SCOTUS upheld the Mandatory Repatriation Tax (MRT) in Moore v. U.S., decided a month ago. A raft of commentary by tax profs and other experts has flooded the Internet. This post compiles a few of them, mainly as an archive for my use. Reactions vary. I plan to periodically update it. At least one law review is soliciting articles for a symposium. I expect the debate to go on for decades, along with more litigation. The case has a Wikipedia page.
Good news
The good news is that the Court’s opinion, written by Kavanaugh and joined in by the three liberals plus Roberts, is careful and narrow. It appropriately holds that the case did not present the legal and constitutional issue as framed by petitioners and in the grant of certiorari – whether realization is required by the 16th amendment to avoid apportionment. It was clear there was realized income – the profits of the controlled foreign corporation (CFC) that the Moores owned shares in. The profits had not been distributed, so they argued that they had no realized income. But longstanding caselaw permits realized, but undistributed, income to be attributed and taxed to the shareholder-taxpayers under the pass-through taxation model. This was not the case for the Court to resuscitate or expand Eisner v. Macomber, which involved issuing a classic stock dividend, rather than attributing an entity’s income to its owners. That’s why the Court never should have granted cert or should have dismissed it as improvidently granted, the only truly good result.
Bad News
The bad news is what the Court’s opinion did not say and what the Barrett concurring in judgment and Thomas dissenting opinions did say.
The Court declined to reaffirm prior Courts’ consistent narrowing of Macomber in the last 100 years, e.g., by failing to cite Cottage Savings, the most recent case that observed in dicta that realization was an administrative convenience (implicitly not a constitutional requirement). As an aside, Roberts argued Cottage Savings (and lost) for the government. In a footnote the Moore opinion makes it clear it is not deciding or weighing-in (unnecessarily as it seems to do in other contexts these days, like the Trump cases) on whether realization – at either the entity or owner level – is required:
Because the MRT taxes realized income—namely, income realized by the corporation and attributed to the shareholders—we do not address the Government’s argument that a gain need not be realized to constitute income under the Constitution. Fn 6.
Footnote 2 makes it clear that the Court is not deciding whether appreciation without a sale or disposition can be taxed or whether realized income could be taxed at both the entity level and the owner level (sheesh, they might constitutionalize Congress’s general policy approach of avoiding “double” taxation?). This is bad news because the Court (more likely just Kavanaugh and Roberts) is going out of its way to make it clear that whether the 16th amendment requires realization is an open question. Prior Courts had said that in dicta. That’s bad news and an invitation to litigation to challenge existing provisions that may not require realization – e.g., taxation of straddles and original issue discount bonds and the repatriation tax – depending upon how one defines realization.
Justice Jackson’s concurrence explicitly says realization is not required, as well as pointing out it’s not clear if an income tax even is a direct tax requiring apportionment. She probably would be inclined to overrule Pollock, unlike the dissenters who are trying to breathe new life into it.
(Aside about Pollock: In the dissent’s view, Pollock’s holding consisted of two elements – a tax on personal property is a direct tax and a tax on income from property, including personal property, is indistinguishable from a property tax. The 16th amendment overturned the latter holding IF the income is realized because its language includes “from any source derived” and “derived” = “realized.” But the former element of Pollock is still valid in their view. Thus, a wealth or marked-to-market tax is a direct tax that must be apportioned among the states. To my knowledge, the 16th amendment is the only instance in which a constitutional amendment was explicitly passed to overturn a Supreme Court decision. Of course, Dred Scott was one of a myriad of causes of the Civil War, which led to the 13th, 14th, and 15th amendments and burying Dred Scott. Given that context, reading the 16th amendment in such a narrow and crimped fashion seems ahistorical, if one can torture the text to get there, as Thomas does. Just my off-the-cuff observation.)
The Barrett concurrence (joined by Alioto) and Thomas’s dissent (joined by Gorsuch) make their views emphatically clear – the 16th amendment requires realization. Barrett might have held for the taxpayers if they had litigated the case differently.
So, the 7-2 decision is really a 5-4 decision on the substance. And on the issue as originally framed (Is realization constitutionally required?) the real vote is probably 3 (Jackson, Sotomayor, and Kagan, no realization requirement) – 4 (Barrett, Alioto, Thomas and Gorsuch, realization required) – 2 (Kavanaugh and Roberts, unclear). At least, I assume if the issue is squarely presented, the three liberals, despite forgoing joining in Jackson’s concurrence, will follow the longstanding conventional wisdom regarding Macomber’s vitality.
We’re in for a lot of uncertainty and litigation. If the Court goes with the dissent and the concurrence in judgment and requires realization, the tax planning and financial engineering worlds will surely go into hyperdrive. It won’t be too difficult to devise a myriad of ways to defer and delay taxation of income from capital, potentially forever. See Gene Steuerle, Moore v. The United States: Will The Supreme Court Join the Whack-A-Tax Shelter Game? for a short explanation of that reality.
A constitutional realization requirement would put a huge burden on Congress to respond and protect the tax system and revenue base. I doubt it is up to the task in the current partisan polarized world, where doing so would be cast as a tax increase. Lobbying can tie Congress up for years, preventing or delaying the most modest of dike-plugging against unjustified abuses. A recent example is how long it to half-fix syndicated conservation easement tax shelters that yielded wildly overvalued charitable contributions. To answer Steuerle’s rhetorical question, SCOTUS can’t and won’t do it, except to the extent it upholds statutory efforts to find outs, including broad definitions of realization, attribution, limiting unrealized losses like depreciation and amortization, casting provisions as excise taxes, and similar. We’re one vote in a follow-on case from a big mess.
Moore Links
Here are a series of links to blog posts and articles about Moore, mainly but not exclusively by tax profs:
- Lawrence Zelenak, Moore Thoughts – probably because he (like me) approached the case expecting the worst, he was surprised both that the Court did not explicitly require realization and by it disapproved of Pollock. He points out a couple of potential clever implications of the latter. The first of which had occurred to me, but not the second. Both seem too subtle to be relevant in a future SCOTUS case.
- John Brooks & David Gamage, Moore v. United States: Initial Reactions – these are the guys who shot down the originalist/textualist argument against pass-through attribution of corporate taxes (notwithstanding Thomas’s dissent to the contrary IMO). They’re more on the Pollyanna side than I am regarding the Court’s opinion.
- Conor Clarke, Four More Takeaways From Moore
- Brian Galle, What’s Next For Wealth And Mark-To-Market Taxes After Moore? – concludes Moore opinion does not cast doubt on a clever work around for wealth or marked-to-market taxes that allows the taxpayer to defer tax until sale or disposition. As a first reaction, I’m not so sure about that.
- Andy Grewal, Moore Decides Less – reaffirms that a tax on personal property (not just real property or land) is a direct tax by citing NFIB v. Sebelius (Roberts’ weird formulation that ACA penalty = tax) and Macomber still alive.
- Michael Graetz, Moore v United States—Winning the Battle but the War Goes On – this is a nice summary of the political context for the case, each of the opinions (other than Jackson’s), and sobering implications for the future.
- Dan Shaviro, Good news and bad news from the Supreme Court’s Moore decision – nice and succinct summary that aligns with my views.
- Rebecca Kysar, Moore v. United States—The Stakes of Constitutionalizing the Tax Law – excellent short overview of the risk of constitutionalizing limits on income tax and has a great one paragraph takedown of Barrett’s concurrence in judgment (similar to Graetz in that regard).
- Donald B. Tobin and Alex Tobin, Using Living Constitutionalism to Avoid Constitutional Quicksand: Moore, Interpretation, and Wealth – argues the Court opinion may mark a retreat by the Court from originalism to old fashioned constitutional interpretation in tax cases. Nice thought but count me skeptical. This Court is nothing but strategic in using originalism and textualism when it is consistent with the desired result, but abandons it when it is not (see the Trump cases). In this case, Kavanaugh and Roberts simply blanched at the idea of blowing a hole (Kavanaugh’s words paraphrased) in federal revenues.
- Alex Zhang, Moore and The Judicial Role In Tax Law – advocates for the Court to take more tax cases, starting with statutory interpretation ones, to get its feet wet in understanding tax law, rather than relegating it to a specialty. He takes heart in the number of academic amicus briefs cited in the opinions. I personally think
- Reuven S. Avi-Yonah, Taxing the Superrich After Moore and Taxation With Realization After Moore (ways to preserve provisions in present law that arguably do not require realization).
- Tax Notes webinar – features two lawyers who litigated the SCOTUS case for the plaintiffs (along with Andy Grewel and the DOJ lawyer who won in the 9th Circuit). In their view, they won. Despite explicit language in the Court’s opinion to the contrary (repeated several times), they believe it de facto requires realization (whatever that means) to be an income tax under the 16th amendment. Grewel appeared to agree with them (as a general matter, not as to the Court’s opinion). In the long run, they may be right. I wouldn’t bet against it, but it was jarring to hear them argue that green is blue. The NYU Tax Law Center calls them out on this fairly brazen attempt to mischaracterize the opinion. The failure of the Tax Notes moderator to do so was striking to me.
- Lily Batchelder, Ari Glogower, Chye-Ching Huang, David Kamin, Rebecca M. Kysar, Kelsey Merrick, Darien Shanske, and Thalia T. Spinrad, The Moores Lost Their Claim and Moore – a collection of tax profs provide a nice summary the Court’s decision, in part, designed to refute the Moore’s counsels’ irritating claims that the decision actually affirms Macomber’s holding that realization is required. (It does not, although this Court may later decide that is so.) I fully agree with their conclusion, the first two paragraphs of which are copied below with footnotes eliminated. What Roberts’ and Kavanaugh’s actual views are is wide open, in my mind, if a new marked-to-market or wealth tax came to the Court.
The Moores’ counsel and some of their amici are urging that the opinion be read to tacitly rule out wealth taxes, mark-to-market taxes, and perhaps even impose a constitutional realization requirement, despite the fact the opinion explicitly disclaims doing any of those things. After all, that would turn their loss into a win. But the Court expressly declined to decide these questions.
Indeed, the logic of the majority opinion suggests the opposite — that a future Court should continue to exercise restraint in examining
any proposed limits on Congress’s taxing power. Future litigants are likely to face the same challenges as the Moores if the Court continues to follow the majority’s logic. If and when the Court reaches the question of realization, the Moore opinion suggests that Macomber does not offer a workable definition of a constitutional realization
rule and that any workable rule — if it exists — must avoid a blast radius within the tax system, a test the Moores’ proposed rule failed.
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