Rosenthal: Moore Could Invalidate Decades Of Tax Rules

Steven M. Rosenthal (Tax Policy Center), Moore Could Invalidate Decades of Tax Rules, 181 Tax Notes Fed. 285 (Oct. 9, 2023):

Former House Speaker Paul Ryan, R-Wis., recently warned that a “lot of the tax code would be unconstitutional” if the Supreme Court rules for the petitioners in Moore. In Moore, U.S. shareholders in a “controlled” foreign corporation object to having been taxed on income they had not yet received as a cash distribution. They hope to breathe new life into Macomber, a 1920 Supreme Court decision requiring income be “realized” to be taxed, even though that decision has been eroded by later rulings by the Court (as recognized by lower courts and commentators) over the ensuing century.

I share Ryan’s concerns, particularly for tax legislation that has been enacted to reflect income more accurately in the absence of a sale or other disposition. Much of that legislation was in response to complex international and financial structuring designed to facilitate tax avoidance. The IRS has administered this tax legislation and taxpayers have followed it for decades, with few difficulties by either.

These laws should survive the Court’s review.

I know firsthand, as a former congressional staffer, how carefully Congress crafted the reforms both to work in practice and to conform to all relevant precedents, including the Court’s jurisprudence. In deciding Moore, the Court should correspondingly exercise care and recognize the powers and practices of Congress.

Such judicial recognition of Congress’s taxing power is especially important now. The political will to raise taxes is dwindling while the level of services the government is expected to provide is rising. As a result, deficits and our national debt are exploding. Upending our tax code and reopening loopholes would be disastrous to our country’s financial health. As a matter of fiscal prudence and good practice, Congress must be able to craft tax laws that keep pace with increasingly sophisticated markets without fear of judicial reproach.

This article briefly reviews the Court’s decisions on the power of Congress to tax and, specifically, its power to tax unrealized income. It considers how Congress responded to those decisions by adopting rules taxing unrealized income, which it reasonably believed to be constitutional. The focus here is on Congress’s critical power to tax unrealized income arising in international and capital market transactions. With this narrative, I hope to add, to the many analyses Moore has already generated, a unique perspective grounded in my own experience as a congressional staffer and tax practitioner.

Conclusion
Congress’s efforts to reflect income more accurately and prevent abuses are potentially in jeopardy if the Court, in Moore, breathes new life into Macomber and its realization rule. The Court could well upend a lot of long-accepted tax rules and reopen abuses. At a minimum, it would cast a cloud of uncertainty over them, which could be resolved only by more litigation.

Recasting the realization rule as a constitutional requirement also would upset a healthy balance between the legislative and judicial branches of government when it comes to the federal tax code. Now more than ever, at a time of staggering deficits and debt, Congress must retain — and the Court must recognize — the legislature’s expansive authority in that realm. And only Congress, with its resources, expertise, and experience, can balance administrative convenience and fairness to create tax rules for the evolving international and capital markets.

See also Steven M. Rosenthal (Tax Policy Center), An Expansive Decision in Moore Case Could Spell Trouble for Our Tax Code (Oct. 10, 2023)

Prior TaxProf Blog coverage:

• 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), If Moore Is Reversed, 179 Tax Notes Fed. 2215 (June 26, 2023)
• John Brooks (Fordham) & David Gamage (Indiana), Moore v. United States and the Original Meaning of Income (June 27, 2023) (reviewed by Michelle Layser (San Diego) here)
• Daniel Hemel (NYU), The Low And High Stakes Of Moore, 180 Tax Notes Fed. 563 (July 24, 2023) (reviewed by Young Ran (Christine) Kim (Cardozo) here)
• Alex Zhang (Emory), Moore, Eisner v. Macomber, and the Future of Structural Tax Reform, 92 Geo. Wash. L. Rev. __ (2024) (Aug. 29, 2023)
• Thomas Lee (BYU), Lawrence Solum (Virginia), James Cleith Phillips (Chapman) & Jesse Egbert (Northern Arizona), Moore, Corpus Linguistics, And The Original Public Meaning Of The Sixteenth Amendment (Sept. 14, 2023)
• Christopher Hanna (SMU), Moore, The 16th Amendment, And The Underpinnings Of The TCJA’s Deemed Repatriation Provision (Sept. 28, 2023)
• Joint Committee on Taxation, Tax Code Provisions Implicated In Moore (Oct. 5, 2023)
• Natasha Sarin (Yale), The Supreme Court Tax Case That Could Blow A Hole In The Federal Budget (Oct. 7, 2023)
• John Brooks (Fordham) & David Gamage (Indiana), “From Whatever Source Derived”: The Sixteenth Amendment and Congress’s Income Tax Power (Oct. 9, 2023)
• Reuven Avi-Yonah (Michigan), Moore Questions Than Answers, 180 Tax Notes Fed. 2256 (Oct. 10, 2023)