Paul L. Caron

Friday, November 17, 2023

Taxpayer's Reply Brief In Moore v. United States: 'Macomber Decided The Question Of Realization, Decided It Correctly, And That Holding Remains Good Law'

Following up on my previous post, Tax Prof Amicus Briefs In Moore v. United States: 23 For Government, 1 For TaxpayerReply Brief For Petitioners, Moore v. United States, No. 22-800 (Nov. 15, 2023):

The 110 years since adoption of the Sixteenth Amendment have been marked by the unrelenting growth of federal spending and quest for revenue to fund it. Yet Congress has never ventured to tax families on appreciation in their homes, investors on appreciation in their investments, or ordinary shareholders on corporations’ retained earnings. That omission reflects not forbearance on Congress’s part but the understanding that these enormous pots of potential revenue lie beyond the reach of unapportioned taxation because they are not income.

The Government ignores that central fact in favor of focusing on narrow tax-avoidance measures tailored to target abuses of the corporate form to separate taxpayers from their otherwise-taxable income. Among those is Subpart F, whose reticulated structure can only be understood as an attempt to fit within the limits of the Sixteenth Amendment’s exception to apportionment for “taxes on incomes.” Yet the Government disavows that Subpart F rests on a theory of constructive realization of income to advance a more ambitious argument: that Congress may tax any “gain” as income, irrespective of taxpayer realization.

That argument is bold in its implications, which would eliminate the central restraint on the federal taxing power by nullifying the apportionment requirement as to taxation of property. Its substance is bolder. The Court rejected the same argument in Eisner v. Macomber, 252 U.S. 189 (1920), and its precedent has consistently recognized the necessity of realization. Unlike the last time the Government took a run at Macomber, it does not ask the Court to overrule the decision. Instead, it insists Macomber’s central holding was “dictum,” when the Government has always maintained the opposite, or has been overruled, when it has always been followed. Macomber decided the question of realization, decided it correctly, and that holding remains good law.

It controls here. Petitioners Charles and Kathleen Moore realized nothing on the investment for which they were subject to liability under the Mandatory Repatriation Tax. The MRT taxes them and others not because they realized income, but because they owned shares in certain corporations on a certain date. The Government identifies no precedent, legislative or judicial, for the MRT’s income-taxation of property because of ownership.

The Court should reverse the decision below and reaffirm that unrealized gains are not income.

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