What's at Stake With Moore v. United States: Transcript

Cara Griffith: Welcome, everyone. I'm Cara Griffith, president and CEO of Tax Analysts. Thank you for joining us today to discuss Moore v. United States, a case for which the Supreme Court recently heard oral remarks. It addresses the mandatory repatriation tax under section 965. Moore is attracting a lot of attention because, depending on how the court rules, it could upend other aspects of federal taxation.

Today's event is another in Tax Analysts' series of public discussions that we call Taxing Issues. We launched this series as another way for Tax Analysts to encourage debate on tax issues. We've been bringing together the tax community with leading policymakers and experts for bipartisan discussions on the future of tax policy and administration. As always, we welcome your feedback on how we can make our webinars more useful, as well as your suggestions on future webinar topics. You can send your feedback and suggestions to events@taxanalysts.org.

And now, onto today's topic: The controversy, the court case, and the potential impact of the tax code centered around section 965 transition tax, also known as the mandatory repatriation tax, which was enacted as part of the Tax Cuts and Jobs Act of 2017. It deems deferred foreign income of certain foreign corporations in the years after 1986 as taxable income in either 2017 or 2018, depending on the tax year of the foreign corporation.

In essence, it imposes a tax on income that a foreign corporation earned in prior years but didn't distribute to its U.S. shareholders. In the case at hand, Charles and Kathleen Moore owned 11 percent of a company in India that supplied farming tools to small farmers in that country. In 2017, the company had $508,000 of retained earnings.

As a result, the Moores were subject to tax on their proportionate share of that amount, resulting in a U.S. income tax liability of $15,000. The Moores challenged the constitutionality of the transition tax. They alleged that it violates the Constitution's apportionment clause and due process clause.

After the district court ruled against them, the Moores appealed to the Ninth Circuit Court of Appeals. That court held that the transition tax is consistent with the apportionment clause and that courts have consistently upheld taxes similar to the transition tax. The court concluded that the realization of income does not determine the constitutionality of a tax and that Congress is not prohibited from disregarding the corporate form in order to tax shareholder income. On the due process clause, the court held that the tax serves a legitimate purpose, preventing CFC shareholders who have not received distributions from obtaining a windfall by not having to pay taxes on offshore earnings that had not yet been distributed.

The transition tax essentially treats all undistributed CFC earnings as if they were repatriated. After a panel of the Ninth Circuit denied a request for an en banc hearing, the Moores appealed to the Supreme Court. To the surprise of some legal experts, the court granted their request and heard oral arguments last week.

Now we're all waiting with bated breath for the Court's opinion. A ruling for the Moores would invalidate the transition tax, but there's also potential unintended and significant consequences for other provisions of the tax code that impose an income tax in the absence of a realization requirement. Striking down the transition tax would have a very real impact on how cross-border income is taxed. So how is the court going to rule, and what are the implications of a ruling either way? Well, we have a terrific panel today to explain the issues and discuss potential outcomes.

First, we have Reuven Avi-Yonah, a law professor and the director of the International Tax LLM Program at the University of Michigan. Next is Mark Berg, a partner with Klehr Harrison Harvey Branzburg and chair of the firm's tax practice. And third is Andrew Velarde, a legal reporter at Tax Notes who has been closely following and reporting on the Moore case. I want to thank all of you for joining us today and for sharing your thoughts and opinions on this very interesting and relevant topic.

Andrew, let me start with you. I did what I hoped was a very high-level overview of the case, but you've been covering it so closely I was hoping you could give us a little bit more background on the case. What is the transition tax? Who are the Moores? What are they arguing, and what was discussed at oral arguments?

Andrew Velarde: Sure, thank you, Cara. That was very good background. I just want to dig a little deeper on a few of those points. So real quickly, let me just give a very high-level constitutional background to level-set here. Generally, under the Constitution, direct taxes must be apportioned among the states by population. Now, there is some debate as to what a direct tax is, but for apportionment that's impossible, or at least is impractical in so many cases, it effectively kills a tax.

Under the 16th Amendment, however, income taxes can be collected without apportionment. So then the question becomes, what is required for something to be income? Now, throughout litigation, the Moores have argued that income has a realization requirement. The transition tax is not a tax on income, they argue, but rather is one on property and thus must be apportioned, which it is not in this case. They argue the transition tax is unique because it doesn't rely on — their term is "constructive realization" — of income by those being taxed and instead relates back to ownership of a specified asset at a specified point in time.

Now, as you mentioned, Cara, the transition tax is imposed on shareholders of a foreign corporation on their post-1986 accumulated earnings of those entities. With regard to the transition tax, the Moores are seeking a relatively small $15,000 refund, but this case is potentially worth far more than that.

Now, Cara, you alluded to other provisions being potentially caught up in this, but before we even get to that, the transition tax alone was pegged by the Joint Committee on Taxation to bring in $340 billion over 10 years. Now it's worth noting that that's mostly targeted at large corporations, not people like the Moores.

Now, when this case first started, it did generate some interest in tax media, but it wasn't exactly lighting the tax world on fire the way it has in the last year or so. In 2020, the district court dismissed the suit without even bothering with oral arguments.

The transition tax was income, the court held, and it found that many subsequent decisions departed from Eisner v. Macomber‘s realization standard. We're going to get more on that case later because it's the key one that the taxpayers rely on at all levels of litigation, including at the Supreme Court. But I just wanted to introduce it real quickly right there.

The Ninth Circuit affirmed the district court and rejected the challenge in 2022. And in particular, it compared subpart F constitutional challenges, which were all rejected decades ago by circuit courts. Now, from the government's perspective, the first cracks in litigation started to appear when a petition for rehearing was denied, a victory for the government, but there were four Ninth Circuit judges that dissented.

I want to read from that here because I think it gets to the heart of the matter here at the Supreme Court arguments and leading up to it. They said, they penned in the dissent, "We opened the door to expansion of federal taxing powers beyond the limits placed by the Constitution. Indeed, without a realization requirement, it is hard to see what's left of the constitutional apportionment requirement. Now, I fear any tax on property or other interests can be categorized as an income tax and elude the requirement of apportionment. While the 16th Amendment expanded the federal government's taxing power, it did not dissolve other constitutional restrictions."

So as you said, the Moores appealed to the Supreme Court on the income realization issue, but not the due process issue, which they were granted cert. Now, the tax community at this point had already started paying closer attention to this case, but that's when interest really skyrocketed because people started realizing, "Oh my gosh, this could shake it to the very foundation." We've had dozens of amicus briefs filed lining up on either side of this dispute.

Now, the facts of this case are also not without some controversy. The Moores were minority shareholders in KisanKraft, who's an Indian farming supply CFC. In their filings to the district court and in later briefings, the Moores have presented a picture of themselves as small-time shareholders with no control over how the company distributes its earnings.

However, Indian filings from the company that were revealed in Tax Notes show that Charles Moore was far more involved in the company than was divulged in the court documents. According to those filings, Moore was a director at the company for five years from 2012 to 2017. He received travel reimbursements for his trips to India. He provided share application money, which essentially in his case ended up being a short-term high interest loan to the company. He made subsequent purchases of the company's stock.

And then in 2019, he sold some of his interest for many times more than what he had paid for it initially. Now, these revelations generated a lot of interest among the tax community, but not so much during oral arguments in the Supreme Court.

Those were far more focused on the bigger picture of what this could mean for the tax system. Justices seemed concerned about the potential ramifications, both if they ruled broadly for the government or broadly for the taxpayer. There was a lot of talk about how other provisions may or may not be differentiated from the transition tax. And I want to say, I was down there at oral arguments, and all the justices were extraordinarily engaged in these oral arguments, especially for a tax case, which is not always the case. We had multiple questions coming from every justice, and both sides were peppered with questions. The oral arguments had been scheduled for an hour, they lasted over two.

And based on the questioning, it's possible this decision does not split down traditional ideological lines. The Court appeared to be looking for a narrow way out of this case, at least by some lines of questioning, possibly not addressing to what extent realization applies to income more broadly, that if there's realization by the corporation, that point was emphasized by several justices. Chief Justice Roberts kept coming back to that point. That may be a way to narrow the decision. And they kept emphasizing that this case was one of attribution from the corporation to the shareholder.

Cara Griffith: Excellent. Thank you, Andrew. That was terrific background and kind of gets us up to speed. Now, before we dig into the oral arguments in more depth, which I think is what everyone wants to talk about and hear about, I want to take a step back and talk about the case that you mentioned, Eisner v. Macomber. It's a 100-year-old case, but it certainly played a big role at least in many of the arguments and in the briefs for this case. Mark, would you mind giving us a little bit of background on Macomber and sort of tell us something about it and how it played into this case?

Mark Berg: Sure, thank you, Cara. And thank you both, Cara and Andrew, for that great introduction to the issues here. I'll just embellish on that just a tiny bit. In order for a tax to be unconstitutional under these provisions, two things have to be true. It has to be a direct tax in the first place, and we can get to in a bit what that means, and as you say, there isn't a whole lot of clarity on what that means, but there is some.

There've been several cases over the decades that have determined that. And if it is a direct tax, then it's OK if it's taxed on income within the meaning of the 16th Amendment, but it's not OK if it's not imposed on income within the meaning of the 16th Amendment, unless it's apportioned. And let's just say for present purposes, a tax is never going to be apportioned in modern times.

So we can just assume that if it's a direct tax that's not on incomes, it's unconstitutional, and that's what the taxpayers are arguing in this case. So Eisner v. Macomber was a case in 1920, just a few years after the 16th Amendment was adopted and ratified, to look at what income means for purposes of that provision.

And in Eisner v. Macomber, a shareholder, a common shareholder of an oil company, a public oil company, was issued a stock dividend which gave her more common stock in respect of the common stock that she already had. Under the tax code at the time, that was considered taxable income. And the taxpayer went to the Supreme Court arguing that that was not income, that was not an income event to her and therefore that was a direct tax that absent apportionment was unconstitutional, and the court held for the taxpayer in that case.

There's a lot of language that's quoted again and again by people when they talk about that issue. But the basic idea was that, at least in the context of stock dividends and in the context of gain transactions, the court said that in order for it to be income within the meaning of the 16th Amendment, there had to be a severance from the capital. The taxpayer had to get something that was separate from the capital that she already had. A mere appreciation in the value of that capital was not sufficient to constitute income for purposes of the 16th Amendment.

And there's also a thread in the Macomber case that is also I think relevant to the Moores' case, which is that there was also talk of the courtroom antecedent accumulations of profits, basically saying that if shareholders of a corporation were going to be taxed on a corporation's accumulated earnings as opposed to current earnings, that that was a tax on capital. The theory being that once those earnings were not distributed and the year ended, those earnings became part of the capital of the company.

And so an attempt to tax shareholders on that amount was a tax on the capital, therefore a tax on their property as opposed to a tax on income, and a tax that's imposed on a person solely in respect of the property that they own is a direct tax and absent apportionment is unconstitutional.

And just a footnote there, the simplest kind of direct tax to think about, well the very simplest, is a head tax where everybody is taxed the same amount all over the country. That is the quintessential direct tax, but it's not the only kind of direct tax. A tax on land for example, everybody lives in a community that taxes their land, that is clearly a direct tax. States and localities are permitted under the federal constitution to impose that tax. The federal government is not, and the very reason the federal government does not impose those kinds of taxes is that they are clearly direct taxes. So in Eisner v. Macomber, the court held back in 1920 that a tax on a shareholder on a stock dividend, a common-on-common stock dividend, was a tax on her property and not a tax on income and therefore was unconstitutional.

I mentioned the antecedent accumulation of profits aspect of the case because, as we'll talk about, and as you two both mentioned, the Moores' case addresses two different but related things. The question of whether realization of income is required under the 16th Amendment, and then the question of attribution of income from corporations to shareholders and if there's income that the corporation realized, can Congress constitutionally attribute that income to the shareholders and tax it at that level? And does it matter whether that income is current income of the corporation or accumulated income of the corporation? That's kind of a lead into I think the relevance of Macomber to the case.

Cara Griffith: Excellent. Thank you so much. It's always fascinating to me when such an old case can still have relevance today. You should never discard anything. Reuven, I wanted to turn to you for a moment. First to give you an opportunity to give any additional background that you would like to provide, but then also to help kick off our conversation about the collateral consequences of the Moore case.

Reuven Avi-Yonah: Thanks. Thank you very much for having me. So just a couple of footnotes to what Mark has said about Macomber. I view the case a little more narrowly than that because I focus on what the holding was as opposed to dicta. The holding is the stock dividend, one-on-one stock dividend common, is not income and that is because there's no enrichment. That's what they emphasize. They added a definition of income as something derived from labor or capital or both combined.

That definition was explicitly repudiated by the Court in Commissioner v. Glenshaw Glass Co. in 1955. So it's not relevant anymore, but the fundamental concept that you need some kind of enrichment in order to have income has stayed with us. And obviously when you get two pieces of paper instead of one, and each piece of paper is what exactly half of what the one piece of paper was worth together, then you haven't been enriched.

Now, how did they get into this all discussion about corporate earnings and attribution and realizations? That was because there was a dissent by Justice Brandeis who said, "Actually, why can't Congress tax a stock dividend because Congress can tax a cash dividend, but the shareholder is also not enriched where there's a cash dividend because usually the value of the remaining shares will go down." And then he said, "Well, the actual time with the shareholder is enriched is when the company makes the money, that's when the value of the shares is expected to go up."

And in response to that, the majority said, "OK, yes, but we can't— Corporation is a separate taxpayer, we already had a corporate tax, and you can't attribute corporate earnings to the shareholder." Now there was already a case back in the Civil War income tax that said exactly the opposite.

Collector v. Hubbard said you can attribute corporate earnings to shareholders, and this is in fact what the Civil War income tax did. That was also true for some taxes that were around at the time of Macomber. But this was all not really relevant to the holding because nobody was trying to tax Mrs. Macomber on the earnings of standard only, in fact, that was absolutely impossible to do because this was a very, very widely held public corporation, maybe the most widely held public corporation in the United States at that time.

And so you can't attribute corporate earnings to a widely publicly traded corporation. That was true then, and it is still true today, as opposed to closely held corporations like the Civil War corporations and like the Indian corporation that is at stake here because you have to be a 10 percent shareholder in order to be a U.S. shareholder over CFC. And in that context, you can attribute earnings to the shareholders. So that's just by way of background.

Now, in terms of the collateral consequences, it was realized relatively early on, in fact before the Court granted cert, that if the court defines realization — and then there's a question of what exactly is realization — but if the court defines realization as the receipt of manual property, basically, as a constitutional requirement of being an income tax, then that has very broad collateral consequences for large parts of the code. In fact, former House Speaker Paul Ryan said, "About a third of the code might be unconstitutional."

So just to mention a few, obviously the most closely related are subpart F and GILTI, which use exactly the same mechanism as the mandatory repatriation tax. But then you get to many other contexts in which there is a taxation without realization in this narrow sense, such as all of subchapter K, arguably subchapter S, and then you have various mark-to-market type taxes like, for example, section 475 dealing with securities dealers, section 1256, section 1259, section 877A, and so on and so forth.

The list is potentially very long and the amount of revenue at stake is far larger than the $340 billion that was mentioned by Andrew earlier. There's been various calculations, but we're talking about trillions of dollars potentially. And one last point: if the Supreme Court were to hold that realization is required, then every taxpayer who has this kind of income in these other provisions has presumably substantial authority not to put that income on their tax return and avoid penalties because there's a Supreme Court decision.

So the revenue loss of the federal government could be immediate once that decision like that comes out. And that I think is the most scary thought.

Cara Griffith: As you walk through it, that's a pretty dire situation. But Mark, Andrew, I want to give you an opportunity to respond to what Reuven said, get in your individual takes on the potential collateral consequences of this case.

Andrew Velarde: Well, I thought it was interesting that the court really focused in on the collateral damage. That seemed to be the primary focus of the court, and not exclusively from the collateral damage if they rule in favor of the taxpayer, because there was also a series of questions on the collateral damage if they rule too broadly for the government.

But it was interesting to see, it was Andrew Grossman for BakerHostetler, answer the questions the justices were coming at him with, with how do you distinguish, especially subpart F, the partnerships passthrough taxation, mark-to-market. I think he tried to distinguish mark-to-market taxation by saying those were excise taxes. With partnership passthrough, I think it was about, with S corps they make that choice of the entity. With partnerships, I think he argued that the corporate form has long been recognized as distinct. But with regard to the subpart F, I'm not sure if all the justices were buying the distinctions he was trying to make.

He was, I want to make sure I get this right, he was saying subpart F deals with income shifting, and subpart F deals with categories of income that are taxed on a current basis, which Congress viewed as being earned by shareholders because of the nature of the category. So these were distinctions that he was trying to make. And Justice Sotomayor had a line of questioning here. After Grossman had talked about the difference, Sotomayor said, and this is a quote from her, "It sounds to me that what you're attacking is only a due process issue of how long the tax is for and not the ability to tax."

And Justice Barrett came back to that question as well. And that's interesting because due process was not actually granted cert and so they argued that earlier, but they kept asking about the retroactivity of the tax compared to others and bringing it back to a due process question. So I found that very interesting.

Mark Berg: Yes, and I found it interesting as well. Interesting both how prepared the justices were to talk about this issue that very few of us have been thinking about for as many years, but they were very up to speed on it. I think it's important to note when we're talking about other provisions, I guess I have two points about what the ramifications of this are going to be. One relates to how much of the $340 billion that was collected might be refundable, I want to get to that second.

First and probably more importantly, in terms of these other provisions that people talk about and Professor Avi-Yonah talked about that might be at risk were the taxpayers to win in the Moore case. Again, I think we have to remember first of all that in order for a tax to get struck down, it not only has to be imposed on something that isn't income within the meaning of the 16th Amendment, but it has to be a direct tax.

I think that a lot of the kinds of taxes that people are talking about that would be at risk would clearly not qualify as direct taxes. And I know there was a Supreme Court case back in the 1890s, the Pollock v. Farmers' Loan & Trust Co. case, that decided that income taxes were in many cases direct taxes, but that has long been repudiated and in any event, superseded by the 16th Amendment.

So a lot of these taxes, taxes that are imposed on actual transactions people are engaged in are just not direct taxes, there's no way you could really argue that they are taxes imposed on property. So for that reason alone, I don't think they're at risk here. But whatever one thinks a direct tax is, I think a second argument and an important argument here is that in many of these cases, not all, some of the taxes I do agree with Professor Avi-Yonah are inconsistent with the realization principle.

And if the Court were to hold, that realization is required in order for there to be income, there are certain taxes, for example, the expatriation tax under section 877A, that would be very hard to justify, and I've written on that subject. But other kinds of taxes— subpart F, partnership rules under subchapter K, and the S corporation rules under subchapter S — in addition to not really being direct, taxes, the one thing you'll notice about those provisions is that they are attributing income from one entity to another.

So they're taking a corporation's or a partnership's income and attributing it to its owners and taxing it at that level. And what they're doing is doing that in the context of current income — current income of the entity only. The subchapter K provisions on partnerships, for example, don't tax partners on the accumulated earnings of the partnership.

They're taxing partners on a year-by-year basis on the current earnings of the partnership. And likewise with subpart F, dealing with subpart F income, passive income earned in a controlled foreign corporation, and even GILTI, the more recently enacted provisions that expand that regime to much of the active income of foreign corporations, is imposing tax on the shareholders on the current earnings of the corporation, as opposed to the section 965 tax that's at issue in the Moore case is imposing a current tax on the shareholders on what could be, in some cases, up to 30 years of accumulated earnings. And to my mind, that runs directly into the language in Macomber that made it clear that that kind of tax would be a tax on property on capital — a direct tax — and is not a tax on income. And Professor Avi-Yonah made some comments, and he's in very good company in these comments, as to how Macomber has been narrowed by the Supreme Court over the years.

We probably don't have enough time to go case by case through the cases that people cite for that proposition. But in my view, having read all those cases very carefully and written on the subject, I think that while they have narrowed the scope of Macomber in the sense that for example, Glenshaw Glass, that Professor of Avi-Yonah mentioned, said that the severance from capital concept of Macomber is not the touchstone for all gross income questions. I think what they meant there is that there are kinds of gross income that have nothing to do with gain and nothing to do with capital. In that case it was punitive damages.

So I don't think they were repudiating the concept of realization in the case of gain. I think they were just saying, there were kinds of income that don't have anything to do with gain and don't have anything to do with severance of capital. Because every one of those cases that people cite for that proposition, you'll notice that they repeatedly, each and every one of them talks about realization, talks about income realized by the taxpayer as being the kind of income that is subject to tax under the Constitution.

Cara Griffith: It's so interesting to me how many different fingers this case has and different areas that it could play into, but it does seem that after the oral arguments, that the court is going to be looking for a way to narrow this opinion so as to not get into as many of these collateral issues as we're discussing. I think the court is going to want, whether it rules for the Moores or the government, the court is going to want to keep that decision narrow.

Andrew, you made a comment early on that the Court will take a narrow reading of the issue and make it all about attribution. Can you explain what you meant by that and sort of what is your take on where the Court might go?

Andrew Velarde: Sure. And I want to preface it to say I don't have a crystal ball. I have been wrong with many predictions about this case.

Cara Griffith: But we're holding you to it, Andrew.

Andrew Velarde: I didn't think they were going to a grant cert to begin with. So take this for what you will. But as I alluded to, and it wasn't just Chief Justice Roberts, you had multiple justices who were saying at multiple points during the oral arguments, what you have here inarguably is the company, the CFC, KisanKraft, realized income — there is a realization event there. Now, can that realized income be attributed to the shareholders? That's the next step. And I think the court is going to have an easier time disposing of that question.

Let me go back, I want to get some language here. Justice Barrett was the one saying it was the distinct question from whether it's income in the 16th Amendment, and it seems like Justice Sotomayor was talking about it may be — well, let me just say it was possibly an easier question for them to answer in the government's favor without getting into a broader question of, does income always have to be realized?

And I think when the court first took this case, people really did think they were going to answer that one way or the other. And I don't know why they took the tact they did in the oral arguments. Maybe the plethora of amicus briefs coming in and talking about the extent of the way this could shake the tax system to its foundation, maybe it ended up influencing their line of questioning. But it did seem to me like if they're looking for a way out, that's going to be the avenue they're going to take.

Cara Griffith: That's interesting. Reuven, I want to get your take on it. Do you agree with Andrew on that? How do you think the court is going to narrow this? Let's assume for the second that they want to narrow it.

Reuven Avi-Yonah: Yeah, I agree with Andrew having listened to the oral argument. I think the majority of the justices probably don't want to opine on whether realization is a requirement for income under the 16th Amendment. And in that sense, this case is relatively easy to distinguish because, as we've been discussing, we are talking about income that was clearly realized. Nobody's disputing that the Indian company realized the income, they realize it by any standard, it was the business earnings. The question is, who should be taxed on that income in a context in which this is a foreign corporation and the United States doesn't have jurisdiction to tax it directly.

And in that context, there's a very long tradition going all the way back to 1937 of taxing the shareholders on the earnings of foreign corporations in order to prevent them from indefinitely deferring it. And this goes through subpart F, through GILTI, and through all of these other provisions and goes all the way back also actually to 1913. And so, the Court could relatively easily say, "Look, we are talking about a corporation that has realized this income and that is a closely held corporation, and therefore you can attribute that income to the shareholders, and therefore we don't need to decide today whether realization is a requirement for something to be income."

Mark Berg: I do think, though, that the court would have to at least disavow the language in Macomber in order to do that. Because the thing that ties to— First of all, subpart F, there have been lots of cases, no Supreme Court cases, but appeals court cases that have, not lots, but several that have upheld the constitutionality of subpart F against challenge. And those cases are interesting because they talk about control, they talk about abuse.

Basically, I think the courts in those cases were saying, "There's such an abuse potential for people hiding passive income in foreign corporations, it can't be that Congress doesn't have authority to do that, so we're going to decide that they do." But again, in those cases, it was current income of those corporations that was being attributed to the shareholders. And there is this language in Macomber and kind of tradition as well that says that you get different considerations when it is accumulated income of the corporation that you're trying to attribute.

I'm not even sure attribute is the right word. Because it's not current income, you're not really attributing that income to the shareholders. What you're doing is deeming a distribution of that income to the shareholders. And there's a lot of authority that says that once the shareholders receive a distribution, even if they're receiving a distribution of long-ago accumulated earnings, that's OK because they're realizing that income in the year that it's distributed to them.

So, there's an old case about a distribution post the enactment of the first income tax of earnings that went back prior to the enactment of the income tax, and taxpayers were saying, "That's not right, you can't tax that." And the Court said, "We're not taxing that we're taxing the current distribution."

Likewise, in this section 965 tax that's at issue in the Moore case, what Congress is trying to do is to tax these shareholders as if they received a then-current distribution in 2017 or 2018 of up to 30 years of accumulated income of the foreign corporation.

And I would just add that to the extent that abuse was a consideration in the lower courts deciding that subpart F, for example, was constitutional, and there was a lot of talk in the oral argument by the solicitor general of all of the abuse that existed with people parking all of these trillions of dollars of earnings in foreign corporations, I'll just point out that there was nothing illegal about that. Under the law prior 2017, that was the way it worked. There were two levels of tax. There was a corporate level that you couldn't impose because it was a foreign corporation, and the shareholder level tax was not imposed until such time as those foreign earnings were actually repatriated to the United States or certain other things happened that were the equivalent of a repatriation of those earnings to the United States.

And it was that regime that was upended by the 2017 change in the tax law. And it's hard, really, I think to call what was happening before that abuse given that it was completely within the letter and the spirit, I will add, of the law because the laws that allowed that to happen were not some loophole or mistake. They were conscious decisions by Congress back in the sixties as to how foreign income of U.S. multinationals was going to be taxed.

Andrew Velarde: We've been talking a lot about the broader ramifications, the potential ramifications, if they rule in favor of the taxpayer. But I did want to make sure we got to — there was a line of questioning directed at the solicitor general, a lot from Justices Thomas and Alito, and I think also Justice Gorsuch, and this did not come out of left field because people have been calling for a long time saying that this case was about wealth taxes. This was the "stalking horse" for wealth taxes. And they kept trying to pin the solicitor general down on their position on wealth taxes and the increases in the value of real estate or the increases in value of securities and property.

And we got, I think the closest thing we got, we got an admission by the government that it would be a more difficult question. I don't remember the exact language they used, something like that, but they didn't say it was unconstitutional. What do we make of this line of questioning? How different are wealth taxes, potentially, than what was being argued here?

Reuven Avi-Yonah: So I think they're very different, and that's the point. And in fact, I'm not even sure that what they were aiming at was a classic traditional wealth tax. The example would be the local property tax. That's a tax on your property. It has nothing to do with a change in its value between one period of time. It's just, every year you have to pay X percent of the value of your property as your tax. And this I think most people will concede is a direct tax within the meaning of the taxing clause of the Constitution, and therefore it cannot be imposed realistically by the federal government.

And I think that's what the General Prelogar was talking about. Now, that kind of tax is not very likely, I would say, to be enacted by Congress anytime soon. There have been a couple of proposals to this effect, but they really didn't go anywhere.

And therefore, I don't think that that was the real target. The real target, I think, is something that is a little bit more realistic, although I don't think it's very realistic. And that's the kind of mark-to-market tax that Sen. Ron Wyden, D-Ore., and the administration have proposed, where you take the change in the value of, let's say, publicly-traded stock between the beginning of the year and the end of the year, and you tax that. Now, this is not a wealth tax. And the key distinction is that when you tax that increase, you get basis for it.

So in the next year, if it goes further up in value, you don't again pay tax on the previous appreciation. You only pay tax on the appreciation. And in fact, if there's depreciation, the government is supposed to acknowledge the loss and give you a check for that. So, I think that's what they were aiming at.

And that is in fact a more difficult question, and I think that's not a direct tax, I think that's an income tax. In fact, there's one interesting provision that was not discussed, of course, and that is a definition of what is an income tax for the purpose of the foreign tax credit. And one of the requirements is the realization requirement, except that the way they define realization is to say, you need to have a realization requirement to be an income tax. Or, if it's taxable before realization, you need to give credit for that tax when it is realized. That is, you need to get basis.

And that in my mind is the key distinction. And I would say that because of this mark-to-market tax such as the one that might potentially be imposed on Mark Zuckerberg and Jeff Bezos and Elon Musk and so on, on the unrealized appreciation in their shares, which is most of their wealth after all, is perfectly constitutional. And I know Mark will disagree with that.

Mark Berg: As a matter of fact, I do. Yes, I would disagree with that. And interestingly, that tax, a mark-to-market tax, unlike perhaps the tax that's at issue in the Moores' case, will directly raise the question of whether there is a realization requirement. I think we can agree that if there is a realization requirement in the 16th Amendment, a tax that's imposed on the increase in value of your assets from point A to point B, whether you get basis for it or however that mechanism works, that is going to be a tax that is not going to meet the realization test.

So that tax directly raises the issue that people are talking about in the Moore case that the Supreme Court might be able to dodge. And of course people are eagerly awaiting the decision in the Supreme Court and how it's going to be worded.

And I agree with what everybody has been saying about the tenor of the questions from both the so-called left and the right. We're all geared toward trying to figure out how to issue as narrow an opinion as possible, one that wouldn't prejudge wealth tax or mark-to-market cases and one that wouldn't open the floodgates — floodgates that I don't think really exist, as I've said — but open the floodgates to striking down the whole swaths of the Internal Revenue Code. There was a lot of emphasis by several of the justices, maybe all of the justices in one way or another, on trying to get some help in figuring out how to issue a narrow decision. But a wealth tax or a mark-to-market tax particularly would directly raise the issue, and it wouldn't be able to be dodged.

Reuven Avi-Yonah: I would just say, I wish they had brought the tax, since there is no mark-to-market tax generally under the expatriation tax, which Mark mentioned earlier, because that would've forced them to decide this particular issue in a way that I think is relevant. Except that of course, expatriates are not very popular, and like poor hapless Mr. Moore was a minority shareholder in an Indian corporation, et cetera, et cetera.

Mark Berg: Yes. There are large corporations with trillions of dollars parked overseas. The solicitor general made a point of reminding the justices on three or maybe four different occasions that, while poor Mr. Moore was a very small shareholder in a little company, this mandatory repatriation tax mostly affects Apple and Microsoft and all of these people that of course you must hate because they have a lot of money, and we all hate them — that kind of a thing.

Reuven Avi-Yonah: But you should mention one thing that's really important and has not really been emphasized, which is that they couldn't bring a corporate tax case because the Supreme Court held in 1911 before the 16th Amendment, that the corporate tax is an excise tax and not a direct tax, and therefore, unless they repudiate debt holding, no corporation can ever challenge the constitutionality on these particular grounds.

Cara Griffith: That's interesting.

Andrew Velarde: Yeah, well, just based on what we're saying here, I've been asking myself this question for a while, especially based on the line of questioning. Why did they take this case in the first place? If it sounds like they want to — we heard the same oral arguments, it seems like they might want to go narrow, and maybe this is not the ideal vehicle for talking about a wealth tax, which would be even an advisory opinion if they wanted to. Why did they take this case?

Reuven Avi-Yonah: So I think they took it because they thought that — or the justices that voted for cert, which I doubt was more than four justices given the way the oral argument went — they thought that this would be a way of getting at the wealth tax or at least a mark-to-market tax based on the kind of arguments that Mark had made. And I think that the way it developed, it doesn't look like the majority of the court agrees with that. And they would rather, because of this whole emphasis about the collateral consequences, issue a much more narrow opinion. And I don't think they thought that this would be the way things would go because in the Ninth Circuit, the circuit did say that this has to do with the Macomber and realization and so on and did not treat this as a mere attribution case.

Mark Berg: And I think I would add to that that part of the background here, I think having studied this direct tax issue for more years than I care to remember, is there are a lot of people out there, including some pretty esteemed constitutional law professors, who have been arguing for years that the direct taxes no longer have any effect — that we should read them out of the Constitution because they're tied up with slavery and all the compromises that were made at the beginning of the republic relating to slavery in small states and big states, and we ought to just throw all that out.

There were some interesting twists and turns doctrinally with some of the arguments that were made to get there, but part of maybe what the Supreme Court was thinking, and there was a glimmer of this in the first Obamacare case in 2012, this is the first time we've had occasion to even address these parts of the Constitution. Before you get to Macomber and before you even get to the 16th Amendment, here we have right before us a case causing us to decide whether the direct tax clauses, the apportionment clauses, still have any effect.

So that may have gone into the thinking as to why they took the case as well. Here's an opportunity to address this issue and put to bed some of these arguments that have been floating around for several years about the extent to which these clauses even still apply.

Cara Griffith: Which is really interesting, I came through a state tax background and you get constitutional questions on a regular basis, and so seeing one at the federal level was actually quite interesting to me because it is out of the ordinary and it seems that once you can start challenging the constitutionality of the federal tax system, we might have some real problems.

A few of the questions that have come in are slightly more procedural, and so I didn't want to completely ignore them. What do taxpayers do now? As they're sitting there and they're thinking about if this decision is going to come out, do you file a protective claim? Should taxpayers that might be in the Moores' position or a much larger company that for sure would be subject to the transition tax, what should they be thinking and doing right now?

Mark Berg: Well, in terms of the transition tax itself, it may be a little late for a lot of people to be doing anything about it because the limitation period for refunds, absent somebody may be filing a protective claim for refund when they paid the tax, is for most people probably gone. And there's another aspect to the refund claims on that particular tax as well.

Section 965, the tax at issue, permitted people who were subject to that tax to elect to pay the tax interest-free over an eight-year period on a backloaded basis, even. So there are people who follow that election and are still I guess paying that tax over that period of time.

There's a procedural rule in the federal tax law that says that in order to file a claim for refund, you have to have made full payment of the tax. And so somebody in that situation who is paying over time, if they filed a claim for refund right now, some of those payments they would be able to get back, but some of them they wouldn't, and they wouldn't be able to get any of them back until they paid the full tax.

So I think what somebody would have to do now who's on an installment plan paying this tax would have to pay the rest of it and then sue for refund of that amount and the amounts that they paid over the, say, two years before that. But everything else would be gone. And my guess is, and this is just a complete guess, that a large portion of the $340 billion that was raised, if that's the right number, is past the limitations period and gone. I suppose it's possible that if the tax is ruled unconstitutional, the government could decide, "We shouldn't have been collecting an unconstitutional tax and we'll give it back." But probably doubtful. I wouldn't bet on that one.

Cara Griffith: Yeah, that seems like an uphill climb. I did want to go around the virtual, so to speak, room and ask your opinion on how you think the court is actually going to rule and what it will look like. You can give your predictions. We will not actually hold you to them. So Reuven, if I could start with you.

Reuven Avi-Yonah: So I would predict 6-3 for the government on the narrow ground, that is on the attribution ground, because I have counted I think six justices who seem to have suggested, including the chief justice, that this is the way they would like to go. And dissenters would presumably be the ones who really think that they should say something about wealth taxes or at least mark-to-market taxes.

And to this, I need to quote what in my mind was the best line in the whole oral argument was when Justice Kavanaugh turned to justice Alito and says, "Oh, about these hypotheticals, about taxing on the increase in the value of your home or taxing on the increase in the value of your 401K, members of Congress want to get re-elected." I think that's exactly right.

Cara Griffith: Mark, what's your prediction? I should say, what's your prediction and also how would you like to see, and Reuven if you want to change your answer, but how would you like to see this case handled?

Mark Berg: I would like to see the taxpayers win the case. I would like to see a ringing reaffirmation of the realization principle in Macomber. And I would like to see the taxpayers win this case on the basis that yes, there have been lots of attributions of income over the years, but not of accumulated income, and we reaffirm the language in Macomber that made it clear that an attempt to tax shareholders on a corporation's accumulated income is a direct tax and not a tax on income, and therefore it's unconstitutional. That's what I would like to see happen.

Reuven Avi-Yonah: I would like the opposite in the sense that I would've liked the Court to say that there is no realization requirements in the definition of income, and therefore all of these other types of taxes, that even if it doesn't require control, even if there's no attribution issue, even if there's no abuse, are constitutional, and that would be the end of it. But as I said, I don't think they will go that far.

Cara Griffith: Yeah, I think that's probably true.

Andrew Velarde: So Mark, how do you think they're going to roll?

Mark Berg: I was trying to avoid the question.

Cara Griffith: That's why I brought a reporter to this.

Mark Berg: Interestingly, I guess, I think a 6-3 ruling for the government is certainly possible. I do think that there will be not only dissenting opinions but also concurring opinions amongst the six. They're going to make it clear that either they're not saying anything whatsoever about a wealth tax or a mark-to-market tax or maybe even casting aspersion on those kinds of taxes.

I found the part of that oral argument where the solicitor general was answering questions about how the government would react to these kinds of taxes and she very begrudgingly, I thought, acknowledged that an actual wealth tax, an actual property tax would be a direct tax that would be unconstitutional, but made it also clear that if there were a mark-to-market type of a tax in front of her, she would be, I don't know if she said eagerly, but eagerly defending that tax.

And one of the justices pointed out, "But isn't that your job to defend whatever taxes are enacted?" And everybody laughed, and she said, "Yes it is." But I think it's possible that there will be some language that will give some indications of how a number of the justices feel about taxes like that.

Reuven Avi-Yonah: In my mind, one of the interesting questions is, it's been over a hundred years since they've decided to rule on the constitutionality of an income tax provision. As I think you mentioned, Cara, they rule on the constitutionality of state taxes all the time, every year almost, but nothing on the federal tax. And I suspect, or at least that's what people have said, that one reason is simply because they got a lot of heat for Macomber and there was a lot of criticism. They narrowed it down and I think they over the time began to feel that they don't really know enough tax.

One of the big changes that have happened in relatively recent years is that they've taken fewer and fewer statutory tax cases. They used to decide quite a few statutory tax cases every year, but now many years, many terms can pass by without taking a single federal income tax case, or at least not a substantive federal income tax case.

And so neither they or their clerks know a lot. I was impressed by — but they still got subpart and sub-chapter and all of these things confused. Solicitor General Prelogar was great. She was citing subsections — that was really amazing. But they got stuff wrong, and I think they know that they got stuff wrong.

I think they realize that they don't really know the collateral consequences of a lot of their decisions even on the statutory decisions. We can all cite decisions that everybody agrees had massive collateral consequences they didn't think about. Just think about Cottage Savings Association v. Commissioner, INDOPCO Inc. v. Commissioner, and Arkansas Best Corporation v. Commissioner, and all of those decisions that we all are familiar with, then had consequences that were not anticipated by the justices.

But the problem, of course, is if it's constitutional, nobody can do anything about it. And so I suspect they will be reluctant to take another one, although I also suspect that people will try again. If the taxpayer fails in Moore, the same people who brought Moore will try to look for another case maybe in a better fact pattern to challenge precisely what they've been trying to challenge. And it'd be really interesting to see whether the court is willing to, or whether four justices, let's put it this way, are willing to try again.

Mark Berg: I think there's another reason that we haven't seen in a hundred years or so this kind of a challenge. And that is that Congress hasn't enacted a whole lot of unconstitutional taxes. There are lots of provisions. States are doing it all the time, and there's a fairly well-developed body of law about the due process and commerce clause issues that can have an impact with state taxes. But on the federal side, my sense is that Congress took what happened in Macomber very seriously and has very seldom since then come as close to the line or gone over the line.

I think there were some instances where they have, but most of them are relatively recent. And this tax, as soon as it was enacted, it struck me that like the exit tax under section 877A, that this was fundamentally different from the vast majority of taxes that Congress enacts. That yes, there are some mark-to-market taxes around the edges, but something that was going to affect this many taxpayers and raise this much money, this is the kind of thing that they maybe haven't done since the tax that was struck down in Macomber. So I think that's another reason that we haven't seen a lot of activity on that front on federal taxes in the Supreme Court.

Reuven Avi-Yonah: I wonder though, what do you make of Original Issue Discount, which doesn't have control and doesn't have receipts of anything, and it's not about abuse, or maybe you think it is about abuse, but that's a provision that's pretty old, right?

Mark Berg: It is, but I don't think — with all respect, I don't think it has much to do with what we're talking about. I don't think OID is a tax that's imposed in the absence of realization. It's like the accrual method of accounting. One of the parts of the oral argument where I have to say my heart sank a little bit is where Justice Kagan was challenging Grossman on how it is that he thinks that the accrual method of accounting wouldn't be implicated if they held for the taxpayers.

And the accrual method, this goes back to, I think, a conflation in a lot of people's minds between realization and cash in your pocket. That somebody's on the accrual method of accounting means they're realizing income on a different basis than a cash method taxpayer realizes income. So I assume you agree, Reuven, that there's nothing about the accrual method of taxation that's at risk or implicated by a decision either way in the Moore case.

And I think OID is in a similar situation. OID is an attempt to both tax taxpayers on interest as it accrues, even if they're on the cash method, much as when you were a kid, when you took your passbook into the bank and got it stamped with interest, whether you went into the bank or not and got it stamped with interest, you still had interest income, whether you put it in your pocket, whether you took it out, whether you saw it in your bank book, it was still realized income. And other parts of the OID provisions re-characterize realized gain as interest income.

Again, this isn't taxation prior to realization or in the absence of realization. These are re-characterization provisions that treat realized gain in a different way than its form in accordance with its substance or in accordance with normal tax accounting principles.

Cara Griffith: I have to thank you guys. That was an outstanding discussion and as you can see, there are a lot of collateral issues that I think could be implicated. It's also going to be very interesting to see the concurring and the dissenting opinions as they come out because I think that may give us some indication as to whether or not there is a better, a different fact pattern that might be picked up by the court in subsequent terms.

But I want to thank all three of you for joining today for sharing your thoughts and opinions, and I look forward to having you all on again. We can do this once we get an opinion, and then we'll really be dealing with what the aftermath is. But to all of our viewers, thank you so much, and I hope everyone has a great rest of your day.