Zelenak: Moore Thoughts

TaxProf Blog Op-Ed:  Moore Thoughts, by Lawrence Zelenak (Duke; Google Scholar):

In terms of its bottom line, the Supreme Court's Moore decision is no surprise to anyone who listened to (or read the transcript of) the oral argument last December. It seemed then nearly certain that the Court would uphold the mandatory repatriation tax (MRT) as a constitutionally permissible attribution to the Moores of income indisputably realized by their controlled foreign corporation, and the Court's opinion does exactly that.

There are, nevertheless, a couple of interesting surprises—at least to me—lurking in Justice Kavanaugh's majority opinion.

First, I expected the Court to affirm (in dictum) the holding of Eisner v. Macomber that the Sixteenth Amendment includes some sort of realization requirement, even while declining to say much about the contours of that requirement. After all, as Justice Thomas notes in his dissent, the question on which the Court granted certiorari was "[w]hether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states." And the continued validity—or not—of Macomber featured prominently in December's oral argument. Instead, however, Justice Kavanaugh's majority opinion states, "[w]e do not decide . . . today" the question of "whether realization is required for an income tax." Moreover, Justice Kavanaugh specifically notes that his opinion "does not address the distinct issues that would be raised by . . . (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on [unrealized] appreciation." Thus the constitutionality of the wealth taxes proposed by Senators Warren and Sanders, and of the mark-to-market income taxation of billionaires proposed by the Biden administration and by Senator Wyden, is as uncertain on June 20 as it was on June 19.

The second surprise is a bit more subtle in its implications. In the historical background portion of his opinion, Justice Kavanaugh goes out of his way to disapprove of the Court's 1895 holding in Pollock v. Farmers' Loan & Trust Co., that taxes on the income from property (both real and personal) are direct taxes, and thus invalid under the original Constitution if not apportioned. Kavanaugh writes, "Because income taxes are indirect taxes, they are permitted under Article I, § 8 without apportionment." In his telling, the Sixteenth Amendment simply "confirmed what had been the understanding of the Constitution before Pollock: Taxes on income—including income from property—are indirect taxes that need not be apportioned." Because nothing in the Court's discussion of Pollock ends up mattering for purposes of the Court's analysis of the MRT, the Moore opinion's reaching out to reject of Pollock is puzzling.

Despite the Pollock discussion not affecting the result in Moore, I see two ways it may matter going forward. (Whether Justice Kavanaugh had either of these in mind, I have no idea.) The first will be good news to anyone who disfavors constitutional constraints on Congress's taxing power, while the second will be bad news.

First. If, properly interpreted, the Constitution always permitted an unapportioned income tax, then proponents of the income taxation of unrealized gains can sidestep the question of whether the Sixteenth Amendment includes a realization requirement; as long as the original Constitution does not include a realization requirement, a tax on unrealized gains is constitutional.

Second. Prior to Moore, the combination of Pollock and the Sixteenth Amendment suggested a counterintuitive, but plausible, argument for the constitutionality of a broad-based federal wealth tax, along the following lines. If, according to Pollock, a tax on income from property equals a tax on property, then it follows (from the transitive property of equality) that a tax on property equals a tax on income from property. (As Justice Thomas puts it in his dissent=s approving discussion of Pollock, "In the end, the [Pollock] Court concluded that income could not be distinguished from the source from which it was derived for purposes of determining whether a tax on that income would be direct or indirect.") And if a property tax is really an income tax, then the Sixteenth Amendment authorizes not only an unapportioned income tax, but also an unapportioned property or wealth tax. Justice Kavanaugh's rejection of Pollock pulls the rug out from under that otherwise nifty argument.

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

• Lawrence Zelenak (Duke), Moore Thoughts (June 21, 2024)
• Conor Clarke (Washington University), Four More Takeaways From Moore (June 22, 2024)
• Reuven Avi-Yonah (Michigan), Is A Mark To Market Tax Constitutional After Moore? (June 23, 2024)
• John Brooks (Fordham) & David Gamage (Missouri-Columbia), Moore v. United States: Initial Reactions (June 24, 2024)
• Brian Galle (Georgetown), What's Next For Wealth And Mark-To-Market Taxes After Moore?
• Andy Grewal (Iowa), Moore Decides Less (June 26, 2024)
• Michael Graetz (Columbia), Moore v United States—Winning the Battle but the War Goes On (June 27, 2024)
• Alex Zhang (Emory), Moore And The Judicial Role In Tax Law (June 28, 2024)