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Tuesday, July 9, 2024

Kysar: Moore v. United States—The Stakes Of Constitutionalizing The Tax Law

TaxProf Blog Op-Ed: Moore v. United States—The Stakes of Constitutionalizing the Tax Law, by Rebecca Kysar (Fordham; Google Scholar): 

Rebecca KysarSince the ratification of the Sixteenth Amendment in 1913, the Court has generally left Congress to its own devices when it comes to tax law. [1] Indeed, a leading federal income tax casebook has observed that, in modern times, “the Constitution seems to stop where the Internal Revenue Code begins.” The Moore v. United States majority followed this general pattern of exercising restraint in the tax sphere by sidestepping the question presented—whether a gain must be realized to constitute income under the Sixteenth Amendment. Instead, the majority decided the case on a narrow rationale advocated by certain amici curiae (of which I am among) that the income targeted by the MRT was indeed realized at the entity level and that Congress could tax shareholders on their portion of that income.

In so doing, the Court avoided the need to “contain the blast radius of [the petitioners’] legal theory” to escape “fiscal calamity.” More broadly, it reaffirmed that the Court will not abrogate Congress’s taxing power lightly, implicitly following Justice Harlan’s admonishment to the Pollock v. Farmers’ Loan & Trust Co. majority that the remedy for abuses of the taxing power “is to be found at the ballot box.” More specifically, the Moore majority confirmed that pass-through taxation falls within Congress’s constitutional taxing authority. A mere decade ago, most tax experts would have taken such a conclusion for granted, but in today’s political and judicial climate, this aspect of Moore is an important victory for the tax system and its ability to address the nation’s acute revenue needs.

Admittedly, the Court in Moore did signal a renewed interest in some of the boundaries of Congress’s taxing authority. The majority, for instance, noted that the Due Process Clause requires that income attributions are not “arbitrary,” an analysis which turns on the “taxpayer’s relationship to the underlying income.” Justice Barrett also invoked the Due Process Clause in her opinion concurring in the judgment, volunteering that a tax on shareholders of a widely held or domestic corporation might be a different question than the MRT’s targeting of income by a closely held corporation. And Justice Thomas, in his dissent, explicitly embraces the idea that Congress may only attribute income to controlling shareholders. These passages suggest that a future Court might take up thorny questions heretofore left to Congress and the Internal Revenue Service, such as the degree of control necessary to bypass the corporate entity and how to define such control. Constitutionalizing such inquiries will surely result in technical conundrums. And, given its constitutional status, Congress and the Internal Revenue Service may be unable to close loopholes in this new scheme that taxpayers will inevitably exploit.

As others have written on these pages, the Court also did little to explicitly embrace the long-held view by tax law scholars that decades of precedent and practice have rendered Macomber’s constitutional holding regarding realization inoperative, with the exception of Justice Jackson in her concurrence. Instead, four justices concluded that there is one indeed. Nonetheless, Jake Brooks and David Gamage have also noted the importance of the majority’s reading of Macomber as limited to the issue of whether stock dividends could be economic gain, treating as “dicta” Macomber’s conclusion that a shareholder’s portion of accumulated profits is not income. This passage in Moore may indicate that at least five justices may be hesitant to deem as binding Macomber’s language that the realization requirement is a constitutional one. That being said, at least one of those justices may be willing to rule that such a constitutional limitation exists based not necessarily on precedent, but on other textual or historical evidence (however shaky such evidence may be), thereby creating the necessary votes to do so.

[Re]constitutionalizing realization would, of course, raise the stakes on crafting a workable definition of it. And its analytically dubious underpinnings would make such a task a fool’s errand. This reality is perhaps best illustrated by Justice Barrett’s quixotic exploration of the existing caselaw on the subject in her opinion. After all, how does one reconcile Cottage Savings, which seems to require a mere change in legal entitlements before realization is triggered, with the result in Macomber, where Ms. Macomber ended up with more shares in the stock dividend at issue yet no realization was found? Or Helvering v. Bruun, in which the Court held that a landowner realized taxable income when a tenant simply abandoned a building on his land, with Macomber’s language that income must be severed from capital in order to constitute realization?

But apart from these definitional and administrative frustrations, there are bigger issues at stake in further constitutionalizing the tax law. The U.S. Constitution contains relatively few substantive requirements of tax legislation as compared with other countries. This state of affairs perhaps reflects the fact that fiscal policy is, inherently, an exercise of distributive justice—that is, how to allocate resources and opportunities fairly within a society. Lacking a determinate theory of distributive justice, the polity is arguably the best situated to calibrate the level of desired redistribution. Furthermore, voters must not only make the difficult decision of how to allocate resources among them but also must wrestle with how to allocate resources between generations. Such decisions are core democratic ones since they revolve around tradeoffs between the individual and society, the public and the private, the present and the future, and other deep and thorny philosophical questions.

The Court’s insertion of itself into this process disrupts the democratic balancing of these tradeoffs by legalizing them in one direction or another. And given the current composition of the Court, it would likely do so in one direction only—in favor of the individual over society, and the constriction of the public sphere to expand the private one. The Court will, in effect, decide what we owe to one another, instead of us doing so—and in its view, the answer will likely be very little.

Of course, Alexis de Tocqueville, famously warned against the “tyranny of the majority”, and in the context of taxation, redistribution via democratic procedures could take the form of expropriation of wealth. One could thus rationalize greater involvement by the judiciary by arguing that the few number of substantive constitutional constraints on tax legislation in the United States means that the minority lacks protection against the whims of the majority. But safeguards do exist. The Framers of the U.S. Constitution bestowed the power to originate revenue legislation to the House of Representatives, thereby seemingly acquiescing to popular will over tax matters. This power, however, is checked by requiring cooperation from the Senate, which represented the gentry, to raise taxes. The President, of course, must also acquiesce for legislation to take effect. Rather than pursuing constitutional restrictions on fiscal policy, the United States turned to a process-based solution—vetogates—to guard against tyranny of the majority.

Yet in recent decades, the tax legislative process has been coopted to represent the will of the minority alone. The antitax movement has grown so powerful and well-funded that it has transformed the U.S. government into a massively underfunded and hence fundamentally unsustainable enterprise, and U.S. society into an unequal one where individuals are left to their own fate—without a net. Since the late 1970s, these highly organized, conservative interests have gained control of the vetogates of lawmaking, with liberal lawmakers doing little to stand in their way.

In more recent years, the antitax movement has also weaponized the judiciary and administrative state, challenging tax regulations for minor and at times mythical APA infractions and creating lop-sided bureaucratic layers to help ensure publicly minded ones don’t get written in the first place. The public has no similar recourse for litigating against regulations written at the behest of private interest lobbying since taxpayer standing doctrine prevents such suits, and there is no one to represent the public interest at the regulatory writing stage aside from a few nonprofits and law professors whose attention is often elsewhere. Still not sated, however, the antitax movement has now set its sights on constitutional attacks of legislated tax increases since judgments based on statutory interpretation arguments can be reversed by legislation or, in some circumstances, regulation. If the past is any guide, Moore is just the beginning of this new strategic phase of the antitax movement.

Thus, the problem is not that there are insufficient political barriers to taxation of the minority. The issue is that there are too many. This state of affairs is not without backlash. Since the global financial crisis, the progressive movement has championed greater taxation of corporations, wealth, and unrealized gains to a degree not seen since perhaps the Gilded Age. These are signs of significant frustration with the level of inequality within, as well as the diminishment of, the state. If majority will is strong enough, one can imagine a world in which raising revenue once again becomes the price one pays for a stable, civil, and fair society, overcoming the barriers erected by the antitax movement over the past fifty years. Unless, of course, those barriers are constitutionalized.

[1] A notable exception, of course, is Eisner v. Macomber, but the problematic implications of that decision has led the Court to effectively cabin Macomber to its facts. See Brief of Amici Curiae Tax Law Center at NYU and Professors Ari Glogower, David Kamin, Rebecca Kysar, and Darien Shanske in Support of Respondent in Moore v. United States (Supreme Court of the United States, filed Oct. 23, 2023).

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

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