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Reading the Taxpayers’ Brief in Moore

Posted on Oct. 2, 2023

Lawrence A. Zelenak (zelenak@law.duke. edu) is the Pamela B. Gann Distinguished Professor of Law at Duke University.

In this article, Zelenak explains that the strategy of the taxpayers’ brief in Moore is to distinguish the mandatory repatriation tax from other provisions that arguably violate Eisner v. Macomber, rather than to claim that those other provisions are also unconstitutional; he also analyzes several serious weaknesses in the brief’s arguments.

What is at stake in Moore,1 the pending Supreme Court case in which the taxpayers challenge the mandatory repatriation tax (MRT) of the Tax Cuts and Jobs Act2 as an unconstitutional tax on unrealized appreciation, in violation of the realization requirement enunciated by the Court more than a century ago in Macomber?3 Only a modest amount is at stake for the taxpayers themselves.

As minority (13 percent) shareholders in KisanKraft, a controlled foreign corporation selling basic tools and equipment to small farmers in the poorest regions of India, Charles and Kathleen Moore had $132,512 of deemed income in 2017 — their share of KisanKraft’s retained earnings from its founding in 2005 through 2017 — and a tax liability of $14,729 under the MRT.4

Of course, the stakes are immensely higher when the potential effect of the Court’s decision on other taxpayers is taken into account. According to a recent estimate by the Tax Foundation, if the Court invalidated the MRT only as applied to individuals and passthrough entities owning stock in CFCs, the revenue loss would be about $3.5 billion over the next 10 years.5 If it also invalidated the MRT as applied to corporate shareholders of CFCs, the estimated revenue loss over 10 years would be $346 billion, nearly 100 times greater.6 And if the Court’s opinion indicated, either expressly or by implication, that other aspects of the current income tax are unconstitutional under a reinvigorated version of Macomber, the revenue effect could be greater still.

In its brief in opposition to the Moores’ petition for certiorari, the government noted the similarity of the MRT to (among other things) subchapter K’s passthrough taxation of partners, subchapter S’s passthrough taxation of S corporation shareholders, the expatriation tax of section 877A, mark-to-market taxation of futures contracts under section 1256, and mark-to-market taxation of securities dealers under section 475.7 The government’s point, of course, was that a sweeping Supreme Court victory for the Moores might indicate that some or all of those other provisions were also invalid. Under the Tax Foundation’s view of the broadest possible taxpayer victory in Moore, if the Court were to invalidate all business income taxes on undistributed earnings, it estimates that “eliminating the taxation of pass-through and corporate retained earnings would reduce federal revenue by nearly $5.7 trillion over 10 years.”8

Finally, the Court’s ringing endorsement of an expansive interpretation of Macomber would severely limit Congress’s future tax policy options. Perhaps most notably, it would mean Congress could not validly enact mark-to-market taxation of the appreciation in publicly traded stock owned by the ultrawealthy, as President Biden’s Treasury Department has proposed.9

The Moores’ attorneys filed their brief on the merits on August 30. In structuring it, the attorneys had to decide whether to go for the low-percentage home run (a sweeping victory that would result in revenue loss in the hundreds of billions, or even trillions, of dollars) or for a higher-percentage base hit (a victory limited to invalidation of the MRT). Given the deep involvement of the conservative Competitive Enterprise Institute in the Moore litigation,10 one might have expected the brief to swing for the fences, even at an increased risk of striking out. Instead, it is surprisingly modest in its ambitions. In fact, the brief is at pains to explain why most of the other provisions commonly cited as vulnerable to the reinvigoration of Macomber are distinguishable from the MRT and are constitutionally permissible even if the MRT is not. Evidently, the attorneys’ cost-benefit analysis concluded that the possibility of a broader victory was not worth the risk that the Court would blanch at the prospect of invalidating large swaths of the Internal Revenue Code.

Of course, the Court is not bound by the limits of the arguments of the parties, and it could decide in the Moores’ favor in an opinion more sweeping than the taxpayers’ brief. If, however, the Court follows its usual practice of not giving winning litigants broader victories than they requested, the Moores’ brief suggests a taxpayer victory may not be nearly as momentous as the government’s worst-case scenario.

Two primary themes emerge from the Moores’ brief: First, the brief’s strategy is to distinguish the MRT from other tax provisions also arguably in violation of Macomber, rather than to argue that those other provisions are also unconstitutional. Second, despite, and to some extent because of, its narrowness, the brief’s argument has serious weaknesses that the brief fails to recognize, let alone address.

The Moore Brief and Constructive Realization

In rebutting the government’s claim that a taxpayer victory in Moore would invalidate numerous other code provisions, the Moores’ brief explains that the other provisions are constitutional under the “constructive realization” doctrine, which “treats as taxable income which is unqualifiedly subject to the demand of a taxpayer . . . whether or not such income has actually been received in cash.”11 The problem with the MRT, according to the brief, is that its imposition

does not turn on any event of constructive realization by shareholders. . . . Instead, all that matters is ownership divorced from realization of income: the MRT tags a shareholder with taxable “income” even if he or she purchased the shares in 2017, long after the corporation earned the sums being taxed.12

In distinguishing the impermissible MRT from the other constitutionally valid provisions, the brief is rather vague on the contours of the constructive realization doctrine and why it is satisfied in the case of those other provisions but not in the case of the MRT. A review of the brief’s discussion of the other provisions suggests that the real problem with the MRT is less the absence of “an event of constructive realization by shareholders” than it is the possibility that the CFC’s income taxed to a specific shareholder will not be that shareholder’s income in an economic sense, if the taxpayer acquired the CFC shares after the years in which the CFC’s income arose.

In any event, the brief is latitudinarian about what can constitutionally qualify as a constructive realization, outside the MRT context. The brief concludes, for example, that mark-to-market taxation of futures contracts (section 1256) is constitutional because the taxpayer could have received the appreciation in the contract in cash, and likewise for mark-to-market taxation of securities dealers (section 475).13 Passthrough taxation of partners is permissible because partnership income “is their income, partnerships having no existence separate from their partners,”14 the brief says (emphasis in original).

Passthrough taxation of S corporation shareholders is permissible because they “unanimously elect to be taxed on the business’s income, thereby conceding that its income is theirs.”15 And the expatriation tax (section 877A) is constitutional because taxpayers have the option to defer tax until they dispose of their appreciated assets, on the condition that they provide security for and pay interest on the deferred tax.16

The brief explains that the pre-TCJA aspects of subpart F — taxing United States shareholders of CFCs on their pro rata shares of the CFC’s subpart F income for the current year — are also constitutional, even though the MRT is not. By targeting “specific events, like a foreign corporation’s earning of investment income while being controlled by a small number of domestic shareholders,” the pre-TCJA portion of subpart F satisfies the constructive realization requirement.17

The bottom line, according to the brief, is that although the constructive realization doctrine will support a wide range of congressional impositions of income tax without a “sale of other disposition of property,”18 it will not do so when the effect of a provision is to tax a person on income the economic accrual of which occurred before that person owned the income-producing property. There are, however, three big problems with that position.

The Moore Brief’s Phellis Problem

The Moores’ claim that the MRT unconstitutionally taxes CFC shareholders on CFC income predating their stock ownership runs counter to the holding and reasoning of the Court’s 1921 decision in Phellis19 — a case nearly as old as Macomber, and (unlike Macomber) a case the continuing validity of which is not in question. Then, as now, the income tax statute treated as a taxable dividend a distribution to a shareholder out of a corporation’s accumulated earnings and profits. This was (and remains) the case even if the distribution did not constitute economic income to a specific shareholder because the shareholder had purchased the stock after the E&P had been generated, so that in an economic sense for that shareholder, the distribution was a return of capital rather than income.

In rejecting C.W. Phellis’s argument (based in part on Macomber) that the dividend could not be taxed as income to him, the Court wrote:

In buying at a price that reflected the accumulated profits, [Phellis,] of course, acquired as a part of the valuable rights purchased the prospect of a dividend from the accumulations bought “dividend on,” as the phrase goes — and necessarily took subject to the burden of the income tax proper to be assessed against him by reason of the dividend if and when made. He simply stepped into the shoes, in this as in other respects, of the shareholder whose shares he acquired.20

Despite the obvious implications of Phellis for the Moores’ constitutional argument, their brief does not cite on this point — let alone attempt to distinguish — the case.

But if the step-in-the-shoes analysis was enough to justify the tax in Phellis, it should also be enough to justify the MRT in Moore. Perhaps the Moores could argue that the analysis prevails only when the tax is triggered by the sharpest of realization events — a cash dividend. The problem, however, is that realization events are supposed to be triggers for the taxation of income, and if corporate earnings predating a taxpayer’s stock ownership cannot constitutionally qualify as income of the taxpayer, then even with a cash dividend, the shareholder has received nothing that can be taxed.

If the Moores are right, Phellis is wrong and should be overruled (and the long-standing subchapter C regime for the taxation of corporate distributions is unconstitutional in significant part). Conversely, if the Court is unwilling to abandon Phellis and its step-in-the-shoes analysis, the Moores’ argument fails.

The Moore Brief’s Section 951 Problem

According to their brief, the taxpayers’ argument that the MRT is invalid as an unapportioned direct tax on property “does not cast doubt on the facial constitutionality of Subpart F’s other [and much] older provisions.”21 The crucial difference, claims the brief, is that “the MRT simply attributes a foreign corporation’s retained earnings going back thirty years to whoever owned its shares in 2017, irrespective of any event by which they might have realized anything,” whereas the older provisions (in particular, section 951) attribute to current shareholders only current-year earnings.22

There are two problems with that alleged constitutional distinction. The first problem is that it is based on an inaccurate understanding of the older portions of subpart F.23 Under section 951(a), United States shareholders of a CFC must include in their gross income their pro rata share of the CFC’s current-year subpart F income, if they owned stock of the CFC on the last day of the CFC’s tax year. So, for example, if the shareholder and the CFC are both calendar-year taxpayers, the CFC is a CFC for the entire year, and the shareholder owns 20 percent of the CFC’s stock on the last day of the year, then the shareholder must include in gross income 20 percent of the CFC’s subpart F income for the entire year.

That inclusion is required even if the shareholder did not acquire the stock until December 1 (or even December 31, for that matter), in which case 11/12 (or 364/365) of the inclusion is of income earned by the CFC before our shareholder became a shareholder. Section 951(a)(2)(B) provides for a reduction of our taxpayer’s inclusion if the previous owner of our taxpayer’s shares received an actual dividend from the CFC during the current year. The exception makes all the clearer, however, that in the absence of an actual dividend to the previous shareholder, subpart F routinely taxes an end-of-year shareholder on the stock’s pro rata share for the entire year, regardless of how small of fraction of the year the shareholder owned the shares.

Thus, the older subpart F provisions have precisely the same feature that the brief claims is the fatal flaw of the MRT — taxing a CFC shareholder as of a statutorily specified date on CFC income predating the taxpayer’s ownership of the stock. The Moore brief’s attempted distinction thus fails, unless the difference between taxing several decades’ worth of pre-ownership CFC income (MRT) and taxing 364 days’ worth of pre-ownership CFC income (section 951) is of constitutional dimensions.

Perhaps an argument to that effect could be developed, but the foundation for it is far from self-evident,24 and it isn’t even hinted at in the brief. If a constitutional distinction based on the duration of the pre-ownership passthrough period is unavailing, the Moores must either argue that the pre-TCJA portions of subpart F are also unconstitutional (more than 60 years after their enactment) or abandon the core of their argument for the unconstitutionality of the MRT.

The Moore Brief’s As-Applied Problem

As noted, there is a second problem with the Moore brief’s identification of the taxation of pre-ownership CFC income as the MRT’s constitutionally fatal flaw. Although the MRT could tax some taxpayers on CFC income attributable to years before they became shareholders, it does not have that effect for the Moores. As the brief explains, the Moores acquired all their KisanKraft stock at the corporation’s founding.25

Thus, all KisanKraft income taxed to the Moores under the MRT is corporate income for years in which the Moores owned their KisanKraft stock. Assuming for the sake of argument that passthrough taxation of a CFC shareholder on CFC income earned in years predating that taxpayer’s ownership of CFC stock is unconstitutional, it becomes crucial whether the Court treats Moore as a facial challenge to the constitutionality of the MRT or as an as-applied challenge. With their case analyzed as a facial challenge, the Moores could prevail as long as the MRT would unconstitutionally tax some other hypothetical taxpayer. But with their case analyzed as an as-applied challenge, it would fail because the MRT has no unconstitutional impact on the Moores.26

The jurisprudence on distinguishing between facial and as-applied constitutional challenges to the Internal Revenue Code is underdeveloped — both because serious constitutional challenges to the federal income tax are few and far between, and because taxpayers do not commonly assert constitutional objections when the taxpayers themselves are not victims of the statute’s alleged constitutional defect.27 For what it’s worth, however, nontax Supreme Court jurisprudence on the facial-versus-as-applied question indicates that facial challenges are generally disfavored.

The Court has explained that “to succeed in a typical facial attack, [a challenger] would have to establish ‘that no set of circumstances exists under which [the statute] would be valid,’ or that the statute lacks any ‘plainly legitimate sweep.’”28 Under that standard, because the MRT would be “valid” and have a “plainly legitimate sweep” in many circumstances — as applied to the Moores themselves, for example — the Court would reject a facial challenge to the MRT. On the other hand:

In the First Amendment context . . . [the] Court recognizes a “second type of facial challenge,” whereby a law may be invalidated as overbroad if “a substantial number of its applications are unconstitutional, judged in relation to the statute’s plainly legitimate sweep.”29

Only in the (seemingly unlikely) event that the Court extended this special solicitude for First Amendment challenges to challenges under the 16th Amendment would the Moores have any hope of overcoming the difficulty that they are not themselves casualties of the allegedly unconstitutional feature of the MRT.


Whatever arguments might be made on the Moores’ behalf, the arguments in the brief are deeply problematic — because they do not grapple with the Phellis step-in-the-shoes precedent for taxing corporate shareholders on income economically accruing during the stock ownership of their predecessors, because they depend on a false distinction between the MRT and the pre-TCJA aspects of subpart F, and because they amount to an as-applied constitutional challenge asserted on behalf of taxpayers who are not victims of the claimed constitutional defect.

Readers unsympathetic to the Moores’ cause may be heartened not only by the problematic nature of the brief’s arguments regarding the Moores themselves but also by three implications of the brief for other tax provisions — existing and proposed — that might be challenged on Macomber’s authority. First, the brief expressly acknowledges the constitutionality of several provisions, including sections 475, 877A, and 1256, and subchapters K and S.

Second, even regarding the MRT itself, the logic of the brief’s argument strongly suggests that, were the Court to invalidate anything, it should invalidate the MRT only to the extent it attributes to CFC shareholders income earned by the CFC before they became shareholders. The Tax Foundation study did not include a revenue estimate for that possible holding, but one suspects that the government would be able to collect a substantial majority of MRT dollars under such a holding.

The final implication concerns the proposed billionaire’s tax that would impose mark-to-market taxation on traded stock owned by ultrawealthy taxpayers. The concept of constructive realization — acknowledged by the brief to pass constitutional muster — is vague and capacious. It is but a small step from the brief’s position that mark-to-market taxation of securities dealers (under section 475) is constitutional because it applies only to assets “that are subject to liquidation and payment at market value at any time”30 to the conclusion that mark-to-market taxation of Jeff Bezos’s Amazon stock is also constitutional.

Correction, October 2, 2023: A previous version of this article provided that the Moores' Supreme Court brief did not cite Phellis. Their brief did cite Phellis, albeit in a context different from the one to which Zelenak refers. 


1 Moore v. United States, No. 2:19-cv-01539 (W.D. Wash. 2020), aff’d, 36 F.4th 930 (9th Cir. 2022), reh’g den., 53 F.4th 507 (9th Cir. 2022), cert. granted, No. 22-800 (U.S. 2023).

2 The MRT is codified at section 965.

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

4 Brief for Petitioner at 12, Moore, No. 22-800 (U.S. Aug. 30, 2023).

5 Daniel Bunn et al., “How the Moore Supreme Court Case Could Reshape Taxation of Unrealized Income,” Tax Foundation (Aug. 30, 2023).

6 Id.

7 Brief of the United States in Opposition at 10-11, Moore, No. 22-800 (U.S. May 16, 2023).

8 Bunn et al., supra note 5, at 4.

9 Department of the Treasury, “General Explanation of the Administration’s Fiscal Year 2023 Revenue Proposals,” 34-37 (Mar. 2022).

10 The Competitive Enterprise Institute’s website accurately states, “The case was brought by the Competitive Enterprise Institute and Baker Hostetler on behalf of” the Moores. Andrew Grossman and Dan Greenberg, “Supreme Court Agrees to Hear Moore v. U.S., Consider Constitutionality of Tax on Unrealized Income,” Competitive Enterprise Institute, June 26, 2023.

11 Brief of Petitioner, supra note 4, at 48, quoting Ross v. Commissioner, 169 F.2d 483, 490 (1st Cir. 1948). The discussion in Ross is about the doctrine of “constructive receipt,” rather than constructive realization. The Moore brief, however, does not use the constructive receipt terminology, thus implicitly treating constructive receipt and constructive realization as synonymous for purposes of constitutional analysis.

12 Brief of Petitioner, supra note 4, at 45.

13 Id. at 52-53 (noting, at 53, that a dealer’s inventory securities “are subject to liquidation and payment at market value at any time”).

14 Id. at 51, citing Heiner v. Mellon, 304 U.S. 271 (1938). The brief could have also cited (but did not) the passage in Macomber itself, in which the Court clearly implies that passthrough taxation of partners is permissible: “We cannot . . . ignore the substantial difference between corporation and shareholder, treat the entire organization as unreal, look upon stockholders as partners when they are not such” (emphasis added). Macomber, 252 U.S. at 214.

15 Brief of Petitioner, supra note 4, at 51 (citations omitted).

16 Id. at 52.

17 Id. at 50.

19 United States v. Phellis, 257 U.S. 156, 171-172 (1921).

20 Id. at 171-172. Eight years later, the Court applied a similar analysis and reached a similar conclusion in Taft v. Bowers, 278 U.S. 470 (1929). The Court in Taft upheld against constitutional challenge the predecessor of today’s section 1015, the effect of which was to tax the donee of appreciated property on appreciation that had accrued while the donor owned the property, with the tax imposed upon the sale of the property by the donee. Citing both Macomber and Phellis, the Court described the donee as having “assumed the [tax] position of her donor,” and concluded that the statutory structure was “entirely appropriate for enforcing a general scheme of lawful taxation.” Taft, 278 U.S. at 482.

21 Brief of Petitioner, supra note 4, at 51.

22 Id.

23 The second problem, discussed in the following section, is that the Court would probably treat the Moores’ constitutional claim as an as-applied challenge, rather than as a facial challenge, and that the Moores’ circumstances do not permit them to make a successful as-applied challenge.

24 To point out the obvious, if the magnitude of the pre-ownership passthrough is constitutionally important, 364 days of passthrough income to one taxpayer in a section 951 case might far exceed in dollars 30 years’ worth of passthrough income to another taxpayer in an MRT case.

25 Brief of Petitioner, supra note 4, at 11.

26 The last two sentences of the Moore brief imply that theirs is a facial challenge: “Even if application of one or another of the cited income taxes might overstep the constitutional line in some hypothetical case, they are facially valid because they kept that line in sight. The MRT does not.” Id. at 53. The brief does not, however, make any attempt to persuade the Court that it should analyze the Moores’ claim as a facial challenge, rather than simply reject it as clearly failing to qualify as an as-applied challenge.

27 Presumably, the Competitive Enterprise Institute, had it focused on this concern, could have found a taxpayer who would have been able to assert an as-applied challenge, because the taxpayer had not owned the CFC stock for some of the period covered by the MRT.

28 United States v. Stevens, 559 U.S. 460, 472 (2010), quoting United States v. Salerno, 481 U.S. 739, 745 (1987), and Washington v. Glucksberg, 521 U.S. 702, 740, n.7 (1997) (Stevens, J., concurring in judgments).

29 Stevens, 559 U.S. at 473, quoting Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 449, n.6 (2008).

30 Brief of Petitioner, supra note 4, at 53.


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