source: Caselaw Access Project

author:
      Justice Kennedy
      Justice Scalia, Justice Brennan,
      Justice Blackmun, Justice Stevens,

license: Public Domain

text:
    DELLMUTH, ACTING SECRETARY OF EDUCATION OF PENNSYLVANIA v. MUTH et al.
    CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
    No. 87-1855.
    Argued February 28, 1989
    Decided June 15, 1989

      Maria Parisi Vickers, Chief Deputy Attorney General of Pennsylvania, argued the cause for petitioner. With her on the briefs were LeRoy S. Zimmerman, former Attorney General, Ernest D. Preate, Jr., Attorney General, John G. Knorr III, Chief Deputy Attorney General, and Gregory R. Neuhauser, Senior Deputy Attorney General.

      Martha A. Field argued the cause for respondents and filed a brief for respondent Muth. Joanne D. Sommer filed a brief for respondent Central Bucks School District.

        Lacy H. Thornburg, Attorney General, and Edioin M. Speas, Jr., Special Deputy Attorney General, filed a brief for the State of North Carolina as amicus curiae urging reversal.

        Minna J. Kotkin, Kathleen A. Sullivan, Herbert Semmel, and Elizabeth Lottman Schneider filed a brief for the American Civil Liberties Union et al. as amici curiae urging affirmance.

   Justice Kennedy

delivered the opinion of the Court.

The question before us is whether the Education of the Handicapped Act abrogates the States’ Eleventh Amendment immunity from suit in the federal courts.

I

The Education of the Handicapped Act (EHA), 84 Stat. 175, as amended, 20 U. S. C. §1400 et seq. (1982 ed. and Supp. V.), enacts a comprehensive scheme to assure that handicapped children may receive a free public education appropriate to their needs. To achieve these ends, the Act mandates certain procedural requirements for participating state and local educational agencies. In particular, the Act guarantees to parents the right to participate in the development of an “individualized education program” (IEP) for their handicapped child, and to challenge the appropriateness of their child’s IEP in an administrative hearing with subsequent judicial review. See 20 U. S. C. § 1415 (1982 ed. and Supp. V); School Committee of Burlington v. Department of Education of Massachusetts, 471 U. S. 359, 361 (1985).

Alex Muth, the son of respondent Russell Muth (hereinafter respondent), is a bright child, but one handicapped within the meaning of the EHA by a language learning disability and associated emotional problems. Alex was enrolled in public school in the Central Bucks School District of Pennsylvania from 1980 to 1983. In the summer of 1983, respondent requested a statutory administrative hearing to challenge the district’s IEP for Alex. In September, shortly before the hearing convened, respondent enrolled Alex in a private school for learning disabled children for the coming school year.

The hearing examiner found that Alex’s original IEP was inappropriate and made a number of recommendations. Both respondent and the school district then appealed.the decision to the secretary of education, as provided under Pennsylvania law, see 22 Pa. Code § 13.32(24) (1988). The secretary remanded the case to the hearing examiner with instructions to the school district to revise Alex’s IEP (1988). After the district did so, the hearing examiner issued a decision declaring the revised IEP appropriate, and the secretary-affirmed that decision on October 24, 1984, more than a year after the original due process hearing.

While the administrative proceedings were underway, respondent brought this suit in the Eastern District of Pennsylvania against the school district and the state secretary of education, whose successor is petitioner here. As amended, respondent’s complaint alleged that the district’s IEP for Alex was inappropriate and that the Commonwealth’s administrative proceedings had violated the procedural requirements of the EHA in two respects: the assignment of review to the secretary, an allegedly partial officer; and the delays occasioned by the secretary’s remand to the hearing examiner. Respondent requested declaratory and injunctive relief, reimbursement for Alex’s private-school tuition in 1983-1984, and attorney’s fees.

The District Court found various procedural infirmities in Pennsylvania’s administrative scheme and entered summary judgment on respondent’s procedural claims. The court held a hearing to resolve the remaining issues in the case and to determine the proper remedy for the procedural violations. The court concluded that, while the district’s proposed IEP for 1983-1984 had been appropriate within the meaning of the EHA, respondent was entitled to reimbursement for Alex’s tuition that year because the procedural flaws had delayed the administrative process. The District Court further determined that the school district and the Commonwealth of Pennsylvania were jointly and severally liable, agreeing with respondent that the EHA abrogated Pennsylvania’s Eleventh Amendment immunity from suit. The court also awarded attorney’s fees, assessed jointly and severally against the school district and the Commonwealth.

The United States Court of Appeals for the Third Circuit affirmed. Muth v. Central Bucks School Dist., 839 F. 2d 113 (1988). Most pertinent for this case, the Court of Appeals agreed with the District Court that the Eleventh Amendment did not bar the reimbursement award against the Commonwealth. The court concluded that “the text of EHA and its legislative history leave no doubt that Congress intended to abrogate the 11th amendment immunity of the states.” Id., at 128.

To resolve a conflict among the Circuits, we granted certio-rari sub nom. Gilhool v. Muth, 488 U. S. 815 (1988), on the question whether the EHA abrogates the States’ sovereign immunity under the Eleventh Amendment. Compare David D. v. Dartmouth School Committee, 775 F. 2d 411 (CA1 1985) (finding abrogation), with Gary A. v. New Trier High School Dist. No. 203, 796 F. 2d 940 (CA7 1986); Doe v. Maher, 793 F. 2d 1470 (CA9 1986); and Miener v. Missouri, 673 F. 2d 969 (CA8 1982) (finding no abrogation). We now reverse.

II

We have recognized that Congress, acting in the exercise of its enforcement authority under §5 of the Fourteenth Amendment, may abrogate the States’ Eleventh Amendment immunity. Fitzpatrick v. Bitzer, 427 U. S. 445, 456 (1976). We have stressed, however, that abrogation of sovereign immunity upsets “the fundamental constitutional balance between the Federal Government and the States,” Atascadero State Hospital v. Scanlon, 473 U. S. 234, 238 (1985), placing a considerable strain on “‘[t]he principles of federalism that inform Eleventh Amendment doctrine,’” Pennhurst State School and Hospital v. Halderman, 465 U. S. 89, 100 (1984), quoting Hutto v. Finney, 437 U. S. 678, 691 (1978). To temper Congress’ acknowledged powers of abrogation with due concern for the Eleventh Amendment’s role as an essential component of our constitutional structure, we have applied a simple but stringent test: “Congress may abrogate the States’ constitutionally secured immunity from suit in federal court only by making its intention unmistakably clear in the language of the statute.” Atascadero, supra, at 242.

In concluding that the EHA contains the requisite clear statement of congressional intent, the Court of Appeals rested principally on three textual provisions. The court first cited the Act’s preamble, which states Congress’ finding that “it is in the national interest that the Federal government assist State and local efforts to provide programs to meet the education needs of handicapped children in order to assure equal protection of the law.” 20 U. S. C. § 1400(b)(9). Second, and most important for the Court of Appeals, was the Act’s judicial review provision, which permits parties aggrieved by the administrative process to “bring a civil action ... in any State court of competent jurisdiction or in a district court of the United States without regard to the amount in controversy.” 20 U. S. C. § 1415(e)(2). Finally, the Court of Appeals pointed to a 1986 amendment to the EHA, which states that the Act’s provision for a reduction of attorney’s fees shall not apply “if the court finds that the State or local educational agency unreasonably protracted the final resolution of the action or proceeding or there was a violation of this section.” 20 U. S. C. § 1415(e)(4)(G) (1982 ed., Supp. V). In the view of the Court of Appeals, this amendment represented an express statement of Congress’ understanding that States can be parties in civil actions brought under the EHA.

Respondent supplements these points with some non-textual arguments. Most notably, respondent argues that abrogation is “necessary ... to achieve the EHA’s goals,” Brief for Respondent Muth 37; and that the 1986 amendments to another statute, the Rehabilitation Act, 100 Stat. 1845, 42 U. S. C. §2000d-7 (1982 ed., Supp. IV), expressly abrogate state immunity from suits brought under the EHA, Brief for Respondent Muth 30. In connection with the latter argument, respondent recognizes that the Rehabilitation Act amendments expressly apply only to “violations that occur in whole or in part after October 21, 1986.” 42 U. S. C. §2000d-7(b) (1982 ed., Supp. IV). Respondent contends, however, that “[a]lthough the amendment became effective after Muth initially filed suit, . . . the overwhelming support for the amendment shows that it reflects Congress’ intent in originally enacting the EHA [in 1975].” Brief for Respondent Muth 32, n. 48.

We turn first to respondent’s nontextual arguments, because they are the easier to dismiss. It is far from certain that the EHA cannot function if the States retain immunity, or that the 1986 amendments to the Rehabilitation Act are a useful guide to congressional intent in 1975. Indeed, the language of the 1986 amendments to the Rehabilitation Act appears to cut against respondent. Without intending in any way to prejudge the Rehabilitation Act amendments, we note that a comparison of the language in the amendments with the language of the EHA serves only to underscore the difference in the two statutes, and the absence of any clear statement of abrogation in the EHA. The amendments to the Rehabilitation Act read in pertinent part:

“A State shall not be immune under the Eleventh Amendment of the Constitution of the United States from suit in Federal court for a violation of [several enumerated provisions] or the provisions of any other Federal statute prohibiting discrimination by recipients of Federal financial assistance.” 42 U. S. C. §2000d-7(a) (1) (1982 ed., Supp. IV).

When measured against such explicit consideration of' abrogation of the Eleventh Amendment, the EHA’s treatment of the question appears ambiguous at best.

More importantly, however, respondent’s contentions are beside the point. Our opinion in Atascadero should have left no doubt that we will conclude Congress intended to abrogate sovereign immunity only if its intention is “unmistakably clear in the language of the statute. ” Atascadero, 473 U. S., at 242. Lest Atascadero be thought to contain any ambiguity, we reaffirm today that in this area of the law, evidence of congressional intent must be both unequivocal and textual. Respondent’s evidence is neither. In particular, we reject the approach of the Court of Appeals, according to which, “[w]hile the text of the federal legislation must bear evidence of such an intention, the legislative history may still be used as a resource in determining whether Congress’ intention to lift the bar has been made sufficiently manifest.” 839 F. 2d, at 128. Legislative history generally will be irrelevant to a judicial inquiry into whether Congress intended to abrogate the Eleventh Amendment. If Congress’ intention is “unmistakably clear in the language of the statute,” recourse to legislative history will be unnecessary; if Congress’ intention is not unmistakably clear, recourse to legislative history will be futile, because by definition the rule of Atascadero will not be met.

The gist of Justice Brennan’s dissent’s argument appears to be that application of the governing law in Atascadero is unfair in this case. The dissent complains that we “resor[t] to an interpretative standard that Congress could have anticipated only with the aid of a particularly effective crystal ball.” Post, at 241. This complaint appears to be premised on an unrealistic and cynical view of the legislative process. We find it difficult to believe that the 94th Congress, taking careful stock of the state of Eleventh Amendment law, decided it would drop coy hints but stop short of making its intention manifest. Rather, the salient point in our view is that it cannot be said with perfect confidence that Congress in fact intended in 1975 to abrogate sovereign immunity, and imperfect confidence will not suffice given the special constitutional concerns in this area. Cf. Johnson v. Robison, 415 U. S. 361, 373-374 (1974) (federal statute will not be construed to preclude judicial review of constitutional challenges absent clear and convincing evidence of congressional intent).

We now turn our attention to the proper focus of an inquiry into congressional abrogation of sovereign immunity, the language of the statute. We cannot agree that the textual provisions on which the Court of Appeals relied, or any other provisions of the EHA, demonstrate with unmistakable clarity that Congress intended to abrogate the States’ immunity from suit. The EHA makes no reference whatsoever to either the Eleventh Amendment or the States’ sovereign immunity. Cf. supra, at 228. Nor does any provision cited by the Court of Appeals address abrogation in even oblique terms, much less with the clarity Atascadero requires. The general statement of legislative purpose in the Act’s preamble simply has nothing to do with the States’ sovereign immunity. The 1986 amendment to the EHA deals only with attorney’s fees, and does not alter or speak to what parties are subject to suit. Respondent conceded as much at oral argument, acknowledging that “the 1986 EHA Amendments . . . are not directly relevant [here] because they concerned only attorney’s fees.” Tr. of Oral Arg. 28. Finally, 20 U. S. C. § 1415(e)(2), the centerpiece of the Court of Appeals’ textual analysis, provides judicial review for aggrieved parties, but in no way intimates that the States’ sovereign immunity is abrogated. As we made plain in Atascadero: “A general authorization for suit in federal court is not the kind of unequivocal statutory language sufficient to abrogate the Eleventh Amendment.” 473 U. S., at 246.

At its core, respondent’s attempt to distinguish this case from Atascadero appears to reduce to the proposition that the EHA “is replete with references to the states,” whereas in “Atascadero . . . the statutory language at issue did not include mention of states.” Brief for Respondent Muth 32-33. We recognize that the EHA’s frequent reference to the States, and its delineation of the States’ important role in securing an appropriate education for handicapped children, make the States, along with local agencies, logical defendants in suits alleging violations of the EHA. This statutory structure lends force to the inference that the States were intended to be subject to damages actions for violations of the EHA. But such a permissible inference, whatever its logical force, would remain just that: a permissible inference. It would not be the unequivocal declaration which, we reaffirm today, is necessary before we will determine that Congress intended to exercise its powers of abrogation.

I — I hH H

We hold that the statutory language of the EHA does not evince an unmistakably clear intention to abrogate the States’ constitutionally secured immunity from suit. The Eleventh Amendment bars respondent’s attempt to collect tuition reimbursement from the Commonwealth of Pennsylvania. The judgment of the Court of Appeals is reversed, and the case is remanded for proceedings consistent with this opinion.

It is so ordered.

Justice Scalia,

concurring.

I join the opinion of the Court, with the understanding that its reasoning does not preclude congressional elimination of sovereign immunity in statutory text that clearly subjects States to suit for monetary damages, though without explicit reference to state sovereign immunity or the Eleventh Amendment.

Justice Brennan,

with whom Justice Marshall, Justice Blackmun, and Justice Stevens join,

dissenting.

I respectfully dissent from the Court’s holding that the Commonwealth of Pennsylvania is immune from suit in the federal courts for violations of the Education of the Handicapped Act (EHA), 20 U. S. C. § 1400 et seq. (1982 ed. and Supp. V). For reasons I have set out elsewhere, see Welch v. Texas Dept. of Highways and Public Transportation, 483 U. S. 468, 509-511 (1987) (Brennan, J., dissenting); Atascadero State Hospital v. Scanlon, 473 U. S. 234, 258-302 (1985) (Brennan, J., dissenting), I would accept respondent Muth’s invitation to overrule Hans v. Louisiana, 134 U. S. 1 (1890), as that case has been interpreted in this Court’s recent decisions. Even if I did not hold that view, I would nevertheless affirm the decision of the Court of Appeals on the ground that Congress in the EHA abrogated state immunity.

I

Applying the standard method for ascertaining congressional intent, I conclude, with the Court of Appeals, that “[t]he text of EHA and its legislative history leave no doubt that Congress intended to abrogate the 11th amendment immunity of the states.” Muth v. Central Bucks School Dist., 839 F. 2d 113, 128 (CA3 1988).

The EHA imposes substantial obligations on the States, as well as on local education authorities, as might be expected in an Act authorizing federal financial aid “to assist States and localities to provide for the education of all handicapped children.” 20 U. S. C. § 1400(c). To be eligible for federal assistance, a State must develop a plan for the education of all handicapped children and establish the procedural safeguards mandated in § 1415. §§ 1412(2), (5). It is the state educational agency that is “responsible for assuring that the requirements of [EHA Subchapter II, dealing with federal assistance for education of handicapped children] are carried out and that all educational programs for handicapped children within the State, including all such programs administered by any other State or local agency, [are] under the general supervision of the persons responsible for educational programs for handicapped children in the State educational agency.” § 1412(6). See Smith v. Robinson, 468 U. S. 992, 1010 (1984) (“The responsibility for providing the required education remains on the States”); Board of Education of Hendrick Hudson Central School Dist. v. Rowley, 458 U. S. 176, 182-183 (1982).

In accord with this overarching responsibility placed upon the States, the EHA contemplates that in a number of situations where a local education authority cannot or will not provide appropriate educational services to the handicapped, the State will do so directly. See 20 U. S. C. § 1411 (c)(4)(A)(ii) (State to assure provision of services where local authority barred from receiving federal funds because it has failed to submit a proper application); § 1414(d) (State “to provide special education and related services directly to handicapped children residing in the area served by [a] local educational agency” that is unable or unwilling to establish or maintain programs, or to be merged with other local agencies to enable it to do so, or that has “handicapped children who can best be served by a regional or State center”). And in any event, where a local education authority would be entitled to less than $7,500 in EHA funding for a fiscal year, the State may not distribute the funds, but must use the funds itself to ensure provision of appropriate services. §§ 1411(c)(4)(A)(i), (c)(4)(B). Moreover, a State may choose to administer up to 25 percent of its federal funding itself, rather than distributing these funds to local education authorities, and use such funds to provide direct services to the handicapped. §§ 1411(c)(1), (c)(2).

“[T]he EHA confers upon disabled students an enforceable substantive right to public education in participating States and conditions federal financial assistance upon a State’s compliance with the substantive and procedural goals of the Act.” Honig v. Doe, 484 U. S. 305, 310 (1988) (emphasis added; citation omitted). See also Smith v. Robinson, supra, at 1010. Thus, § 1415(e)(2) provides that “any party aggrieved by the findings and decision [made in an administrative process] shall have the right to bring a civil action ... in any State court of competent jurisdiction or in a district court of the United States without regard to the amount in controversy.” This provision makes no distinction between civil actions based upon the type of relief sought and hence plainly contemplates tuition-reimbursement actions. See School Committee of Burlington v. Department of Education of Massachusetts, 471 U. S. 359 (1985). In light of the States’ pervasive role under the EHA, and the clarity with which the statute imposes both procedural and substantive obligations on the States, I have no trouble in inferring from the text of the EHA that “Congress intended that the state should be named as an opposing party, if not the sole party, to [a] proceeding” brought under § 1415(e)(2), whatever remedy is sought, and that Congress thereby abrogated Eleventh Amendment immunity from suit in federal court. David D. v. Dartmouth School Comm., 775 F. 2d 411, 422 (CA1 1985), cert. denied, 475 U. S. 1140 (1986). Indeed, in those situations where a State has elected to provide educational services to the handicapped directly, or where under the EHA it is required to provide direct services, the State would appear to be the only proper defendant in a federal action to enforce EHA rights.

This solely textually based interpretation of the EHA is supported by the statute’s legislative history. Senator Williams, a primary author of the EHA, explained to Congress that, under the Act,

“it should be clear that a parent or guardian may present a complaint alleging that a State or local educational agency has refused to provide services to which a child may be entitled or alleging that a State or local educational agency has erroneously classified a child as a handicapped child.” 121 Cong. Rec. 37415 (1975) (emphasis added).

In addition, he emphasized that “any party aggrieved by the findings and decision rendered in the due process hearing o[r] the State educational agency review of such hearing shall have the right to bring a civil action with respect to the original complaint,” id., at 37416 (emphasis added), that is, with respect to the administrative complaint, which of course may allege EHA violations by the State. The text and legislative history of the EHA thus make it unmistakably clear that Congress there intended to abrogate state immunity from suit.

II

The Court does not seem to disagree with this analysis of actual congressional intent. Even without benefit of reference to the legislative history that confirms the obvious interpretation of the text and makes Congress’ purpose undeniably clear — history spurned by the Court because it has devised in this case a novel rule that “[legislative history generally will be irrelevant to a judicial inquiry into whether Congress intended to abrogate the Eleventh Amendment,” ante, at 230 — the Court is able to

“recognize that the EHA’s frequent reference to the States, and its delineation of the States’ important role in securing an appropriate education for handicapped children, make the States, along with local agencies, logical defendants in suits alleging violations of the EHA. This statutory structure lends force to the inference that the States were intended to be subject to damages actions for violations of the EHA.” Ante, at 232.

Nevertheless, although Congress did intend to abrogate the States’ immunity from suit, the Court refuses to give effect to this intention because it was not, in the Court’s view, “unequivocal and textual.” Ante, at 230.

I dispute the Court’s conclusion that the text of the EHA is equivocal. To my mind, immunity is “unequivocally” textually abrogated when state amenability to suit is the logical inference from the language and structure of the text. Cf. Edelman v. Jordan, 415 U. S. 651, 673 (1974) (a clear declaration of a State’s consent to suit in federal court does not require “‘express language,”’ but may be found in “‘overwhelming implications from the text [that] leave no room for any other reasonable construction,”’ quoting Murray v. Wilson Distilling Co., 213 U. S. 151, 171 (1909)). The Court reaches the conclusion it does only because it requires more than an unequivocal text. In doing so, the Court is far removed from any real concern to discern a “clear and manifest” statement of congressional intent, Rice v. Santa Fe Elevator Corp., 331 U. S. 218, 230 (1947), which is all that the Court has otherwise looked for when inquiring into the meaning of congressional action, even “[i]n traditionally sensitive areas, such as legislation affecting the federal balance,” United States v. Bass, 404 U. S. 336, 349 (1971).

Were the Court in fact concerned with Congress’ intent it could not have adopted the strict drafting regulations it devises today, ruling out resort to legislative history and apparently also barring inferential reasoning from text and structure. The Court’s justification for such a rule is that abrogation of immunity “upsets ‘the fundamental constitutional balance between the Federal Government and the States,’. . . placing considerable strain on ‘[t]he principles of federalism that inform Eleventh Amendment doctrine,”’ and that a “stringent test” is necessary “[t]o temper Congress’ acknowledged powers of abrogation with due concern for the Eleventh Amendment’s role as an essential component of our constitutional structure.” Ante, at 227-228. I maintain that the Court makes one very basic error here, for “[t]here simply is no constitutional principle of state sovereign immunity.” Atascadero, 473 U. S., at 259 (Brennan, J., dissenting). But quite apart from that, the Court has never explained why it is that the constitutional principle it has created should require a novel approach to ascertaining congressional intent. As I said in Atascadero, “special rules of statutory drafting are not justified (nor are they justifiable) as efforts to determine the genuine intent of Congress; no reason has been advanced why ordinary canons of statutory construction would be inadequate to ascertain the intent of Congress.” Id., at 254. I entirely fail to see, for example, why the “clear and manifest purpose of Congress” to pre-empt under Article VI “the historic police powers of the States,” Rice, supra, at 230, may be found in so many and various ways, while the Court in the Eleventh Amendment context insists on setting up ever-tighter drafting regulations that Congress must have followed (though Congress could not have been aware of such requirements when it acted) in order to abrogate immunity. A genuine concern to identify Congress’ purpose would lead the Court to consider both the logical inferences to be drawn from the text and structure of the EHA, cf. Edelman v. Jordan, supra, at 673, and the statute’s legislative history, see Employees v. Missouri Dept. of Public Health and Welfare, 411 U. S. 279, 283-285 (1973) (examining legislative history in order to determine whether Congress abrogated Eleventh Amendment immunity), in deciding whether Congress intended to subject States to suit in federal court.

Though the special and strict drafting regulations the Court has now foisted on Congress are unjustifiable, still worse is the Court’s retroactive application of these new rules. It would be one thing to tell Congress how in the future the Court will measure Congress’ intent. That at least would ensure that Congress and this Court were operating under the same rules at the same time. But it makes no sense whatsoever to test congressional intent using a set of interpretative rules that Congress could not conceivably have foreseen at the time it acted — rules altogether different from, and much more stringent than, those with which Congress, reasonably relying upon this Court’s opinions, believed itself to be working. See Atascadero, supra, at 255, n. 7 (Brennan, J., dissenting). The effect of retroactively applying the Court’s peculiar rule will be to override congressional intent to abrogate immunity, though such intent was absolutely clear under principles of statutory interpretation established at the time of enactment. Retroactive application of new drafting regulations in such circumstances is simply unprincipled. Cf. Welch, 483 U. S., at 496 (Scalia, J., concurring in part and concurring in judgment) (where Congress has enacted statutes based on an assumption reasonably derived from our cases, “[ejven if we were now to find that assumption to have been wrong, we could not, in reason, interpret the statutes as though the assumption never existed”).

Congress has already had cause to complain of the Court’s changing its interpretative rules in midcourse. After the Court held in Atascadero that § 504 of the Rehabilitation Act of 1973, 29 U. S. C. § 794, contained no “unmistakable language” abrogating Eleventh Amendment immunity, 473 U. S., at 243, Congress in 1986 enacted an amendment to the Act providing:

“A State shall not be immune under the Eleventh Amendment of the Constitution of the United States from suit in Federal court for a violation of [enumerated provisions of the Rehabilitation Act] or the provisions of any other Federal statute prohibiting discrimination by recipients of Federal financial assistance.” 42 U. S. C. § 2000d-7(a)(l) (1982 ed., Supp. IV).

Congress enacted this provision, the Senate Conference Report tells us, because “[tjhe Supreme Court’s decision [in Atascadero] misinterpreted congressional intent. Such a gap in Section 504 coverage was never intended. It would be inequitable for Section 504 to mandate state compliance with its provisions and yet deny litigants the right to enforce their rights in Federal courts when State or State agency actions are in issue.” S. Conf. Rep. No. 99-388, pp. 27-28 (1986). See also 132 Cong. Rec. 28623 (1986) (amendment “eliminate[s] the court-made barrier to effectuating congressional intent that the holding in the Atascadero case so unwisely has raised”) (Sen. Cranston, a principal author of § 504 of the 1973 Act). Had the Court followed the usual rules for determining legislative intent, as Congress in 1973 had every reason to expect it would, the Court could not have fallen into this error. See Atascadero, 473 U. S., at 248-252 (Brennan, J., dissenting) (examining the text, structure, and legislative history of § 504 to conclude that Congress intended that the States be amenable to suit in federal court).

It is perfectly clear that again today the Court ignores Congress’ actual intent to abrogate state immunity — an intent that is even plainer here than in the case of § 504, which lacked the EHA’s frequent reference to the obligations of States — instead resorting to an interpretative standard that Congress could have anticipated only with the aid of a particularly effective crystal ball. When § 1415 was enacted in its present form in 1975, Edelman v. Jordan, 415 U. S. 651 (1974), and Employees v. Missouri Dept, of Public Health and Welfare, supra, established that this Court would consider legislative history and make inferences from text and structure in determining whether Congress intended to abrogate Eleventh Amendment immunity. Indeed, in Quern v. Jordan, 440 U. S. 332, 342-345 (1979), the Court evidently remained of the view that legislative history might be taken into account. Cf. Hutto v. Finney, 437 U. S. 678, 693-694 (1978). And later still, in Pennhurst State School and Hospital v. Halderman, 465 U. S. 89, 99 (1984), the Court still was requiring only “an unequivocal expression of congressional intent,” and citing cases in support — Edelman and Quern — that discuss legislative history in assessing whether Congress intended to abrogate immunity. Obviously, there was no rule in 1975 of the sort the Court has devised in this case, and I fail to understand what theory it is that justifies the Court now gauging the 94th Congress’ intent by using such a rule.

Ill

Though I would hold that Pennsylvania is not immune from suit in federal court for breaches of its obligations under the EHA, I find it unnecessary to go on to consider the second question upon which certiorari was granted: whether the Court of Appeals erred in ruling that Pennsylvania’s secretary of education is precluded from deciding special education administrative appeals under § 1415(c) because he is an employee of the Commonwealth. There was an alternative ground for the Court of Appeals’ judgment against Pennsylvania — that because of the secretary’s remand to a hearing officer following respondent’s administrative appeal, respondent was deprived of the timely “final” judgment to which he was entitled under 20 U. S. C. § 1415(e) and 34 CFR § 300.512 (1988). 839 F. 2d, at 124-125. Petitioner’s predecessor did not seek review of the Court of Appeals’ decision on this alternative ground, which appears adequate to support the judgment below, and no purpose would be served by our considering whether the secretary’s participation in the appeal was a violation of the EHA’s procedural requirements. I would thus affirm the judgment below.

Justice Blackmun,

dissenting.

I join Justice Brennan’s opinion because he correctly ascertains the unmistakable intent of Congress to subject state agencies to liability for tuition-reimbursement awards under the Education of the Handicapped Act, 20 U. S. C. § 1415(e)(2). See also School Committee of Burlington v. Department of Education of Massachusetts, 471 U. S. 359 (1985). Indeed, as Justice Brennan convincingly demonstrates, this statute passes even the stringent test set forth in Atascadero State Hospital v. Scanlon, 473 U. S. 234 (1985). It is only by resorting to a stricter standard yet that the Court is able to reach the result that it does here. Because the Court never should have started down this road, it certainly should not take today’s additional step.

Justice Stevens,

dissenting.

While I join Justice Brennan’s dissent, I adhere to my view that a “statute cannot amend the Constitution.” Pennsylvania v. Union Gas Co., ante, at 24 (concurring opinion). Because this case deals with the judicially created doctrine of sovereign immunity rather than the real Eleventh Amendment’s limitation on federal judicial power, the congressional decision to confer jurisdiction on the federal courts must prevail.

       Petitioner concedes that the EHA was enacted pursuant to Congress’ authority under § 5 of the Fourteenth Amendment, and that Congress has the power to abrogate the Eleventh Amendment with respect to the Act. Tr. of Oral Arg. 14-15; see Atascadero State Hospital v. Scanlon, 473 U. S. 234, 244-245, n. 4 (1985). We decide the case on these assumptions.

       Respondent also offers us another avenue to affirm the result below, which is to overrule the longstanding holding of Hans v. Louisiana, 134 U. S. 1 (1890), that an unconsenting State is immune from liability for damages in a suit brought in federal court by one of its own citizens. We decline this most recent invitation to overrule our opinion in Hans.

       Our grant of certiorari also embraced the question whether the EHA precluded petitioner from hearing administrative appeals. Since we conclude that the Commonwealth is not subject to suit under the EHA, and since the school district did not petition for review of the Court of Appeals decision, we have no occasion to reach this question.
      After oral argument, respondent filed a motion to remand this suit to the District Court for consolidation with another related action. In light of our disposition today, respondent’s motion is denied.

       Moreover, it is not even clear that in those situations where the State is the only proper defendant, an action could always be brought against the State even in state court; for in Will v. Michigan Dept, of State Police, ante, at 66, the Court seems to suggest that the very same rule of interpretation it applies here to decide whether Eleventh Amendment immunity is abrogated is also to be used to determine whether a federal statute requires a State to allow itself to be sued in state court. See ante, at 76 (Brennan, J., dissenting). If the EHA does not guarantee that the State can be sued someivhere, then our previous statements that the statute provides enforceable rights are a mockery.

       The view that Congress believed it had abrogated state immunity in the EHA is confirmed by the legislative history of the Handicapped Children’s Protection Act of 1985. Congress complained that “[c]ongressional intent was ignored by the U. S. Supreme Court when ... it handed down its decision in Smith v. Robinson, 468 U. S. 992 (1984),” where the Court held that “ ‘the EHA repealed the availability of sections 504 [of the Rehabilitation Act of 1973] and 1983 [of Title 42] to individuals seeking a free appropriate public education,’ ” so that such litigants could no longer obtain attorney’s fees. H. R. Rep. No. 99-296, p. 4 (1985) (quoting Smith, supra, at 1030 (Brennan, J., dissenting). To correct this error, Congress enacted an amendment, codified at 20 U. S. C. § 1415(e)(4) (1982 ed., Supp. V), providing for the award of attorney’s fees under the EHA. The statement in the House Report on this amendment that “[i]n some actions or proceedings in which the parents or guardian prevail, more than one local or State agency may be named as a respondent,” and that in such cases, “it is expected that the court will apportion the award of attorneys’ fees and other expense based on the relative culpability of the agencies,” H. R. Rep. No. 99-296, at 6, clearly demonstrates a belief that Congress had abrogated Eleventh Amendment immunity in the EHA.

       I can only express amazement at the Court’s statement that “a comparison of the language in the [Rehabilitation Act] amendments with the language of the EHA serves only to underscore the difference in the two statutes,” ante, at 229, as if the omission from the EHA of the Rehabilitation Act amendments’ provision that “[a] State shall not be immune under the Eleventh Amendment” actually tells us something about Congress’ intent when it enacted the EHA. The 1986 amendment was a response to Atascadero, tailored to overrule a decision that had misinterpreted Congress’ intent in the Rehabilitation Act of 1973 to abrogate state immunity. If Congress’ reaction to Atascadero tells us anything, it is that Congress prior to that decision believed it could effectively express its intent to abrogate immunity without resorting to the degree of textual clarity the Court demands in this ease.


author: Justice Kennedy Justice Stevens,

text:
    COLONIAL AMERICAN LIFE INSURANCE CO. v. COMMISSIONER OF INTERNAL REVENUE
    CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
    No. 88-396.
    Argued April 18, 1989
    Decided June 15, 1989

      Carolyn P. Chiechi argued the cause for petitioner. With her on the briefs were Margaret Milner Richardson, Francis M. Gregory, Jr., James V. Heffernan, Gordon 0. Pehrson, Jr., and George R. Abramowitz.

      Michael R. Dreeben argued the cause for respondent. With him on the brief were Acting Solicitor General Bryson, Acting Assistant Attorney General Knapp, Deputy Solicitor General Wallace, Alan I. Horowitz, Gary R. Allen, David English Carmack, and Nancy G. Morgan.

        William B. Harman, Jr., Jack H. Blaine, John W. Holt, and John T. Adney filed a brief for the American Council of Life Insurance et al. as amici curiae urging reversal.

   Justice Kennedy

delivered the opinion of the Court.

The arcane but financially important question before us is whether ceding commissions paid by a reinsurance company to a direct insurer under a contract for indemnity reinsurance are fully deductible in the year tendered or instead must be amortized over the anticipated life of the reinsurance agreements.

I

This case involves the workings of the reinsurance industry. In order to spread the risks on policies they have written or to reduce required reserves, insurance companies commonly enter into reinsurance agreements. Under these agreements, the reinsurer pays the primary insurer, or “ceding company,” a negotiated amount and agrees to assume the ceding company’s liabilities on the reinsured policies. In return, the reinsurer receives the future income generated from the policies and their associated reserve accounts.

Reinsurance comes in two basic types, assumption reinsurance and indemnity reinsurance. In the case of assumption reinsurance, the reinsurer steps into the shoes of the ceding company with respect to the reinsured policy, assuming all its liabilities and its responsibility to maintain required reserves against potential claims. The assumption reinsurer thereafter receives all premiums directly and becomes directly liable to the holders of the policies it has reinsured.

In indemnity reinsurance, which is at issue in this case, it is the ceding company that remains directly liable to its policyholders, and that continues to pay claims and collect premiums. The indemnity reinsurer assumes no direct liability to the policyholders. Instead, it agrees to indemnify, or reimburse, the ceding company for a specified percentage of the claims and expenses attributable to the risks that have been reinsured, and the ceding company turns over to it a like percentage of the premiums generated by the insurance of those' risks.

Both the assumption and the indemnity reinsurer ordinarily pay an up-front fee, known as a “ceding commission,” to the ceding company. The issue in this case is whether ceding commissions for indemnity reinsurance may be deducted by the reinsurer in the year in which they are paid, or whether they must be capitalized over the estimated life of the underlying policies. Petitioner writes and reinsures life, accident, and health insurance. In 1975 and 1976, petitioner entered into four indemnity reinsurance agreements to rein-sure blocks of life insurance policies written by Transport Life Insurance Company, the ceding company. The agreements required petitioner to indemnify Transport for 76.6% of Transport’s liabilities under the block of reinsured policies. Petitioner also contracted to pay ceding commissions of $680,000 for the 1975 pair of agreements and $852,000 for the 1976 pair of agreements. In addition, petitioner paid Transport a “finder’s fee” of $13,600 in 1975, which the parties agree is subject to the same tax treatment as the ceding commissions.

On its federal income tax returns for 1975 and 1976, petitioner claimed deductions for the full amount of the ceding commissions and the finder’s fee. The Commissioner disallowed the deductions, concluding that the ceding commissions and finder’s fee had to be capitalized and amortized over the useful life of the reinsurance agreements, a period later stipulated to be seven years. Petitioner then filed for review in the Tax Court, which agreed with petitioner that the ceding commissions could be deducted in full in the year of payment.

The Court of Appeals for the Fifth Circuit reversed, holding that ceding commissions are not currently deductible. 843 F. 2d 201 (1988). The Court of Appeals reasoned that ceding commissions represent payments to acquire an asset with an income producing life that extends substantially beyond one year, and that under fundamental principles of taxation law, such payments must be amortized over the estimated life of the asset.

To resolve a conflict in the Courts of Appeals, we granted certiorari. 488 U. S. 980 (1988).

II

This case is initially a battle of analogies. The tax treatment of life insurance companies is prescribed in Part I of Subchapter L of the Internal Revenue Code of 1954, 26 U. S. C. §§801-820 (1970 ed. and Supp. V). Given that these provisions do not specify in explicit terms whether ceding commissions for indemnity reinsurance may be taken as current deductions, the parties each argue that the tax treatment of allegedly analogous payments should be controlling. Petitioner analogizes to the tax treatment of “agents’ commissions and other expenses incurred by a life insurance company in issuing directly-written insurance.” Brief for Petitioner 21. Such expenses of primary insurers are currently deductible under § 809(d)(12) of the Code, which incorporates the allowance for “ordinary and necessary” business expenses under § 162(a). Petitioner argues that indemnity reinsurance is in effect a direct insurance agreement between the reinsurer and the ceding company. Parties to an indemnity reinsurance agreement, petitioner points out, stand in the same relation to one another as do the parties to a conventional insurance policy: in return for a premium, the rein-surer agrees to reimburse the ceding company in the event the company becomes liable for certain designated risks. Petitioner reasons that just as a direct insurer may currently deduct the commissions it pays to acquire policies, so should an indemnity reinsurer be able to deduct currently the ceding commissions it expends to acquire business.

Respondent counters with an analogy to assumption reinsurance, the ceding commissions for which, it is well established, must be capitalized and amortized. See 26 CFR § 1.817-4(d) (1988). “[Tjhere is essentially no economic difference,” respondent argues, “between a ceding commission paid in an assumption reinsurance transaction and one paid in an indemnity reinsurance transaction.” Brief for Respondent 19-20. In both cases, according to respondent’s analysis, the ceding commission represents payment for the right to share in the future income stream from the reinsured policies. Id., at 18-19.

As the parties’ dispute makes clear, indemnity reinsurance bears some formal and functional similarities to both direct insurance and assumption reinsurance. But the salient comparison is between ceding commissions in indemnity reinsurance and their asserted analogues in the other two forms of insurance. At this level of inquiry, we agree with respondent that the analogy to ceding commissions in assumption reinsurance is the more compelling one. Although indemnity-reinsurance is different from assumption reinsurance in some important ways, none of them go to the function and purpose of the ceding commissions. Whether the reinsurer assumes direct liability to the policyholder in no way alters the economic role that the ceding commissions play in both kinds of transactions. The only rational business explanation for the more than $1,500,000 that petitioner paid in ceding commissions to Transport is that petitioner was investing in the future earnings on the reinsured policies. The ceding commissions thus are not administrative expenses on the order of agents’ commissions in direct insurance; rather, they represent part of the purchase price to acquire the right to a share of future profits.

The parallels between ceding commissions in indemnity insurance and agents’ commissions in direct insurance, on the other hand, are chiefly nominal. The commission paid to the insurance agent in a direct insurance setting is an administrative expense to remunerate a third party who helps to facilitate the sale; the agent’s commission is akin to a salary, and to other sales expenses of writing new policies, such as administrative overhead. In the reinsurance setting, by contrast, the ceding company owns the asset it is selling, and the reinsurer pays a substantial “commission” as part of the purchase price to induce the ceding company to part with the asset it has created; the payment, in other words, is for the asset itself rather than for services.' This point is illustrated by a comparison with risk-premium insurance, which is in effect like a direct insurance contract between the rein-surer and the ceding company. In risk-premium reinsurance, the reinsurer does not acquire a future stream of income extending beyond the 1-year term of insurance; rather, in exchange for a premium, it agrees to indemnify the ceding company against liability to its policyholders. Not coincidentally, risk-premium reinsurance agreements typically do not involve the payment of ceding commissions. See n. 1, supra.

Finally, even if we were to accept petitioner’s arguments about the resemblances between direct insurance and indemnity reinsurance, it would not undermine the basic character of the ceding commissions at issue here as capital expenditures. Petitioner’s argument at most proves only that Congress decided to carve out an exception for agents’ commissions, notwithstanding their arguable character as capital expenditures. We would not take it upon ourselves to extend that exception to other capital expenditures, notwithstanding firmly established tax principles requiring capitalization, where Congress has not provided for the extension.

We therefore agree with respondent that the ceding commissions paid in respect of indemnity reinsurance, like those involved in assumption reinsurance, represent an investment in a future income stream. The general tax treatment of this sort of expense is well established. Both the Code and our cases long have recognized that amounts expended to acquire an asset with an income-producing life extending substantially beyond the taxable year of acquisition must be capitalized and amortized over the useful life of the asset. See 26 U. S. C. §263 (1970 ed. and Supp. V.); Commissioner v. Idaho Power Co., 418 U. S. 1, 12 (1974); Woodward v. Commissioner, 397 U. S. 572, 575 (1970); see also Massey Motors, Inc. v. United States, 364 U. S. 92, 104 (1960) (the basic purpose of capitalization rules is to “mak[e] a meaningful allocation of the cost entailed in the use ... of the asset to the periods to which it contributes [income] ”)• Our agreement with respondent as to the character of ceding commissions therefore resolves this case, absent some specific statutory-provision indicating that ceding commissions for indemnity insurance are an exception to the general rule for which Congress has authorized current deduction. Petitioner offers three possible sources in Subchapter L of such a specific authorization.

We consider first petitioner’s contention that the commissions are currently deductible under § 809(d)(12) of the Code. That provision authorizes deductions for “ordinary and necessary” business expenses as described in § 162(a). It is § 809(d)(12) upon which direct insurers rely in deducting the commissions paid to their agents. Petitioner argues that there is no distinction in Subchapter L between direct insurance and indemnity reinsurance, and therefore that the allowance for direct insurers applies in the latter context as well. This argument, in other words, is the statutory hook upon which petitioner hangs its general submission that its ceding commissions should receive the same tax treatment as the agents’ commissions paid by direct insurers.

Were we to agree with petitioner’s general premise, § 809(d)(12) would be a logical source of authority to deduct ceding commissions as ordinary and necessary business expenses. But since we have rejected petitioner’s efforts to analogize ceding commissions to agents’ commissions paid in a direct insurance setting, we necessarily reject its argument that § 809(d)(12) authorizes the deduction petitioner claimed. That section does permit petitioner to deduct ordinary and necessary business expenses such as salaries and certain administrative costs, but the ceding commissions at issue in this case do not fall in that category.

Petitioner also relies on § 818(a) of the Code, which requires a life insurance company to compute its taxes in a manner consistent with the accounting procedures established by the National Association of Insurance Commissioners (NAIC) for purposes of preparing an annual statement, except when such procedures would be inconsistent with accrual accounting rules. See Commissioner v. Standard Life & Accident Ins. Co., 433 U. S. 148, 158-159 (1977). Petitioner points out that NAIC practices prescribe the current deduction of ceding commissions, and argues that the Code, through § 818(a), incorporates the same prescription. In the first place, we think petitioner’s argument begs the question. Treasury Regulations require accrual taxpayers to amortize the expenses of procuring intangible assets that produce economic benefits extending over more than one year. Thus, § 1.461 — 1(a)(2) of the Treasury Regulations, 26 CFR § 1.461-1(a)(2) (1988), entitled “Taxpayer using an accrual method,” provides that “any expenditure which reáults in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year may not be deductible, or may be deductible only in part, for the taxable year in which incurred.” Since NAIC practices do not apply where their applicátion would be inconsistent with accrual accounting rules, they are inapposite if a ceding commission is properly characterized as an “expenditure which results in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year.” Petitioner’s contention that § 818(a) justifies the deduction therefore loops back into its general contention that ceding commissions are up-front expenses rather than capital expenditures, a contention which we have rejected.

More important, petitioner’s argument rests on an unduly expansive reading of the reference to the NAIC in § 818(a), one that would trump many of the precise and careful substantive sections of the Code. Under petitioner’s interpretation, the fundamental question whether an expense is properly characterized as a capital outlay which has to be amortized or instead as an ordinary business expense subject to immediate deduction would be answered by simple reference to accounting procedures in the industry. It is inconceivable that Congress intended to delegate such a core policy determination to the NAIC. Indeed, under petitioner’s argument, it appears that ceding commissions for assumption reinsurance, no less than those for indemnity reinsurance, should be immediately deductible because NAIC accounting principles appear not to distinguish between the two kinds of ceding commissions. See Patterson, Underwriting Income, in Reinsurance 539 (R. Strain ed. 1980). Yet it is common ground among the parties that ceding commissions for assumption reinsurance must be amortized, regardless of the treatment they are accorded under NAIC accounting. As this point suffices to illustrate, petitioner’s interpretation of § 818(a) proves too much.

Petitioner’s remaining statutory argument, based on § 809 (c)(1) of the Code, is more difficult to dismiss. As part of their computation of gains from operations, life insurance companies must calculate the gains from several designated categories, including “Premiums.” Section 809(c)(1) provides the somewhat complicated formula governing gains from premiums. The provision instructs the company to take into account

“[t]he gross amount of premiums and other consideration (including advance premiums, deposits, fees, assessments, and consideration in respect of assuming liabilities under contracts not issued by the taxpayer) on insurance and annuity contracts (including contracts supplementary thereto).”

From this amount the taxpayer is then to subtract

“return premiums, and premiums and other consideration arising out of reinsurance ceded. Except in the case of amounts of premiums or other consideration returned to another life insurance company in respect of reinsurance ceded, amounts returned where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management shall not be included in return premiums.” 26 U. S. C. §809(c)(1) (1970 ed.).

The sum of the amounts identified in the first clause of the provision minus the amounts excluded in the second part of the provision represents the gross amount of premium income earned by a life insurance company. This figure is then added to the other sources of income identified in §§ 809(b) and (c), and from that total the life insurance company subtracts any allowable deductions identified in § 809(d). The result represents the company’s net gain or loss from operations, which is the basis of its tax bill. In this way, the items identified in the latter part of § 809(c)(1) which are subtracted from premium income contribute eventually to a reduction in the insurance company’s taxable income.

Petitioner contends that § 809(c)(1) allows it to subtract the ceding commissions it pays for indemnity reinsurance from its premium income in either of two ways. The commissions, petitioner argues, qualify under the latter part of § 809(c)(1) both as “return premiums” and as “premiums and other consideration arising out of reinsurance ceded.” In construing the statutory phrase “return premiums,” petitioner relies on the definition of that phrase in the Treasury Regulations. Title 26 CFR § 1.809 — 4(a)(l)(ii) (1988) provides:

“The term ‘return premiums’ means amounts returned or credited which are fixed by contract and do not depend on the experience of the company or the discretion of the management. Thus, such term includes amounts refunded due to policy cancellations or erroneously computed premiums. Furthermore, amounts of premiums or other consideration returned to another life insurance company in respect of reinsurance ceded shall be included in return premiums.”

Thus, to compress petitioner’s labyrinthine statutory argument, petitioner should prevail in this case if ceding commissions for indemnity reinsurance are fairly encompassed in either the statutory term “premiums and other consideration arising out of reinsurance ceded” or the regulatory definition “consideration returned to another life insurance company in respect of reinsurance ceded.”

It cannot be denied that the language on which petitioner relies, taken in isolation, could be read to authorize the tax treatment it seeks. Ceding commissions for indemnity reinsurance might loosely be described as consideration “arising out of” or “in respect of reinsurance ceded.” But when the statutory and regulatory language is parsed more carefully, petitioner’s position becomes dubious, and when the language is read against the background of the statutory structure, it becomes untenable.

The difficulty with including ceding commissions within the regulatory definition of “return premiums” is that ceding commissions are not “returned to” the ceding company at all. The commissions never belong to the ceding company until they are paid over in exchange for the right to share in the future income from the reinsured policies. The term “return premiums” more naturally refers to premiums that the insuring or reinsuring company has been paid and then must remit to the individual policyholder or ceding company, as, for example, pursuant to an experience-rated refund clause, which readjusts the amounts of policy premiums paid over to the ceding company to reflect unanticipated savings.

As for the statutory language “premiums and other consideration arising out of reinsurance ceded,” ceding commissions do not find a snug fit within this phrase either. Unlike individual policyholders and, in the case of risk-premium reinsurance, ceding companies, reinsurers do not pay premiums. Therefore, a plausible reading of this language is that it refers only to payments from the ceding company to the rein-surer, as, for example, when the ceding company is simply passing on premiums it has received from a policyholder but is obligated to deliver to a reinsurer under an indemnity-reinsurance agreement. The “other consideration” phrase, while admittedly open ended, can be read in quite a sensible way as tagalong language that refers to analogous expenditures of this kind, rather than as a broad catchall provision that encompasses payments of any kind from any party. This reading is supported by a comparison with the identical language in the first portion of § 809(c)(1), which also furnishes possible content to “other consideration.” That phrase would appear to refer only to incidental items such as “advance premiums, deposits, [and] fees” paid, like premiums, to the reinsurer from the ceding company.

What this closer reading augurs, a broader examination of the statutory structure confirms: ceding commissions are not at all the kind of payments that Congress sought to permit the taxpayer to exclude from gross premiums in § 809(c)(1). In fact, deduction of ceding commissions has nothing to do with the calculations prescribed by that provision. The purpose of § 809(c)(1) is to ensure that “premium income” is included in a company’s tax base and to specify exactly what is and is not encompassed by that term. The provision begins with a general definition of premium income, which it then fine-tunes in the latter part of the section by excluding certain items that might otherwise be considered to come within the general definition. As the Court of Appeals for the Eighth Circuit has written, the latter part of § 809(c)(1) “serves simply to eliminate from the ‘gross amount of premiums and other consideration’ those portions of premiums received which do not, in the end, ‘belong’ to the company in question, but which must either be returned to the policyholder or turned over to or shared with another company under an indemnity reinsurance agreement. ” Modern American Life Ins. Co. v. Commissioner, 830 F. 2d 110, 113-114 (1987) (footnote omitted).

Thus, we read the latter part of § 809(c)(1) as a fine-tuning mechanism that permits the exclusion from premium income of phantom premiums that might be encompassed within a strict definition of premiums but that in fact never really accrued to the company that nominally receives them. This category might include, for example, experience-rated refunds; or premium payments that have been refunded because of an overcharge or the cancellation of a policy; or premiums that the ceding company has received from policyholders and must pass on to an indemnity reinsurer. See S. Rep. No. 291, 86th Cong., 1st Sess., 39, 54 (1959). But the ceding commissions that are at issue in this case fall well outside what we take to be the intended purpose of the provision, which is to except from the general provision a small, residual category of payments that resemble premiums but do not fairly represent income to the recipient. There is no need for careful delineation of ceding commissions as apart from the general statutory category of premium income, because ceding commissions never would be thought to come within that category in the first place. Unlike the above examples, ceding commissions bear no resemblance to premiums; rather, they are an up-front, one-time payment to secure a share in a future income stream.

Finally, we note that petitioner’s reading of § 809(c)(1) is highly implausible in light of the intricate attention to detail displayed throughout Subchapter L. To accept petitioner’s submission, we would have to conclude that Congress subsumed a major deduction within the fine details of its definition of premium income. This would be especially surprising given that § 809(c) in its entirety concerns gross income; deductions are treated in a separate subsection, § 809(d). We find it incredible that Congress, with but a whisper, would have tucked away in the fine points of its definition of premium income a deduction of this magnitude.

I — I !

We have concluded that ceding commissions are costs incurred to acquire an asset with an income-producing life that may extend substantially beyond one year. General tax principles provide that such costs must be amortized and capitalized over the useful life of the asset, and no specific provision in the Code dictates a contrary result. The judgment of the Court of Appeals therefore is

Affirmed.

Justice Stevens,

with whom Justice Blackmun and Justice O’Connor join,

dissenting.

Charting one’s course through the intricacies of the Internal Revenue Code on the basis of first principles rather than statutory text can be hazardous. Intuitively, the Court concludes that the ceding commission a reinsurer pays to indemnify a direct insurer on its policy risks constitutes the purchase price for a capital asset because it produces a stream of future income. The same intuition should lead to the conclusion that the commission a direct insurer pays to acquire policies that will bring future profits constitutes a capital expenditure. Yet everyone agrees that the latter payment is currently deductible. See ante, at 250.

If the Court had begun its analysis with the text of 26 U. S. C. §809 (1970 ed.) and the regulations promulgated thereunder — instead of waiting until after it had decided the case on its view of first principles to respond to the statutory provision — it might well have recognized the merit in the taxpayer’s position. Section 809(c)(1) distinguishes between assumption and indemnity reinsurance, providing that return premiums “arising out of” an indemnity reinsurance transaction are deductible from gross premiums received. See ante, at 256. The Treasury Regulations thus confirm that while payments made by an assumption reinsurer for purchases of policies must be amortized, Treas. Reg. § 1.817-4(d)(2)(ii)(B), 26 CFR § 1.817-4(d)(2)(ii)(B) (1988), “consideration returned to another life insurance company [by an indemnity reinsurer] in respect of reinsurance ceded” is immediately deductible from the reinsurer’s gross premiums. Treas. Reg. § 1.809-4(a)(l)(ii), 26 CFR § 1.809-4(a)(l)(ii) (1988). There is no warrant in the text for the Court’s rulings that assumption reinsurance and indemnity reinsurance should be treated alike for tax purposes, ante, at 251, and that experience refunds constitute return premiums while ceding commissions do not. See ante, at 257-258. In the context of this transaction, in which the ceding commission was netted against the initial reinsurance premium, the commission quite literally is a sum that the “reinsuring company has been paid and then must remit to the . . . ceding company.” Ante, at 258. In all events, for the reasons stated in full in Judge Will’s opinion for the Court of Appeals for the Seventh Circuit in Merit Life Ins. Co. v. Commissioner, 853 F. 2d 1435 (1988), cert. pending, No. 88-955, I would reverse the judgment of the Court of Appeals.

       There is a form of indemnity reinsurance known as risk-premium, or yearly-renewable-term, reinsurance that does not involve ceding commissions. Under risk-premium reinsurance, much like a normal insurance policy, the ceding company typically pays an annual premium to the rein-surer in return for which the reinsurer promises to reimburse the ceding company should identified losses arise.

       The parties structured the agreements so as to require the actual transfer of only a small amount of cash. To understand this arrangement, it is necessary to touch on the differences between the two types of coinsurance, which is the most common form of indemnity reinsurance. These two types are conventional coinsurance and modified coinsurance. The two differ in their effect on the reserves that insurance companies are required to maintain against potential liabilities, and which represent essentially an estimate of the present value of future benefits less future premiums. In a conventional coinsurance agreement, the ceding company pays a “reinsurance commission” to the reinsurer in an amount equal to the reserves that the reinsurer must establish to support the liabilities assumed; in a modified coinsurance agreement, the ceding company continues to maintain the reserves and transfers to the reinsurer only the investment income that the reserves generate. Insurance companies frequently pair conventional and modified coinsurance agreements in such a proportion that the ceding commission is roughly equal to the reinsurance commission, with the net effect being that very little money changes hands. So it was in this case: petitioner entered into two modified coinsurance agreements covering 70'%' of a block of policies, and two conventional coinsurance agreements covering 6.6% of the same block of policies; the total ceding commissions were designed to be roughly equal to the reserves petitioner was required to establish under the conventional agreements, with the result being that petitioner actually paid Transport a total of less than $5,000. The parties elected to treat the modified coinsurance agreements for tax purposes as if they were conventional coinsurance agreements, which the Code then permitted. 26 U. S. C. §820 (1976 ed.). Thus, the difference between modified and conventional coinsurance agreements is, mercifully, of no legal significance in this case.

       Compare Prairie States Life Ins. Co. v. United States. 828 F. 2d 1222 (CA8 1987) (requiring capitalization), with Merit Life Ins. Co. v. Commissioner, 853 F. 2d 1435 (CA7 1988) (permitting current deduction).

       Although the Code does not explicitly permit primary insurers to deduct agent’s commissions in the year in which they are paid, such deductions have been permitted historically, and Congress has recognized and approved of the historic practice. See S. Rep. No. 291, 86th Cong., 1st Sess., 7, 9 (1959); H. R. Rep. No. 98-432, p. 1428 (1984).

       Petitioner suggests that the ceding commission is designed in part to reimburse the ceding company for the deductible, administrative costs it originally incurred in issuing the policies. Even assuming this is so, however, petitioner’s argument confuses the character of the payment to the taxpayer with its function to the seller. Whether the payment represents a partial reimbursement of deductible expenses to the seller is not pivotal, for as respondent points out, that is often the case with capital assets. See Brief for Respondent 19, n. 11. The important point is not how the purchase price breaks down for the seller but whether the taxpayer is investing in an asset or economic interest with an income-producing life that extends substantially beyond the taxable year. For this reason, contrary to Justice Stevens’ suggestion, see post, at 261, n., whether the receipt of the ceding commission creates a capital gain for the ceding company is of no relevance in this case.

       Likewise, we do not mean to imply that other expenses that do bear a greater resemblance to agents’ commissions would be currently deductible, notwithstanding the strictures of the Code. We confront today only the specific tax treatment of ceding commissions for indemnity reinsurance.

       Petitioner suggests that § 1.461-l(a)(2) is not an accrual accounting rule because its prescription applies equally to cash-basis taxpayers. Under petitioner’s argument, NAIC accounting principles would dictate all questions of accounting save in those rare instances where Congress or the Commissioner had promulgated a special rule applicable only to accrual-basis taxpayers. We decline to interpret a statutory provision requiring life insurance companies to compute their taxable income “under an accrual method of accounting,” § 818(a)(1), to prescribe application of the rules of accrual accounting only to the extent that they are inconsistent with the rules of cash-basis accounting.

       As petitioner points out, 26 CFR § 1.809 — 4(a)(l)(iii) (1988) specifies that the term “reinsurance ceded” in § 809(c)(1) includes indemnity reinsurance but not assumption reinsurance.

      Similarly, if a ceding commission constituted a capital asset for the purchaser in an indemnity reinsurance transaction, the receipt of a commission should, at least in some circumstances, create a capital gain for the seller. Yet, as the Commissioner conceded at oral argument, the receipt of the ceding commission is taxable as ordinary income. See Tr. of Oral Arg. 20-21.


author: Per Curiam. Justice Scalia,

text:
    CARELLA v. CALIFORNIA
    APPEAL FROM THE APPELLATE DEPARTMENT, SUPERIOR COURT OF CALIFORNIA, LOS ANGELES COUNTY
    No. 87-6997.
    Argued April 26, 1989
    Decided June 15, 1989

      Christopher D. Cerf, by appointment of the Court, 488 U. S. 992, argued the cause pro hac vice and filed briefs for appellant.

      Arnold T. Guminski argued the cause for appellee. With him on the brief were Ira Reiner and Harry B. Sondheim.

        William T. Stephens filed a brief for the American Rental Association as amicus curiae urging affirmance.

   Per Curiam.

On March 24, 1986, after a jury trial in the Municipal Court of Beverly Hills Judicial District, California, appellant Eugene Carella was convicted of grand theft for failure to return a rented car. At his trial, the court adopted the prosecution’s requested instructions applying the statutory presumptions in Cal. Veh. Code Ann. § 10855 (West 1987) and Cal. Penal Code Ann. § 484(b) (West 1988). Specifically, over Carella’s objection, the court charged the jury as follows:

(1) “Presumption Respecting Theft by Fraud:

“Intent to commit theft by fraud is presumed if one who has leased or rented the personal property of another pursuant to a written contract fails to return the personal property to its owner within 20 days after the owner has made written demand by certified or registered mail following the expiration of the lease or rental agreement for return of the property so leased or rented.”

(2) “Presumption Respecting Embezzlement of a Leased or Rented Vehicle:

“Whenever any person who has leased or rented a vehicle wilfully and intentionally fails to return the vehicle to its owner within five days after the lease or rental agreement has expired, that person shall be presumed to have embezzled the vehicle.” App. 15.

On appeal to the Appellate Department of the Superior Court, the prosecution confessed error, acknowledging that these two instructions unconstitutionally imposed conclusive presumptions as to core elements of Carella’s crime. The Appellate Department disagreed, however, and validated the presumptions on the ground that Carella “never offered testimony concerning the nonexistence of the presumed facts. ...” Id., at 61. This disposition was so plainly at odds with prior decisions of this Court that we noted probable jurisdiction, 488 U. S. 964 (1988), and now reverse.

The Due Process Clause of the Fourteenth Amendment denies States the power to deprive the accused of liberty unless the prosecution proves beyond a reasonable doubt every element of the charged offense. In re Winship, 397 U. S. 358, 364 (1970). Jury instructions relieving States of this burden violate a defendant’s due process rights. See Francis v. Franklin, 471 U. S. 307 (1985); Sandstrom v. Montana, 442 U. S. 510 (1979). Such directions subvert the presumption of innocence accorded to accused persons and also invade the truth-finding task assigned solely to juries in criminal cases.

We explained in Francis and Sandstrom that courts should ask whether the presumption in question is mandatory, that is, whether the specific instruction, both alone and in the context of the overall charge, could have been understood by reasonable jurors to require them to find the presumed fact if the State proves certain predicate facts. See Sandstrom, supra, at 514. The prosecution understandably does not now dispute that the instructions in this case were phrased as commands, for those instructions were explicit and unqualified to that effect and were not explained elsewhere in the jury charge to be merely permissive. Carella’s jury was told first that a person “shall be presumed to have embezzled” a vehicle if it is not returned within 5 days of the expiration of the rental agreement; and second, that “intent to commit theft by fraud is presumed” from failure to return rented property within 20 days of demand.

These mandatory directions directly foreclosed independent jury consideration of whether the facts proved established certain elements of the offenses with which Carella was charged. The instructions also relieved the State of its burden of proof articulated in Winship, namely, proving by evidence every essential element of Carella’s crime beyond a reasonable doubt. The two instructions violated the Fourteenth Amendment.

The State insists that the error was in any event harmless. As we have in similar cases, we do not decide that issue here. In Sandstrom v. Montana, supra, at 515, the jury in a murder case was instructed that the “law presumes that a person intends the ordinary consequences of his voluntary acts.” We held that, because the jury might have understood the presumption to be conclusive or as shifting the burden of persuasion, the instruction was constitutional error. There was a claim of harmless error, however, and even though the jury might have considered the presumption to be conclusive, we remanded for the state court to consider the issue if it so chose.

In Rose v. Clark, 478 U. S. 570 (1986), we again said that a Sandstrom error is subject to the harmless-error rule. “Nor is Sandstrom error equivalent to a directed verdict for the State. When a jury is instructed to presume malice from predicate facts, it still must find the existence of those facts beyond a reasonable doubt. Connecticut v. Johnson, 460 U. S. 73, 96-97 (1983) (Powell, J., dissenting). In many cases, the predicate facts conclusively establish intent, so that no rational jury could find that the defendant committed the relevant criminal act but did not intend to cause injury. ... In that event the erroneous instruction is simply superfluous: the jury has found, in Winship’s words, ‘every fact necessary’ to establish every element of the offense beyond a reasonable doubt.” Rose, supra, at 580-581 (footnote and citations omitted). We also observed that although we have the authority to make the harmless-error determination ourselves, we do not ordinarily do so. Hence, we remanded the case for the lower court to make that determination in the first instance.

We follow the same course here and reverse the judgment of the California court without deciding here whether no rational jury could find the predicate acts but fail to find the fact presumed. 478 U. S., at 580-581. Accordingly, the judgment of the Appellate Department is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.

It is so ordered.

Justice Scalia,

with whom Justice Brennan, Justice Marshall, and Justice Blackmun join,

concurring in the judgment.

I agree with the Court that the decision below must be reversed, and that it is sensible to permit the state court to conduct harmless-error analysis in the first instance. I write separately, however, because the Court has only implicitly acknowledged (by quoting the passage that it does from Rose v. Clark, 478 U. S. 570, 580-581 (1986), see ante, at 266) what should be made explicit — that the harmless-error analysis applicable in assessing a mandatory conclusive presumption is wholly unlike the typical form of such analysis. In the usual case the harmlessness determination requires consideration of “the trial record as a whole,” United States v. Hasting, 461 U. S. 499, 509 (1983), in order to decide whether the fact supported by improperly admitted evidence was in any event overwhelmingly established by other evidence, see, e. g., Milton v. Wainwright, 407 U. S. 371, 372-373 (1972); Harrington v. California, 395 U. S. 250, 254 (1969). Such an expansive inquiry would be error here, and I think it important both to explain why and to describe the mode of analysis that is appropriate. The Court’s mere citation of Rose is inadequate to those ends, since, for reasons I shall describe, infra, at 271-272, that case itself is ambiguous.

The Court has disapproved the use of mandatory conclusive presumptions not merely because it “ ‘conflicts] with the overriding presumption of innocence with which the law endows the accused,’” Sandstrom v. Montana, 442 U. S. 510, 523 (1979) (quoting Morissette v. United States, 342 U. S. 246, 275 (1952)), but also because it “‘invade[s] [the] fact-finding function’ which in a criminal case the law assigns solely to the jury,” 442 U. S., at 523 (quoting United States v. United States Gypsum Co., 438 U. S. 422, 446 (1978)). The constitutional right to a jury trial embodies “a profound judgment about the way in which law should be enforced and justice administered.” Duncan v. Louisiana, 391 U. S. 145, 155 (1968). It is a structural guarantee that “reflects] a fundamental decision about the exercise of official power — a reluctance to entrust plenary powers over the life and liberty of the citizen to one judge or to a group of judges.” Id., at 156. A defendant may assuredly insist upon observance of this guarantee even when the evidence against him is so overwhelming as to establish guilt beyond a reasonable doubt. That is why the Court has found it constitutionally impermissible for a judge to direct a verdict for the State. See United States v. Martin Linen Supply Co., 430 U. S. 564, 572-573 (1977). That is also why in Carpenters v. United States, 330 U. S. 395 (1947), the Court did not treat as harmless a jury instruction that mistakenly did not require express authorization or ratification to hold a union criminally liable for its officers’ participation in an antitrust conspiracy — regardless of how overwhelming the evidence that authorization or ratification in fact existed. We said:

“No matter how strong the evidence may be of an association’s or organization’s participation through its agents in the conspiracy, there must be a charge to the jury setting out correctly the limited liability under [the Norris-LaGuardia Act, 47 Stat. 70,] of such association or organization for acts of its agents. For a judge may not direct a verdict of guilty no matter how conclusive the evidence. There is no way of knowing here whether the jury’s verdict was based on facts within the condemned instructions ... or on actual authorization or ratification of such acts . . . .” Id., at 408-409 (footnotes omitted).

In other words, “the question is not whether guilt may be spelt out of a record, but whether guilt has been found by a jury according to the procedure and standards appropriate for criminal trials.” Bollenbach v. United States, 326 U. S. 607, 614 (1946). “Findings made by a judge cannot cure deficiencies in the jury’s findings as to the guilt or innocence of a defendant resulting from the court’s failure to instruct it to find an element of the crime.” Cabana v. Bullock, 474 U. S. 376, 384-385 (1986).

These principles necessarily circumscribe the availability of harmless-error analysis when a jury has been instructed to apply a conclusive presumption. If the judge in the present case had instructed the jury, “You are to apply a conclusive presumption that Carella embezzled the rental car if you find that he has blue eyes and lives in the United States,” it would not matter, for purposes of assuring Carella his jury-trial right, whether the record contained overwhelming evidence that he in fact embezzled the car. For nothing in the instruction would have directed the jury, or even permitted it, to consider and apply that evidence in reaching its verdict. And the problem would not be cured by an appellate court’s determination that the record evidence unmistakably established guilt, for that would represent a finding of fact by judges, not by a jury. As with a directed verdict, “the error in such a case is that the wrong entity judged the defendant guilty.” Rose v. Clark, supra, at 578.

Four Members of the Court concluded as much in Connecticut v. Johnson, 460 U. S. 73 (1983) (plurality opinion), which considered whether it could be harmless error to instruct a jury that “every person is conclusively presumed to intend the natural and necessary consequences of his act.” Id., at 78. Justice Blackmun wrote for the plurality:

“An erroneous presumption on a disputed element of a crime renders irrelevant the evidence on the issue because the jury may have relied upon the presumption rather than upon that evidence. If the jury may have failed to consider evidence of intent, a reviewing court cannot hold that the error did not contribute to the verdict. The fact that the reviewing court may view the evidence of intent as overwhelming is then simply irrelevant. To allow a reviewing court to perform the jury’s function of evaluating the evidence of intent, when the jury never may have performed that function, would give too much weight to society’s interest in punishing the guilty and too little weight to the method by which decisions of guilt are to be made.” Id., at 85-86 (footnotes omitted).

The plurality therefore determined — I think correctly — that the use of conclusive presumptions could be harmless error only in those “rare situations” when “the reviewing court can be confident that [such an] error did not play any role in the jury’s verdict.” Id., at 87. The opinion mentioned as among those “rare situations” an instruction establishing a conclusive presumption on a charge of which the defendant was acquitted (and not affecting other charges), and an instruction establishing a conclusive presumption with regard to an element of the crime that the defendant in any case admitted. Ibid.

Another basis for finding a conclusive-presumption instruction harmless explains our holding two Terms ago in Pope v. Illinois, 481 U. S. 497 (1987). Although the error in instruction held to be harmless there was not a conclusive presumption but rather misdescription of an element of the offense, the latter like the former deprives the jury of its factfinding role, and must be analyzed similarly. (Thus, as noted earlier, misdescription of an element of the offense has similarly been held not curable by overwhelming record evidence of guilt. See Carpenters v. United States, supra, at 408-409.) In both convictions at issue in Pope the juries had been instructed to apply a “community standar[d]” in deciding whether allegedly obscene magazines, “‘taken as a whole, lac[k] serious literary, artistic, political, or scientific value.’” 481 U. S., at 498-499 (citation omitted). The Court concluded, however, that the First Amendment required a different finding: “whether a reasonable person would find such value in the material, taken as a whole.” Id., at 501. Even though the juries were not instructed to make the precise finding necessary to convict the defendants, the Court held that the error was harmless. I joined that opinion only because I believed that no rational juror could plausibly have found the magazines utterly lacking in value under a community standard and come to a different conclusion under a reasonable person standard. See id., at 504 (Scalia, J., concurring). In an appropriate case, a similar analysis could lead to the conclusion of harmless error for a conclusive presumption: When the predicate facts relied upon in the instruction, or other facts necessarily found by the jury, are so closely related to the ultimate fact to be presumed that no rational jury could find those facts without also finding that ultimate fact, making those findings is functionally equivalent to finding the element required to be presumed. The error is harmless because it is “beyond a reasonable doubt,” Chapman v. California, 386 U. S. 18, 24 (1967), that the jury found the facts necessary to support the conviction.

The Court’s opinion does not discuss any of this precedent, but relies exclusively upon citation of, and quotation from, Rose v. Clark. See ante, at 266-267. In that case we acknowledged the possibility of harmless error (and remanded for determination of that issue) with respect to an instruction that said: “[I]f the State has proven beyond a reasonable . . . doubt that a killing has occurred, then it is presumed that the killing was done maliciously. But this presumption may be rebutted . . . .” 478 U. S., at 574. In explaining why the use of an impermissible presumption, unlike the granting of a directed verdict for the State, can in some circumstances be deemed harmless error, we observed:

“When a jury is instructed to presume malice from predicate facts, it still must find the existence of those facts beyond a reasonable doubt. ... In many cases, the predicate facts conclusively establish intent so that no rational jury could find that the defendant committed the relevant criminal act but did not intend to cause injury. . . . In that event . . . the jury has found . . . ‘every fact necessary’ to establish every element of the offense beyond a reasonable doubt.” Id., at 580-581 (emphasis in original).

That passage suggests the mode of analysis just discussed in connection with Pope. Were that all which Rose contained on the subject, or were the Court willing to make explicit that the more usual harmless-error analysis does not apply, today’s opinion could be regarded as terse but not misleading. Elsewhere, however, Rose says that usual harmless-error analysis is applicable: “Where a reviewing court can find that the record developed at trial establishes guilt beyond a reasonable doubt, the interest in fairness has been satisfied and the judgment should be affirmed,” 478 U. S., at 579; see id., at 583. I therefore think it at best misleading to suggest without qualification that Rose governs here.

Even if Rose’s more expansive description of the sort of harmless-error analysis available is accepted with regard to the type of presumption at issue in that case — a rebuttable presumption — it need not (and for the reasons discussed above cannot) be accepted for conclusive presumptions such as that in the present case. The Rose jury, instructed regarding a rebuttable presumption of malice, could — indeed, was compelled to — weigh the relevant evidence and decide whether the presumption had been overcome. It had made a finding regarding the elemental fact, and the only difficulty was that the burden of proof had been placed upon the defendant rather than the State. It is one thing to say that the effect of this erroneous burden shifting will be disregarded if “the record developed at trial establishes guilt beyond a reasonable doubt”; it is quite another to say that the jury’s failure to make any factual determination of the elemental fact — because of a conclusive presumption resting upon findings that do not establish beyond a reasonable doubt the elemental fact — will be similarly disregarded.

For these reasons, I concur only in the judgment of the Court.

       Carella was acquitted of the charged violation of Cal. Veh. Code Ann. § 10851(a) (West 1987), which provides that the nonconsensual taking or driving of a vehicle is a “public offense” if accomplished with the specific “intent either to permanently or temporarily” deprive the owner of title or possession.

       California Veh. Code Ann. § 10855 reads: “Whenever any person who has leased or rented a vehicle wilfully and intentionally fails to return the vehicle to its owner within five days after the lease or rental agreement has expired, that person shall be presumed to have embezzled the vehicle.”

       California Penal Code Ann. § 484(b) reads: “Except as provided in Section 10855 of the Vehicle Code, intent to commit theft by fraud is presumed if one who has leased or rented the personal property of another pursuant to a written contract fails to return the personal property to its owner within 20 days after the owner has made written demand by certified or registered mail following the expiration of the lease or rental agreement for return of the property so leased or rented.”

        Sandstrom v. Montana, 442 U. S. 510 (1979), is also cited, see ante, at 266, but only (or only properly) for the proposition that we need not conduct harmless-error analysis ourselves, not for the proposition that harmless-error analysis is applicable. In Sandstrom we “decline[d] to reach” not only the State’s claim that the flawed instruction “constituted harmless error,” but also the defendant’s claim that “in any event an unconstitutional jury instruction on an element of the crime can never constitute harmless error.” 442 U. S., at 526-527.