Supreme Cour watching is a prime longtime hobby of mine. It was mainly a hobby since SCOTUS takes so few tax cases and those often address procedural or niche issues, like Polselli v. I.R.S. last term. Thus, I had little work justified reason to spend much time on the SCOTUS docket. So, the cert grant in Moore v. U.S. (SCOTUS blog case page) on the last day of the 2022-23 term caught my attention.
Moore challenges TCJA’s repatriation tax, which the taxpayer characterizes as outside of Congress’s 16th amendment authority to tax income. The tax details, not surprisingly, are complex involving the rules governing minority shareholders (but >10% owners) of Controlled Foreign Corporations (CFCs) and undistributed earnings deferred under pre-TCJA’s international tax rules. TCJA’s repatriation tax imposed a low-rate tax on CFCs’ deferred income. Minority shareholders, like the taxpayers in Moore, owe part of the tax. The more common taxpayer is a domestic parent corporation. The taxpayers in Moore contend that they didn’t realize this income because it wasn’t distributed, they didn’t control its distribution as minority shareholders, and income as used in the 16th amendment requires realization. The corporation obviously realized it. So, they’re arguing more narrowly that the corporation’s realization cannot be imputed to minority shareholders as “income” as used in the16th amendment.
Depending upon how it is decided, the case could preemptively resolve whether a mark-to-market tax on unrealized gains or treating death or gift as a capital gain realization is permitted by the 16th amendment. If they’re not income and are not excise taxes (taxing gifts or transfers on death could easily be excises as could TCJA’s repatriation tax), the requirement of direct apportionment would doom them. Opponents of wealth taxes, like those advocated by Bernie Sanders and Elizabeth Warren, have advocated the Court take the case to foreclose constitutionally Congress imposing a wealth tax and/or unrealized capital gains.
For an easy-to-understand description of the case see David Kamin, Thalia Spinrad, and Chye-Ching Huang, New Supreme Court Case Could Unsettle Large, Longstanding, Parts of the Tax Code Built on a Bipartisan Basis Over Decades and Give a Windfall to Multinational Corporations (Tax Law Center, 6/26/2023). Or if you’re like me and revel in details, you can read the taxpayer’s petition for cert and government’s brief in opposition, both available at the SCOTUS blog page linked above.
The cert grant was an inexplicable decision in my view. There is no split in the circuits. It’s a one-time tax with peculiar characteristics. Large swaths of the tax system have long been based on similar concepts (e.g., subpart F and S corp taxation) in which a corporation’s realized but undistributed income is taxed to shareholders. SCOTUS usually avoids tax cases that address big philosophical issues like this (What is income?) unless there is a compelling reason to do so. I could go on.
One inclined to assume the worst might conclude that (at least) four conservative justices are spoiling for an opportunity to clamp down on the power to tax. (I wonder who besides Alioto, Gorsuch, and Thomas voted to grant cert.) That requires an assumption that limiting the income tax has become a thing for conservative “movement judges” as Tsai and Ziegler characterize them. See Robert L. Tsai and Mary Ziegler, Abortion Politics and the Rise of Movement Jurists (6/26/2023). I hope that is not the case and don’t think it is. (As an aside, the Tsai and Ziegler piece is interesting reading for a Court watcher like me, even though the abortion issue had never much held my attention. Some of it resonates with me, especially as an explanation for the atrophy of standing and the apparent reaching for cases to decide. I’m not sure I’m a buyer, yet. I would observe that movement judges, as they characterize them, often have odd views of tax. William O. Douglas, a liberal movement judge under their criteria, is a classic case. If constitutionally hobbling the income tax is really a conservative legal movement cause, the billionaire largess lavished on Thomas and Alioto takes on an even uglier look.) Haste and/or tax ignorance are other alternative explanations but also seem unlikely.
I’m sure that the tax community will amp up its education and amicus briefs and articles by blue chip tax professors will multiply like rabbits. This reminds me of the DC Court of Appeals decisions in the Murphy case in the aughts, which similarly limited what constituted “income” (damages for emotional distress in that case) under the 16th amendment. The tax community’s freakout caused the panel to reverse itself on rehearing. See Paul Caron, The Story of Murphy: A New Front in the War on the Income Tax for the story of that episode. Moore is more consequential, because it’s in the Supreme Court and the fact pattern involved. One hopes the results are similar to Murphy, although an order dismissing cert as improvidently granted is too much to hope for.
I worry what the result will be when the fusion of textualism and originalism is used by the Supremes to analyze whether Gilded Agers considered realization an essential element of income. That X-Ray machine is unlikely to reveal Haig-Simons bones, I’d guess. Brooks and Gamage, Moore v. United States and the Original Meaning of Income, posted by two tax profs this week, suggests it could and should. They point out that 19th century U.S. income taxes were imposed on undistributed earnings to shareholders before passage of the 16th amendment. Reading the essay (warning, it’s 22 pages long) gives a preview of the text parsing while trying to think like turn-of-the-20th century minds that will likely dominate the arguments. Constitutional analysis has come down to this.
Stay tuned.
8/3/2023 Update
The Tax Notes podcast, Tax Notes Talk, has an episode interviewing Hank Adler, a Chapman University business professor, who is one of the advocates for the taxpayer’s position. Moore Money, More Tax Problems? Analyzing Moore v. United States (July 20,2023). His case is pretty simplistic (in my opinion), relying heavily on the Eisner v. Macomber being valid. It’s hard to tell whether he is really a true believer or this is just part of the advocacy shtick.
Daniel Hemel, NYU tax professor, provides a much more interesting and nuanced discussion of the complexity of the issues in his Tax Notes piece (outside the paywall), The Low and High Stakes of Moore (July 24, 2023). He points out that how the Court decides the case, not who wins, will be crucial to the effects on the current and future income tax system. His piece points out the murkiness of the line between income and wealth taxes and how temporal considerations play into this (when income was earned or realized, how far back the government can tax, etc.), as well as corporate entity status relative to realization. Wealth obviously is the combination of accumulated past income and the prospects for earning future income. The exclamation point on all of this is the unknown proclivities of the Court, given all of its newish members, and how sophisticated the Court will be in considering the long run implications of its reasoning for the tax system (or whether the Trump appointees’ limited government, Federalist Society priors view reigning in taxing authority as a positive).
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2 replies on “Inscrutable SCOTUS”
Why the Court granted cert in Moore is a mystery. A similar enigma occurred when the Court granted cert in Kaestner v. North Carolina, which addressed a state’s constitutional authority to tax the income of a nonresident trust. The taxpayer in Kaestner prevailed in state court. The state court’s decision was entirely consistent with Supreme Court precedents, but those precedents were at least 70 years old. There was no real split of authority in the state courts, although there were a couple of odd but distinguishable cases. As counsel to the trust in Minnesota’s Fielding case, I was quite surprised (and concerned) when the Court granted cert in Kaestner. Many in the academic community were convinced that the Court took the case to discard the old due process precedents, but they were wrong. The Court followed precedent and ruled for the taxpayer. It later denied cert in Fielding, thus concluding the litigation in the taxpayer’s favor. So why did the Court take Kaestner? Did it want to update the old precedents? Maybe. Or maybe four justices were troubled by the facts of the case even though, at the end of the day, no justice ruled for the state.
Perhaps the Court took Moore because there is no definitive Supreme Court holding addressing whether realization is required by the 16th Amendment. In Eisner v. Macomber, 252 U.S. 189 (1920), the Supreme Court addressed whether a pro rata stock dividend was a tax on “income” within the meaning of the 16th Amendment. This was a sensible determination. After a pro rata stock dividend, the shareholders own more shares of stock, but their percentage ownership of the corporation remains unchanged. There is no accretion to wealth. The Court said: “We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, … he has not realized or received any income in the transaction.” The reference to “realized” led to speculation that realization was a constitutional requirement, but nothing about realization was necessary to the Court’s holding. Later on, the Court in Helvering v. Horst, 311 U.S. 112 (1940), stated: “The [realization] rule, founded on administrative convenience, is only one of postponement of the tax to the final event of enjoyment of the income … .” (Horst is a seminal case addressing assignment of income.) I think the consensus view these days is that Congress may require realization as an administrative convenience, but there is no constitutional requirement that it do so.
It is very difficult to imagine that the Court would hold that realization is a constitutional requirement, as that would probably eviscerate a lot of Code provisions that have long been accepted: Subchapter F, Subchapter K, Subchapter S, and many specific Code sections, especially those relating to international taxation. Perhaps there could be a holding on narrower grounds. The retroactive aspect of the Mandatory Repatriation Tax (MRT) is a little troubling. The MRT taxes earnings realized by a company since 1986. In the Moore’s case, the earnings accrued since 2005. However, the question presented does not mention retroactivity and even it did taxpayers rarely have prevailed when retroactivity is the issue.
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I too was surprised by the grant in Kastner. I still think that four justices somehow thought that state taxation of trust income needed updating but after the case was briefed and argued saw no reasonable path for doing so (at least using a due process judicial rule). So, they punted and left things unchanged.
In Moore, you have the WSJ editorial board ( https://www.wsj.com/articles/wealth-tax-ninth-circuit-moore-v-u-s-charles-and-kathleen-moore-supreme-court-constitution-6cdfba92 ) and modestly high profile amicie arguing for a cert grant likely to preempt Congress from imposing a wealth tax advocated by Sanders and Warren and/or tax proposals by the Senate Finance chair and the administration that don’t involve realization. To me that gives a different context and cast to the grant than in Kastner.
I do, however, expect that (like Kastner) when the Court sees the implications of striking down the repatriation tax (unless it is done in some cramped, narrow way), it will back off. The implications for the tax system are too big. The facts don’t really squarely present a classic tax w/o relatization, so overruling MacComber seems less likely. I too have assumed its ruling had largely been abandoned and realization isn’t required. But the Roberts court has too often upended basic constitutional stuff I had assumed to be true (e.g., the scope of Congress’s commerce power extends to requiring people to do stuff like buying health insurance).
Regarding the MRT’s retroactivity, another frame for that is that the taxpayers are better off than the non-retroactive alternative of immediate taxation when the CFC realized the income – i.e., they got an interest free loan for the excess over whatever foreign tax credit would have applied (little for income from tax haven locations) and now the feds are calling the loan and giving a steep rate discount (albeit w/o a foreign tax credit). In any case, the taxpayers abandoned that argument in their petition for cert.
On the plus side for me, it’ll be interesting watching this unfold.
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