In re Abrams, 743 N.E.2d 743 (N.Y. 1990)

The Necessary and Proper Clause grants Congress the power to enact laws that override state escheat laws related to unclaimed federal tax refunds, as such actions are incidental to Congress’s power to lay and collect taxes.

Summary

This case concerns New York State’s attempt to claim unclaimed federal tax refunds of its residents under the state’s abandoned property law. The United States Congress then passed the Omnibus Budget Reconciliation Act of 1987, which prohibited the refund of tax overpayments to a state if the amount would escheat to that state. New York challenged the constitutionality of this Act. The New York Court of Appeals held that the Act was a valid exercise of Congress’s power under the Necessary and Proper Clause, incidental to its power to lay and collect taxes. This preempted New York’s escheat rights, even for funds that might have already been subject to escheat before the Act’s passage.

Facts

The New York State Attorney General sought to recover unclaimed federal tax refunds belonging to New York residents, which had been held by the U.S. Treasury for more than seven years. New York based its claim on Article XII-A of the Abandoned Property Law, which extends the state’s policy regarding unclaimed property to property held by the U.S. Government. The federal government had been holding these unclaimed refunds in the general fund of the Treasury.

Procedural History

The Attorney General initiated a proceeding in New York State court. The U.S. Government unsuccessfully attempted to remove the case to federal court and sought dismissal based on sovereign immunity. Following these losses, Congress enacted the Omnibus Budget Reconciliation Act of 1987. The trial court upheld the constitutionality of the Act but granted partial relief to the State for refunds that had escheated before the Act’s effective date. The Appellate Division reversed, holding that the Act applied retroactively to preclude all recovery by the State. The New York Court of Appeals then reviewed the Appellate Division’s order.

Issue(s)

Whether Congress’s enactment of the Omnibus Budget Reconciliation Act of 1987, which prevents the escheat of unclaimed federal tax refunds to states, is a valid exercise of its power under the Necessary and Proper Clause, incidental to its power to lay and collect taxes?

Holding

Yes, because the Act is a permissible exercise of Congress’s powers under the Necessary and Proper Clause, implementing its authority to lay and collect income taxes under the Sixteenth Amendment, and is a valid limitation on state escheat rights under the Supremacy Clause.

Court’s Reasoning

The court reasoned that the power to lay and collect taxes includes the power to establish an administrative framework for tax collection and refunds. The court stated that the method and manner of making refunds are a congressional prerogative. “Manifestly, the method and manner of making these refunds are as much a congressional prerogative as are the method and manner of collecting citizens’ tax payments in the first instance.” The government’s system of tax refunds preserves a federally administered fund against which taxpayers or their heirs may claim refunds of overpayments. The Omnibus Act was intended to prevent states from interfering with the federal policy of preserving the taxpayer’s right to recover unclaimed funds directly from the government at any time. The court rejected the argument that the government cannot demonstrate a need to control the refund process on a permanent basis, holding that the premise was based on the circular logic that refunds unclaimed for seven years lose any relationship to the administration of the tax system. The court emphasized that the Attorney General did not claim any constitutionally protected vested interest in the unclaimed funds. The court concluded that the Act’s prohibition against refunding overpayments that would escheat to a state applied to the future conduct of public officers, and thus no question of retroactive effect on past conduct or events was presented. The court also noted the legislative history demonstrating Congress’s clear intent that the Act apply to all unclaimed refunds held in the U.S. Treasury. The court cited United States v. Schooner Peggy, stating that courts should decide controversies on the basis of substantive law as it exists at the time of the decision.