WILLIAM F. NETSKY, AS EXECUTOR OF THE ESTATE OF FRANK W. NETSKY,
DECEASED, PETITIONER V. UNITED STATES OF AMERICA

   No. 88-921

   In the Supreme Court of the United States

   October Term, 1988

   On Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The Third Circuit

   Memorandum For The United States In Opposition

   Petitioner contends that the court of appeals lacked jurisdiction
over the government's appeal on the ground that appeal lay exclusively
to this Court under 28 U.S.C. 1252.

   1. The underlying substantive issue in this case is the same as
that decided by this Court in United States v. Wells Fargo Bank, No.
86-1521 (Mar. 23, 1988), namely, whether certain "Project Notes"
issued by local housing authorities were exempt from the federal
estate tax under the United States Housing Act of 1937, ch. 896, 50
Stat. 888.  The pertinent facts are as follows:  Frank W. Netsky died
on August 18, 1981, owning Project Notes in the aggregate face amount
of $2,900,000.  On May 18, 1982, petitioner filed a federal estate tax
return for the decedent's estate, and that return included in the
gross estate the Project Notes and interest accrued thereon to the
date of death.  Petitioner paid the tax of $1,378,548 shown as due on
the return.  Pet. App. A19-A21.

   In 1984, however, a federal district court held that such Project
Notes were exempt from the federal estate tax.  Haffner v. United
States, 585 F. Supp. 354 (N.D. Ill.), aff'd, 757 F.2d 920 (7th Cir.
1985).  Shortly thereafter, petitioner, invoking the Haffner decision,
filed a claim for refund of a large part of the federal estate taxes
previously paid, asserting that the Project Notes should not have been
included in the decedent's gross estate.  When the Internal Revenue
Service did not act favorably upon the claim within six months,
petitioner instituted this suit for refund in the United States
District Court for the Eastern District of Pennsylvania.

   In the interim, on July 18, 1984, the Deficit Reduction Act of 1984
(DEFRA), Pub. L. No. 98-369, 98 Stat. 494, was signed into law.
Section 641 of that Act responded to the Haffner decision.  Subsection
(a) provided that nothing in any provision of law exempting any
property from taxation should exempt the transfer of such property
from federal estate, gift, and generation-skipping taxes.  Subsection
(b)(1) made the provisions of subsection (a) applicable to the estates
of decedents dying, gifts made, and transfers made on or after June
19, 1984.  Subsection (b)(2) provided that the provisions of
subsection (a) should also apply in the case of any transfer of
property "if at any time there was filed an estate or gift tax return
showing such transfers as subject to Federal estate or gift tax." See
United States v. Wells Fargo Bank, slip op. 2.

   2. The district court considered the case on the basis of
cross-motions for summary judgment.  The government put forth two
defenses to the refund suit.  First, it argued that Haffner was
wrongly decided and that Project Notes had never been exempt from the
federal estate tax.  Second, it argued that, in any event, Section
641(a) and (b)(2) of DEFRA applied because petitioner had reported the
Project Notes as taxable on the estate tax return, and therefore
petitioner could not invoke the Housing Act of 1937 to claim that the
Project Notes were exempt from the estate tax.  In response,
petitioner argued that Haffner was correctly decided, and that DEFRA
did not prevent the court from following Haffner.  The latter argument
had two separate components.  First, petitioner argued that Section
641 should not be construed to apply retroactively, at least not to
refund claims filed before its enactment (C.A. App. 69-77).
Specifically, petitioner argued that the statutory language did not
clearly extend Section 641(a) to claims filed before its effective
date.  Petitioner further argued that "interpretations which avoid
constitutional difficulties are preferred," and stated that his
suggested construction that DEFRA does not apply in this case "avoids
constitutional infirmities which otherwise would require the
invalidation of the statute" (C.A. App. 77).  Second, petitioner
argued that, if the court "were to construe Section 641 to be of
retroactive effect before June 19, 1984," then "(s)uch retroactive
application * * * would violate the due process and equal protection
clauses of the Fifth Amendment" (ibid.; see id. at 77-84).

   The district court accepted petitioner's arguments (Pet. App.
A19-A34).  The court approved and adopted the Haffner decision (Pet.
App. A24), and it then turned to a consideration of Section 641 of
DEFRA.  The court clearly stated that it agreed with petitioner that,
as a matter of statutory construction, DEFRA did not apply to the
refund claim in this case (Pet. App. A24-A27).  The court stated (id.
at A27):  "I do not accept the (government's) argument that the act
should apply to refund claims filed before June 19, 1984.  Neither the
language of the statute nor its legislative history necessarily compel
the conclusion that Congress intended the act to be applied in a fully
retroactive fashion." The court then added (ibid.):  "Moreover, even
if that were Congress' intent, I find that retroactive application of
the statute would be inappropriate in the circumstances of the instant
case because it would violate the plaintiff's constitutional
guarantees of due process." The court then proceeded to explain in
detail (id. at A27-A32) why it believed that retroactive application
of Section 641 "would violate the due process clause" (Pet. App. A32,
A33).

   3. The government appealed to the court of appeals under 28 U.S.C.
1291.  Petitioner filed a motion to dismiss the appeal for lack of
jurisdiction, asserting that the District Court had held a federal
statute to be unconstitutional and therefore 28 U.S.C. 1252 and 1291
permitted an appeal only to this Court.  After this Court entered its
decision in Wells Fargo Bank, the court of appeals denied the motion
to dismiss and reversed the judgment below (Pet. App. A1-A14).  The
court of appeals held that the district court's "language rejecting
the retroactive application of (Section 641) on the basis of its
language and legislative history amply supports the government's
position that the district court based its holding on statutory
grounds" (Pet. App. A9-A10).  With respect to the district court's
additional discussion supporting its conclusion that retroactive
application "would be" unconstitutional, the court of appeals stated
that "(t)he district court here used the subjunctive mood, indicating
that the district Court's opinion was carefully structured to avoid
holding that section 641 was unconstitutional" (id. at A11-A12).  On
the merits, the court stated that this Court's decision in Wells Fargo
Bank required reversal of the judgment of the district court (Pet.
App. A13-A14).

   4. Petitioner, having successfully argued to the district court
that Section 641 of DEFRA should be construed not to apply
retroactively to the refund claim in this case, now argues that the
district court's decision was one holding a federal statute
unconstitution, and therefore that the court of appeals lacked
jurisdiction to entertain an appeal from its judgment.  The court of
appeals correctly rejected that contention, and its decision does not
conflict with any decision of this Court or of any other court of
appeals.  Moreover, the question presented is of no continuing
significance because the statute providing for direct appeal to this
Court when a federal statute has been held unconstitutional, 28 U.S.C.
1252, was repealed by Pub. L. No. 100-352, 102 Stat. 662, effective
with respect to judgments entered on or after September 25, 1988.
Accordingly, review by this Court is not warranted.

   The district court in this case plainly held, as petitioner argued
that it should, that Section 641 should not be construed retroactively
to apply to the refund claim in this case.  The court supported that
conclusion by reference to the statute's language and legislative
history.  The court also stated that retroactive application of the
statute would be unconstitutional, which supported its statutory
construction because of the principle that statutes should be
construed, if possible, to avoid constitutional problems -- a
statutory construction argument that petitioner pressed upon the
district court (see C.A. App. 77).  As the court of appeals held,
direct appeal to this Court under Section 1252 cannot be invoked
where, as here, "the district court merely uses the possible
unconstitutionality of a contrary statutory interpretation as the
basis for its narrow construction of the statute" (Pet. App. A11).

   The correctness of the court of appeals' conclusion is clearly
demonstrated by this Court's decision in United States v. Christian
Echoes National Ministry, Inc., 404 U.S. 561 (1972), where the
district court overturned the IRS's decision to revoke the Ministry's
status as a tax-exempt religious organization because of its political
activities.  The district court found that all of the organization's
activities were in furtherance of its religious beliefs, and it
narrowly construed 26 U.S.C. 501(c)(3) as not proscribing those
activities.  The district court found that this construction of the
statute was necessary to preserve its constitutionality, discussing in
some detail the reasons why, in its view, interpreting Section
501(c)(3) to justify revocation of the organization's tax exemption
would render the statute unconstitutional.  See 28 A.F.T.R.2d (P-H)
Paragraph 71-5260, at 71-5945 (N.D. Okla. 1971).  This Court held that
the district court's decision was not directly appealable under
Section 1252, and instead that appeal properly lay to the court of
appeals.  The Court explained (404 U.S. at 565-566):  "Although the
(statutory) construction was based on a constitutional premise, it did
not amount to a holding that an Act of Congress is unconstitutional,
as contemplated by Section 1252.  To the contrary, the District Court
construed the section so as to save its constitutionality." Similarly
here, the district court's holding rested on a construction of the
statute that it viewed as avoiding constitutional difficulties, and
the court of appeals correctly held that the decision was not directly
appealable to this Court under 28 U.S.C. 1252.

   It is therefore respectfully submitted that the petition for a writ
of certiorari should be denied.

   CHARLES FRIED

      Solicitor General

   JANUARY 1989