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If Moore Is Reversed

Posted on June 26, 2023

To the Editor:

On June 15 The Wall Street Journal editorialized that the Supreme Court should grant certiorari in Moore.1 In that opinion, the WSJ joins the Manhattan Institute, the U.S. Chamber of Commerce, the Cato Institute, and other conservative outlets (the Competitive Enterprise Institute argued on behalf of the individual plaintiffs). The issue in Moore is whether the transition tax imposed on U.S. multinational enterprises by the Tax Cuts and Jobs Act on the $3 trillion of low-taxed income they accumulated offshore between 2005 and 2017 (the Mandatory Repatriation Tax, or MRT) was unconstitutional because it’s not based on realization, and therefore is arguably contrary to the Court’s decision in Eisner v. Macomber that realization is a constitutional requirement of an income tax.2

If the transition tax is not an income tax, arguably Congress is not authorized by the 16th Amendment to impose it without apportionment among the states by population. As the WSJ editorial clearly states, the real target is not the transition tax per se (although if it is held to be unconstitutional the MNEs would reap many billions in refunded taxes plus interest) but federal and state wealth taxes. That’s why the focus is on realization and not on retroactivity, which was argued below but would not apply to a purely prospective wealth tax.3

I will let others argue for the constitutionality of taxation without realization.4 But even if the Court grants certiorari and is tempted to require realization as a constitutional matter for an income tax, it should consider the many provisions of the code that could be rendered unconstitutional. I hope such a consideration would make even some conservative justices think twice, especially because they are not tax experts (nor usually are their clerks).

Subpart F and GILTI

Subpart F (sections 951 through 960) and the global intangible low-taxed income regime (section 951A) both rely on deemed dividends. Section 951(a)(2) defines subpart F income as:

The amount —

(A) which would have been distributed with respect to the stock which such shareholder owns (within the meaning of section 958(a)) in such corporation if on the last day, in its taxable year, on which the corporation is a controlled foreign corporation it had distributed pro rata to its shareholders an amount (i) which bears the same ratio to its subpart F income for the taxable year, as (ii) the part of such year during which the corporation is a controlled foreign corporation bears to the entire year.

GILTI cross-refers to this definition in section 951A(e)(1):

For purposes of this section —

(1) In general

The pro rata shares referred to in subsections (b), (c)(1)(A), and (c)(1)(B), respectively, shall be determined under the rules of section 951(a)(2) in the same manner as such section applies to subpart F income and shall be taken into account in the taxable year of the United States shareholder in which or with which the taxable year of the controlled foreign corporation ends.

In neither case is there a realization event because the U.S. shareholder does not receive any actual dividends. If realization is a constitutional requirement, subpart F and GILTI would be presumptively unconstitutional.

Branch Profits Tax

Section 884 provides that:

  1. In addition to the tax imposed by section 882 for any taxable year, there is hereby imposed on any foreign corporation a tax equal to 30 percent of the dividend equivalent amount for the taxable year.

  2. Dividend equivalent amount. For purposes of subsection (a), the term “dividend equivalent amount” means the foreign corporation’s effectively connected earnings and profits for the taxable year adjusted as provided in this subsection.

In this case the code imposes a withholding tax on a deemed payment from a branch to a head office measured by the branch`s ECI, even though the branch is not a separate taxpayer from the head office of the same foreign corporation. No realization is involved, and the United States has renegotiated its tax treaties to allow for dividend equivalent amounts to be subject to withholding tax as if an actual dividend had been paid. The branch profit tax would be open to constitutional challenge by the foreign corporation if realization were required.

Sections 1256 and 817A

Code section 1256(a)(1) governs regulated futures contracts and provides that:

(a) General rule

For purposes of this subtitle —

(1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year).

Similarly, code section 817A provides for life insurance companies that:

In the case of any life insurance company, for purposes of this subtitle —

(B) If any segregated asset is held by such company as of the close of any taxable year —

i. such company shall recognize gain or loss as if such asset were sold for its fair market value on the last business day of such taxable year, and

ii. any such gain or loss shall be taken into account for such taxable year.

These sections are not elective, and both require taxation without realization. The Ninth Circuit upheld section 1256 against a constitutional challenge based on Macomber, but if realization is a constitutional requirement, both sections 1256 and 817A would be presumptively unconstitutional.5

Original Issue Discount

Code section 1272(a)(1) provides that:

For purposes of this title, there shall be included in the gross income of the holder of any debt instrument having original issue discount, an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument.

OID is deemed interest calculated based on the difference between the original issue price of a debt instrument and its stated redemption price at maturity. Since OID is taxed without being paid, it fails the realization test and therefore the OID rules would be unconstitutional if Moore were reversed.

Section 877A

Under section 877A:

(a) General rules

For purposes of this subtitle —

(1) Mark to market

All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.

Because this section requires a deemed sale of all the assets of an expatriate without an actual sale taking place, it would be presumptively unconstitutional if realization is a constitutional requirement.

Elective Sections: 475, PFIC, Check-the-Box

There are several provisions of the code that permit taxpayers to elect mark-to-market or passthrough treatment, such as section 475 (for securities dealers) and sections 1291(d)(2) (the qualified electing fund election for passive foreign investment companies), 1296 (mark-to-market election for PFIC stock), and 1366 (S corporations). Presumably, these would not be unconstitutional because they’re elective, but if a taxpayer that makes the election later regrets doing so, it may be able to argue that it can’t be prevented from reversing the election because that would vitiate its constitutional right to realization treatment. The same result could apply if the taxpayer makes the check-the-box election to treat what would otherwise be a C corporation under the Court’s four-factor test in Morrisey6 as a passthrough, resulting in taxation without realization, and later regrets it. And it’s not clear whether the check-the-box regulations can impose passthrough treatment as the default for domestic eligible entities.

Potential Responses

Could the Court distinguish all these instances if it chooses to grant certiorari and reverse Moore?

The government’s brief raises some of the problem areas noted above. It states:

Beyond Subpart F, the MRT is similar to other longstanding income taxes. . . . For instance, Congress has long taxed an individual partner’s “proportionate share of the net income of [a] partnership,” even where that share is not “currently distributable, whether by agreement of the parties or by operation of law.” Heiner v. Mellon, 304 U.S. 271, 281 (1938); see id. at 277-281 (upholding such a tax against various statutory challenges); United States v. Basye, 410 U.S. 441, 453 (1973) (“[I]t is axiomatic that each partner must pay taxes on his distributive share of the partnership’s income without regard to whether that amount is actually distributed to him.”); see also 26 U.S.C. 702(a). And for the 65 years since it recognized S corporations, Congress has imposed an analogous requirement on shareholders of S corporations. 26 U.S.C. 1366(a)(1)(A) (taxing “the shareholder’s pro rata share of the corporation’s items of income”); see Subchapter S Revision Act of 1982, Pub. L. No. 97-354, section 2, 96 Stat. 1677; Technical Amendments Act of 1958, Pub. L. No. 85-866, section 64, 72 Stat. 1652. Nothing in the 16th Amendment’s text or history suggests that the undistributed income of a CFC must be treated differently from the undistributed income of a partnership or S corporation.

In addition, the Code includes several other income taxes that share common features with the MRT. For instance, U.S. citizens who relinquish their citizenship are taxed as if they had sold all their assets the day before expatriation — even though no realized gain from such a sale in fact took place. See 26 U.S.C. 877A(a). And numerous assets are taxed as if they had been sold for a realized gain at the end of a taxable year — even if they were not in fact sold — including regulated futures contracts, 26 U.S.C. 1256(a) and (b), securities held by securities dealers, 26 U.S.C. 475(a), and certain assets held by life insurance companies, 26 U.S.C. 817A(b). See Murphy v. United States, 992 F.2d 929, 931 (9th Cir. 1993) (rejecting the argument that Section 1256 “is unconstitutional because it taxes unrealized gains”). Those established taxes are materially comparable to the MRT, which taxes CFC shareholders on a CFC’s post-1986 deferred income as if it had been earned in 2017. See 26 U.S.C. 965(a).7

The taxpayer’s reply dismisses all these examples, suggesting how the Court may want to distinguish them:

While this Court has not addressed the constitutionality of Subpart F, its provisions predating the MRT all turn on events of that Congress identified as manifesting constructive realization of corporate income by shareholders, whereas the MRT simply attributes a foreign corporation’s income going back thirty years to its shareholders, irrespective of realization. . . . The hodge-podge of other tax provisions cited by the Government are even farther off the mark. Partners are taxed on partnership income, 26 U.S.C. 702, because it is their income, partnerships having no existence separate from their partners. . . . Similarly, an S corporation’s owners unanimously elect to be taxed on the business’s income, 26 U.S.C. section 1362(a)(2), thereby conceding that its income is theirs, Garlin v. Murphy, 42 A.D.2d 30, 32 (N.Y. App. Div. 3d 1973), aff’d, 34 N.Y.2d 921 (1974). The “exit tax” for persons renouncing citizenship permits liability to be deferred “until the due date of the return for the taxable year in which such property is disposed,” 26 U.S.C. section 877A(b)(1) — that is, when the taxpayer actually realizes the income being taxed. And the “mark-to-market” taxes on certain futures contracts and the like rely on the fact that the contracts are settled daily and give the taxpayer “the right to withdraw cash from . . . his futures trading account on a daily basis,” which Congress regarded as manifesting realization. Murphy v. United States, 992 F.2d 929, 930-31 (9th Cir. 1993) (addressing 26 U.S.C. section 1256).8

None of these attempts to distinguish the other examples of taxation without realization are persuasive. It would be truly surprising to partnership tax practitioners to learn that “partnerships hav(e) no existence separate from their partners” because that would vitiate the large number of provisions in subchapter K treating the partnership as an entity and not as an aggregate (see, for example, the list of items keeping their character as they flow through a partnership in section 702(a), which would be superfluous if the partnership were always treated as an aggregate of its partners). And while subchapter S treatment is elective, the limits on reversing the election could be disregarded if realization treatment becomes a constitutional right.

“Constructive realization” as advanced by the taxpayers is a red herring. It was invented by the Ninth Circuit in Murphy to reject a constitutional attack on section 1256 because of the lack of realization. The circuit court stated that:

Although Murphy did not sell his futures contracts, his gains could be treated as realized because he was entitled to withdraw those gains daily. There were no restrictions, and his failure to receive cash was entirely due to his own volition. See id.; cf. Baxter v. Commissioner, 816 F.2d 493, 495 (9th Cir. 1987) (taxpayer did not constructively receive income in tax year, even though check was dated December 30, where taxpayer’s control of receipt was subject to substantial restrictions). Murphy’s failure to withdraw his gains immediately was little different from a failure to withdraw interest which has been credited to a bank account. Absent substantial limitations, the interest is taxable, whether withdrawn or not. See Treas. Reg. 1.451-2(b). So, too, with Murphy’s commodity gains. Of course, today’s gain could be eliminated by tomorrow’s loss, but that would not change the fact that today’s gain was available today. That the investment remains at risk is inconsequential; so do loaned or deposited funds.9

This analogy to the constructive receipt doctrine is misplaced because it would mean that any controlling shareholder could be treated as constructively realizing the income of a corporation she controls because she can always make the board declare a dividend, which would be unwelcome news to Messrs. Bezos, Musk, and Zuckerberg. Nor is subpart F or GILTI based on constructive realization because they apply to 10 percent by vote U.S. shareholders who cannot force a dividend.

Finally, the taxpayer’s description of section 877A as based on realization because of the 877A(b) election to defer paying the tax until realization is completely wrong. This is merely a recognition of the fact that some taxpayers face liquidity constraints, but it’s premised on (a) proper security being posted for paying the tax, (b) a waiver of any treaty-based defenses, and (c) an interest charge. None of these would apply in the case of an election based entirely on realization. In fact, section 877A has the same structure as the MRT: An immediate imposition of the tax (section 965(a)), but an election to defer payment to address liquidity issues (section 965(h)). It also has the same structure as the proposal by Senate Finance Committee Chair Ron Wyden, D-Ore., to tax billionaires on a mark-to-market basis on publicly traded assets but defer taxation until realization with an interest charge for non-publicly traded assets.10

Thus, if the Court grants certiorari and holds that realization is a constitutional requirement, it’s difficult to see how any of the provisions listed above can be fully defended from a constitutional challenge.


Justice Robert Jackson referred to the Court’s “sporadic omnipotence” in tax cases. The problem with the Court ruling on tax cases is that the justices are not tax experts, otherwise they would not have reached the results they did in, for example, Gitlitz (an 8-1 decision joined even by Justice Ruth Bader Ginsburg; apparently being married to a great tax lawyer is not enough).11 Gitlitz was promptly reversed by Congress. But if the Court grants certiorari in Moore and holds that realization is a constitutional requirement, the consequences will be felt in many areas of the code that have nothing to do with the transition tax or with wealth taxes, and Congress can do nothing about it.

I hope the Court will realize that (no pun intended) and deny certiorari. After all, there’s a reason why the Court did not rule a federal income tax provision unconstitutional in over a century, and I hope some of the conservative justices will understand that constitutionalizing tax is not a great idea.12

Reuven S. Avi-Yonah

University of Michigan

June 18, 2023


1 Editorial, “Is a U.S. Wealth Tax Constitutional?The Wall Street Journal, June 15, 2023, discussing Moore v. United States, 36 F.4th 930 (9th Cir. 2022).

2 Eisner v. Macomber, 252 U.S. 189 (1920).

3 On retroactivity, see Reuven S. Avi-Yonah et al., “Is New York’s Mark-to-Market Act Unconstitutionally Retroactive?Tax Notes State, Feb. 8, 2021, p. 541.

4 For the voluminous literature on the constitutionality of a wealth tax, see, e.g., Ari D. Glogower, “A Constitutional Wealth Tax,” 118 Mich. L. Rev. 717 (Jan. 24, 2019); John R. Brooks and David Gamage, “Why a Wealth Tax Is Definitely Constitutional,” SSRN (Jan. 9, 2020); Brooks and Gamage, “Taxation and the Constitution, Reconsidered,” SSRN (May 25, 2023) (forthcoming in Tax L. Rev.); Joseph M. Dodge, “The Apportionment of Direct Taxes Under the Constitution,” FSU College of Law, Public Law Research Paper No. 250 (Mar. 2007); Calvin H. Johnson, “Apportionment of Direct Taxes: The Glitch in the Center of the Constitution,” SSRN (Nov. 1997).

5 Murphy v. United States, 992 F.2d 929 (9th Cir. 1993).

6 Morrisey v. Commissioner, 296 U.S. 344 (1935).

7 Brief of the United States in opposition to certiorari, Moore, No. 22-800 (S. Ct. May 16, 2023).

8 Petitioners’ reply brief in Moore, No. 22-800 (S. Ct. May 30, 2023).

9 Murphy, 992 F.2d 929.

10 Wyden, Billionaires Income Tax (Oct. 27, 2021).

11 Gitlitz v. Commissioner, 531 U.S. 206 (2001).

12 See Avi-Yonah, “Should U.S. Tax Law Be Constitutionalized? Centennial Reflections on Eisner v. Macomber (1920),” Duke J. Const. L. Pub. Pol’y 65, 68-69 (2021).


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