Paul L. Caron

Friday, July 7, 2023

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Moore v. United States And The Original Meaning Of Income By Brooks & Gamage

This week, Michelle Layser (San Diego; Google Scholar) reviews John R. Brooks (Fordham; Google Scholar) and David Gamage (Indiana-Maurer; Google Scholar), Moore v. United States and the Original Meaning of Income


One of the most fundamental concepts taught to income tax students is the realization requirement. In short, income generally is not subject to taxation until it is realized through a conversion into cash or property. But is realization a constitutional requirement? The Supreme Court is expected to provide an answer to that question next year in Moore v. United States. In that case, the Court has been asked to decide whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states. The taxpayers in Moore are challenging a provision of the Tax Cuts and Jobs Act of 2017 known as the Mandatory Repatriation Tax. 

The tax is a one-time tax on profits of controlled foreign corporations, and it “essentially deem[s] all those earnings as repatriated to U.S. shareholders” even though they were never paid out.

The taxpayers have challenged the law as an “unapportioned direct tax.” (The Sixteenth Amendment authorizes Congress to tax income, but direct taxes on property are prohibited unless they are apportioned among the states). The district court dismissed their claim, and the Ninth Circuit affirmed the dismissal. The taxpayers petitioned for certiorari to the Supreme Court, arguing that the Ninth Circuit decision contradicted the original meaning of income, which they say included a realization requirement. Professors John Brooks and David Gamage disagree. In a new Essay, the authors identify “significant errors and omissions” that the taxpayers, Ninth Circuit dissenters, and amici have made in their historical arguments about the original meaning of income.

The authors begin their critique of the taxpayers’ arguments with an analysis of dictionary definitions that existed when the Sixteenth Amendment was ratified in 1913. In their briefs, the taxpayers, the Ninth Circuit dissenters, and amici all cite dictionary definitions that refer to gains that proceed from labor, business, property, or capital; income that comes in to a person as gain from an investment in capital; or gains that a person derives from property. They argue that these phrases—proceeds, comes in, and derives—refer to realization. However, Brooks and Gamage show that “if we dig further into these dictionaries, we can see that words like ‘derived’ are not describing some action but are rather describing sources of income.” In other words, they do not imply a realization requirement. Further, the authors demonstrate that the same dictionaries include separate dictionary entries for the term “realization,” which was “a clearly defined and unambiguous concept—but was not used to clarify the meaning of income or gain.” For these reasons, the authors argue that the language cited by the taxpayers is misleading, and that contemporaneous dictionary definitions of income did not unambiguously include a realization requirement.

The authors then turn to an analysis of the taxpayers’ citations to contemporaneous treaties like Black’s A Treatise on the Law of Income Taxation (1913) and Montgomery’s Income Tax Procedure (1919). The taxpayers quote language from both treaties to suggest that there was a consensus among experts that the definition of income included a realization requirement. However, Brooks and Gamage show that the treatises were not nearly so decisive. They explain that Black’s statements that support the realization requirement reflected his “opinion, not black-letter law,” and that Black himself noted “a split of authority.” Similarly, Montgomery appeared to favor a realization requirement but lamented that there was not an “authoritative definition of ‘income.’” According to the authors, “what stands out most in a number of treatises is some real doubt and imprecision about the exact contours of the income concept, even at the time of the Sixteenth Amendment.”

Meanwhile, the authors argue that economic theories of income that did not include realization requirements—similar to the Haig-Simons definition—were well known at the time when the Sixteenth Amendment was ratified. They also identify several examples of laws enacted around the same time that taxed unrealized income. In fact, “[t]he 1913 income tax—the first after ratification of the Sixteenth Amendment—also expressly included undistributed corporate earnings in the income of at least some individuals.” Other opinions and rulings during the period “acknowledged that income is accrued prior to its realization.” The authors argue that this context casts further doubt on the Moore taxpayers’ interpretation of original meaning.

The issues raised by the Moore case extend beyond those discussed in this Essay, and the authors have written several other papers with analyses relevant to the case (See, e.g., Taxation and the Constitution, Reconsidered, 76 Tax L. Rev. __ (forthcoming 2023); The Constitutional Meaning of Income (working paper)). The goal of this Essay was modest: to correct the historical record in light of misleading arguments made by parties in the Moore case. Nevertheless, this Essay is important and timely, as it provides much needed context to evaluate the strength of the taxpayers’ arguments within an originalist frame that is favored by several Supreme Court justices. It also makes important theoretical contributions related to definitions of income and constitutional limits on taxation. I recommend this Essay to anyone who is following the Moore case or interested in income tax theory.

Here’s the rest of this week’s roundup:

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