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The Biggest Implications of Moore

Posted on Dec. 18, 2023

In this installment of the Star Forum, experts answer the following question: What do you see as the biggest implications of Moore, even though we don’t know for sure how the Supreme Court will decide the case?

The authors drafted their initial essays — and reached their conclusions — without seeing each other’s contributions.

Conor Clarke

We Are All Tax Historians Now, by Conor Clarke, associate professor of law, Washington University School of Law

The opposing parties in Moore1 obviously don’t agree on much, but on one point they see eye to eye: History can help determine the constitutionality of a tax law. Four separate times in her argument, the solicitor general returned to the point that “history and tradition” — going back most especially to a series of laws from the 1860s and 70s that taxed business owners on undistributed profits — decisively demonstrated the constitutionality of the 2017 mandatory repatriation tax (MRT). Not to be outdone, counsel for the Moores likewise turned to history, opening his argument with his view on how income “was understood at the time of the 16th Amendment’s adoption.” The numerous briefs are riddled with disquisitions on obscure old treatises, Founding-era practice, and the ratification debates in both 1789 and 1913. History was king.

“We’re all textualists now,” Justice Elena Kagan famously proclaimed in honor of her then-colleague Justice Antonin Scalia, and as a testament to his influence on statutory and constitutional interpretation. Before that, Milton Friedman declared us all Keynesians. Moore might suggest an updated variant for tax lawyers and scholars: We’re all historians now.

With an arguable majority of self-identified originalists on the Court, “history and tradition” have of course become talismanic watchwords throughout constitutional law. Under the establishment clause of the First Amendment, a “history and tradition” test has long been a strand in the doctrine and has now moved closer to the core.2 More recently, in assessing the constitutionality of firearm regulations under the Second Amendment, the Court has asked whether the law “comported with history and tradition.”3 But the humble 16th Amendment? The arcane direct tax clause? These are not familiar objects of a “history and tradition” inquiry in the courts. Whatever the specific outcome, Moore points toward an era in which they are.

What would bringing history to tax law mean for tax? Most straightforwardly, it would add a new dimension to the work that lawyers do. Students of tax law — perhaps lured to the subject by promises of solving a particularly complex and satisfying modern statutory puzzle — may now have to dust off their copies of the Revenue Act of 1864, not to mention Alexander Hamilton’s thoughts on the 1794 taxation of carriages. Moore may also change the way in which Congress writes tax laws. In recent decades, Congress has not had occasion to give profound thought to the scope of its enumerated powers when it has passed tax legislation. (The Tax Cuts and Jobs Act contains no agonizing of a sort that might apply to, say, legislation under the more conventionally controversial commerce power.) That is a contrast with the post-Pollock years, in which, for example, Congress framed the 1909 corporate income tax as an “excise” to respond to the Court’s 1895 Pollock opinion.4 Moore may be sufficient motivation for Congress to make more express findings and legislate with the right magic words (whatever they turn out to be).

A historical turn would also raise many of the analytical difficulties that bedevil other areas of law. Any resort to history naturally requires contestable analogical reasoning — the bread and butter of any lawyer’s work, but perilous work when it involves plucking old statutes and cases from an unfamiliar context.5

And tax issues raise some particularly thorny historical difficulties. One is how to reason across tax history in the face of profound technological and economic change. There were no S corps or mutual funds in 1789. Indeed, the modern income tax itself represents a massive technological development. In his 1776 The Wealth of Nations, for example, Adam Smith made the startling claim that the sheer “impossibility of taxing the people in proportion to their revenue” is what led “to the invention of taxes upon consumable commodities.” In other words, because it was impracticable to tax income, it was necessary to tax consumption. How times have changed!

A second puzzle is how to think about precedent before Pollock and the 16th Amendment: Pollock marked a departure from 19th century precedents, and the 16th Amendment undid Pollock — but the degree to which the amendment restored preexisting judicial precedent seems debatable.

And, finally, the Constitution’s historical categories may not be the conceptual categories in which lawyers are accustomed to thinking. The Constitution makes no mention of Robert Haig or Henry Simons. And the categories the document does mention — “direct taxes,” “duties,” “excises” — may be conceptually unappealing for a profession infused with modern public finance and inclined to see a tax base neatly divided into savings and consumption.

Patrick Driessen

Tax Mandates, Leverage, and Whipsaws, by Patrick Driessen, former government economist and revenue estimator

The traction of the Moores’ challenge to the TCJA’s taxation of pre-2018 deferred foreign earnings has been surprising, even if it is “just” a scarecrow to ward off accrual and wealth taxes (that, too, would seem to me a bad outcome). Also, the TCJA’s MRT itself was surprising seven years ago. Either I surprise easily, or tax policy has become more suspenseful.

Starting in 2002, a spate of repatriation tax holidays, including what became law as section 965 in 2004, were proposed. Eventually policymaker fatigue with the holiday circus was telling in the arc of the Obama administration’s tax proposals. The administration’s 2009 targeting of foreign tax credit blending and expense location tax arbitrage and some other good ideas evolved into 2015 MRT advocacy, which didn’t account for heterogeneity in U.S. outbound investors.

Many individual 10 percent and majority owners of controlled foreign corporations (including many overseas “accidental Americans”) are more sympathetic than the Moores, and certainly more sympathetic than the big multinational enterprises that sought a low-tax end of the lockout of foreign earnings. Some of these people merited assistance, including a full carveout,6 beyond the TCJA’s S corporation deferral and section 962 election. It would be odd if the TCJA’s MRT, after casting a wide net with no income or wealth thresholds and having been enacted by people who generally disfavor accrual and wealth taxes, were used to bar wealth and accrual taxation aimed only at the very top end of the income and wealth distributions.

Even after the MRT ideas of the Obama administration (and former House Ways and Means Committee Chair Dave Camp), MRT to me did not seem politically viable given investor heterogeneity, especially combined with novel prospective international taxation. Consider how difficult it would be, in terms of horizontal equity, to repeal old deferral layers, even in provisions as arguably unlikable (other than for sellers of used cars or real estate or those hoping to retire!) as last-in, first-out; like-kind exchanges; and Roth IRA/401(k)s.

Deferral was quite favorable to MNEs, especially with advance U.S. tax deductibility of domestically sited expenses (interest and overhead) that were economically allocable to deferred foreign earnings. I never thought an MRT’s main obstacle would be constitutional. That was my failure on many levels, including as a naïve economist not anticipating that with Moore, political and constitutional interest could be the same.

But the case also prods thinking about electivity. There are at least two types of tax proposals relying on electivity, illustrated by the history of section 965.

The first wave of repatriation tax holiday ideas, including what was enacted in 2004, foremost were highly MNE favorable. The 2004 law permitted as much as an 85 percent U.S. residual tax discount for repatriated low-foreign-taxed earnings while allowing selective cross-crediting via blending of high-foreign-taxed earnings with inbound royalties. Monitoring of the use of repatriated funds was cosmetic.7

Had one of those MNE-favorable holiday ideas been enacted after 2004 and before 2017 (there was even a Senate floor vote in 2009), perhaps the TCJA as we think of it would not have been enacted. Many especially mature MNEs likely would have preferred a pre-TCJA system, even with a tax rate not far below 35 percent, punctuated with occasional friendly holidays that included gifts from the U.S. fisc.

Another type of elective proposal (still, but not as much, MNE favorable) could have created leverage or a whipsaw to raise revenue but also may (if modestly) have served equity. For example, the TCJA might have collected about the same $340 billion in revenue projected by the Joint Committee on Taxation staff for the MRT on pre-2018 deferral had a temporary window permitted MNEs to elect, say, a 15 percent U.S. pre-FTC rate (no cash-versus-noncash distinction, and a 20 percent FTC haircut) on old earnings. Pre-2018 earnings would have remained deferrable, but as repatriated they would face the pre-2018 35 percent corporate rate and separate FTC (cross-crediting) limitation.8

Any Moore chilling of, say, mandatory taxation of accrued-but-unrealized gains or wealth accumulation also heats up proposals designed to induce changes voluntarily. An example of creativity in the international area is pillar 2’s semi-genius undertaxed profits rule (no doubt the Moores will sue for that, too). Domestically, ideas include the Biden administration’s clever pairing of a higher tax rate on capital gains with the treatment of death and donation as realization events,9 and retrospective taxation of realized capital gains explored by lawyers and economists.

Another tax code linkage is that a Moore ruling that adopts or flirts with the adjective “constructive” may have to reckon with section 78, the taxpayer-favorable gross-up that includes deemed paid foreign taxes. Section 78 allows FTCs, and policing has been needed to stop taxpayers from purposefully triggering subpart F to get the FTC cross-crediting benefits. Even with TCJA’s global intangible low-taxed income, there remain section 78 leaks (for example, when CFC qualified business asset investment as a proportion exceeds the 20 percent FTC haircut, or when allocable expenses get disregarded in the GILTI high-tax exclusion). The deemed paid part of section 78 drives the politics and economics of FTCs, so too much chilling via Moore and all taxpayers may have to deduct rather than credit foreign taxes, perhaps making professor Daniel Shaviro happy.

So perhaps a pleasant Moore surprise could be policymaker creativity in eliciting desired behavior (well, at least behavior I want to see) of people, MNEs, and (with pillar 2) nations.

Michael J. Graetz

What I Learned at the Oral Argument in Moore, by Michael J. Graetz, professor emeritus at Columbia and Yale law schools

On December 5 the Supreme Court heard only one argument. Moore is a constitutional challenge to income taxes imposed by a complex provision enacted to help fund the 2017 transition from a worldwide system with deferral of taxes on unrepatriated income of U.S. CFCs to an exemption system for foreign earnings, coupled with a minimum tax (the GILTI provision).10 There was no swarm of protesters in front of the Supreme Court, but the courtroom was full, including a large cadre of interested tax lawyers, journalists, and law professors. Neckties — rare now even in stodgy law offices — enjoyed a glorious, if brief, resurrection. An argument that Chief Justice William H. Rehnquist would have limited to 60 minutes lasted more than two hours with Chief Justice John G. Roberts Jr. indulging every colleague’s questions until exhaustion set in.

The oral argument confirmed one thing we already knew: The Moores’ lawsuit over $14,000 of tax was an empty vehicle, filling up with antitax, antigovernment amici on its way to the Supreme Court. It is a case on behalf of wealthy people hoping to erect constitutional barriers to income taxes on unrealized appreciation of large holdings of securities or other assets and to the even more remote prospects of a wealth tax on multimillionaires and billionaires, such as those proposed by Sen. Elizabeth Warren, D-Mass., and Sen. Bernie Sanders, I-Vt.

Justices Samuel Alito and Neil Gorsuch endeavored to characterize the case as threatening to average Americans with some securities in their retirement accounts and mutual funds, but a series of articles on tax avoidance of wealthy Americans by ProPublica (no friend of the Court) detailed how avoiding taxes on unrealized appreciation while borrowing for current consumption and more investments allows very rich people to live large while paying little or no income tax. As Harvard Law professor Bill Andrews wrote decades ago in an article describing realization as the “Achilles’ heel” of the income tax:

The omission of unrealized appreciation [from the income tax] is a severe defect. . . . Unrealized appreciation is not a uniform fraction of income or accumulation; many taxpayers have none of it, while others have more than enough to live on. Even worse, unrealized appreciation can readily be substituted for other forms of income through complex and sometimes unnatural investment arrangements.11

As longtime Court watchers will attest, predicting Supreme Court decisions based on oral argument is often a fool’s errand, something I’ve experienced firsthand. And as the great philosopher Yogi Berra cautioned: The problem with predictions is that they are about the future. But I agree with most of the journalists, pundits, and lawyers who concluded, after the oral argument, that the Moores are likely to lose. If you are a corporate director hoping to ride the Moore bus to the bank to collect refunds of your company’s transition taxes, you should shut off the engine; you will almost certainly be disappointed by the Court’s decision.

The Moores’ counsel was no more successful at oral argument than the petitioners’ briefs in distinguishing the transition tax from the rest of subpart F or explaining why the foreign corporation here enjoys constitutional protections unavailable to partnerships or the domestic corporate entities whose income is taxed directly to their owners. When the Moores’ counsel claimed in rebuttal that the taxation of original issue discount before it’s paid is a constitutional excise tax rather than a tax on income, I had to stifle a giggle.

Solicitor General Elizabeth Prelogar, an extraordinarily talented oral advocate, made a powerful argument in defense of the transition tax. She began — where the government’s brief should have started — by pointing out that the Court doesn’t “need to resolve any fundamental questions in this case about whether the 16th Amendment requires realization.” The provision at issue “taxes income that was actually realized by the foreign corporation, and Congress permissibly attributed the tax on that realized income to U.S. shareholders as it has done in any number of passthrough taxes throughout our nation’s history. The Court could just say that and affirm.” Justice Gorsuch claimed this argument created a conundrum for him, insisting the government had not made it in its brief and had waived it, but no one picked up this cudgel.

Toward the end of the government’s argument, Justice Sonia Sotomayor attempted to urge a narrow government victory by summarizing, “Nobody’s happy with anybody’s definition of anything.” By “anything” she was referring to definitions of income or realization. But Solicitor General Prelogar, pressed about the limits of her argument — in which she had addressed the potential vulnerability of existing tax provisions — decided she needed to answer questions about hypothetical taxes Congress had not enacted. She insisted the hypotheticals were “unlikely to ever come to pass,” and emphasized that many of the provisions she had defended, including those that taxed gains on a mark-to-market basis, were responses to taxpayers’ efforts to “manipulate realization events.”

Justice Gorsuch justified the Court’s need to explore unenacted hypotheticals by asserting, “When the Court opens a door, Congress tends to walk through it.” Justice Brett Kavanaugh pointed out with regard to the “proverbial open door for Congress, members of Congress want to be elected.” But he then posed a hypo of his own: whether a “federal tax on the value of someone’s property” would be a direct tax that would have to be apportioned to the states. Solicitor General Prelogar agreed that it would, distinguishing it from an income tax on “the increment of gain over time.” One could almost hear the Moores’ antitax amici applauding when the government’s lawyer conceded that an unapportioned federal wealth tax would be unconstitutional.

That victory may not suffice. The Court seems unlikely to fail to answer the question it took the case to decide: whether the 16th Amendment’s permission to tax income requires realization. More than an hour into the argument, when the Rehnquist Court would have returned to its chambers, Solicitor General Prelogar agreed with Justice Amy Coney Barrett, and then Chief Justice Roberts (who limited his question to real property), that there is no Supreme Court authority for taxing “an unrealized increase in value from time to time.” Along with Justices Clarence Thomas, Alito, Gorsuch, and perhaps Kavanaugh, there may well be five votes or more to constitutionalize some realization requirement. But the Court will have to tread very carefully not to raise constitutional doubts about the mark-to-market provisions cataloged by the government, and to do so without opening new planning opportunities or inviting more litigation. After all, when the Court opens a door, taxpayers will run through it.

For many years, when the constitutional holding of Eisner v. Macomber seemed moribund — before Chief Justice Roberts injected new life into it in his Obamacare opinion — I told my students the Constitution appeared to stop where the Internal Revenue Code begins. But no one should say that anymore. John Roberts argued and lost Cottage Savings when he was acting solicitor general: He knows how taxpayers can manipulate realization events. Recognizing the dangers, Chief Justice Roberts may assign the opinion to himself.

In The Power to Destroy: How the Antitax Movement Hijacked America, my new book, I describe how, during this last half-century, reducing taxes at the top and curbing the government’s ability to raise the revenues necessary to fund government spending became the linchpin holding together disparate elements of the Republican coalition. The antitax movement, I claim, is “the most overlooked social and political movement in recent American history.” Activist members of that movement have now enlisted the Supreme Court — by attacking as unconstitutional an obscure international tax provision, enacted as a crucial element of a Republican tax law — to block their real target: Democratic proposals to increase taxes on the rich. Leaving the oral argument, I marveled at the skill with which the movement successfully recruited a Supreme Court majority of longtime Republican conservatives into their project of limiting taxes on wealthy Americans.

Daniel J. Hemel

Winning by Losing, by Daniel J. Hemel, professor of law, New York University School of Law

By the end of the oral argument in Moore on December 5, it seemed likely — indeed, almost certain — that petitioners Charles and Kathleen Moore would lose. The three swing justices — Roberts, Kavanaugh, and Barrett — all signaled that they were inclined to rule for the government on the basis that KisanKraft, the Indian corporation in which the Moores are minority shareholders, realized all of the income that is now being taxed to the Moores. As Justice Kavanaugh put it: “We have realization in this case. The entity realized income. . . . And we’ve long held that Congress may attribute the income of the company to the shareholders.” The “only real wrinkle,” according to Kavanaugh, is that the MRT “goes back and captures prior years’ income,” but the justices seemed inclined to write that off as a substantive due process issue that lies outside the scope of the question presented.

Yet for the Competitive Enterprise Institute (CEI), the libertarian think tank that brought the case on the Moores’ behalf, the litigation effort is likely to be a strategic victory. This lawsuit was never really about the Moores themselves, whose $14,729 tax bill would not have been worth fighting all the way to the Supreme Court if there weren’t larger ideological stakes at play. Nor was it about the MRT, which required U.S. shareholders to pay a one-time tax at the end of 2017 on earnings and profits accumulated by CFCs since 1986. The MRT was enacted as part of the Republican-drafted TCJA, and the Moores’ backers were — on the whole — enthusiastic supporters of the TCJA.

From the start of the litigation, the MRT was a stalking horse for wealth and mark-to-market income taxes proposed by prominent Democrats — taxes that CEI couldn’t challenge because they haven’t yet been passed. Indeed, the Moores’ cert petition explicitly urged the Court to hear the case so that the justices could head those taxes off. And on both the wealth tax and mark-to-market fronts, CEI and the conservative and libertarian groups that filed amicus briefs backing the Moores appear to have gained significant ground.

Whether or not the majority opinion in Moore specifically says that a federal wealth tax would need to be a direct tax, the Biden administration now has conceded as much. At oral argument, Justice Kavanaugh asked Biden administration Solicitor General Prelogar if a wealth tax would need to be apportioned among the states, adding that he thought the answer was “easy”: yes.

“Exactly,” Prelogar agreed. That may have been a tactically wise response from the extraordinarily talented solicitor general, who — after all — is the lawyer for the Biden administration, not a hypothetical Warren or Sanders administration. But for conservative and libertarian opponents of wealth taxation, the concession was catnip. In its effort to win the Moore case, the Biden administration essentially threw the Warren and Sanders wealth tax plans under a constitutional bus.

On the issue of mark-to-market taxation, Prelogar was more circumspect. President Biden has included a mark-to-market-based minimum tax in each of his last two green books, and unsurprisingly, the justices pressed the solicitor general on whether mark-to-market taxation would pass constitutional muster. “I don’t want to suggest that a tax on appreciation in stock would necessarily be invalid,” Prelogar said in response to a question from Justice Gorsuch. “Not necessarily invalid” is, by any measure, a rather tepid endorsement for one of Biden’s signature tax proposals from the administration’s top appellate advocate.

A few years ago, the conventional wisdom in tax policy circles held that the realization requirement was a matter of “administrative convenience,” not a limit on Congress’s 16th Amendment power. By the end of the Moore oral argument, it was clear that a critical mass on the high court disagrees. Chief Justice Roberts — generally the most moderate of the six Republican appointees — remarked at one point that it is a “pretty basic proposition” that “the government can’t tax as income to the property owner the appreciation in value of the property.” Without Roberts’s support, it’s doubtful that a mark-to-market tax along the lines proposed by President Biden could garner four votes on the current Court — much less five.

We won’t know until the Court hands down its decision — sometime before the end of June 2024 — whether the Moore majority will explicitly hold that realization is a 16th Amendment requirement. The majority might assume, arguendo, that a realization requirement applies and say that in this case the requirement has been satisfied. Either way, though, the Moore majority — by resuscitating the realization requirement or by treating it as if it still had a beating heart — is likely to cast a constitutional pall over mark-to-market proposals for the foreseeable future.

A ruling along the lines telegraphed by Roberts, Kavanaugh, and Barrett — allowing income realized at the entity level to be attributed to the entity’s owners — would preserve the most important tax code components that were potentially implicated by the Moores’ challenge: subchapter K, subchapter S, and the subpart F rules for CFCs, all of which rely on analogous attribution principles. As for other accrual-based provisions that can’t be salvaged on an attribution theory — for example, mark-to-market accounting for securities dealers under section 475, mark-to-market taxation of futures contracts under section 1256, the OID rules under section 1272, and the expatriation tax under sections 877 and 877A — these may manage to survive as well. Conservative and libertarian groups do not seem terribly interested in targeting those code sections as long as broader wealth and mark-to-market taxes are off the table. If challenged, some of those provisions might be justified as excises, and a conservative Ninth Circuit panel previously upheld section 1256 on constructive realization principles.12 As long as circuit courts continue to reject challenges to those provisions, the Supreme Court can swat away cert petitions that raise difficult constitutional questions about the pockets of accrual-based taxation in the current code.

Meanwhile, progressive tax policy thinkers who read the writing on the wall should consider whether some of the goals of wealth and mark-to-market taxes might be accomplished through other means. One approach might be to apply a version of the MRT to large shareholders of domestic corporations. For example, anyone who holds 10 percent or more of the vote or value of a C corporation with at least $1 billion of undistributed E&P could be taxed — either on a one-time or ongoing basis — on their pro rata share of the corporation’s realized income. That would reach Elon Musk (Tesla), Larry Ellison (Oracle), Warren Buffett (Berkshire Hathaway), Larry Page and Sergey Brin (Alphabet), and Mark Zuckerberg (Meta). If the threshold were lowered to 5 percent, it would reach Jeff Bezos (Amazon) as well. And to the extent that it prompted some of those billionaires to lower their percentage stakes through sales or intrafamily transfers, it would generate substantial capital gains and gift tax revenues.

The details of this proposal — and of other alternatives to wealth and mark-to-market taxes — will require much more fleshing out. The larger point is that in the long-term chess game over capital taxation, conservatives and libertarians will likely lose a pawn, but they may gain a better board position as a result of Moore. And those of us who want to see a more robust regime of capital taxation will likely have to revise our playbook in response.

Joseph T. Henderson

Ramifications of the Forthcoming Decision in Moore, by Joseph T. Henderson, adjunct professor, Tulane Law School

The invention of the corporation as a vehicle for capital formation and limited liability was wonderful, but respecting it for tax purposes launched the tax law world into such complexity that it siphoned off incalculable talent from society just to manage the consequences of that fateful decision. That “human tax” surely dwarfs the trillions of dollars that the solicitor general referred to as the consequence of the Moores winning their case. Alas, we are where we are, and what the heck, it gave us all good jobs.

So, one wonders, if the Supreme Court can, in Moline Properties Inc. v. Commissioner, 319 U.S. 436 (1943), state that, generally, corporations must be respected as entities separate from their owners, then the Court could, as we occasionally see in other contexts, just as easily say, “Nah, let’s forget that.”

In a superb 1965 article that examined the constitutionality of subpart F, Richard J. Horwich noted that the Court has, on occasion, thought that ignoring a corporation was appropriate.13 Horwich cited the example of Helvering v. National Grocery Co., 304 U.S. 282, 288 (1938), in which the Court upheld the special corporate tax on unreasonably accumulated earnings, writing that:

It is said that the statute is unconstitutional because the liability imposed is not a tax upon income, but a penalty designed to force corporations to distribute earnings in order to create a basis for taxation against the stockholders. If the business had been carried on by Kohl individually all the year’s profits would have been taxable to him. If, having a partner, the business had been carried on as a partnership, all the year’s profits would have been taxable to the partners, although these had been retained by the partnership undistributed. . . . Kohl, the sole owner of the business, could not by conducting it as a corporation, prevent Congress, if it chose to do so, from laying on him individually the tax on the year’s profits. If it preferred, Congress could lay the tax upon the corporation, as was done.

Holy cow! So, just how fragile are corporations insofar as the tax law goes? In Moline, the Court acknowledged numerous exceptions to recognizing a corporation for tax purposes, and Lee A. Sheppard listed the modern-day exceptions in her article on Moore.14 But even with Congress and courts seemingly cherry-picking as to when to recognize a corporation for tax purposes, corporations are sturdy enough to pay roughly $300 billion in tax annually,15 while shareholders pay tax on dividends.

Our tax system generally relies on a transactional approach, stemming largely from the distinction between the chosen word in the 16th Amendment, “income,” and “capital.” See, for example, Eisner v. Macomber, 252 U.S. 189 (1920). The realization notion that grew out of this distinction is generally useful in tax administration, but not always appropriate, as we see with subpart F, various corporate look-through rules, and the treatment of partnerships. All of these exceptions to realization were instituted for good reason, such as preventing tax avoidance,16 and their existence does not justify a generally applicable look-through rule.

Could a win for the government justify taxing mere stock appreciation? No, not when you consider how we got where we are today. But, in the event Congress were encouraged in this regard, we can rest assured that all the best legal reasoning would not overturn such foolhardiness faster than the next election would.

Steven M. Rosenthal

Don’t Mess With Taxes, by Steven M. Rosenthal, senior fellow, Urban-Brookings Tax Policy Center

Don’t mess with taxes. That lesson echoed again and again during the oral arguments in Moore at the Supreme Court.

The Moores object to a $15,000 tax bill for their share of undistributed earnings of a foreign-based company that they, with other American owners, controlled. And the Court agreed to consider whether Congress could tax this unreceived, or “unrealized,” income.

Today, does Congress tax your income before you receive it? The answer is usually no, but sometimes it’s yes. The income from many businesses and investments is taxed before it’s received because otherwise it could not be fairly or efficiently taxed at all. And our international, partnership, and capital tax regimes require this flexibility. As the government’s lawyer explained, if Congress could never tax income before it was received, business earnings would escape taxation, and tax loopholes that have long been closed would be reopened. And it would cost our country several trillions of dollars in lost tax revenue.

The Court heard, and resent, the message: Requiring income to be received before being taxed would upend our current tax code. So, the justices pressed the Moores’ attorney repeatedly on how such an outcome could be avoided if the Court sided with their clients. But the lawyer’s answers were ad hoc and ill-conceived.

He could not explain, most tellingly, why Congress could not tax the undistributed earnings of his clients’ foreign corporation when Congress has taxed the earnings of other such corporations for decades. Since 1937, Congress has taxed U.S. shareholders on the investment income of their “foreign personal holding companies” to prevent “incorporated pocketbooks” in tax havens. In 1962 Congress widened these tax rules to also include undistributed interest, dividends, royalties, and other — mainly passive — income received by actual operating corporations controlled by U.S. shareholders.

And in keeping with this precedent, in 2017 Congress required U.S. shareholders — including the Moores — to pay tax on the earnings that had been accumulated in their offshore corporations. Otherwise, those earnings would have escaped taxation permanently after the 2017 restructuring of our international tax rules.

The Moores’ attorney tried to distinguish his clients’ foreign corporation from those other American-controlled foreign corporations, emphasizing the different types of income — passive versus active — received by each. But there is no distinction: The Moores’ company falls precisely into the definitions created decades ago to effectively tax undistributed overseas profits of American shareholders. And the source of the income is irrelevant.

The Moores’ lawyer also tried to claim that the taxation of undistributed earnings of participants in other kinds of business enterprises — such as partnerships — was not precedent. His brief asserted that “partnerships hav[e] no existence separate from their partners,” unlike corporations.17

While at one time many states treated a partnership as an alter ego of its partners, now virtually all states treat partnerships as entities separate from their owners. And today, partnerships are predominantly limited partnerships and limited liability companies. As the names perfectly describe, the partners in these entities have limited liability, compared with the original general partnerships, whose partners have unlimited liability.

The other arguments by the Moores’ attorney were equally unconvincing. He described the tax on unreceived income from zero-coupon and other OID bonds as “an excise on the purchase or receipt of such bonds.” But then, under this theory, a tax on unrealized gains from other publicly traded securities could also be so classified.

As a final effort to explain other current departures from a realization requirement, the Moores’ attorney invented a new doctrine: “constructive realization,” which is not found in the tax code or any precedent. His brief stated that constructive realization “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.” But by that standard, a taxpayer could be liable for taxation for any gain on publicly traded securities or mutual fund shares that could readily be sold, which supports rather than limits congressional taxing power.

As a rhetorical flourish and to threaten catastrophe, the Moores’ lawyer claimed that if the government’s arguments were correct, “novel” categories of income, presumably including unrealized gains, “would already be subject to taxation under existing law.” After all, both the 16th Amendment and section 61 of our tax code authorize the taxation of all income from whatever source derived, which, the government argues, includes unrealized gains derived from property.

But the Moores’ lawyer overlooks that in 1924 Congress elsewhere limited gains to the “amount realized” from “the sale or disposition” of the property and its adjusted basis.18 The Court pointed out this statutory realization requirement over 30 years ago, and the IRS cannot ignore it now.19

But a statutory realization requirement is not a constitutional one. Congress can depart from it when appropriate. For example, Congress explicitly requires gains and losses from a futures or other derivative contract to be realized as if the contract has been sold for its fair market value on the last business day of the tax year.20 Here, Congress deems a sale for tax purposes where one would not otherwise exist.

Taxpayers with relatively simple forms of income — wages, dividends, interest — may well be confused by the idea of taxing unreceived income. They are unfamiliar with sophisticated business structures and exotic forms of income created by Wall Street’s financial engineers. But Congress, after careful consideration, has over the decades identified certain types of income that would escape tax altogether if receipt was required. And only Congress can balance revenue demands, administrative convenience, and fairness to properly tax it.21

Now, the wise course for the Court would be to take its lesson in hand: Don’t mess with taxes. Leave that to Congress.

Lawrence A. Zelenak

Moore May Be Less (Than It Might Have Been), by Lawrence A. Zelenak, Pamela B. Gann Distinguished Professor of Law, Duke University School of Law

For all the cataclysmic potential of a Supreme Court decision in Moore — with the possibilities ranging from a sweeping invalidation of every passthrough tax regime in the current code on the one hand, to the Court’s pronouncing last rites over Macomber on the other — in light of the recent oral argument, it seems likely that the Court’s opinion will be less than earthshattering. With the caveats that even expert predictions based on oral arguments are unreliable, and that I am no expert in Supreme Court prognostications, it now seems probable that the Court (1) will not invalidate the MRT, (2) will not hint at the invalidity of any existing code provisions, and (3) will not bury Macomber.

Instead, it will declare that realization remains a constitutional requirement for an unapportioned income tax (thus rebuking the Ninth Circuit’s bold announcement to the contrary), but that the income in question was indeed realized — albeit by KisanKraft, rather than by the Moores — and that the Moores had a close enough relationship to the income to justify attributing it to them. Justices Gorsuch and Kavanaugh — both likely to be in the majority in any Moore decision — seemed particularly interested in this realization-plus-attribution approach, which offers a clear route to upholding not only the MRT but all the code’s other passthrough regimes as well. One indication of the likely survival of the MRT was a dog that did not bark: the lack of any questions about the severability of the MRT from the rest of the TCJA. If the Court were seriously considering striking down the MRT, there should have been questions about whether the MRT was severable from the rest of the TCJA’s sweeping international tax reforms, severable from the reduction of the corporate tax rate to 21 percent, or indeed severable from the entirety of the TCJA. The absence of any such questions suggests that the MRT is not in mortal peril.

But neither does Macomber seem to be in mortal peril. Although Justice Ketanji Brown Jackson suggested the Court might take Moore as an opportunity to “just put an end” to Macomber, there was no enthusiasm for that approach among the six conservative justices. When the discussion turned from passthrough taxation to mark-to-market taxation, the conservative six evinced no interest in freeing Congress from constitutional constraints. Chief Justice Roberts strongly hinted he would resist any effort to “stab” or “bury” Macomber. Justice Thomas asked Solicitor General Prelogar about the permissibility of a tax on unrealized appreciation in real estate (she replied that that was a more difficult question than the constitutionality of the MRT), and Justice Alito asked a similar question about a tax on the unrealized gains of a billionaire who started a tech giant in his garage. I suspect the justices were looking for a way to uphold the MRT and other passthrough taxes while signaling that Macomber still imposes constraints on mark-to-market taxation. I detected no indication, however, that any justices were interested in questioning the validity of the limited existing forms of mark-to-market taxation applicable to (for example) securities dealers and expatriating individuals.

Despite Justice Sotomayor’s comment that she did not fault the parties for “shooting for the stars,” in fact neither the taxpayers nor the government shot for the stars. Both in briefing and in oral argument, Andrew Grossman and the taxpayers’ other attorneys went out of their way to explain that every seemingly at-risk passthrough and mark-to-market provision in the current code is constitutional, with the sole exception of the MRT. And Solicitor General Prelogar and her colleagues made clear that the government, although asking the Court to limit the scope of Macomber, was not urging the Court to overrule the case. With each side seeking a less sweeping victory than it might have, it is not too surprising that the justices also seem to be contemplating a relatively narrow opinion.

My guess is that, although the Court’s opinion will neither invalidate the MRT nor cast constitutional doubt on any other provisions in the current code, the Court will make clear that the rumors of the death of Macomber are greatly exaggerated and signal that any congressional attempt at broad-based mark-to-market taxation, including the Biden administration’s proposed billionaire’s tax, would be viewed dubiously (or worse) by the Court. In terms of practical effects in the next few years, the most likely impact of Moore may be to discourage Congress from seriously considering enactment of a billionaire’s tax.

From the parochial perspective of one who teaches the introductory law school course on the federal income tax, Moore is almost certain to have two additional effects. First, I will no longer have the pleasure of complaining to my students about how the Court has allowed Macomber’s uncertain precedential status to persist for so many decades. Second, and bizarrely enough, I will have to explain the basics of the MRT to students in the first few weeks of their study of the income tax.


1 See Transcript of Oral Argument, Moore v. United States, No. 22-800 (U.S. argued Dec. 5, 2023).

2 See American Legion v. American Humanist Association, 139 S. Ct. 2067, 2087 (2019).

3 See New York State Rifle and Pistol Association Inc. v. Bruen, 142 S. Ct. 2111, 2128 (2022).

4 I am grateful to Reuven Avi-Yonah for emphasizing this point to me.

5 For a nice example in another context, see Maggie Gardner, “Admiralty, Abstention and the Allure of Old Cases,” 99 Notre Dame L. Rev. __ (forthcoming 2024).

6 I read the TCJA’s limit of the MRT’s scope to post-1986 earnings combined with repeal of section 955 as effectively a full carveout of old-old shipping income. The 2027 expiration of section 965’s higher tax rate applicable to corporate inversions (something that legislation should delay further) also suggests that the MRT’s scope was adjusted for some, but not for others.

7 Edward D. Kleinbard and Patrick Driessen, “A Revenue Estimate Case Study: The Repatriation Holiday Revisited,” Tax Notes, Sept. 22, 2008, p. 1191.

8 A voluntary repatriation idea with varying individual tax rates was offered before enactment of the TCJA. Driessen, “Cure for the Repatriation Tax Holiday Blues,” Tax Notes, Jan. 9, 2017, p. 261.

9 See also Steven M. Rosenthal and Robert McClelland, “Taxing Capital Gains at Death at a Higher Rate Than During Life,” Urban Brookings TaxVox, May 13, 2022. Daniel J. Hemel below also describes a corporate integration idea.

10 I have previously described my broader views on Moore in Tax Notes Federal; see Graetz, “To Avoid the Moore Morass, the Court Should DIG It — But It Probably Won’t,” Tax Notes Federal, Nov. 13, 2023, p. 1253.

11 Andrews, “The Achilles Heel of the Comprehensive Income Tax,” in New Directions in Federal Tax Policy for the 1980s (1983).

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

13 Horwich, “The Constitutionality of Subpart F of the Internal Revenue Code,” 19 U. Miami L. Rev. 400 (1965).

14 Sheppard, “Supreme Court Urged to Rule on TCJA Transition Tax,” Tax Notes Federal, June 26, 2023, p. 2113. Sheppard also notes that subpart F has withstood constitutional challenge.

15 See Joint Committee on Taxation, “Corporate Tax Receipts and Corporate Tax Liabilities,” JCX-4-20, at 12 (Feb. 10, 2020).

16 See Robert W. Wales, “Tax Policy in Relation to Foreign Business Income,” 40 Taxes 961, 971-973 (1962) (referring to subpart F as a tax avoidance remedy); H.R. Rep. No. 87-1447 (1962); and S. Rep. No. 87-1881 (1962).

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

18 Section 202(a) of the Revenue Act of 1924 (now section 1001 of the code).

19 See Cottage Savings Association v. Commissioner, 499 U.S. 554, 559 (1991).

21 See Rosenthal, “Moore Could Invalidate Decades of Tax Rules,” Tax Notes Federal, Oct. 10, 2023, p. 285.


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