Avi-Yonah: More On Moore

Following up on my previous posts:

• John Brooks (Fordham) & David Gamage (Indiana-Maurer), Moore v. United States And The Original Meaning Of Income (June 27, 2023)
• Christopher Cox (Former Rep. (1989-2005) & SEC Chair (2005-2009)) & Hank Adler (Chapman), The Ninth Circuit Upholds A Wealth Tax (Jan. 30, 2023)

Reuven Avi-Yonah (Michigan; Google Scholar), If Moore Is Reversed, 179 Tax Notes Fed. 2215 (June 26, 2023):

On June 15 The Wall Street Journal editorialized that the Supreme Court should grant certiorari in Moore. In that opinion, the WSJ joins the Manhattan Institute, the U.S. Chamber of Commerce, the Cato Institute, and other conservative outlets (the Competitive Enterprise Institute argued on behalf of the individual plaintiffs). The issue in Moore is whether the transition tax imposed on U.S. multinational enterprises by the Tax Cuts and Jobs Act on the $3 trillion of low-taxed income they accumulated offshore between 2005 and 2017 (the Mandatory Repatriation Tax, or MRT) was unconstitutional because it’s not based on realization, and therefore is arguably contrary to the Court’s decision in Eisner v. Macomber that realization is a constitutional requirement of an income tax.

If the transition tax is not an income tax, arguably Congress is not authorized by the 16th Amendment to impose it without apportionment among the states by population. As the WSJ editorial clearly states, the real target is not the transition tax per se (although if it is held to be unconstitutional the MNEs would reap many billions in refunded taxes plus interest) but federal and state wealth taxes. That’s why the focus is on realization and not on retroactivity, which was argued below but would not apply to a purely prospective wealth tax.

I will let others argue for the constitutionality of taxation without realization. But even if the Court grants certiorari and is tempted to require realization as a constitutional matter for an income tax, it should consider the many provisions of the code that could be rendered unconstitutional [Subpart F and GILTI, Branch Profits Tax, Sections 1256 and 817A, Original Issue Discount, Section 877A, Elective Sections: 475, PFIC, Check-the-Box, ] I hope such a consideration would make even some conservative justices think twice, especially because they are not tax experts (nor usually are their clerks). ...

Conclusion
Justice Robert Jackson referred to the Court’s “sporadic omnipotence” in tax cases. The problem with the Court ruling on tax cases is that the justices are not tax experts, otherwise they would not have reached the results they did in, for example, Gitlitz (an 8-1 decision joined even by Justice Ruth Bader Ginsburg; apparently being married to a great tax lawyer is not enough). Gitlitz was promptly reversed by Congress. But if the Court grants certiorari in Moore and holds that realization is a constitutional requirement, the consequences will be felt in many areas of the code that have nothing to do with the transition tax or with wealth taxes, and Congress can do nothing about it.

I hope the Court will realize that (no pun intended) and deny certiorari. After all, there’s a reason why the Court did not rule a federal income tax provision unconstitutional in over a century, and I hope some of the conservative justices will understand that constitutionalizing tax is not a great idea.

Reuven Avi-Yonah (Michigan; Google Scholar) & Steven Rosenthal (Tax Policy Center), Prospects for “Moore” Damage to Our Tax Code (TaxVox July 3, 2023):

The Moore litigation also may be a stalking horse to block billionaire and wealth taxes, which have been proposed, but not yet enacted. President Biden and Senate Finance Chair Senator Ron Wyden both have proposed taxes on the rise in value of stock owned by billionaires like Jeff Bezos, Elon Musk, and Mark Zuckerberg, without requiring them to sell. One of the amicus briefs labeled the 9th Circuit’s Moore decision "an invitation to enact more wealth taxes.” A lead Wall Street Journal editorial encouraged the Supreme Court to “shut [the] constitutional door” to a wealth tax by ruling explicitly that Congress cannot tax unrealized sums.

But for the Court to preempt taxes that Congress has not yet enacted is unsettling—and unwise. Shortly after the Court announced its review, some tax advisers recommended that taxpayers file refund claims for transition taxes that have been paid or will be paid (many taxpayers elected to pay the transition tax over eight annual installments). Other advisers suggested considering refund claims for income from CFCs, partnerships, and similar flow-through tax regimes. We also might expect some taxpayers to exclude income on their tax returns this year, in anticipation of the Court’s ruling.

So, we must wait until next year to assess the damage from a $15,000 tax dispute, but the stakes are much larger: a potentially massive windfall for wealthy investors and multinational corporations. And unwieldy strictures on Congress’s ability to tax.