Couple Takes Repatriation Tax Challenge to Supreme Court

Mark Berg & Fred Feingold, The Deemed Repatriation Tax — A Bridge Too Far?, 158 Tax Notes 1345 (2018)

Press Release, The White House, President's Budget Rewards Work, Not Wealth with new Billionaire Minimum Income Tax (Mar. 28, 2022)

Press Release, Wyden Unveils Billionaires Income Tax (Oct. 27, 2021)

2 Records of the Federal Convention of 1787, (M. Farrand ed. 1911)

Robert H. Montgomery, Income Tax Procedure (1917)

Robert Hunter & Charles Morris, Universal Dictionary of the English Language (1897)

S. 510

Sean P. McElroy, The Mandatory Repatriation Tax Is Unconstitutional, 36 Yale J. Reg. Bull. 69 (2019)

Ultra-Millionaire Tax Act of 2021, H.R. 1459, 117th Cong. (2021)

Webster's American Dictionary of the English Language (1889)

Webster's Revised Unabridged Dictionary (1913)

PETITION FOR WRIT OF CERTIORARI

Charles and Kathleen Moore respectfully petition for a writ of certiorari to review the judgment of the Ninth Circuit in this case.

OPINIONS BELOW

The Ninth Circuit's opinion is reported at 36 F.4th 930 and reproduced at App.1. The opinion of the District Court for the Western District of Washington is unpublished and reproduced at App.21.

JURISDICTION

The judgment of the court of appeals was entered on June 7, 2022. App.1. A timely petition for rehearing was denied on November 22, 2022. App.36. This Court has jurisdiction under 28 U.S.C. § 1254(1).

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

The Sixteenth Amendment to the U.S. Constitution provides:

Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

The Constitution's Apportionment Clause and Direct Tax Clause, U.S. Const., art. I, § 2, cl. 3; id. § 9, cl. 4, and relevant portions of the Tax Code are reproduced at App.57, et seq.

STATEMENT

This case presents a question of exceptional importance concerning Congress's taxing power. Confronted with a “novel” new tax, App.8, the Ninth Circuit held for the first time ever that “realization of income is not a constitutional requirement” for Congress to impose a tax exempt from apportionment under the Sixteenth Amendment, App.12. On that basis, it concluded that “there is no constitutional prohibition against Congress attributing a corporation's income pro-rata to its shareholders” and then taxing them on it, as happened here. App.13.

That decision shatters what had been an unbroken judicial consensus dating back to Eisner v. Macomber, 252 U.S. 189 (1920), that the Sixteenth Amendment's exemption from apportionment is limited to taxes on realized gains. That limitation is plain on the face of the Amendment's text, which contemplates that “income” will be “derived” from a “source,” and is the only interpretation consistent with the universal understanding of “income” at the time of the Amendment's adoption. The decision below is not only wrong, but dangerous, opening the door “to new federal taxes on all sorts of wealth and property without the constitutional requirement of apportionment.” App.55 (Bumatay, J., dissenting from denial of rehearing en banc).

This case provides a clean and timely vehicle for the Court to “solidify . . . the long-established norm of federal income taxation that a realization event is required before there is taxable 'income' in the constitutional sense.” Christopher Cox & Hank Adler, The Ninth Circuit Upholds a Wealth Tax, Wall St. J., Jan. 25, 2023. The time to do so is now, to provide certainty to families and businesses arranging their financial futures and to head off a major constitutional clash when Congress accepts the Ninth Circuit's invitation to enact an unapportioned tax on property or wealth. The petition should be granted.

A. Factual and Legal Background

1. In 2006, Charles and Kathleen Moore made an investment to help launch an overseas company formed to empower India's underserved rural farmers. App.70–71. Charles's friend and former coworker, Ravindra “Ravi” Kumar Agrawal, saw that farmers in India's most impoverished regions lacked access to even the most basic tools available in American hardware stores. App.70. To improve their livelihoods, he founded an India-based corporation, KisanKraft Machine Tools Private Limited, to import, manufacture, and distribute affordable farming equipment. App.70–71. Moved by Ravi's vision, the Moores put up $40,000 — for them, a significant sum — and received about 13 percent of KisanKraft's common shares. App.71. Ravi retained approximately 80 percent ownership and moved to India to manage the business. App.72; CA9.ER.36.¹

KisanKraft's rapid growth confirmed that Ravi had identified a genuine need. It was profitable almost from the start, and its revenues increased every year since its founding. CA9.ER.38. True to Ravi's original business plan, KisanKraft reinvested all its earnings to grow the business, which has expanded to serve farmers across India. App.71, 73; CA9.ER.37–38. By 2017, it employed over 350 representatives in 14 regional offices serving 2,500 local dealers. App. CA9.ER.38.

The Moores received regular updates from Ravi on KisanKraft's activities, as well as annual financial statements. App.72. Charles visited India several times and was impressed with the difference that KisanKraft was making in the lives of India's rural poor. App.72. The Moores never received any distributions, dividends, or other payments from KisanKraft. App.73. And as minority shareholders without any role in KisanKraft's management, they had no ability to force the company to issue a dividend. App.73. For the Moores, it was payment enough that they were able to support KisanKraft's “noble purpose . . . to improve the lives of small and marginal farmers in India” and see the good that it was doing. App.71.

Then came the tax bill. In 2018, the Moores learned from Ravi that, under the recently enacted “Mandatory Repatriation Tax,” they owed income tax on KisanKraft's reinvested earnings going back to 2006. App.74. Specifically, the MRT deemed a portion of KisanKraft's earnings for each year proportional to the Moores' ownership stake in 2017 to be the Moores' 2017 income — even though they hadn't received a penny from the company and likely wouldn't for some time, if ever. App.74. Ultimately, the Moores had to declare an additional $132,512 as taxable 2017 income and pay an additional $14,729 in tax. App.74–75.

2. The MRT was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). App.6. It targets U.S. shareholders who own 10 percent or more (by value or voting power) of foreign corporations that are primarily owned or controlled by U.S. persons. 26 U.S.C. § 965; see also id. § 957 (defining subject corporations). Prior to the MRT, these shareholders were usually taxed when the foreign corporation distributed its earnings. App.6. The MRT, however, simply deems the corporations' retained earnings going back to 1986 to be the 2017 income of their U.S. shareholders in proportion to their ownership stakes in 2017. 26 U.S.C. § 965(a). The shareholders are then taxed on that deemed “income” — which, by definition, has not been distributed to them — at a rate based on how the corporation held the retained earnings in 2017: 15.5 percent for earnings held in cash or cash equivalents and 8 percent otherwise. Id. § 965(a), (c); see also id. § 951(a).²

The MRT taxes shareholders irrespective of whether they owned shares at the time the corporation made the earnings on which they're being taxed and irrespective of whether they could force the corporation to make a distribution. All that matters is that a given shareholder owned the requisite number of shares in 2017. Id. §§ 965(a), 951(a).

The principal legislative purpose of this one-time tax was to partially fund the TCJA's shifting of U.S. corporate taxation from a worldwide system toward a territorial one — that is, one where U.S. corporations are taxed only on their domestic-source income.³ To accomplish this shift, the statute prospectively relieved U.S. corporations from paying taxes on most distributions received from foreign corporations, including subsidiaries. 26 U.S.C. § 245A. That change was limited to corporate taxpayers, id.; individual taxpayers like the Moores remain liable for income tax on distributions they receive, id. § 61(a)(7).

The MRT's questionable constitutional status did not pass unnoticed. While approving of its policy, a leading tax scholar observed that the MRT “abandoned the realization requirement” and “disregard[s] the Macomber precedent.” Henry Ordower, Abandoning Realization and the Transition Tax: Toward a Comprehensive Tax Base, 67 Buff. L. Rev. 1371, 1393, 1396 (2019). Others concluded that it “goes well beyond” other taxes in abandoning realization and “ventures well beyond the limits” recognized by precedent. Berg & Feingold, supra, at 1353, 1355. It is, one analysis concluded, “best characterized as a direct tax on wealth” and therefore, being unapportioned, constitutionally invalid. Sean P. McElroy, The Mandatory Repatriation Tax Is Unconstitutional, 36 Yale J. Reg. Bull. 69, 82 (2019).

B. Procedural History

The Moores filed this action to obtain a refund of the additional tax they paid to satisfy the MRT. App.78. They alleged that the MRT is an unapportioned direct tax in violation of the Constitution's apportionment requirements, U.S. Const., art. I, § 2, cl. 3; id. § 9, cl. 4, because it taxes them on ownership of personal property (their KisanKraft shares), not on income they had realized. App.83–84. Before the district court and the court of appeals, the Government never disputed that the Moores realized nothing from their investment in KisanKraft; instead, it argued that realization of income by the taxpayer is unnecessary for a tax to be exempt from apportionment under the Sixteenth Amendment. It was also undisputed that the MRT is not apportioned among the states according to population.

The district court granted the Government's motion to dismiss and denied the Moores' cross-motion for summary judgment. App.21–22. It acknowledged that this Court's cases like Macomber adopted a “realization framework” for Sixteenth Amendment “income,” App.26, but it concluded that “Macomber's realization standard” had been undercut by lower-court decisions addressing constructive realization of income and was therefore not controlling, App.26–28. Without further analysis, it declared the MRT “a tax on income.” App.28.

The Ninth Circuit affirmed, holding the MRT to be a tax on income authorized by the Sixteenth Amendment. App.13. Like the district court, the panel did not explain how KisanKraft's retained earnings were the Moore's income. Instead, it broadly declared that “realization of income is not a constitutional requirement” for Congress to avail itself of the Sixteenth Amendment's exemption from apportionment for “taxes on incomes.” App.12. It therefore followed that “there is no constitutional prohibition against Congress attributing a corporation's income pro-rata to its shareholders.” App.13. The panel distinguished Macomber and Commissioner v. Glenshaw Glass, 348 U.S. 426, 431 (1955), which followed Macomber's lead in requiring realization, on the basis that neither purported to set forth a “universal” definition of “income.” App.15.

The Ninth Circuit denied the Moores' rehearing petition. App.36. Judge Bumatay, joined by Judges Ikuta, Callahan, and VanDyke, dissented. App.37. The panel decision, Judge Bumatay argued, conflicted with “ordinary meaning, history, and precedent,” all of which recognize that “an income tax must be a tax on realized income.” App.39. By holding otherwise, the Ninth Circuit had “become the first court in the country to state that an 'income tax' doesn't require that a 'taxpayer has realized income' under the Sixteenth Amendment.” App.38. And that holding, he warned, “open[s] the door to expansion of the federal taxing power beyond the limits placed by the Constitution,” App.39, including “taxes on all sorts of wealth and property without the constitutional requirement of apportionment,” App.55.

REASONS FOR GRANTING THE PETITION

The Sixteenth Amendment carves out a significant but narrow exemption from Article I's apportionment clauses for “taxes on incomes.” Following the Amendment's text, this Court's precedents have always understood that exemption to be limited to taxes on gains realized by the taxpayer. While precedent has approved income taxes on constructively realized income, no decision until the Ninth Circuit's in this case dispensed with the need for realization altogether. In so doing, the decision below sweeps away the essential restraint on Congress's taxing power, opening the door to unapportioned taxes on property (as in this case) and anything else Congress might deem to be “income.” This case accordingly presents a constitutional question of the first order, one that warrants the Court's review.

I. The Ninth Circuit's Holding on Realization Plainly Conflicts with This Court's Precedents and Those of Other Appeals Courts

In holding that “realization of income is not a constitutional requirement” for Sixteenth Amendment “taxes on incomes,” the decision below breaks with over a century of this Court's decisions, which have uniformly held the opposite. That holding also conflicts with decisions of the Fourth and First Circuits following the lead of this Court's decisions in recognizing that Sixteenth Amendment “income” requires realization.

A. From the very beginning, this Court has made clear that the Sixteenth Amendment's exemption from the apportionment requirement is limited to taxes on realized gains. Even before that issue was squarely presented in Macomber, the Court had consistently defined “income” for purposes of pre-Amendment taxes as “the gain derived from capital, from labor, or from both combined.” Stratton's Indep., Ltd. v. Howbert, 231 U.S. 399, 415 (1913) (emphasis added); see also Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918) (same). Macomber, in turn, regarded that definition's focus on derived gains as identifying “the characteristic and distinguishing attribute of income” under the Sixteenth Amendment: that a “gain,” “profit,” or other thing of value must be “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” 252 U.S. at 207 (emphases in original). Only “that is income derived from property. Nothing else answers the description.” Id. (emphasis in original).

What led Macomber to confront the constitutional question of realization was the Government's contention — just as in this case — that the Sixteenth Amendment permits it to tax, without apportionment, ordinary shareholders on a corporation's retained earnings. Id. at 214. To account for accumulated earnings, the corporation in question had issued a stock dividend in proportion to shareholders' existing interests, without altering their ownership stakes. Id. at 200. The Government insisted that the dividend was taxable as a shareholder's income because it “measure[d] the extent to which the gains accumulated by the corporation have made him the richer.” Id. at 214. The Court flatly disagreed: the shareholder has realized no income because he “has no individual share in accumulated profits, nor in any particular part of the assets of the corporation.” Id. at 219. Only upon distribution “does the stockholder realize a profit or gain which becomes his separate property, and thus derive income from the capital that he or his predecessor has invested.” Id. at 209. Absent such a distribution, the taxpayer has not realized income, so that taxing him on the corporation's retained earnings would be “taxation of property because of ownership, and hence would require apportionment.” Id. at 217.

Recognized as a “landmark precedent[ ] on realization,” Cottage Sav. Ass'n v. Comm'r, 499 U.S. 554, 561 (1991), Macomber has been consistently understood by this Court to stand for the proposition that realization is an essential component of Sixteenth Amendment income. Weiss v. Stearn, 265 U.S. 242, 254 (1924), applied Macomber's realization holding to a corporate reorganization, holding that shareholders had received no income because none had realized “a thing really different from what he theretofore had.” Taft v. Bowers, 278 U.S. 470, 481–82 (1929), relied on it in holding that the recipient of a gift of stock could be taxed on its appreciation prior to the donation because, “when through sale or conversion the increase was separated therefrom, it became income.” Citing Macomber, United States v. Safety Car Heating & Lighting Co., 297 U.S. 88, 99 (1936), held essentially the same as to an award of profits earned by a patent infringer prior to the Sixteenth Amendment's ratification, reasoning that realization is when a gain “may be taxed, though it was in the making long before.” Similarly, MacLaughlin v. Alliance Ins. Co. of Philadelphia, 286 U.S. 244, 249 (1932), held that the Revenue Act of 1928 lawfully taxed appreciation prior to its enactment that was realized thereafter because it is “a gain from capital investment which, when realized, by conversion into money or other property . . . has consistently been regarded as income within the meaning of the Sixteenth Amendment and taxable as such in the period when realized.” And Helvering v. Bruun, 309 U.S. 461, 468–69 (1940), while retreating from language in Macomber suggesting that gain must be severable from capital when received by the taxpayer,⁴ restated and applied its central holding that Sixteenth Amendment “income” requires “realization of gain” through the “exchange of property, payment of the taxpayer's indebtedness, relief from a liability, or other profit realized from the completion of a transaction.” Id. at 469.

Helvering v. Horst, which the court below took to undercut Macomber's realization holding, App.15, actually reiterated “the rule that income is not taxable until realized,” 311 U.S. 112, 116 (1940). It applied that rule to a taxpayer who had directed that interest on bonds be paid to a family member. Id. at 114. And that, it held, was constructive realization: the “power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it.” Id. at 118.

The Court's final refinement of the standard for Sixteenth Amendment “income” occurred in Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955), which held punitive damages awards to be taxable income. The decision observed that Macomber's language defining income as “'the gain derived from capital, from labor, or from both combined'” was “useful” in “distinguishing gain from capital” but “not meant to provide a touchstone to all future gross income questions.” Id. at 430–31. But it again reiterated Macomber's holding on realization, reasoning that punitive damages are taxable as income because they are “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Id. at 431 (emphases added). The Court subsequently applied that formulation in James v. United States, 366 U.S. 213, 219 (1961) (holding that embezzled funds are taxable income), Comm'r v. Kowalski, 434 U.S. 77, 83 (1977) (holding that meal-allowance payments are taxable income), and Comm'r v. Indianapolis Power & Light Co., 493 U.S. 203, 209 (1990) (holding that refundable customer deposits held by a utility were not taxable income because the utility never obtained “complete dominion” over them).⁵

The common thread running through the Court's Sixteenth Amendment decisions is this: the Amendment's exemption from Article I's apportionment requirement is limited to taxes on gains realized by the taxpayer.

B. The Ninth Circuit's decision in this case flatly contravenes Macomber's central holding on realization and that decision's progeny. Its attempt to distinguish Macomber and Glenshaw Glass into oblivion does not withstand scrutiny.

According to the decision below, Macomber is limited to its facts, providing no “universal definition” of “income.” App.15. But whatever the status of Macomber's gain-derived-from-capital-or-labor definition, its holding is that only a “gain” “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal” is taxable as income. 252 U.S. at 207 (stating that this “fundamental conception is clearly set forth in the Sixteenth Amendment” and its reference to “incomes, from whatever source derived”). Contrary to the decision below, App.15, Glenshaw Glass did not repudiate that holding, but repeated it. 348 U.S. at 431 (requiring that gains be “clearly realized” by taxpayers and reduced to their “complete dominion”).

The Ninth Circuit's treatment of Glenshaw Glass was outright defiance. Unable to distinguish its holding, the decision below deems it limited to its facts because this Court neglected to declare “that the definition it used was [ ] universal.” App.15. Under that approach, practically any decision of this Court could be evaded in like manner. In any event, this attempt to wave away Glenshaw Glass's holding is inconsistent with this Court's application of the same standard in James, Kowalski, and Indianapolis Power & Light. James, in particular, turned on the question of realization. Compare 366 U.S. at 219 (reasoning that an embezzler obtains “actual command over the property taxed,” rendering it income) (quotation marks omitted) with id. at 248–52 (Whittaker, J., dissenting) (disputing that). In its haste to bury Glenshaw Glass, the Ninth Circuit skipped past the fact that this Court and others have repeatedly applied its realization requirement.

The Ninth Circuit's claim that Horst or Helvering v. Griffiths, 318 U.S. 371 (1943), sub silentio narrowed or overruled Macomber's and Glenshaw Glass's holdings on realization is difficult to take seriously. See App.15. To begin with, both Horst and Griffiths predate Glenshaw Glass, with its insistence that income be “clearly realized,” by more than a decade. As noted, Horst repeated and applied “the rule that income is not taxable until realized.” 311 U.S. at 116. It holds that directing payment to a third party is realization, no different that securing payment to oneself before gifting the money. Id. at 117–18. Not a word in Horst casts doubt on the need for realization; to the contrary, its entire analysis focuses on whether the taxpayer realized the gain in question. As for Griffiths, it expressly refused the Government's request to overrule Macomber. 318 U.S. at 404.

The Court's decisions are clear that realization is required for a taxpayer to have “income” taxable as such, and the Court has never deviated from that principle. Just as clearly, the decision below repudiates a century's worth of this Court's precedents.

C. The decision below also creates a conflict in authority among the courts of appeals. The First and Fourth Circuits have held Glenshaw Glass to set the standard for Sixteenth Amendment income, including that it must be “clearly realized.” Quijano v. United States, 93 F.3d 26, 30–31 (1st Cir. 1996), applied that standard to hold that a sale that resulted in a dollar gain only because of currency appreciation produced “realized income, fully taxable under the Constitution” without apportionment.

Simmons v. United States, 308 F.2d 160, 167–68 (4th Cir. 1962), likewise applied the Glenshaw Glass standard to hold that taxation of prize money “comes within the Sixteenth Amendment” because “receipt of [the prize] constitutes an economic gain over which [the taxpayer] has complete control and . . . complete legal right.” The “crucial factor,” Simmons understood, “is the status in the recipient's hands of the money being taxed.” Id. at 167. That understanding, which Quijano also embraced, squarely conflicts with the holding of the decision below that realization is unnecessary for Sixteenth Amendment income.

II. The Ninth Circuit's Holding Clashes with the Sixteenth Amendment's Text and Eviscerates Article I's Apportionment Requirement

Not only does the decision below break with governing precedent, but it is also indefensible as a matter of constitutional interpretation.

A. Begin with the text. The Sixteenth Amendment's exemption from apportionment is limited to “taxes on incomes, from whatever source derived.” As Macomber astutely observed, that text plainly contemplates that “incomes” must be realized: a gain is not income unless and until it has been “derived” by the taxpayer from some “source.” 252 U.S. at 207–08.

That “income” refers to the receipt of an economic gain was well understood at the time of the Sixteenth Amendment's drafting and ratification. “The word 'income' . . . has a settled legal meaning” and was “uniformly construed” by “courts . . . to include only the receipt of actual cash as opposed to contemplated revenue due but unpaid.” Maryland Cas. Co. v. United States, 52 Ct. Cl. 201, 209 (Ct. Cl. 1917); see, e.g., Gray v. Darlington, 82 U.S. 63, 65–66 (1872) (holding that appreciation in the value of securities was not income because it was not “realized” and so was “merely . . . increase of capital”); Connecticut Gen. Life Ins. Co. v. Eaton, 218 F. 188, 205 (D. Conn. 1914) (applying Stratton's Independence's definition of “income” and holding that taxpayer received no income on items listed as assets “until the same were paid or realized”); Mut. Ben. Life Ins. Co. v. Herold, 198 F. 199, 214–15 (D.N.J. 1912) (“[I]ncome . . . means what has actually been received, and not that which, although due, has not been received, but its payment for some reason deferred or postponed.”). United States v. Schillinger, 27 F. Cas. 973, 973 (C.C.S.D.N.Y. 1876) (“[I]ncome must be taken to mean money, and not the expectation of receiving it, or the right to receive it, at a future time.”); cf. Gibbons v. Mahon, 136 U.S. 549, 558 (1890) (explaining that a corporation's accumulated earnings are, to shareholders, “capital, and not income”).

Contemporaneous dictionary definitions are to the same effect. The 1913 edition of Webster's defined “income” as “that gain which proceeds from labor, business, property, or capital of any kind.” Webster's Revised Unabridged Dictionary (1913) (emphasis added); see also Webster's American Dictionary of the English Language (1889) (“That gain which proceeds from labor, business, or property of any kind.”). Likewise, the Century Dictionary and Cyclopedia (1901) defined “income” as “[t]hat which comes in to a person as payment for labor or services rendered in some office, or as gain from lands, business, the investment of capital, etc.” (emphasis added). See also Robert Hunter & Charles Morris, Universal Dictionary of the English Language (1897) (“That gain which a person derives from his labor, business, profession, or property of any kind.”); Joseph Worcester, Dictionary of the English Language (1875) (“Gain derived from any business or property.”).

Contemporaneous legal authorities similarly understood “income” to turn on realization. The 1910 edition of Black's Law Dictionary defined “income” to include “that which comes in or is received from any business or investment of capital.” Black's Law Dictionary (2d ed. 1910) (emphases added). Black's author, Henry Campbell Black, also published a treatise on income tax shortly after ratification of the Sixteenth Amendment to address the new law. Henry Campbell Black, A Treatise on the Law of Income Taxation Under Federal and State Laws (1913). The very first page begins, “An income tax is distinguished from other forms of taxation” in that it is “levied . . . upon the acquisitions of the taxpayer arising from” trade and business. Id. at 1. Black's treatise goes on to define “income” as “that gain which proceeds from labor, business, or capital of any kind.” Id. at 73 (emphasis added). Realization, he explained, is essential: when, for example, the owner of an appreciated security “sells, then the sum gained may be constitute a part of his income, but it cannot be so described while he continues to hold the security.” Id. at 77.

Edwin Seligman, a leading proponent of the Sixteenth Amendment and federal income tax, likewise recognized the necessity of realization in his influential The Income Tax (1911). Income, he explained, “is that which comes in to an individual above all necessary expenses of acquisition, and which is available for his own consumption.” Id. at 19 (emphases added). And that same understanding prevailed after the Amendment and federal income tax took effect. See Robert H. Montgomery, Income Tax Procedure 198 (1917) (stating that the federal government has no “right to tax any transaction unless there is an actual realization of income”).

In its insistence that “income” requires realization, Macomber followed “the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment to the Constitution.” Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509, 519 (1921). The decision below contradicts that original understanding.

B. The decision below also does great violence to constitutional structure, virtually eviscerating Article I's apportionment requirement. The Sixteenth Amendment arose in response to Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 637 (1895), which held “taxes . . . on the income of personal property” to be direct taxes requiring apportionment. In drafting what became the Sixteenth Amendment, Congress considered and rejected the broader approach of striking the direct-tax clauses altogether. See Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of “Incomes,” 33 Ariz. St. L.J. 1057, 1116 (2001). The Amendment's principal author explained, “my purpose is to confine it to income taxes alone.” Id. (quoting 44 Cong. Rec. 3377 (June 17, 1909)).

The consequence of that decision was to retain the plenary requirement that direct taxes be apportioned among the states, subject to an exception only for “taxes on incomes.” See Brushaber v. Union Pac. R. Co., 240 U.S. 1, 18–19 (1916). “Nothing in the Sixteenth Amendment relieved Congress of its duty to apportion other forms of direct taxation, such as a tax on property interests.” App.38 (Bumatay, J., dissenting); see also Nat. Fedn. of Indep. Bus. v. Sebelius, 567 U.S. 519, 571 (2012) (recognizing that the Court has “continued to consider taxes on personal property to be direct taxes” requiring apportionment).

The decision below effectively repeals what the Sixteenth Amendment preserved. By decoupling “income” from realization, it empowers Congress to deem practically anything “income” and tax it as such, without apportionment. That includes, as in this case, personal property in the form of stock, but the decision's holding is by no means limited to stock: if taxpayers like the Moores can be income-taxed on sums they've never actually or constructively realized, then nothing prevents Congress from arbitrarily attributing “income” to any taxpayer as a basis for taxation. “[W]ithout a realization requirement, it is hard to see what's left of the constitutional apportionment requirement.” App.39–40 (Bumatay, J., dissenting).

III. The Question of Congress's Power To Tax Unrealized “Income” Without Apportionment Is Exceptionally Important and Warrants Review

The importance of the question presented cannot be overstated. This case presents a fundamental constitutional question concerning Congress's core power of taxation. That question is not only politically important, but practically important, as American families and businesses plan their financial futures. The decision below upsets the heretofore settled expectation that federal taxation of property and wealth was effectively impossible, due to the difficulty of apportionment. The Court's review is required to resolve this question of vast legal and practical significance, and this case is the ideal vehicle for the Court to do so.

A. The question of Congress's power under the Sixteenth Amendment to tax persons on “incomes” they have not realized in any form is exceptionally important. In the proceedings below, neither the Government nor the Ninth Circuit identified any precedent approving an income tax that operates in the absence of realization. The reason is that, following Macomber, Congress refrained from overstepping the line this Court drew. See Helvering v. Nat'l Grocery Co., 304 U.S. 282, 288 n.4 (1938) (describing evolution of tax treatment of corporations' retained earnings); Griffiths, 318 U.S. at 389–93 (describing Congress's care in following Macomber); see generally Henry Ordower, Revisiting Realization: Accretion Taxation, the Constitution, Macomber, and Mark to Market, 13 Va. Tax Rev. 1, 9 (1993) (describing the “Macomber effect” that deterred Congress from “tax[ing] the unrealized appreciation in a taxpayer's property”). It abandoned that restraint with the MRT, which the decision below recognizes to be a “novel concept” in taxation. App.8. It is, at a minimum, a marked departure from Congress's historic exercise of its taxing power.

As such, the MRT calls into question long-accepted limitations on that power. For example, following Macomber Congress ceased its brief experiment in taxing shareholders on corporations' retained earnings. Nat'l Grocery Co., 304 U.S. at 288 n.4. The MRT, however, conflicts with the long-held understanding that Congress lacks the power to levy such taxes without apportionment. And the decision below spells out what the MRT implies, holding that nothing prohibits Congress from “attributing a corporation's income pro-rata to its shareholders” and then taxing them on it. App.13.

The consequences of that alone are earth-shattering. Millions of Americans hold stock in their retirement and investment accounts or through mutual funds. Taken at its word, the decision below authorizes Congress to tax every single one of them on the retained earnings of the corporations in which they've invested. The tax would be practically indistinguishable from one on the shares themselves, given that every major corporation has funded its growth, to a large extent, through reinvestment of profits. For example, the retained earnings carried on Exxon's books actually exceed its total shareholder equity.⁶ Under the logic of the decision below, Exxon's shareholders could be deemed to have “income” that exceeds the value of their shares and then taxed on it.

More broadly, repudiating the requirement that taxable income be realized calls into question the longstanding consensus that Congress lacks the power to tax property without apportionment. This Court held as much in Pollock, 158 U.S. at 637 (“taxes on personal property . . . are [ ] direct taxes” requiring apportionment). But the MRT's logic, as reflected in the decision below, suggests that Pollock turned only on Congress's failure of imagination in taxing property in so many words; if, instead, it taxes property-owners on deemed “income,” then the apportionment requirement goes out the window. So while Congress cannot lay an unapportioned tax on farmland, it could very well tax farmers on the imputed rental value of their land, deeming that to be their “income.” Or “Congress could simply deem taxpayers to have sold all their assets” and tax them “on the income deemed to result.” Berg & Feingold, supra, at 1354 (discussing import of MRT); see also Ordower (2019), supra, at 1409 (arguing that the MRT provides a model for a one-time tax on all property). Without the need for income to be realized, there is no limit.

This is no idle threat. The President has proposed a tax on appreciation in property, which the White House candidly describes as “unrealized income.” Press Release, The White House, President's Budget Rewards Work, Not Wealth with new Billionaire Minimum Income Tax (Mar. 28, 2022).⁷ In the last Congress, legislation to establish a wealth tax was introduced in both the House and the Senate. Ultra-Millionaire Tax Act of 2021, H.R. 1459, 117th Cong. § 2901(a) (2021) (“In the case of any applicable taxpayer, a tax is hereby imposed on the net value of all taxable assets of the taxpayer on the last day of any calendar year.”); S. 510 (same). Meanwhile, the Chairman of the Senate Finance Committee introduced a proposal to tax gains on stockholdings and other “tradeable assets” annually. Press Release, Wyden Unveils Billionaires Income Tax (Oct. 27, 2021).⁸ There is every reason for the Court to resolve the pivotal constitutional question of realization now, when its judgment can inform lawmakers and stands to head off a major constitutional clash down the line.

Finally, the interests of federalism also weigh in favor of review. To uphold the MRT, the Ninth Circuit had to unravel one of the central “compromises which made the adoption of the constitution possible” and continues to secure our “dual form of government.” Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 583 (1895). The whole point of the apportionment requirement was “to prevent an attack upon accumulated property by mere force of numbers.” Id. Apportionment deters Congress from working “partiality or oppression” against localities through property taxes that have localized consequences unknown to remote Members of Congress. Federalist No. 36 (Hamilton); see also 2 Records of the Federal Convention of 1787, p. 307 (M. Farrand ed. 1911) (“Seize and sell their effects and you push them into Revolts.” (Gouverneur Morris)). Apportionment is not, as the court below viewed it, an archaism or mere formality to be circumvented through clever draftsmanship.

B. This case is an ideal vehicle for the Court to address the question presented. This case presents only that question, and it presents it squarely and cleanly. Whereas most other tax cases present a host of statutory and factual disputes, this case does not. It is undisputed that the Moores are subject to the MRT, and it is undisputed that the MRT taxes the Moores on sums they did not realize in any fashion. In particular, there is no question of constructive realization. The sole question is the constitutional one: whether an unapportioned income tax may be levied in the absence of any realized gain by the taxpayer. That question was pressed at every stage below, fully briefed by the parties, and decided by the court of appeals. Given the typical complexity of tax disputes, the Court is unlikely to ever see a cleaner or more straightforward vehicle to address this fundamental question.

CONCLUSION

The Court should grant the petition.

DAN GREENBERG
SAM KAZMAN
DEVIN WATKINS
COMPETITIVE ENTERPRISE INSTITUTE

ANDREW M. GROSSMAN
Counsel of Record
DAVID B. RIVKIN, JR.
JEFFREY H. PARAVANO
BAKER & HOSTETLER LLP
1050 Connecticut Ave., N.W.
Washington, D.C. 20036
(202) 861-1697
agrossman@bakerlaw.com

Counsel for Petitioners

FEBRUARY 2023