We should have a decision in Moore v. U.S. shortly. Moore is the case challenging the constitutionality of TCJA’s mandatory repatriation tax (MRT) as not qualifying as an income tax under the 16th amendment. The case is an effort by the taxpayers, the groups behind it, and some conservative justices to preemptively drive a constitutional stake through wealth taxes and marked-to-market income taxes, advocated by the likes of Bernie Sanders and Elizabeth Warren. It would do that by revitalizing the all but moribund realization requirements in Eisner v. Macomber (1920).
The MRT is a one-time, low-rate tax imposed on certain US owners of controlled foreign corporations or CFCs with income from 1986-2017 that was deferred. It is part of TCJA’s transition of the federal international tax regime from a worldwide to a quasi-territorial tax.
Most of the affected shareholders are US based multinational corporations, but the MRT also applies to individuals, like the taxpayers in Moore, who own at least 10% of a CFC’s shares. The Moores argue that because the profits were not distributed to them and because they are minority shareholders, no income was realized as required by Macomber. Thus, the tax is a property tax (i.e., a direct tax in constitutional lingo) and must be apportioned among the states based on population.
It was a weird case for SCOTUS to take – most importantly because the MRT does not really present an instance where there is no realization (profits earned by a subpart F corporations are clearly realized, even if not distributed to a shareholder) and much of the Code (subparts F, S, and K) similarly tax the income of entities to their shareholder/owners who may or may not receive distributions of the income. That reality raised immediate alarms that major parts of the Code and federal revenues could be at risk. Moreover, other parts of the Code (e.g., actual marked-to-market taxes like I.R.C. § 1256) directly present the issue and could have been challenged instead by affected taxpayers. To further compound the matter, the MRT could be an excise tax (as the corporate income tax has been held to be by SCOTUS over a century ago), eliminating the need for apportionment. (Petitioner taxpayers argue that the government waived that argument, a point repeatedly discussed at the oral argument. It is asserted in the government’s brief but was not so clearly in the lower courts.)
Griffiths
Professor Lawrence Zelenak’s piece, The Income Tax, the Constitution, and the Unrealized Importance of Helvering v. Griffiths, 43 Va. Tax Rev. (2023), on the failed effort by DOJ to reverse Macomber in 1943 was new SCOTUS and tax history to me. According to Zelenak, a majority of the Court was ready and willing to reverse Macomber but refrained from doing so because the case before it did not squarely present the issue. I wish the current Court were as judicially modest as the FDR’s Court was. I fear it is not.
In my view, nothing good can come of Moore since there is no chance for Professor Graetz’s sensible suggestion (dismissing the grant of cert as improvidently granted). The only hope is that damage is minimized. Upholding the MRT on the grounds that Macomber was satisfied by the CFCs receiving the income and leaving it at that (i.e., without weighing in on what “realization” means) is the best to hope for minimum damage, I think. More likely in my view, the tax is upheld and the opinion includes dicta that makes it clear or strongly implies the boogie men, wealth and marked-to-market taxes, are not income taxes because they are not based on realizations, which Macomber requires. Less likely, but possible, the MRT as applied to individual shareholders is struck down and the Court buys into some version of taxpayers’ constructive realization rationale to preserve subparts F, K, and S and debate and litigation ensues about constructive realization means ad infinitum.
Oral Arguments
I listened to the oral arguments back in December but didn’t attempt to organize my thoughts. As a substantive matter, there’s nothing I could add to published commentary by those who know much more than I do. This Tax Notes piece (no paywall), The Biggest Implications of Moore, which collects reactions from tax professors and other experts after the oral argument, is particularly good.
The arguments help relieve my heart palpations that large swaths of the Code could be at risk. A consensus of largely avoiding harm to the tax system seemed to emerge. Questioning from some clearly behind the cert grant (e.g., Gorsuch) came across as asking how they could preemptively kill a wealth tax and/or marked-to-market tax while doing the least damage to the existing tax structure.
4 random observations
In listening to the arguments and later reading the transcript, four things – none of which go to the merits of the case or its likely outcome – struck me.
Who voted for cert?
An initial reaction I had to Moore – which I discovered was shared by other tax types I chatted with – was to wonder who of the justices had decided to take us down this insane and risky road by voting to grant cert. Granting cert requires four justices and the votes are not public. So, we’ll never know. The following is my idle speculation that may be off base.
I assume Thomas, Alito and Gorsuch were affirmative votes as the most activist judicial conservatives. So, the question is who of the more centrist right-wingers (Roberts, Kavanaugh, and Barrett) provided (at least) the fourth vote.
My prime candidate is the chief. I base that inference on three factors:
- The flavor of Roberts’ few questions suggests high regard for Macomber’s importance. For example, he characterized Macomber as being “buried” (transcript, p. 61) or “stabbed” (transcript, p. 62) by the government. (Note: these characterizations were in response to the Solicitor General’s answer to a Thomas question whether a hypothetical tax on appreciation would be constitutional – not the actual situation in Moore, which is a pass-through tax on profits.) More importantly, the tenor of those questions imply he thinks realization is a core limiting principle that distinguishes income from property.
- It’s consistent with Roberts’ MO of being primarily a business-friendly, limited government judge who considers protecting the Court’s standing and reputation as a key element of his job. Unlike a frontal assault on Roe or invalidating the ACA, a decision in Moore poses little risk of a public backlash or further dings on the Court’s reputation. It’s below the public’s radar in a year with multiple Trump cases, abortion pills, and other hot button issues on the docket. This NYT story, The Major Supreme Court Case of 2024, does not even include it. A decision preemptively nixing wealth taxes would score points with WSJ editorial page types, classic business conservatives.
- Neither Barrett nor Kavanaugh are good candidates based on their questions. Kavanaugh’s line of questioning of both sides especially appeared to favor the government and Barrett was not far behind. He also made the obvious point (contra Gorsuch and Alito) that the political difficulty of enacting the feared tax increases made them “farfetched” (transcript, p. 127). That provided a little reality to contradict Gorsuch’s trope that Congress would walk through any possible tax increase door the Court opened.
Characterization of the government’s arguments
A striking pattern of the questions by a couple of the activist conservative justices (Alito and Gorsuch) was to cast the government as arguing (unnecessarily given the tax involved) that realization is not required for a tax on income. The obvious implication in their minds, then, is that a tax on appreciation, such as a marked-to-market tax, is a valid income tax. The 9th Circuit opinion said that, for what it is worth. But that is not what the government was actually arguing. And it’s a case of building a mythical dragon that needs peremptorily slaying by saying some stronger version of Macomber’s realization requirement is alive and well.
I get that this is a natural reaction to the general concerns expressed about Moore putting the tax system at risk – i.e., it calls into question pass through taxation (certainly subpart F taxing of active income to individual shareholders, e.g., GILTI on individuals who are minority shareholders). Burying (to use Roberts’ term) Macomber raises the wealth or marked-to-market tax specter. But the risk is totally asymmetric: Holding for the Moores or including any of a variety of loose language in a Moore opinion while holding for the government could undermine the existing system, an immediate risk with real world consequences. By contrast, deep sixing Macomber (ala the 9th Circuit opinion) only allows the politically unlikely prospect for a future Congress to maybe enact a wealth tax, a tax that a future SCOTUS could strike down as a direct tax. That’s like a kid jumping out a second-story bedroom window to avoid the perceived monster under his bed.
Most bizarrely in my mind, at one point (transcript, pp. 114-15) Gorsuch asked the SG about the inconsistency between the government’s current position and that taken in a pre-Macomber case (over 100 years ago). Not surprisingly, the SG was nonplused and could not say what the government’s position actually was back in 1918. Again, it was on an issue not presented by Moore (i.e., unrealized capital gains). I guess it might be relevant as one data point to the historical parsing of what “income” means in the 16th amendment. But to bring it up in an oral argument? Sheesh.
All this is indicative of justices reaching to solve a problem that does not exist.
SCOTUS legislating
I’ve listened to more oral arguments this year than ever before and on a wider set of topics (thanks to the Trump and Sackler cases). I long ago concluded that I agree with Judge Posner that much of what SCOTUS does is inherently political and quasi-legislative:
What is true is that the power of the Supreme Court and to a lesser extent of the other federal appellate courts is to a significant degree legislative, thus blurring the difference between a legislature and a court. Whenever a court creates a new rule in the course of deciding a case, it is legislating.
What Is Obviously Wrong with the Federal Judiciary, Yet Eminently Curable, Part II, p. 266.
In the context of constitutional law, it rises to the level of writing a constitution (not a statute that can be reversed by Congress), raising the stakes materially.
Resolving circuit splits and statutory ambiguities are important and more judicial. But the Court has been doing less and less of that. The Court is deciding less than half the number of cases it decided in the 1960s. The decline in cases partially reflects repeal of much of its formerly mandatory jurisdiction. But it also seems to me a natural consequence of the increasingly partisan nature of the selection and confirmation of justices. If one goes through a bruising and awful confirmation process, being able to make important policy (quasi-statutory or constitution writing) sooner rather than later is a natural impulse. A process that picks demonstratively true believers in the partisan causes also seem to encourage that sort of impatience.
The arguments I have listened to, including Moore, underlined that reality. This shows up in the focus, not on the specifics of the cases, but how they will affect general behavior. So, in Moore there was much discussion of the impact on hypothetical taxes by the activist conservative justices. That is a legislative, rather than judicial, focus: writing decisions/rules to foreclose future undesired behavior (Congress enacting a wealth tax), rather than deciding if it already has done so. Other stark examples were the questions in the Trump immunity case that turn the focus on the potential impact on future presidents (e.g., Gorsuch: “writing a rule for the ages”), rather than Trump’s actions, the actual subject of the case.
This is the antithesis of judicial modesty and restraint, classic conservatism as represented by the approach of Frankfurter or John Marshall Harlan II, two judicial conservatives (one from each party) whose opinions I remember from law school days. That sort of conservative approach would follow the pattern of Griffiths as described by Zelenak’s article: decide the case narrowly and wait until a case directly presenting the issue comes before the court (i.e., Congress actually enacts a wealth tax). I have some hope that is what will happen with no discussion of the meaning of realization or whether it is required. But I will not be surprised if we don’t get a dose of dicta that muddles things up, just to clarify that some hypothetical wealth taxes must be apportioned among the states based on population.
Whither textualism and originalism?
Initially, I had assumed that the Moore opinions would focus on parsing the meaning of “income” relative to “realization” around the turn of the 20th century. That would follow from the rubric of textualism and originalism, the judicial doctrines animating the conservative judicial movement. There was a tiny bit of that in the oral arguments but just a bit. Two of the amicus briefs (at least) heavily focused on it. I think one has the much better of the argument, but we’ll see how much any of that matters in the actual decision. I’m less sure but making any sorts of inferences from oral arguments on stuff like this is very risky.
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