During oral arguments, the Solicitor General claimed the MRT is no different than some other income taxes that Congress imposes, such as on undistributed earnings of partnerships and S-Corps. Invalidating the MRT, she warned, would “cause a sea change in the operation of the tax code and cost several trillion dollars in lost tax revenue.”
But this need not be so. Under the High Court’s doctrine of constructive realization, Congress can tax income that hasn’t been physically received but which a taxpayer can still control or utilize. This is how Congress justified taxing income earned by “controlled foreign corporations” as the income of their controlling U.S. shareholders.
But the Moores couldn’t control or demand payment of the reinvested earnings on which they were taxed. This distinguishes the MRT from the other taxes the SG cites. The Court could rule in the Moores’ favor and overturn the Ninth Circuit without upending the tax code.
The government argued in its brief with the Court that the Sixteenth Amendment doesn’t require that income be realized for it to be taxed. But the SG shifted during oral arguments to arguing that the MRT is merely a tax on “paradigmatic realized income at the entity-level, and this functions just like the pass-through taxes on partnerships.”
In other words, as long as income is realized by someone at some time, someone else can be made to pay tax on it. But as the Moores’ attorney Andrew Grossman asked, what’s to stop the government from taxing shareholders of ExxonMobil on all of the company’s reinvested earnings going back many years, even during years they didn’t own shares?
Or as Justice Samuel Alito asked: “What about the appreciation of holdings in securities by millions and millions of Americans, holdings in mutual funds over a period of time without selling the shares in those mutual funds?” Ms. Prelogar replied: “I think if Congress actually enacted a tax like that, and it never has, that we would likely defend it as an income tax.”
There you have it. The Biden Administration believes the Sixteenth Amendment lets Congress tax the unrealized appreciation of assets. As Justice Neil Gorsuch noted, when the Supreme Court opens a door, “Congress tends to walk through it.” The Justices should close the wealth-tax door.
Solicitor General Elizabeth Prelogar told the justices that the “ordinary conception of income” means any “economic gain between two points in time.” Ms. Prelogar encouraged the justices “to not rely on concerns about . . . far-fetched hypotheticals” as to what sort of taxes this position might justify, like a tax on home appreciation.
But concerns about the limits of the government’s position aren’t hypothetical. If the court holds that the realization of income isn’t required for purposes of the 16th Amendment, the necessary implication will be that the tax code already reaches all unrealized gains. ...
If “income” for purposes of the 16th Amendment doesn’t require realization, therefore, neither does “income” for purposes of the current tax code. And if the government is right that “income” means any economic gain between two points in time, without regard to whether that gain is realized, then Americans should have been paying taxes on the appreciation of their homes and other investments since the dawn of the income tax in 1913. ...
The same problem remains even if the court accepts a narrower argument Ms. Prelogar offered—that the court doesn’t need to decide whether realization is required because the gains realized by the corporation in the Moores’ case can be “attributed” to them and taxed on a pass-through basis. Have the justices been paying taxes on the retained earnings held by corporations whose stock they hold? I know I haven’t. I doubt Ms. Prelogar has either. Buckle up for tax year 2024, however, if the government wins this case.
The “havoc” the government contends the Moores’ position would wreak on the tax code seems quaint in comparison to the nuclear fallout from a ruling in the government’s favor. Forget the implications of the Moores’ position on obscure provisions like an expatriation tax that hits perhaps a dozen people a year—one of the levies the government raised in its parade of horribles. The government’s position would transform the tax code’s very definition of income.
Yesterday’s oral arguments in Moore v. United States made one thing clear: The Supreme Court has little interest in blowing up the tax code. While many lawyers and economists feared that a far-reaching opinion in an otherwise insignificant dispute could undermine the foundations of much of US tax law, the justices seemed to realize they had fired up an earthmover when a shovel would do.
They spent much of the more than two hours of oral argument thinking aloud about how they could narrow their opinion to the case at hand. ...
Most justices seemed disinclined to use the Moore case to address a wealth tax. Indeed, while it was a critical subtext to the case, the justices had relatively little to say about it in oral arguments. Only Samuel Alito wondered, somewhat indirectly, “What about the appreciation of holdings in securities by millions and millions of Americans … over a period of time without selling the shares..?”
The justices seemed even more explicit about their reluctance to gut existing taxes on income as commonly defined, such as from original issue bonds, or the taxes US shareholders pay on unrealized gains in foreign companies, known as Subpart F. ...
In their search for a way out of the mess they created by accepting the case in the first place, the justices explored a few routes.
Champions of a future billionaire wealth tax can breathe a small sigh of relief after Tuesday’s Supreme Court argument in Moore v. United States. Additionally, those worried that the justices could be eager to blow up the current federal income tax system can sleep better, too. While juris doctors don’t take the Hippocratic Oath, the justices’ questions suggest that the Court’s liberals and conservatives are adopting a “first do no harm” approach regarding the tax code. ...
Though a so-called billionaire wealth tax was never mentioned explicitly during arguments, the prospect was implied when conservative justices raised concerns about the “far-reaching consequences” of siding with the government in this case. Solicitor General Elizabeth Prelogar’s responses ruled out only one form of wealth tax. She agreed with Kavanaugh that a tax on the value of real property (like your home) or personal property (such as a yacht) at a point in time is a direct tax and would need to be apportioned based on population, something that would make it a non-starter.
The justices seemed more sympathetic to Prelogar, but several pushed her for a limiting principle. Alito and Gorsuch asked what would stop Congress from taxing people on unrealized gains in the value of real estate, for example, something states do. Prelogar would not rule that out. However, she emphasized that such a tax was not unlikely and difficult to assess and collect. Plus, she explained, it might not stand up to a challenge as it is not supported by historical tradition. She also noted that the first tax passed by Congress after the 16th Amendment was ratified in 1913 involved taxing shareholders on unrealized gains. As for the due process concerns in retroactively taxing 30 years of income, Prelogar reminded the Justices that the 9th circuit below had already rejected that argument and that the Moores’ counsel had not raised it here.
Watching oral arguments at the Court—live, as I did—it seems that most of the justices are likely to determine that there was a realization of income by the foreign corporation Moore had a controlling stake in and that it’s appropriately within Congress’s role to decide whether to attribute that income to him. I’d also bet that the majority will simply elide the question that the Moores and other supporters hoped they would answer, namely whether the 16th Amendment to the Constitution requires income realization.
That doesn’t mean the Roberts Court will instantly rule against the Moores and also uphold the mandatory repatriation tax. For those of us concerned about growing inequality and persistent tax-dodging efforts of the overclass, upholding the law is probably the best outcome. It might not be that simple, though, as the Court may choose to remand the case to the 9th circuit to determine whether looking back 30 years to capture deferred profits to tax is fair as a matter of due process. Nevertheless, with a limited ruling, sidestepping a thorny question about what income is under the 16th Amendment, the Court will avoid, at least for now, barring a future Congress from enacting a billionaire wealth tax on unearned income. Given how the Court has been eager to overturn decades of precedent in regulatory and other cases to help major corporations, this kind of restraint (if it comes to fruition) ought to count as a victory.