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Monday, June 24, 2024

Brooks & Gamage: Moore v. United States—Initial Reactions

TaxProf Blog Op-Ed:  Moore v. United States—Initial Reactions, by  John R. Brooks (Fordham; Google Scholar) & David Gamage (Missouri-Columbia; Google Scholar):

Brooks & GamageIn its decision in Moore v. United States on June 20, the Supreme Court upheld a broad government power to tax business entities, including corporations, on a pass-through basis. The taxpayers in Moore had challenged as unconstitutional the I.R.C. § 965 “mandatory repatriation tax,” a one-time shareholder-level tax on the accumulated, but undistributed, earnings of controlled foreign corporations. The taxpayers’ argument was that retained earnings of a corporation could not be considered the “income” of a corporation’s shareholders under the Sixteenth Amendment until that income was “realized” by the shareholders through a distribution to them. The Supreme Court originally granted certiorari on this question: whether “unrealized sums” could be income covered by the Sixteenth Amendment.

In its opinion, the Court declined to answer that question, however, because, the Court held, the income in question here was in fact realized—by the corporation. The real question therefore was whether that corporation’s income could be attributed to its shareholders. The Court held that it could be, saying essentially that there is no real constitutional distinction between partnerships and corporations on this issue—the income of any business entity can be attributed to its owners, without limitation. (The majority left some wiggle room on the question of whether an item of undistributed corporate income could be taxed both at the entity level and the owner level, though it was unclear whether that might be a Sixteenth Amendment issue or a Due Process issue.) Something like this result—a focus on attribution rather than realization—was widely predicted after oral argument, but we are somewhat surprised that the majority opinion didn’t take up the issue of realization at all.

Also surprising to us is that the majority further limited the status of Eisner v. Macomber. That case from 1920 was central to Moore, since it contains the strongest language for a constitutional realization requirement and against the pass-through taxation of corporate shareholders. But the majority reads Macomber—correctly, in our view—as limited to the issue of whether stock dividends could be an “economic gain” to the shareholder, and it treats Macomber’s discussion of realization and of whether accumulated earnings can be shareholder income as “dicta.” This is a further nail in the coffin of Macomber, consistent with a long line of cases that has significant constrained its scope.

The decision was formally 7-2, with Justices Barrett and Alito concurring in the opinion. But in reality it’s a 5-4 decision, since Barrett and Alito along with Thomas and Gorsuch, in dissent, would have held that the Sixteenth Amendment does require realization. Their arguments are rather weak, however, perhaps as result of the strong historical arguments by the government and amici (including us). All nine Justices agree, for example, that the Sixteenth Amendment did not purport to enshrine a new or different idea of “income,” and that the Amendment was narrowly targeted at overruling one of the holdings of Pollock v. Farmers’ Loan & Trust Co. and restoring the pre-1895 income tax power. We have shown that fact unambiguously in our work, but it was not obvious going into the case that this Court would agree. Ironically, given their judicial philosophies, these four Justices instead seem to be making a non-originalist prudential argument that we need some rule to distinguish income from property, and an atextual argument that we should read the word “derived” in the Sixteenth Amendment as a “near-synonym” for “realized” in order to establish realization as such a rule. But they don’t seriously consider alternative tests for income—for example, the simple idea of economic gain between two points in time, as advocated by the government. Nor do they engage with the ample historical evidence that tax law and accounting prior to and contemporaneous with the Sixteenth Amendment frequently treated unrealized gain as “income,” including the corporate income tax in operation at the time of the Amendment’s ratification.

While the majority opinion is perhaps the strongest the government could have hoped for from this Court, it does raise some questions that some of us may be mulling on for a while. For example, the majority opinion says the following: “In its brief and at oral argument…the Government indicated that a hypothetical unapportioned tax on an individual’s holdings or property (for example, on one’s wealth or net worth) might be considered a tax on property, not income.” It’s worth pausing for a moment on that parenthetical phrase. The government did concede, as it must, that an annual tax on property, i.e., “the total value of the asset,” would be an unapportioned direct tax, but that sort of ad valorum tax is materially different from a tax on a person’s net worth, and the government did not concede anything about that. At any rate, these and other questions are likely to keep courts and scholars busy for some time.

In the end, Moore enshrines a strong power to tax entities on a pass-through basis and reaffirms important tools such as subpart F. These could form the basis of future tax reforms. Furthermore, its limitation of Eisner v. Macomber and silence of the issue of realization could open the door somewhat wider to tax reforms that target unrealized gain, such as the Billionaire Minimum Income Tax. That said, with four votes clearly in favor of a strong realization requirement, small shifts in the make-up of the Court could have big effects on future tax reform proposals.

TaxProf Blog Op-Eds on Moore v. United States, No. 22–800 (June 20, 2024):

https://taxprof.typepad.com/taxprof_blog/2024/06/moore-v-united-states-initial-reactions.html

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