To Avoid the Moore Morass, the Court Should DIG It — But It Probably Won't

Let me begin with the status of the Moore case. The Supreme Court granted certiorari on June 26, 2023, just as the Court was about to hand down its decision on affirmative action at the end of its term and the justices were leaving for the summer break. The petitioner’s brief on the merits was filed on August 30. A week later briefs of nearly 25 amici for the petitioner were filed on September 6. The government’s brief was filed on October 16. Eighteen briefs for amici in support of the government were filed by October 23 — an unusual, unprecedented outpouring of support for the government in a tax case. The reply brief of the petitioner will be filed in a few days. The case is scheduled for argument on December 5.

What is this case about, and why did the Supreme Court agree to hear it? Moore presents a constitutional challenge to the 2017 transition tax on the earnings of foreign corporations not previously taxed by the United States. In the Court documents, it is described as the mandatory repatriation tax (MRT). But, as the brief in support of the government by Iowa tax professor Andy Grewal points out, the provision at issue is Code section 965, which includes untaxed post-1986 accumulated earnings of foreign corporations in Subpart F income and taxes that income at rates lower than the corporate rate.

It was a great surprise when the Supreme Court took this case. There was no split among the circuits, which is almost always a requirement of the Court to take a federal tax case unless a lower court holds a statute unconstitutional, which did not happen here. The case challenges a rather technical international tax provision of the 2017 Act — not a change that Congress anticipated might cross a constitutional line.

There are only two cases since the enactment of the Sixteenth Amendment that have held income tax provisions unconstitutional. The first was Eisner v. Macomber, a 1920 Supreme Court decision that the petitioner relies on in Moore. The second was a case brought by Ruth Bader Ginsburg, later turned into a movie, based on a sex discrimination claim involving a tax provision on childcare. (For a long time, I said that there was only one case that had held an income tax provision unconstitutional, but Marty Ginsburg reminded me every time that there had been two.) That case was a circuit court decision, so there has been only one Supreme Court case. In 2006, in Murphy v. IRS, a panel of the D.C. Circuit court briefly concluded that section 104 was unconstitutional, but on rehearing, it quickly reversed that conclusion.

What convinced the Court to grant certiorari in this case? The principal mover in this case was the Competitive Enterprise Institute, a libertarian organization devoted to “free enterprise, capitalism, and deregulation,” a common description among such organizations. Moore’s father had been a member of its board. (Charles and Kathleen Moore filed a joint return and are the petitioners in this case, but I refer only to Mr. Moore in this comment.) Importantly, the taxpayer’s certiorari petition was supported by numerous conservative and libertarian organizations, including, for example, the Cato Institute, the Manhattan Institute, the Liberty Justice Center, the Pacific Research Institute, the Landmark Legal Foundation, Saving America’s Family Enterprises, the Atlantic Legal Foundation, and Grover Norquist’s Americans for Tax Reform. The Chamber of Commerce — now an important repeat player in the Supreme Court, filing amicus briefs both for and against certiorari and on the merits — also urged the Court to take this case. In a claim that might be humorous if the stakes weren’t so high, the Chamber contended that the Court should decide this case for Moore because businesses suffer when the law is unpredictable and uncertain. The Chamber was not intentionally joking, but it must know the potential for this case to create chaos in the tax law no matter who prevails.

What is the petitioner’s claim? The petitioner and his amici claim if the Ninth Circuit opinion upholding the transition tax is allowed to stand, it would bless taxes on the unrealized appreciation of assets of wealthy Americans, as Senator Wyden and President Biden have urged, and open the door to a wealth tax like Senators Warren and Sanders have proposed. The opportunity to erect a constitutional barrier to such prospects apparently convinced at least four justices to take the case. That Congress considered those kinds of taxes in 2022 and failed to enact any of them was evidently not relevant to the justices who voted to hear Moore.

Let me now review a little history. The government in its brief relies heavily on income tax history. The inability of the federal government to raise funds through domestic taxation was the paramount problem with the Articles of Confederation that led to the adoption of the Constitution. The national government had been helpless when the states ignored the federal government’s requests to send it money. In order to correct that shortcoming, the Constitution grants the power to Congress, “to lay and collect taxes, duties, imposts, and excises,” so long as they are uniform throughout the United States. Uniformity is not at issue in the Moore case. The second limitation on Congress’s taxing power is the “direct tax clause,” which requires that any “capitation or other direct tax” must be imposed so that each state pays according to its population. This is called the apportionment requirement. The phrase “other direct tax” is not defined in the Constitution, but the limitation on “capitation or other direct taxes” was an integral part of the Constitution’s original (embarrassing) three-fifths compromise on slavery. Historically it included taxes on land. What else, if anything, it includes is not clear from the history of income taxation in the United States. The direct tax clause is the constitutional constraint at issue here.

The United States first enacted an income tax because the country needed the money to pay for the Civil War. Treasury Secretary Salmon Chase told President Lincoln that the Union government could not borrow enough money, a doleful truth that the Confederate states learned too late. The Civil War income tax was upheld by the Supreme Court as constitutional in 1881 in Springer v. United States. The income tax lapsed after the Civil War ended, a common occurrence then. In 1894, when the government again decided to tax income, Congress wanted to replace revenues lost from tariff reductions and to promote economic justice in an industrializing country. That income tax was struck down in 1895 by the Supreme Court in the famous Pollock case, which expanded the “direct tax” limitation to include income taxes — a very controversial 5-4 decision by a conservative court. In 1913 the nation overcame the difficulties of amending the Constitution by enacting the Sixteenth Amendment overruling Pollock and enabling the federal government to tax income.

Moore and his allies now claim the transition tax is an unconstitutional direct tax on property not apportioned to the states by population. The question the Supreme Court presented to the parties is whether the Sixteenth Amendment authorizes Congress to tax unrealized gains without apportionment to the states. The question was prompted by an unnecessarily expansive opinion of the Ninth Circuit panel. That court said, “Whether the taxpayer has realized income does not determine whether a tax is constitutional. The Supreme Court has made clear that realization of income is not a constitutional requirement.” The Ninth Circuit panel described Moore’s reliance on Eisner v. Macomber and the Glenshaw Glass case (which defined income as “accessions to wealth, clearly realized”) as misplaced. Moore petitioned for a rehearing en banc.

Three judges dissented from the denial of the rehearing. Writing for the dissenters, Judge Bumatay said “Now, more than a century after its ratification, our court upsets the balance reached by the people. We 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. Instead, we conclude [quoting the panel’s opinion] that the Sixteenth Amendment authorizes an unapportioned tax on unrealized gains because the “realization of income is not a constitutional requirement.” The dissent adds, “Neither the text and history of the Sixteenth Amendment nor precedent support levying a direct tax on unrealized gains. . . . Simply put, as a matter of ordinary meaning, history and precedent, an income tax must be a tax on realized income. And our court is wrong to violate such a common-sense tautology.” Judge Bumatay’s dissent was undoubtedly important to the Supreme Court when it granted certiorari. Without this dissent, even with the Ninth Circuit’s broad opinion, the Court might not have taken the case.

The district court heard the case without a trial. So there is not a detailed factual record detailing Moore’s situation. In an affidavit, Moore said that he owned more than 10 percent of the stock of KisanKraft, a company in India founded by a friend of his who owned 80 percent or more of the company’s shares. Moore’s friend put his stock in the Indian company into a U.S. holding company for reasons that are not clear. Moore claimed in his affidavit not to have participated in the company’s management, and he asserted that he had no ability to influence its decisions about when to pay out earnings. But someone who subsequently investigated KisanKraft’s reports discovered that Moore was a director of the company between 2012 and 2017, a fact not disclosed to the courts during the litigation. Moore also claimed he traveled to India for pleasure and business, but he failed to disclose that the company had reimbursed $14,000 of his expenses, nearly the amount of tax he now claims should be refunded. These inconsistencies, I think, should be enough for the Supreme Court to DIG the case (dismiss as improvidently granted), but I have no sense that the government will urge such an action. As presented in the record before the Court, Moore seems to be a particularly sympathetic taxpayer, claiming to have no authority to issue dividends or collect cash to pay the tax.

As a legal matter, this case turns on the Court’s view of its 1920 decision in Eisner v. Macomber. Mrs. Macomber was a shareholder of Standard Oil, which gave her a 50 percent stock dividend, increasing the number of her shares from 2,200 to 3,300 without changing her proportionate interest in the company. The Internal Revenue Code then imposed income tax on proportionate stock dividends (a rule that was subsequently changed), and the Court held the provision was unconstitutional. This was a conservative court, long before the New Deal Court came into place. Justice Pitney, writing for a 5-4 majority, relied on Pollock, saying in that case, “it was held that tax upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, imposed by reason of ownership; and that Congress could not impose such taxes without an apportioning among the States according to population.” Justice Pitney went on to conclude that a stock dividend was not income, pointing out that a stock dividend “does not alter the proportionate interest of any stockholder or increase the intrinsic value of his holding or the aggregate holdings of the other stockholders as they stood before. The new certificates simply increased the number of shares, with consequent dilution of the value of each share.” So, instead of being a realization of income the stock dividend “postponed a realization.” The key statements in Macomber for Moore are: “The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit. . . . He has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.”

Justice Holmes in dissent declared that the “known purpose” of the Sixteenth Amendment was to get rid of nice questions as to what might be direct taxes. He added, “I cannot doubt that most people not lawyers would suppose when they voted for it they put a question like the present one to rest.” Justice Brandeis also dissented, analogizing a stock dividend to a cash payment followed by a reinvestment and arguing that they were equivalent under the Sixteenth Amendment. The Macomber Court was surely right as an economic matter, but its constitutional conclusion was criticized from the outset, and the case fell into the abyss for a long time, at least as to its constitutional holding. But the case has been recently cited by the Court.

In 1991 Macomber was cited, without any real effect, in Cottage Savings, a case concerning the realization of losses under section 1001 from the exchange of mortgage interests during the savings and loan crisis. (I was at the Treasury when certiorari was granted in Cottage Savings, and I told my colleagues then that there was no good way the case could come out for the government, no matter who won.)

More importantly, Chief Justice Roberts cited Macomber in his 2012 opinion in NFIB v. Sebelius, the Obamacare case. That case concerned the constitutional validity of the individual mandate requiring people to purchase insurance or to have coverage elsewhere. The mandate was enforced through a tax provision: a provision in the Internal Revenue Code requiring a payment by people who failed to have health insurance coverage. It is quite well known that Chief Justice Roberts had originally agreed with the four conservative justices that the mandate was unconstitutional because it violated the Commerce Clause. In his opinion for what became the majority, which included the four liberals then on the Court, he held to his position that the mandate violated the Commerce Clause. (In 2000 Jerry Mashaw and I published a book on social insurance in which we proposed an individual mandate, and it never occurred to us or anyone who read our book that there was any problem under the Commerce Clause with requiring people to buy health insurance. Health insurance is surely a national issue. Nevertheless, the five conservative justices concluded the mandate violated the Commerce Clause.) But Chief Justice Roberts concluded the mandate was constitutional under the taxing power of the Constitution. This required the majority to answer the question whether the individual mandate was a direct tax requiring apportionment to the states. Chief Justice Roberts’s opinion on this can fairly be described as cryptic. He quickly disposed of the issue, concluding that the mandate was not a direct tax. He suggested that direct taxes are capitation taxes and taxes on real or personal property, citing Pollock and Macomber. In my view, Chief Justice Roberts then breathed a bit of new life into the Macomber decision. My casebook, which goes back to the 1970s, for many years claimed that Macomber was archaic in its constitutional holding. After Chief Justice Roberts’s opinion in 2012, I changed the book so it no longer says that. Justice Scalia in his Obamacare dissent took Roberts to task for his cursory treatment of the direct tax issue with regard to the individual mandate. So Justice Scalia’s dissent is also potentially important on the direct tax question.

I believe Chief Justice Roberts’s dictum in the Obamacare decision calls into question the constitutionality of a wealth tax, but, of course, the Supreme Court (unlike myself) does not issue advisory opinions. Why the Court might think it needs to decide the wealth tax issue now is highly questionable, to be gentle. In summary, in the century since Macomber was decided, no other Supreme Court case has struck down an income tax provision as unconstitutional; there has also been no Supreme Court decision overruling Macomber or clearly holding whether there is any realization requirement under the Sixteenth Amendment.

Moore claims the transition tax is a tax on property, not a tax on income. This is wrong. The amount of income to be taxed, quite clearly under section 965, is measured by the earnings and profits since 1986 of Moore’s Indian company, KisanKraft. Any time you have income in one year, the tax on which is deferred, that income becomes your property until Congress (or the IRS) taxes the deferred income. The line between income and property is thinner than the petitioner argues in Moore. In addition, the question immediately arises, since section 965 is a part of Subpart F of the Code, how the Court can distinguish the rest of Subpart F from the transition tax. The petitioner insists Subpart F can be distinguished and describes an individual who purchased stock in 2017 and was not a shareholder of the company when he or she earned the income being taxed. But that is not this case. Moreover, when a shareholder purchases shares in a company with deferred tax liabilities, the liabilities should be reflected in the purchase price. Moore argued in the Ninth Circuit that retroactivity of the transition tax in going back to post-1986 profits violated the due process clause — not a frivolous argument in my opinion — but he abandoned that argument in the Supreme Court, relying solely on the direct tax issue.

The government’s brief relies on historical practices, pointing to the 1864 income tax that taxed corporate income, whether distributed or not, and taxed other unrealized gains such as the appreciation in the value of livestock, whether the livestock was sold or on hand. (Just to remind you, the United States was quite an agricultural country during the Civil War, compared to today.) The Civil War income taxes on unrealized income were upheld in Collector v. Hubbard, decided in 1871. Hubbard remained good law until Pollock struck down the income tax in 1895 as a direct tax, holding that a tax on income from real or personal property had to be apportioned to the states.

The government argues that when the Sixteenth Amendment overruled Pollock it reinstated prior law. Therefore, the government insists, there is no constitutional requirement for shareholders’ realization of corporate income. The government also describes the 1909 income tax on corporate income, which taxed increases in the value of unsold property and appreciation in the value of securities. The government brief, unsurprisingly given the way the Court relies on history, also spends considerable time reporting on dictionary definitions of income in 1913, which I shall spare you here. The government also relates scholarly writing about the meaning of income in 1913, including a famous definition by the economist Robert Haig, who described income as “the money value of the net accretion to one’s economic power between two points in time.” The government also points to a provision of the 1913 legislation, enacted eight months after the ratification of the Sixteenth Amendment, that taxed shareholders on a corporation’s undistributed income if the income was retained to avoid income tax. That provision, of course, was an early version of the accumulated profits tax. The government emphasizes that the 1913 law taxed partners on undistributed partnership income, and personal service corporations were taxed like partnerships beginning in 1918. The government’s brief concludes, “There is no principled reason that Congress cannot tax corporations like partnerships.” I should add that when I was at the Treasury in the 1990s, we issued a lengthy report on corporate integration, and one of the options considered was taxing corporations like partnerships. We rejected that option on administrative and complexity grounds, but the report was circulated throughout the government and no one suggested the tax law could not tax corporations like partnerships as a matter of constitutional law. (That may turn out to be another failure of my imagination about what the Court might do.)

The government’s view of Macomber is that the case has subsequently been limited to stock dividends and no longer reflects a constitutional imperative. Instead, the government insists realization is a rule of administrative convenience, pointing to a number of cases subsequent to Macomber treating realization as a rule of administrative convenience. The government emphasizes that Justice Pitney’s insistence in Macomber that the Constitution requires shareholders to receive some sort of monetary distribution before being taxed on it was merely dictum. The government claims the petitioner misunderstands Macomber and Macomber itself misunderstood the historical practice by treating Hubbard, the case upholding taxation of unrealized gains in the Civil War income tax statute, as having been overruled by Pollock without taking into account the Sixteenth Amendment’s overruling of Pollock.

Among the cases the government relies on as eroding Macomber’s contention that the Constitution bars taxing undistributed corporate income without apportionment to the states is United States v. Phellis, decided in 1921, a year after Macomber, upholding income taxation of stock dividends when a corporation reincorporated in a state different from the one in which it had originally incorporated. The Marr case, decided in 1925, reaches the same result. The 1924 Weiss decision, however, came to the opposite conclusion when the corporation was reincorporated in the same state — demonstrating the uncertainties that might arise if the Court concludes that realization is required by the Constitution. The Supreme Court’s jurisprudence in these three cases hardly seems sound as interpretation of a constitutional stricture, but they were all cited in the Supreme Court’s 1991 Cottage Savings decision, which treated the realization requirement as “founded on administrative convenience.” In the Bruun case in 1940, which held a landlord to be taxable on the value of a building that his tenant built on his property when the tenant defaulted, the Court treated Macomber simply as clarifying “the distinction between an ordinary dividend and a stock dividend.” In 1943 in the Griffiths case (one more case with Helvering on the other side), the government urged the Court to overrule Macomber, but instead the Court distinguished Macomber and again described it as “limited to the kind of dividend” at issue there. This is as close as the Supreme Court has come to overruling Macomber. Unsurprisingly, the government (which cites numerous other cases not mentioned here) insists that Macomber’s understanding of what constitutes income under the Sixteenth Amendment does not control the Moore case.

One conundrum here is that there is no general rule describing when a realization takes place. Importantly, the Supreme Court has never tried to define what constitutes a realization. The closest it has come was in Cottage Savings — a case Chief Justice Roberts lost when he was serving as Acting Solicitor General — when the Court concluded a realization under section 1001 occurs when taxpayers “enjoy legal entitlements that are different in kind or extent.” To me, the riskiest aspect of the government’s brief — and a surprise — was that the government’s brief does not distinguish Macomber on the ground that in Macomber the corporation’s income had previously been taxed at the corporate level so the tax on a proportionate stock dividend would have been a second tax on the shareholder’s share of the same income. In contrast, in the Moore case the taxpayer is objecting to a statute taxing income of a foreign corporation that had never been taxed by the United States. So, the tax that Moore wants refunded is the first U.S. tax on the earnings of the shareholder’s Indian corporation. Taxes on that income had been deferred under the pre-2017 tax law.

Surprisingly also absent from the government’s brief — especially given its reliance on the history of taxation before the ratification of the Sixteenth Amendment — is any citation or discussion of the Court’s important 1796 decision in Hylton v. United States, argued on behalf of the government by Alexander Hamilton. In Hylton the Court, without dissent, upheld a 1794 federal tax on carriages as not constituting a “direct tax” subject to the Constitution’s apportionment requirement. Importantly, the Court’s decision in Hylton described direct taxes under the Constitution as limited to head (capitation) taxes and taxes on land. The leading academic articles concluding that a federal wealth tax would be constitutional rely heavily on the Hylton decision. Fortunately, the briefs by amici in support of the government in Moore compensate for both of these omissions in the government’s brief.

As I noted, 18 amicus briefs were filed supporting the government, but given the limitations of time and space, I shall describe only a handful here. First, constitutional scholars Akhil Reed Amar and Vikram David Amar filed a powerful brief relying on Hylton, in which they describe the close link between the Constitution’s direct tax clause and slavery and highlight the dramatic break from previously narrow interpretations of the direct tax clause by the Pollock decision before that case was repudiated by the Sixteenth Amendment. (Similar points are also advanced in a brief filed by professors Bruce Ackerman, Joseph Fishkin, and William Forbath.) The Amars’ brief urges the Court to dismiss the Moore case as improvidently granted (to DIG the case).

A number of amici briefs supporting the government emphasize that section 965 imposes tax on previously untaxed foreign income. A group of tax economists from the conservative American Enterprise Institute, expressing their “common belief in free enterprise,” call the Court’s attention to the lack of any historical support for Moore’s position that a tax falling exclusively on foreign commerce is a direct tax under the Constitution. They emphasize that the transition tax falls on “the use of a controlled foreign corporation to shield offshore earnings from U.S. taxation.” Briefs for two prestigious professional tax organizations, the American Tax Policy Institute, a group of “leading experts on taxation from the fields of law, accounting, and economics,” and the American College of Tax Counsel, an association of tax lawyers “recognized for their excellence in tax practice,” explain that the Sixteenth Amendment gives Congress the power to tax shareholders of a foreign corporation on the corporation’s undistributed foreign earnings not otherwise subject to U.S. federal income tax. These briefs distinguish Macomber, where the corporation’s income was taxed, from Moore. So does a brief of the NYU Tax Law Center and a group of law professors, which details how Macomber has been limited to proportionate stock dividends. The NYU brief also notes the statement in Glenshaw Glass that Macomber was not meant “to provide a touchstone to all future income questions.”

An amicus brief in support of the government recounting the six-year development of the 2017 transition tax was submitted by Tax Notes contributor Mindy Herzfeld and George Callas. Callas describes himself as having “spent all his professional career in Republican tax and budget policy,” and having been “intimately involved in the development, design, and drafting” of the provision at issue here. Their brief details how the transition tax was an essential aspect of Congress’s 2017 revision of the international tax rules allowing “U.S. companies to repatriate profits from foreign operations tax-free, while partially exempting any income that had been deferred since 1986.” The brief also relates how the Chamber of Commerce, which supported Moore’s petition for certiorari and filed a brief on the merits in his support, was a strong advocate for and celebrant of the 2017 changes. Although their brief describes a wealth tax as a question “that should be left for another day,” Callas (perhaps to substantiate his conservative credentials) suggests that a federal wealth tax, like those proposed by Senators Warren and Sanders, “is likely” an unconstitutional direct tax.

A brief was also filed in support of the government by the Main Street Alliance, a “network of 30,000 small businesses across the country,” and the Small Business Majority, a national organization composed of “85,000 small businesses and 1,500 community organizations.” They emphasize small businesses’ need for predictability and certainty in the tax code, complaining of the uncertainty that a decision for Moore would engender. I had never heard of either organization before seeing their brief, but when associations of small businesses file a brief in support of the government in an income tax case, it is unmistakable that something has gone badly amiss.

As now seems to be routine in controversial cases before the Court, a number of states also filed briefs in this case. The attorney general of West Virginia, along with sixteen attorneys general from other Republican states, filed a brief contending that taxes on unrealized gains are the states’ domain and urging the Court to use the Moore case to impose strong constitutional constraints on Congress’s taxing power. Not to be outdone, Arizona filed a brief for sixteen states and the District of Columbia, all currently headed by Democrats, in support of the government, asserting that a victory for Moore would decimate their tax bases through “unchecked tax avoidance” and would cause chaos for their states’ tax systems.

At the end of its brief, the government claims that even if the transition tax is not a valid income tax under the Sixteenth Amendment, it is a valid federal excise tax on the use or enjoyment of property or on particular business transactions. This may appear to be a weak point in the government’s brief, but I believe the excise tax claim needed to be advanced. In the 1911 case Flint v. Stone Tracy Co., before the overruling of Pollock by the Sixteenth Amendment, the Supreme Court upheld the 1909 corporate income tax as an excise tax, concluding it was not a direct tax requiring apportionment. The government relies on the Court’s decision in Flint to suggest that even if the Court rules for Moore, it need not and should not strike down the transition tax for corporate shareholders of foreign corporations. The government makes this explicit in footnote 6 (on page 48) where it asserts: “even if it’s not an excise tax on individual shareholders, it is an excise tax on corporate shareholders.” Corporate shareholders, of course, account for the bulk of the revenue raised by the provision at issue. The government may fear that because there are at least four justices who voted to grant certiorari over the government’s objection, there may be five votes for Moore. The mandatory transition tax was estimated to raise $340 billion to pay for the $220 billion in costs of the participation exemption for foreign dividends plus some of the other 2017 tax cuts for businesses. It is hardly surprising that the government urges that remand of the excise tax issue would be particularly prudent here because of the disruptive consequences of holding the transition tax unconstitutional.

What are the potential disruptive consequences of a decision for Moore? One issue not discussed except by implication in the petitioner’s or government’s briefs is the question of severability. If the Court strikes down the transition tax, is that the only provision held to be unconstitutional, or does the Court strike down other provisions as well? The Internal Revenue Code in section 7852 provides if any provision of Title 26 is held to be invalid, the remainder of the Code shall not be affected — a provision creating a strong presumption for limiting any decision to the tax statute held to be invalid. On the other hand, the definition of income subject to the transition tax is a part of Subpart F, and because the transition tax was so intertwined and integral to the transformation of international taxation in the 2017 act, it is possible that the participation exemption, GILTI (which taxes unrealized gains), and other provisions of Subpart F might fall as well. If, however, the Court follows section 7852 and strikes down only the transition tax, it surely will invite litigation over these and many other income tax provisions.

The petitioner attempts to distinguish the remainder of Subpart F by describing it as a limited tax on certain kinds of incomes and claiming, as a result, it is a constructive realization provision. This is a weak argument. In addition to Subpart F, the government and a number of amici in its support have delineated many tax provisions potentially at stake in Moore. These are just the ones listed in the government’s brief: foreign personal holding company rules; the income tax on personal service corporations; the entirety of Subpart F; taxation of partnerships, Subchapter S Corporations, and LLCs; accrual counting rules which tax income when one has the right to receive it but before it is received; the exit tax on unrealized appreciation when Americans relinquish their citizenship; section 1256, dealing with regulated futures contracts; section 475A, dealing with securities dealers; several life insurance rules; the tax on original issue discount (which is necessary for saving accounts and corporate debt to be treated equivalently); the straddle rules (designed to limit abusive tax shelters); and the constructive sales rules under section 1259. Eric Toder of the Tax Policy Center has estimated that the costs of a decision for Moore might cost the government $100 billion or more of revenue annually. The Tax Foundation estimated that a particularly broad decision might cost trillions. The potential disruptions to current law demonstrate why I earlier described the Chamber of Commerce’s support of Moore as ironic on the ground that businesses need predictability and certainty in the tax law.

Another irony here is that Congress explicitly gave individuals a way to avoid the transition tax by forming a Subchapter S Corporation. This provision, along with the statute of limitations, means there are probably very few other individuals holding ten percent or more stock in foreign corporations who are likely to benefit from a Moore victory. Only corporate tax returns from 2017 are likely still open. But the Court could preclude corporate refunds by accepting the government’s contention that the corporate income tax remains a valid excise tax under Flint.

The most difficult question for the government on oral argument, as Daniel Hemel suggested, concerns the scope of the constitutional limitations on Congress’s power to tax. If the government claims the direct tax clause imposes no limits other than on capitation taxes, this seems likely to cause it trouble before this Court. In contrast, the government may concede, in addition to capitation or head taxes, the Constitution’s phrase “other direct taxes” includes taxes on the value of land and requires such taxes to be apportioned to the states. It hardly seems necessary to add that this would poke a substantial hole into a potential wealth tax. That should please, but certainly will not satisfy, Moore’s allies and amici.

As several of the amici briefs have emphasized, the Court can conclude that the Sixteenth Amendment requires realization, but nevertheless decide the Moore case for the government on the ground that the previously untaxed income realized here by KisanKraft may constitutionally be taxed to its U.S. shareholders. Such a decision, however, would spur challenges to numerous other income tax provisions, which is one reason I worry about the decision in this case no matter who wins. Any holding by the Court that realization is a constitutional requirement — whether or not it elaborates on what constitutes a realization — would undermine a century of income tax decisions and amendments to the tax law. Doing so without creating major uncertainties and litigation opportunities under the current income tax requires the Court to refuse to answer the question about realization that it took this case to decide.

In granting certiorari in the Moore case, given the briefs of the petitioner and his amici, it appears like at least four justices viewed the case as providing a potential opportunity to erect a constitutional barrier to a periodic tax on wealth or on unrealized appreciation — the kinds of taxes on billionaires and multimillionaires rejected by a Democratic Congress in 2022. The only good potential outcomes in this case are for the Court to dismiss it as improvidently granted (to DIG it), refuse to decide the constitutional question it presented in granting certiorari, or hold that there is no constitutional requirement of realization.

The justices and their clerks have a large stack of briefs to read, understand, and evaluate between now and December 5th, when the oral argument is scheduled in Moore. Based on grading exams at the Yale and Columbia law schools for many years — I was always disappointed how poorly I had taught the course because of what the exams revealed about the depth of the students’ knowledge. My successors may be doing better than I did in that regard, but I would be surprised if there are many tax experts among the justices and clerks of the Supreme Court now. I hope this does not cause major problems for the income tax.