax for the fiscal year of 2019.
The plan would also impose a carbon emissions tax of $25 per metric ton. This tax would raise approximately $2 billion (per year).
Also included in Inslee’s plan would be an increase to the business-and-occupation (B&O) tax for attorneys, real estate agents and other professionals. The rate would be increased from its current level of 1.5 percent to 2.5 percent. This would generate roughly $2.3 billion.
Inslee’s proposal would also eliminate multiple tax exemptions, such as the exemption on bottled water and the exemption which benefits oil refineries.
Unsurprisingly, given the severity of its probable impact, Inslee’s proposal has sparked substantial criticism from lawmakers on the other side of the political spectrum. Senate Majority Leader Mark Schoesler, for instance, was quoted as saying (disapprovingly) that the proposal by Mr. Inslee would constitute the single largest state tax increase in Washington’s history. Another senator, Ann Rivers, also of the Republican Party, said she felt that Mr. Inslee’s plan appeared to be an overly aggressive solution to the issue of funding state education.
Democratic lawmakers have been more sympathetic, and it seems that Mr. Inslee will likely have full support from members of his party. Importantly, newly elected Superintendent of Public Instruction Chris Reykdal has voiced his support for the proposal and even appeared alongside Inslee during the unveiling of the plan at Lincoln High School in Tacoma.
Whether Governor Inslee’s tax plan will be enacted in its current form remains to be seen. What is certain is that the state must develop a workable plan in double quick time. The court of Washington has already held the state in contempt because of the state’s failure to supply sufficient educational funding and has ordered the state to pay hefty fines. If it wishes to avoid further consequence, the state must develop a full funding plan by September 1, 2018.
One of the most enduring myths about government in the United States is the idea that governmental behavior is more or less congruent with standards of individual morality. In other words, most Americans believe that government authority is shaped and ruled by the same moral standards which shape and rule the behavior of the average individual. Governmental behavior may have special leeway in a few instances, but for the most part it is constrained by the same principles which constrain the typical man on the street.
This idea, while not without foundation, falls well short of capturing the truth. What most people do not realize is that governmental morality is based on processes which are altogether different from those which form the basis for the morality of the individual. Individual morality is based on reciprocity, the classic notion of “give and take”: we refrain from damaging our neighbor’s property or stealing goods from our friends because we expect this same kind of treatment in return. Individual morality is an exchange, it stems from the basic idea that whatever action or inaction we take will be reciprocated by whoever is affected.
And because our government is nothing other than a massive collection of individuals, many people assume that governmental behavior must be based on this same principle. In reality, however, this is not the case, because our government does not take part in the sort of interactions in which the individual takes part. Instead of reciprocity, government behavior is based on reason, it derives from a wholly rational process involving the weighing of pros and cons and the careful analysis of possible outcomes. A good deal of the confusion about government would quickly disappear if this fact were realized.
There are various ways to show that this is an accurate statement; today, we will use the concept of eminent domain to prove our case. Relatively few property owners are aware that the government has the constitutionally conferred power to confiscate private property, and that the exercise of this power is not limited strictly to times of war. Denuded of its lofty name, eminent domain is simply a forcible acquisition of the sort which would be punishable if committed by an individual citizen. Of course, this does not speak to its propriety, but only illustrates the fact that governmental behavior operates according to different rules. Let’s take a peek at the case of Hawaii Housing Authority v. Midkiff (1984) to get a sense of the contours of eminent domain.
On the island of Oahu, 22 landowners held 72.5 percent of the land titles. This oligopoly led to a distorted market which involved inflated prices and general social discontent. One landowner (the Bishop Estates) held an unusually large portion of land. The Hawaii Legislature passed a measure designed to redistribute the lots held by the Bishop Estates to their corresponding lessees. The legislature reasoned that this transfer of ownership was in the best interests of the entire community. The measure was brought before the Supreme Court of the United States in order to determine its constitutionality.
The doctrine of eminent domain arises from the Fifth Amendment to the U.S. Constitution. According to the so-called “public use doctrine,” the government has the ability to transfer title of ownership if such a transfer serves a legitimate public good.
In an 8-0 (unanimous) decision, the Supreme Court of the United States ruled that the measure adopted by the Hawaii Legislature was constitutionally valid. The court’s decision of this case was significant because the legislature did not transfer the title of the land to the “public,” but to a larger share of private homeowners. However, though this was the case, the court determined that the legislature’s invocation of eminent domain was valid because the correction of the market conferred a substantial benefit to the general public. In other words, in order for eminent domain to be invoked, private land does not have to be put specifically to public use; it only has to confer a clear benefit to the wider populace.
Of course, circumstances will rarely compel the typical homeowner to master the finer points of eminent domain; but it is still important for virtually every homeowner – and nearly every citizen, for that matter – to have at least a basic understanding of this concept. As citizens, we have to be aware of all the functions of our government, not just those which are the most visible or common. Eminent domain may not dominate the headlines of our most popular media, but as we’ve seen it is still remarkably important.