Harvard Law Review: Moore And § 877A

Note, Moore than Meets the I.R.C.? The Appointment Rule's Originalist Backstop for I.R.C. § 877A, 137 Harv. L. Rev. 1204 (2024): 

Renunciation of U.S. citizenship is no trivial act. For most, it requires leaving the country, appearing before a consular or diplomatic officer, signing an oath of renunciation, paying a $2,350 fee, and being named in the Federal Register. Yet expatriates, ranging from singer Tina Turner to Facebook cofounder Eduardo Saverin, have risen dramatically in number since 2010. Some, like tennis player Naomi Osaka, renounce so they can represent another country in the Olympics. Others, like former Israeli politician Dov Lipman, do so to hold office in a foreign government. But for the purported majority of expatriates, ex-U.S. citizen and former U.K. Prime Minister Boris Johnson expressed their motive well: When asked about paying a tax bill from the IRS, he responded, “[I]t’s absolutely outrageous. Why should I?”

Policymakers have long expressed ire over reports of Americans renouncing citizenship to avoid taxes. Beyond concerns about forgone revenue, these stories often spark indignation since such expatriates presumably valued their citizenship so cheaply to have sacrificed it for pecuniary gain. Congress has consequently sought to deter tax avoidance by abandonment of citizenship, and the same body of law establishing federal taxes — the Internal Revenue Code (I.R.C.) — provides a few tools to this end. For instance, I.R.C. § 877 imposes levies on U.S.-source income of certain high-income or wealthy renunciants for up to ten years after expatriation. Enacted in 1966 as the nation’s first “expatriation tax,” the provision went unenforced for decades before returning to the spotlight when President Clinton read an article about six affluent Americans who had expatriated for tax purposes. Congress accordingly added disclosure obligations and a public-naming system for expatriates in the Code; amended I.R.C. § 877 to presume a tax-avoidance purpose for those above a certain threshold of wealth; and enacted the Reed Amendment, which barred former U.S. citizens from reentering the country if they had renounced citizenship to avoid taxation. However, these renewed efforts still proved largely unfruitful in the battle against tax-motivated pronouncements.

Cue I.R.C. § 877A. Enacted under the Heroes Earning Assistance and Relief Tax Act of 2008, this provision establishes a different kind of expatriation tax: treating certain renunciants (generally those passing the same threshold from I.R.C. § 877) as if they had liquidated all of their assets at fair market value on the day before relinquishing citizenship. Whereas the Code usually imposes income taxes only upon some realization event, such as a disposition of property, I.R.C. § 877A embraces an uncommon mark-to-market regime in which assets are deemed sold — triggering taxable gain or loss — despite remaining in the taxpayer’s real-world possession. Among other rationales, the statute is intended to tax appreciation that accrued during U.S. citizenship or residency but might have otherwise gone untaxed.

This linchpin mark-to-market scheme comes at a cost: dubious constitutionality. Shortly after the ratification of the Sixteenth Amendment, which enables federal “taxes on incomes[] from whatever source derived,” the Supreme Court interpreted this phrase to allow only levies involving a realization of changed wealth. While subsequent case law has cast doubt on the validity of such a constitutional realization requirement, the Court has also never expressly overruled this decision. Accordingly, as the Justices gear up to confront the Sixteenth Amendment’s meaning in Moore v. United States, many wonder if statutes relying on broader conceptions of income, such as I.R.C. § 877A, could soon be on the constitutional chopping block.

Such speculation has merit. Even if Moore does not fully revive the realization principle, evidence from the Sixteenth Amendment’s passage and ratification — records persuasive to the increasingly originalist bench — supports circumscribing the constitutional definition of income. Moreover, while Congress generally enjoys broad authority over duties, imposts, and excises, the Court could cite documents from the Founding era to narrowly construe such terms. Under these readings, many taxes relying on expansive notions of income must derive constitutionality from a politically impossible requirement: being apportioned among states according to their respective populations. But despite failing the text of this apportionment requirement, I.R.C. § 877A may still pass muster given ample evidence indicating that the Founders had never intended to bar an expatriate-only levy.

This Note investigates the constitutional prospects for I.R.C. § 877A. Part I chronicles the development of taxing powers and restraints in the Constitution, tracing their origins from the Articles of Confederation through landmark cases and up to Moore’s potential revival of a Sixteenth Amendment–based realization requirement. Part II analyzes the interaction between I.R.C. § 877A and this doctrine, scrutinizing three plausible routes to constitutionality as an income, indirect, or apportioned tax. This Note concludes that even in the worst-case scenario wherein the judiciary reads “incomes” narrowly but “direct taxes” broadly, I.R.C. § 877A should survive challenge through an interpretation of the apportionment rule that incorporates historical context. While leaving little room to support more controversial provisions and proposals, this escape hatch preserves the validity of I.R.C. § 877A via its exclusive application to expatriates — a class raising none of the Founders’ concerns that originally fueled limits on federal taxing power. ...

Conclusion
I.R.C. § 877A is a strange tax. After decades of unsuccessfully deterring tax-motivated expatriation, Congress perceived the need for a stronger penalty in the Code that deemed assets sold upon expatriation. And while this relatively uncommon mark-to-market regime raises plausible constitutional questions, its equally uncommon expatriate-only coverage dispels such concerns. Accordingly, even if the Court closes two doors to I.R.C. § 877A’s constitutionality as an income or indirect tax, this statute entirely falls out of the framework required under its last resort, the Direct Tax Clauses. Under the same originalist methodology that generally fuels narrow constructions of federal taxing authority, I.R.C. § 877A would have substantively presented no issue with the apportionment requirement as understood at the Founding. Some expatriates likely view this statute with disdain comparable to former U.K. Prime Minister Boris Johnson’s choice words for American taxes, but one part of I.R.C. § 877A should survive criticism: its constitutionality.