Supreme Court Arguments Transcript Available in Moore Case

CHARLES G. MOORE, ET UX.,
Petitioners,
v.
UNITED STATES,
Respondent.

IN THE SUPREME COURT OF THE UNITED STATES

Washington, D.C.

Tuesday, December 5, 2023

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 10:09 a.m.

APPEARANCES:

ANDREW M. GROSSMAN, ESQUIRE, Washington, D.C.; on behalf of the Petitioners.

GEN. ELIZABETH B. PRELOGAR, Solicitor General, Department of Justice, Washington, D.C.; on behalf of the Respondent.

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CONTENTS

ORAL ARGUMENT OF: ANDREW M. GROSSMAN, ESQ.
On behalf of the Petitioners

ORAL ARGUMENT OF:
GEN. ELIZABETH B. PRELOGAR, ESQ.
On behalf of the Respondent

REBUTTAL ARGUMENT OF: ANDREW M. GROSSMAN, ESQ.
On behalf of the Petitioners

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PROCEEDINGS

(10:09 a.m.)

CHIEF JUSTICE ROBERTS: We will — we'll hear argument this morning in Case 22-800, Moore versus United States.

Counsel.

ORAL ARGUMENT OF ANDREW M. GROSSMAN ON BEHALF OF THE PETITIONERS

MR. GROSSMAN: Mr. Chief Justice, and may it please the Court:

The word "income" is not an inkblot. "Income" was understood at the time of the Sixteenth Amendment's adoption to refer to gains coming into the taxpayer, like wages, rents, and dividends. Appreciation in the value of a home, a stock investment, or other property is not and never has been taxed as income. The reason is that a gain is not income unless and until it has been realized by the taxpayer.

The Court squarely held as much in Eisner versus Macomber just a few years following adoption of the amendment, and the Court's decisions have held that line for a century.

That precedent makes easy work of this case. It is undisputed that the Petitioners realized nothing from their stock investment. They were taxed not because they had any income but because, in 2017, they happened to own shares in a corporation carrying retained earnings on its books.

This is a tax on the ownership of property. It therefore must be apportioned.

Dispensing with the need for realization sweeps away what the Framers regarded as the essential check on Congress's power to tax property. The government cannot identify a single thing that Congress couldn't tax as income under its position that realization is unnecessary. Without realization, there is no limiting principle.

Accepting the government's position on income would make a hash of the current law. The Tax Code's gateway definition of "gross income" exerts the full measure of Congress's taxing power under the Sixteenth Amendment by reaching all income from whatever source derived.

If the government's position in this case is right, then current law already requires taxpayers to report and pay tax on appreciation in the value of all their assets, on corporate earnings for any stocks that they own, and on any paper gains from their contracts and loans.

That's not how the income tax has ever worked going back to 1913. Again, the reason the law doesn't work that way is the obvious one. Unrealized gains are not income. The only way to make sense of the income tax as it's existed for a century is to stick with the original meaning of the Sixteenth Amendment.

The Court should reaffirm that there is no income without realization.

I welcome the Court's questions.

JUSTICE THOMAS: When you say "realization," what — do you have a definition for that or an explanation as to exactly what it is, and — and how is it different from, say, attribution?

MR. GROSSMAN: Thank you, Justice Thomas. Realization in the main is going to be receipt, but in other instances, it would be other types of enjoyment of an economic gain such that the taxpayer can put that gain to his or her own uses and benefits. That might be forgiveness of a loan or it might be assignment of income to a third party.

CHIEF JUSTICE ROBERTS: Well, there certainly is realization here by the corporation, if not the taxpayers, right? It isn't a case like appreciation of property where nothing has happened. You know, you buy a property, you're holding it for 20 years, you haven't sold it, nothing has happened. Here, something has happened, and income has gone to the corporation, isn't that right?

MR. GROSSMAN: Yes. The corporation has income, and we — we don't dispute that the corporation realized income over the decade-plus years that are being taxed by the MRT. But I — I think it really is like the instance of simply appreciation of property from the point of view of the shareholders.

The shareholders' interest in the corporation is solely a capital interest, a property interest, and so the value of their capital has increased. It has appreciated. But, as shareholders, no, they have not realized any income.

JUSTICE SOTOMAYOR: So tell me, what's — why do we permit taxing of individual partners when either state law or their partnership agreement doesn't realize the income to them? In many states, a partner doesn't have personal ownership, doesn't get the value of the partnership, yet we've permitted that tax.

MR. GROSSMAN: Thank you, Justice Sotomayor. A partnership is a fundamentally different form of organization than a corporation. The law has always recognized that a corporation is a person separate from the shareholders in that corporation. And there simply isn't that separate personhood that applies to partnerships. The partnerships are simply a group of people who come together to undertake a business activity, and when they do so, the income that comes in to them is their income directly. That's —

JUSTICE SOTOMAYOR: So what do you do with Subpart F or Subpart S or all of the other ways in which we have attributed corporate income to individuals?

MR. GROSSMAN: The —

JUSTICE SOTOMAYOR: You don't challenge — you don't challenge the constitutionality of Subpart F.

MR. GROSSMAN: That isn't at issue in this case.

JUSTICE SOTOMAYOR: But, in your brief, you don't appear to be challenging it.

MR. GROSSMAN: We think that Subpart F follows the commonly accepted method that Congress has used to address situations when a taxpayer has interposed a corporate structure between themselves and income that is otherwise their —

JUSTICE SOTOMAYOR: Well, but that's the whole purpose of a corporate structure. People do that all the time, particularly for that purpose. You don't incorporate unless you want the corporate shield. You don't incorporate unless you want the benefits of the corporate protection.

So, under your theory, Subpart F, Subpart S — these are longstanding taxing mechanisms by the government — your theory would undermine those as well, wouldn't it?

MR. GROSSMAN: I don't think that's right. Subpart F, again, works on simply categories of income on a current basis where those categories of income are properly viewed as being — and Congress determined are properly viewed as being earned by the shareholders due to the nature of the categories of income that are addressed under the statute.

JUSTICE SOTOMAYOR: Well, it seems — I'm sorry. Go ahead.

JUSTICE BARRETT: So you concede that Subpart F is constitutional? I just want to be sure that I understand your answer.

MR. GROSSMAN: We think that the defect with the MRT doesn't really apply to Subpart F. You know, Sub — the Court has never considered the constitutionality of Subpart F, but, as we take it, we don't think that there's a constitutional issue there.

JUSTICE BARRETT: So what is the distinction? Is it just that other parts of Subpart F, to the extent that they tax income, do it on an annual basis and the MRT was a one shot that went backwards?

MR. GROSSMAN: I think that's part of it. But, again, I think what — what it really is, is that the MR — is that the MR — is — I'm sorry — is that Subpart F addresses this fundamental income-shifting concept, whereas the MRT doesn't, and that's so in two respects.

First of all, Subpart F operates on a current basis while the corporation is subject to the control of the controlling shareholders, whereas the MRT takes no account of whether —

JUSTICE SOTOMAYOR: I — I'm sorry. There's no question that you meet the definition of Subpart F. You need in Subpart F at least 10 percent of the company's share, and the company has to be owned more than 50 percent by U.S. owners. So it's identical in terms of the percentage of ownership or the percentage of shares.

MR. GROSSMAN: That's right, but Subpart F, unlike the MRT, aligns the control and the ability to redirect income with the year that it is applicable to. The MRT takes account —

JUSTICE SOTOMAYOR: It sounds to me that what you're attacking is only a due process issue of how long the tax is for, not the ability to tax.

MR. GROSSMAN: I don't think that's right for the reason that — I think whether you owned a particular piece of property on a given date, which is the question that the MRT asks, is sort of the sine qua non of a tax on property, whereas Subpart F looks at income as it comes in while the controlling shareholder has the ability to redirect that stream of income.

JUSTICE BARRETT: But isn't that then just a question of whether it's fair to attribute — fair from a due process point of view, as Justice Sotomayor was saying, whether it's fair to attribute the income generated by KisanKraft to the Moores, which is a distinct question of whether there was income within the meaning of the Sixteenth Amendment, right?

MR. GROSSMAN: Well, I think it ultimately comes down to a Sixteenth Amendment question for the same reason that the Court thought so in Macomber, which is that a shareholder's interest in a corporation, including in its income, is a capital interest and therefore a property interest.

And so, if there is some reason to look beyond that and attribute income to the shareholder, that would necessarily raise a question of income and why it is that the shareholder isn't being taxed on what would otherwise be a property interest.

So I think the Court has always addressed this sort of question as a question of income, and that includes, for example, all of the assignment-of-income cases that the Court has decided over the years.

JUSTICE SOTOMAYOR: Can I go back to square — to first principles?

The concept of realization was very well established at the time that the Sixteenth Amendment was adopted, but the amendment does not reference realization. All that the drafters had to do was add the word "realize" after "income" to lay and collect taxes on income realized, but they never used the word "realize."

And then I look at the history both before and after the ratification, as far back as 1864, not so far back, Congress taxed — from the ratification — Congress taxed "gains and profits of all companies, whether incorporated or partnerships, in" — "in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or undivided."

In 1913, just eight months after the ratification of the Sixteenth Amendment, Congress included undistributed corporate earnings to certain shareholders.

Your brief tries to distinguish all these things, but I come back to the main point. Both sides can point to congressional actions that tax some realized income, some didn't unrealize — didn't tax unrealized income, but we have examples of Congress taxing realized — unrealized income.

Why don't I take it that the plain text of the amendment doesn't make reference to realization?

MR. GROSSMAN: I think there are two central features of the text of the amendment that reflect that it does apply only to realized gains.

The first is simply the use of the word "income." I would particularly commend to the Court's attention the amicus brief followed — filed by the Professors of Law and Linguistics, which analyzes the use of the word "income" in period text, but —

JUSTICE SOTOMAYOR: As I go back, all of this goes back and forth, because the government has other definitions. We're — we're — we're back in square one if what we're doing is weighing historical definitions.

MR. GROSSMAN: The weighing in this case, Your Honor, is quite lopsided. The government relies principally on two definitions that were — that were put forward by economists in the years following the amendment's adoption and neither of which reflects the common understanding at the time.

One of the economists recognized that he was simply espousing his own economic views divorced from any question of law or common understanding, and the second economist recognized that the common understanding of "income" is what we say that it was, a realized gain.

So far, as the common understanding of the term was concerned, the — the only indication that the Court has before it, aside from dictionaries, which, again, lopsidedly favor our position, is — is the corpus linguistics analysis of the Professors of Law and Linguistics, which looks at how the word was used in everyday language at that time, and it concludes that unanimously, where it's possible to distinguish, "income" meant realized gains.

There's also in the amendment the language "from whatever source derived." As we pointed out, "derived" was generally meant to refer to concepts like receipts. And, indeed, again, the amicus brief of the Professors of Law and Linguistics recognize that when income was described as being derived, it was always used in that fashion.

JUSTICE KAGAN: I thought that —

JUSTICE KAVANAUGH: I guess I'm not sure — go ahead.

JUSTICE KAGAN:Go ahead.

JUSTICE KAVANAUGH:Go ahead.

JUSTICE KAGAN: I thought that that was just a response to Pollack, which had distinguished between income on personal property and other forms of income, and all that the Sixteenth Amendment authors were — were doing is to say that distinction that Pollock drew, we don't approve of that distinction.

MR. GROSSMAN: Right. I think that what the Sixteenth Amendment did was remove the necessity to consider whether income came from one source, particularly property, versus other types of sources. But, in so doing, it necessarily required as a precedent that the amounts — that what was being taxed, in fact, be income and not something else.

JUSTICE JACKSON: But why should we take the common meaning of "income" rather than the legal meaning given the context that Justice Kagan points out?

I mean, if the Sixteenth Amendment was specifically responding to this Court's legal precedent related to the meaning of "income," I guess I'm curious as to why you think that the common meaning of "income" is what we should be focused on when we try to understand what the Sixteenth Amendment meant when it used that term.

MR. GROSSMAN: Well, that's certainly the approach the Court typically takes in addressing questions of original meaning, but that aside, that's what the Court's — Court's cases have said for Merchants Bank and Macomber again and again, that — that the Sixteenth Amendment is to be construed according to its ordinary meaning.

And I would note that if the Court were to depart from that and say, for example, that personal property was not subject to apportionment, which I take it to be the thrust of the — the questions in this direction, taxes on personal property, that is, that would more — that would upend pretty much the entire line of the Court's Sixteenth Amendment jurisprudence over the past century —

JUSTICE SOTOMAYOR: But why?

JUSTICE KAVANAUGH: Are we —

JUSTICE SOTOMAYOR: I'm sorry. Go ahead.

JUSTICE KAVANAUGH: No, go ahead.

JUSTICE SOTOMAYOR: But why? If what we do is to think about a particular tax, which seems to be what we've been doing for over a hundred years, to see whether that tax is — is income as understood by attribution or as an excise tax or by other principles, we wouldn't have to give — we would consider each tax on its own form.

You're asking us to just announce what realization is out of context. And for the last hundred years, we've been studiously avoiding doing that because we recognize that it's dangerous to do that. To — to state a — a word like "realization," we then have to come up with a working definition that applies to every piece of property and every way in which people gain wealth. It doesn't seem logical to me.

MR. GROSSMAN:Respect —

JUSTICE SOTOMAYOR: Why don't you just concentrate on why Congress can't say that in certain situations it's going to ignore the corporate form and attribute to the individual shareholders certain income? That's what it's been doing all along. And, here, it doesn't need realization because Congress has attributed this to the individual owners of the corporation.

MR. GROSSMAN: Respectfully, the Court has already said in multiple occasions that realization is, in fact, required for there to be income under the Sixteenth Amendment. It's not only Macomber. It's also McLaughlin versus Alliance Insurance. It's the Safety Card Heating.

JUSTICE SOTOMAYOR: Yes, on certain types of property, but not all.

MR. GROSSMAN: It's Ivan Allen.

JUSTICE SOTOMAYOR: Where we also said that taxes can — that partnerships can be taxed individually even when the partners are not receiving the property.

We have Subchapter F and S. We have had all sorts of different forms of wealth that we have attributed to individuals rather than to the corporate — to — to the legal forms of ownership.

MR. GROSSMAN: And all of those taxes rely on the principle that the Court expressed in cases like Horst and Banks, which is — which is that income should be taxed to he who earns it and enjoys its benefits.

JUSTICE KAGAN: And putting aside, Mr. Grossman, whether there's any realization requirement at all, I mean, there is quite the history in this country of Congress taxing American shareholders on their gains from foreign corporations and you can see why, right?

Congress — the U.S. Government can't tax those foreign corporations directly, and they wanted to make sure that Americans that kind of stash their money in the foreign corporations watch their money grow and never pay taxes on them.

So, you know, there's a long century-old history of these kinds of taxes on gains from your holdings in a foreign corporation. Why is this any different and why shouldn't we understand that to be quite well settled, that Congress can implement those taxes and enforce those taxes for those purposes?

MR. GROSSMAN: The taxes in that area have typic — have followed the pattern that I described of simply a taxpayer interposing a corporation between themselves and income that would otherwise be theirs and those provisions from the beginning —

JUSTICE KAGAN: Well, that's this —

MR. GROSSMAN: Those provisions —

JUSTICE KAGAN: — isn't it?

MR. GROSSMAN: It isn't. Those provisions from the beginning have typically —

JUSTICE KAGAN: These are the same shareholders as in Subpart F.

MR. GROSSMAN: The difference is that those provisions have typically addressed things like passive income and related party transactions that are properly attributable to, say, a parent corporation.

In other words, a parent corporation could own an income-generating asset itself, or it could simply shift that into a corporation, into a foreign corporation, and thereby avoid the income.

And what the law has recognized is that just as in cases like Horst and Banks, that's effectively an assignment of income and that — and that it can be attributed to the — to the person who — the parent corporation for that reason because the parent corporation is the one that controls the flow of the income as it's coming in.

The MRT, by contrast, operates as a tax on property. It doesn't take account of any power that the shareholder had over the income as it was coming in the door to the corporation. It only takes account of the ownership in 2022.

JUSTICE KAVANAUGH: That seems to be an argument about timing. In other words, we have realization in this case. The entity realized income. The question then is attribution, and we've long held that Congress may attribute the income of the company to the shareholders or the partnership to the partners, and the only real wrinkle, I think, here is that it goes back and captures prior years' income.

MR. GROSSMAN: I think there are two — two wrinkles. One is that, with respect to those prior years, the statute doesn't require that the shareholders being taxed had any ability to control the disposition of the income in those years. That's a fundamental distinction.

The second is that Subpart F —

JUSTICE KAVANAUGH: That's not true for the facts of this case, though, correct?

MR. GROSSMAN: It is not true for the facts of this case, but — but —

JUSTICE KAVANAUGH: But you're saying generally. Yeah.

MR. GROSSMAN: Well, I think — I think it just demonstrates that this is a tax on property. In other words, do you own something on a particular date, as opposed to what do you do with the past? Did you have that power in the past?

But, second, the provisions —

JUSTICE KAVANAUGH: If they had been taxed year by year, would that have been permissible?

MR. GROSSMAN: No, and that's the second wrinkle, so to speak.

In this — the — the MRT is sort — is the inverse of what — of its — of its predecessors in the statutes. All the predecessors, like the foreign personal holding company provisions, as well as Subpart F, focus on categories of income. They're susceptible to being reassigned into the corporate form.

Congress has never reached so far as to tax shareholders of foreign corporations on the active business income of those corporations, but —

JUSTICE KAVANAUGH: Well, why is — why is that different analytically? I mean, this was all part of a big change from a worldwide tax system to a territorial tax system, and this is one piece of that, but I guess I'm not sure why the — which kind of income is at issue matters for the ultimate analysis of whether the attribution is permissible.

MR. GROSSMAN: Because all of these attribution schemes, going back to the very beginning, have focused on effectively the fraudulent or improper availment of the corporate form to avoid income, and they've always done that historically by focusing on particular categories of income that are susceptible to that type of abuse.

Congress took that to the max as it amended Subpart F over the years to capture more and more types of that sort of income avoidance.

What's interesting is that Subpart F says you've captured the field, now let's get everything else, and the "everything else" is the active business income that's attributable solely to the foreign corporation's own legitimate business activities overseas. And so a — the shareholder in a foreign corporation stands in no different position with respect to that income than a shareholder in, say, Microsoft or any other corporation.

This isn't the type of income that that shareholder would, in the ordinary course of affairs or as a matter of reality, be able to shift around into a corporate form and thereby avoid receiving it themselves.

I also want to address just the difficulties that the government's interpretation would raise with respect to the current Tax Code.

As I noted, the Tax Code already — already reaches the full extent of Congress's authority under the Sixteenth Amendment. And if the government is right, therefore, that certain novel categories of income — certain novel categories of what had heretofore been regarded as unrealized income or unrealized depreciation were — were subject to taxation under the Sixteenth Amendment, then those would already be subject to taxation under existing law.

JUSTICE JACKSON: Can I ask you a question about your argument before you go on with the government's?

So, if we agree with you that the Sixteenth Amendment's use of income requires realization and that the MRT does not meet the realization requirement — those are two, I think, different steps of your analysis — it seems to me that all we've done is demonstrate that the Sixteenth Amendment doesn't justify the MRT.

Don't you still have to demonstrate that the MRT is a direct tax in order to establish that the Constitution has been violated?

MR. GROSSMAN: Well, if the MRT is not a tax on income, then I think it stands to reason that it would be a tax on the ownership of shares, because, otherwise, the —

JUSTICE JACKSON: Well, the government makes another argument in their — in their brief. For example, they offer that it could be an excise tax. So I guess my point is just any indirect tax I would think just has to be uniform under the Constitution. So it seems as though it's your burden, regardless of this issue about realization, to — to establish that this tax is a direct tax in order to sustain your constitutional argument.

Am I wrong about that?

MR. GROSSMAN: We alleged below that it was a direct tax. The government filed a motion to dismiss. It argued that it was, in fact, a tax on income. It did not dispute —

JUSTICE JACKSON: So I appreciate that people haven't argued this. Would we then send it back to the Ninth Circuit to determine this issue of whether or not it's a direct tax?

MR. GROSSMAN: I think —

JUSTICE JACKSON: Or is it your argument that we can — we can sustain its constitutionality just because we haven't had briefing on this particular aspect of it?

MR. GROSSMAN: Well, I — I think what the Court could do is answer the question presented. As to whether or not there would be anything left for remand, I think it's at the Court's discretion as to whether it wishes to reach the government's excise tax argument.

So far as that argument is concerned, again, the bare text of the statute operates based solely on ownership of a particular piece of property on a particular date and takes no account of any type of business operations of the people whom it's taxing.

That is the sort of tax that Flint, which I think is the high watermark of the Court's excise tax jurisprudence, indicates is, in fact, a tax on property and cannot be sustained as an excise tax. So I think the Court could very easily make short work of that argument.

Go — go — going to the government's position in regard to —

JUSTICE ALITO: Is that argument within the question presented?

MR. GROSSMAN: No, Your Honor.

JUSTICE ALITO: Was it preserved?

MR. GROSSMAN: No, Your Honor. It was raised for the first time before this Court.

So far as the government's position is concerned, I mean, just think about, for example, if someone has a contract to sell widgets to a third party in a future year. If the price of widgets goes down so that they're less expensive to manufacture or acquire, then necessarily that person has received an economic gain under the government's position that would be taxable. Thank you.

CHIEF JUSTICE ROBERTS: Thank you, counsel.

Justice Thomas, anything further?

JUSTICE THOMAS: Would your case be any different or your argument be any stronger if you — we were talking about real estate rather than owning stocks in a corporation or an interest in a corporation?

MR. GROSSMAN: No, Your Honor. Pretty much all of the Court's Sixteenth Amendment cases over the course of the last century have concerned personal property in the form of investments. I think it's well established at this time that taxes on personal property —

JUSTICE THOMAS: Well, actually, what I'm more interested in is not necessarily a distinction between real and personal property but rather being invest — having an investment in a corporate form or partnership where you can actually — there is an argument that — that the income had been realized by the corporation or income had been realized, as you've heard this morning, by the partnership and whether or not that should then be attributed to the — those who invest in those organizations — in those companies, whereas, in real estate, unless there is a transaction, a sale, or a lease or something, there's no taxable transaction.

So would there be a difference between a stake in a corporation or partnership, as opposed to real estate or personal — other personal property?

MR. GROSSMAN: I don't think so. I mean, the Court has applied the same principles across the sweep of its Sixteenth Amendment cases. Pretty much all of the early ones applying the principle that we put forward did involve corporate investments and different types of corporate reorganizations that the government argued resulted in income to the shareholders.

But the Court applied the same principles in cases like Horst, for example — I'm sorry — Bruun, for example, that involved real property, and recognized that in that instance there equally had to be realization. Likewise, in Blatt, the Court reached the opposite result in Bruun with — again, with respect to an improvement made to real property.

So we don't think the constitutional principles are any different. I think the only difference perhaps with respect to corporate shares is that the government might have an argument that there is some type of constructive realization under — under the statute that imposes the tax.

JUSTICE THOMAS: But isn't that a — as a — just based on the questions this morning, that seemed to be a vulnerability that you would not have with real property, for instance.

MR. GROSSMAN: I don't think it's a vulnerability given that the line — given the general principle that's required and given the nature of this tax. I think it would be a more difficult case if this tax were structured in an entirely different fashion that didn't operate in the way that it does, but that's obviously a hypothetical that's not before the Court.

CHIEF JUSTICE ROBERTS: Justice Alito?

JUSTICE SOTOMAYOR: One last question. Does your theory put at risk limited liability companies, closely held corporations, limited partnership corporations? I mean, there's all sorts of corporate forms that are there. You — your definition, I think, would affect the government's ability to tax those individual partners, no? Those individual shareholders.

MR. GROSSMAN: No, Your Honor.

JUSTICE SOTOMAYOR: Why not?

MR. GROSSMAN: We don't think that those provisions present any constitutional difficulty whatsoever. Again, a corporation is different. The Court's cases have recognized that.

JUSTICE SOTOMAYOR: What — I don't know why. Meaning, whether it's limited liability or — or closely held, it's still a corporation.

MR. GROSSMAN: Well, first of all, I mean, you've got — distinguishing a corporation from partnership, I mean, again, you have the doctrine of corporate personhood that the Court has long understood does make a difference in these circumstances.

But so far as other types of corporations, I guess, corporations are concerned, there is an election that is made by all of the shareholders to those corporations to allow pass-through taxation.

If somebody wants to come to the government and say, I am earning income and that's how I've organized my business and am operating it, I think the government can accept that as a concession.

JUSTICE SOTOMAYOR: We're going back to whether attribution is legal. Thank you.

MR. GROSSMAN: I don't think it's a question of attribution, Your Honor. I think it's question of a concession by the shareholders.

JUSTICE SOTOMAYOR: Well, no, that's exactly the point, which is why should they get to choose and not the government where to attribute the income.

MR. GROSSMAN: Well —

JUSTICE SOTOMAYOR: Thank you, counsel.

CHIEF JUSTICE ROBERTS: Justice Kagan?

JUSTICE KAGAN: So, at the risk of a little bit repeating some of the discussion, it — it seems to me that there are four principal — there may be others, but there are four principal kinds of taxation that Congress has repeatedly countenanced and that this Court certainly has done nothing to get in the way of that you have to distinguish here, and I just want to make sure I understand your distinctions and whether there's a single distinction that sort of covers all of these or whether each one has a different explanation.

So here are my four. It's Subpart F, it's S Corporations, it's partnerships, and it's taxing on an accrual basis. So give me why it is that you think we can decide for you without putting any of those kinds of very established taxation schemes at risk.

MR. GROSSMAN: At a 10,000-foot level, Your Honor, they all hew to the realization line as it's been developed in the Court's cases and by historical precedent.

JUSTICE KAGAN: See, I would have thought that none of them hewed to the realization line.

MR. GROSSMAN: I — I think that the —

JUSTICE KAGAN: I mean, that's why this is my question, I guess.

(Laughter.)

MR. GROSSMAN: Again, Subpart F uses that familiar — that familiar mechanism of simply attributing income to the person who earned it even if they've directed it somewhere else, and it's long — and taxes of that nature have long been justified on that basis.

As corporations, again, are by election of the shareholders, if they concede that this is, in fact, their income and that's how they're operating their business, I don't think that the government would have any basis not to take them at their word should the government choose to do so.

So far as partnerships are concerned, again, there's no separate person that sits above the shareholders of — of a — or, I'm sorry, the partners of a partnership. And those have always been treated differently going back to — I mean, gosh, going back to the Dartmouth College case where it wasn't even new at that point.

But, with respect to income, going back to Gibbons versus Mahon, which recognized it is a well-established principle at that point that corporations are different in that respect from partnerships, indeed, that was the basis on which Macomber rejected the same — the same argument.

And then, finally, with respect to accrual, the Court already addressed that issue in the Safety Car Heating & Lighting case where it held that standard Sixteenth Amendment realization principles — and — and it cited, among others, Macomber — applied to the accrual method of accounting.

So, you know, whatever question there might be about that methodology and — and its constitutional status, I think, at this point, that's been long established and is water under the bridge.

JUSTICE KAGAN: Mm-hmm. And can I go back to Justice Thomas's question, which is your own definition of "realization"? And I'm just going to give you Macomber's, and tell me if you agree with it or disagree with it or think it needs to be modified.

Macomber said, "that which precedes from the property is severed from the capital, is received or drawn by the recipient, that is, the taxpayer, for his separate use."

Is that your definition too?

MR. GROSSMAN: I think subsequent case law has recognized that the separation concept may be — doesn't necessarily apply in every circumstance, although it does apply in the circumstance of distinguishing shareholders versus corporations.

JUSTICE KAGAN: Yes. So, for example, in Bruun, we basically ignored the separation requirement, correct?

MR. GROSSMAN: The Court said that it was applicable in the corporate context but not necessarily in other contexts. In that example, for example, an improvement that was made to land that was not severable from the land.

JUSTICE KAGAN: And that — that definition really wouldn't be very good to — to explain Subpart F, is that correct too?

MR. GROSSMAN: Well, I think what the Court has recognized in subsequent cases is that it's really the concept of realization as opposed to, say, actual receipt that is important.

I mean, look, it's going to —

JUSTICE KAGAN: So what you're saying is basically we've left Macomber behind?

MR. GROSSMAN: No. I think the Court's cases through Glenshaw Glass, you know, up through as recently as, say, Indianapolis Power & Light or Banks recognize that there is something more that is needed — that is needed than a mere economic gain.

JUSTICE KAGAN: No, no, no. I wasn't suggesting that we've left entirely behind any concept of realization. I mean, that's a different question, but that we've left the Macomber definition of "realization" behind.

MR. GROSSMAN: I don't think — I — I think that Macomber's holding in that respect remains good law. I don't think that it's been left behind.

Macomber goes on to recognize, for example, regarding corporations that there may be appropriate circumstances for the law to look behind the corporate form to ascertain the true right and actions of the shareholder with respect to income.

And so I think take — Macomber taken as a whole does recognize this principle and it used the best language that occurred to the judges in the context of the case to express that, look, in most cases, it's going to be receipts, but in other cases, something else may well qualify.

JUSTICE KAGAN: Thank you.

CHIEF JUSTICE ROBERTS: Justice Gorsuch?

JUSTICE GORSUCH: I think the argument we — we've kind of heard from the other side involves, okay, if there is a realization requirement, it's met here because the corporation realized the income, and then it just becomes a question of attribution of that realized income, and Congress has a free hand there, and the Sixteenth Amendment says nothing.

Your response.

MR. GROSSMAN: My response is that income is — I mean, the Court has always looked at questions of income from the point of view of the shareholder. If you point to a Sixteenth Amendment case or a case involving gross income under — under the Tax Code, the Court has always looked at the individual circumstances of the shareholder to ascertain whether or not that — that shareholder has actually realized a gain.

And so, for example, Indianapolis Power & Light, a 1990 case, the Court looks specifically at the facts regarding certain types of customer security deposits. It didn't look at it as some sort of abstract inquiry where things might be assigned and so forth. It sought to address the question as to whether or not that's shareholder income.

Macomber did exactly the same thing with respect to shareholders of corporations. I think the Court would certainly have to reverse Macomber, which the government has not asked it to do, to get beyond the idea that, you know, to some free-floating notion of income is sufficient for the government to point at something and tax it to a particular individual as their income.

JUSTICE GORSUCH: It — it — you're saying, if I — if I can put a fine point on it if I understand it, the question is whether it's income to the taxpayer who's being taxed?

MR. GROSSMAN: Yes, Your Honor.

JUSTICE GORSUCH: Okay. And then I'd like you to go back to the discussion you had with Justice Jackson, and I understand your point that the excise argument has been forfeited or perhaps even waived in this case.

I just want your thoughts on it generally as an original matter. You know, we have the Hilton case from quite a long time ago, carriages were thought perhaps not to be a direct tax.

Could the government as an original matter call this an excise tax?

MR. GROSSMAN: I think the answer resoundingly would be no. The whole point of the direct tax clauses was to make it difficult for Congress to levy these types of taxes while still leaving that authority available at — you know, in times of emergency.

And so far as taxes on personal property and things like investments were concerned, that was addressed extensively during the ratification debates of the — for the Constitution, and it was really — it was really one of the primary arguments of the anti-federalists against ratification of the Constitution, was that permitting the government — permitting Congress to levy direct taxes would simply be a step too far and would — and would allow Congress to destroy — destroy the states and reach all the property that was known to all families across the country.

So, I mean, that was one of the foremost concerns, and the way — the way that the Framers addressed that was to render these types of taxes specifically subject to apportionment. I mean, this was addressed and discussed at the Connecticut, the Pennsylvania, and the Virginia ratifying convention by James Madison, by Chief — Chief Justice Marshall.

It was a central concern at the time. And as a matter of original meaning, this sort of investment, this sort of property, is something that necessarily was subject — taxes on it was subject to apportionment.

JUSTICE GORSUCH: Sorry. One last question. Returning to my first one, apologies to shift you about.

If the Court were to hold that the only realization requirement is some realization somewhere along the chain by a corporation antecedent to the taxpayer, what would be the consequences of a holding like that?

MR. GROSSMAN: The consequences would would be to open the door to taxation of practically everything. I mean, all property that a person owns is the fruit of income at some point in time, whether it might be income, you know, that they received long in the past.

I mean, ultimately, all property that we have is made up of flows of income that have then been invested. And so, if all that was necessary was some level of income, then Congress could simply point at anything and say, well, at some point, this was income to some person at some level and, therefore, can be subject to taxation without apportionment.

JUSTICE GORSUCH: I suppose we could and maybe would have to draw lines as to how far back in — in time one can go in assessing that chain of realization.

MR. GROSSMAN: That's right. And I don't really understand how the Court would do that based on the constitutional text. The government's definition of "income" is simply the increase in a person's wealth between two points in time.

Well, if the time is set at a person's birth or many decades in the past, that could reach some or potentially all of their property, and I don't really understand what the limiting principle would be.

JUSTICE GORSUCH: Thank you.

CHIEF JUSTICE ROBERTS: Justice Kavanaugh?

JUSTICE KAVANAUGH: In your brief, to distinguish Subpart F and S corps and partnerships, you use the phrase "constructive realization," and I would ask if you could define what you mean by "constructive realization."

MR. GROSSMAN: Sure. We use "constructive realization" as a blanket term to encompass such concepts as constructive realization and assignment of income, and it just generally — it refers to the general principle espoused in cases like Banks and like Horst that income should be taxed to the person who earns it and enjoys its benefits.

And Congress, when it has enacted cases relying on that sort of doctrine, you know, has approached it in that nature, in other words, assessing whether the income at issue is something that in the ordinary course of affairs could be attributed to the person, to — to the particular taxpayer at issue regarding, say, categories of income or abuse of the corporate form and so forth.

JUSTICE KAVANAUGH: Okay.Thank you.

CHIEF JUSTICE ROBERTS: Justice Barrett?

JUSTICE BARRETT: Except there are situations, you know, there are cases in which state law said that partners couldn't have control over the property or pull it out unilaterally and which we've said it's okay for that income to be attributed to the partner.

I understand that partnerships are a different kind of form because, as an ownership matter, the partners would own it equally, but I guess I don't think our cases have established control as the linchpin. Can you kind of point me in the right direction if you disagree?

MR. GROSSMAN: With respect to partnerships, if you accept the view that simply a partnership's income is directly the income of its partners, then restrictions on the use to which partnerships may put their income, such as distribution — distributing it in certain circumstances, is no different from a state law preventing an individual from using their own income in some particular fashion, spending it on a particular item that they might wish to purchase.

JUSTICE BARRETT: But I guess I just mean that control — you know, when we're thinking about how to define "income," I'm just questioning whether control can really be the — the word to use, as opposed to just some sort of distinction between capital and income, you know, the, you know, seed and its fruit, right? I mean, it seems to me that control might go a little bit too far.

MR. GROSSMAN: I don't — well, I — control has always been an essential element of income attribution statutes because the general idea has to be that the taxpayer at issue has the ability to redirect that stream of income somewhere else and thereby avoid it and avoid taxes on it.

JUSTICE BARRETT: Why isn't that a due process issue? I guess this goes back to Justice Gorsuch's point about what would the consequences be and we would have to draw lines. You said that means that something that was earned income anywhere along the line ultimately lands in, you know, my bank account and then it can be considered income to me.

But is that a Sixteenth Amendment problem, or is that a due process problem where we have to draw lines about when it's fair to attribute one person's income to someone else?

MR. GROSSMAN: I think it can raise issues under both, but the Court has traditionally considered it to be a Sixteenth Amendment issue not only in Macomber but in trust cases like Corliss, where, again, the Court considered it a question of did the taxpayer have control over the — over the — its stream of income that he had in that case redirected into a trust for the benefit of his close family members.

I mean, that's the way the Court has always analyzed it, from the point of view of the taxpayer and whether that taxpayer has actually received income or not.

JUSTICE BARRETT: And last questions about Subpart F. I just want to be sure that I understand your position.

You say that income is about whether the person has the ability to direct the income stream. Am I accurately repeating what you said when it's about attribution?

MR. GROSSMAN: I think that is a necessary part of it, yes.

JUSTICE BARRETT: It's a necessary part of it. And you've also said that Subpart F corporations in general, of which, you know, KisanKraft meets the definition, Subpart F corporations and Subpart F do not pose the same Sixteenth Amendment problem that you see here, right?

MR. GROSSMAN: We — we think that — oh, do you mean with respect to the application of Subpart F aside from the MRT? JUSTICE BARRETT: Yes.

MR. GROSSMAN: Yes.

JUSTICE BARRETT: Okay. And is that because — kind of going back to your point about control, is the distinction then between MRT and the rest of Subpart F this idea that in the other context, the shareholders have some more ability to direct the stream?

MR. GROSSMAN: Well, I think it's two things. It's not that they have more ability;

Heritage Reporting Corporation

it's that they have any ability, because, again, under the terms of the statute, the MRT doesn't take account as to whether or not a shareholder exercised control while that stream of income was coming in the door. It only focuses on ownership in 2017.

But also, that degree of control has also been — has also been combined historically with the question of whether or not the types of income being taxed are those that are susceptible to that sort of abuse such that attribution is appropriate.

JUSTICE BARRETT: You mean so there's some sort of like fraud overlay to this, like is this really functioning as a tax shelter, as Justice Kagan was pointing out?

MR. GROSSMAN: That's how Congress addressed it in the very first —

JUSTICE BARRETT: And that's a constitutional requirement?

MR. GROSSMAN: I think Congress — Congress certainly viewed it that way in the very first income tax statute. That provision regarding fraudulent availment of corporations to avoid income was specifically limited specifically by many of the chief proponents of the Sixteenth Amendment to avoid the precise question that we're addressing — the precise defect that we're addressing today.

Their view was that you could not ordinarily attribute corporate income to shareholders but could do so only in the instance where there was some sort of fraudulent abuse of a corporation to avoid income. And that's —

CHIEF JUSTICE ROBERTS: Justice Jackson?

JUSTICE JACKSON: Yes. I'm interested in your conversation with Justice Gorsuch about the sort of original meaning of the direct tax clause, and I'm trying to understand whether it's your position that as — as an original matter, the direct tax clause was interpreted to include income and all sorts of things, or was it narrow.

I had thought originally, as we said in the Hylton case, that it was pretty narrowly focused on capitations and taxes on land. Am I wrong about that?

MR. GROSSMAN: The Hylton case had three seriatim opinions. Two of them viewed it as a consumption tax regarding conveyance of persons. The third of them, by Justice Iredell, adopted the view that, well, if it's difficult to apportion something, then it should not be subject to apportionment.

JUSTICE JACKSON: What about Justice Patterson's explanation that this was a pretty narrow clause and that it was designed to protect southern states and slavery from federal interference, that that was really what was going on here, and, therefore, when you're looking at direct taxes, you're talking about — or direct, yeah, taxes, as opposed to indirect, you're talking about certain kinds of things and that it's not necessarily others, income and that sort of thing?

MR. GROSSMAN: Well, I think, as a matter of original meaning, that's incorrect. But I would note in the context of that opinion it was dicta. It certainly didn't stand for the position of the Court.

JUSTICE JACKSON: Did the Court, until Macomber, hold that income was direct?

MR. GROSSMAN: Not with respect so much to income, Your Honor —

JUSTICE JACKSON: Or, I'm sorry, Pollock is what I'm saying, Pollock.

MR. GROSSMAN: Well, prior — I mean, I think the case that addressed this issue prior to Pollock was Springer —

JUSTICE JACKSON: Mm-hmm.

MR. GROSSMAN: — which did adopt the narrower interpretation of the direct tax clauses.

JUSTICE JACKSON: So, up until Pollock, which was addressed by the Sixteenth Amendment, we had a very narrow conception of direct tax?

MR. GROSSMAN: For a 20-year period, there was. Subsequent to that, as I — as I said, pretty much all of the Court's Sixteenth Amendment cases over the past century have concerned taxes on personal property in the form of investments. So I think the Court would really have to upend its jurisprudence if it were to decide at this late date that the direct tax clauses ought to be given some other interpretation.

JUSTICE JACKSON: All right. Let me ask you about realization, going back to Justice Thomas's very first question, and what the definition is.

I guess I'm trying to understand whether you think Congress has the authority to define what constitutes realization or not. Is that something you are giving to the Court through constitutional interpretation, or who — who gets to decide what the realization line is?

MR. GROSSMAN: Well, I think, as an initial matter, yes, I mean, Congress does get deference on that. But it actually has to try to do that, which is not what it did in this case. I mean, again, the tax here on its face turns on ownership of property on a particular date, and it doesn't take into account — it would —

JUSTICE JACKSON: No, I guess I don't understand your answer. If Congress — could we find that there is realization in this case, that there is realization? Like, who — who makes the definition of "realization"? Could the Court determine that there's realization here under a definition that we are appreciating?

MR. GROSSMAN: I mean, the government has never argued that there's realization in this case. The government has simply presented its alternate — the other argument that realization is not required. So I think it would be unusual for the Court to reach out and decide a question of that import without the government actually having addressed it.

JUSTICE JACKSON: But would — are you asking us to — maybe I'm — let me put it this way. Are you asking us to adopt a particular definition of "realization" under which your client wins in this case? If we disagree with you about what "realization" means, do you lose?

MR. GROSSMAN: We're simply asking the Court to adopt — to reaffirm the definition that it's applied since nearly the dawn of the Sixteenth Amendment. So I — I don't think we're asking —

JUSTICE JACKSON: Even though the Sixteenth Amendment doesn't have realization in it, you're saying that the implied realization requirement has a definition that you're asking the Court to adopt?

MR. GROSSMAN: We're simply asking the Court to say that realization is necessary as that concept has been espoused in the Court's decisions over the course of a century.

JUSTICE JACKSON: Thank you.

CHIEF JUSTICE ROBERTS: Thank you, counsel.

General Prelogar.

ORAL ARGUMENT OF GEN. ELIZABETH B. PRELOGAR ON BEHALF OF THE RESPONDENT

GENERAL PRELOGAR: Mr. Chief Justice, and may it please the Court:

The MRT is firmly grounded in the Sixteenth Amendment's text and history. The amendment allows Congress to impose taxes on incomes. That phrase had a well-established meaning drawn from numerous preratification income taxes that Congress enacted before this Court's decision in Pollock.

Several of those taxes were like the MRT in that they taxed shareholders on undistributed corporate earnings, including the income taxes in 1864, 1865, 1867, and 1870. And this Court upheld Congress's power to impose those taxes in Hubbard.

The Sixteenth Amendment's drafters, therefore, would have understood taxes on incomes to include taxes like the MRT.

That's confirmed by the very first income tax Congress enacted under the Sixteenth Amendment. That 1913 law taxed certain shareholders on their pro rata shares of undistributed corporate earnings. And the trend of pass-through taxation has continued throughout the next century from taxes on partners to S Corporation shareholders, to foreign corporation shareholders under Subpart F.

Against all that history, Petitioners stake their case on Macomber. But the Court has limited Macomber to taxes on particular stock dividends that are not at issue here. If the Court now extended Macomber's discussion to invalidate all taxes on undistributed business earnings, it would cause a sea change in the operation of the Tax Code and cost several trillions of dollars in lost tax revenue.

Petitioners say that every other provision of the Tax Code could be saved under a theory of constructive realization, but they don't provide a comprehensive definition of that  term or explain why it would rescue every provision except the MRT.

My friend today said it's a blanket term that's defined by the circumstances where you can say that constructive realization occurred, but that's simply circular.

And by conceding constructive realization, they've acknowledged Congress's power to draw reasonable lines about what counts as income and who can be taxed on it, which is exactly what Congress did in the MRT.

Finally, the Court doesn't actually need to resolve any fundamental questions in this case about whether the Sixteenth Amendment requires realization. The MRT taxes income that was actually realized by the foreign corporations, and Congress permissibly attributed the tax on that realized income to U.S. shareholders just as it has done in any number of pass-through taxes throughout our nation's history. The Court could say only that and affirm.

I welcome the Court's questions.

JUSTICE THOMAS: When you say "realized," "it has been realized," what do you mean by that?

GENERAL PRELOGAR: I think that this is a paradigmatic case of realization, Justice Thomas, insofar as the thing that's being taxed, the underlying tax base for the MRT, are the earnings that actually were — came into the corporation, the foreign corporation's coffers.

So the tax base here was the substantial ordinary business income that the foreign corporation generated through its operations in the foreign country and that has to date been subject to tax deferral.

That income has never been taxed at the corporate or entity level. Instead, what Congress did in the MRT is enact a pass-through tax that attributed the liability on that actual income that was realized to the U.S. shareholders.

JUSTICE THOMAS: Outside of the context of the MRT, do you think that the — just the — the increase in value of real property could be a taxable event?

GENERAL PRELOGAR: So I think that that raises a more difficult question. This presses on the idea of whether you can characterize gains in the form of appreciation as income that's taxable.

I — I think that there's a strong argument that that falls within a definition of "income" that looks to whether there have been economic gains over time, and it's important to note that Congress has at various time imposed taxes on that kind of appreciation.

Some of the Civil War era income tax laws that I pointed to at the beginning of my introduction had appreciation-based taxation for certain property like livestock, and still today there are really important provisions of the Tax Code that effect — effectively tax individuals on appreciation. For example, the mark-to-market taxes that my friend has conceded are constitutional treat a taxpayer as though there was a realizable event at the end of the tax year for certain futures contracts, for certain life insurance holdings, securities dealers holding, that mark the amount of the value to the market price even in the absence of any kind of sale.

So I think that there is strong support for the idea that you can tax at least certain forms of —

CHIEF JUSTICE ROBERTS: Well —

GENERAL PRELOGAR: — appreciation.

JUSTICE KAVANAUGH: In your —

CHIEF JUSTICE ROBERTS: Well, if you're —

JUSTICE BARRETT: But —

CHIEF JUSTICE ROBERTS: — there's strong support — I mean, you've — you've buried Macomber, I mean, and that takes away a lot of the strong support for a pretty basic proposition that the — the government can't tax as income to the property owner the appreciation in value of the property.

So, I mean, what is left to defend that proposition without Macomber?

GENERAL PRELOGAR: Well, Mr. Chief Justice, I — I disagree with the suggestion that Macomber involved a tax on appreciation. The Court there instead concluded —

CHIEF JUSTICE ROBERTS: Well, but I mean I know your — your argument that it's limited to stock dividends, but it also has been recognized as the — at least in the beginning, before it certainly narrowed over time, as standing for the proposition that the government cannot tax the appreciation in — in property.

And you've taken that off the board in your presentation today. So I, one, wonder if you can give us a little more view or assurance in what's left to defend that proposition once you've stabbed Macomber.

(Laughter.)

GENERAL PRELOGAR: Well, Mr. Chief Justice, I want to say that we're invoking this Court's own precedent about Macomber's scope and reach. It's the Court itself that said that Macomber is limited to the particular type of stock dividend at issue there. And — and that type of stock dividend didn't actually represent any kind of economic gain to the taxpayer.

In other words, in Macomber, the taxpayer received additional shares in the company, but it was a stock split and her shares were diluted in a commensurate amount so that the Court said, from the taxpayer's perspective, there was no difference in her ownership stake in the company both before and after the stock —

JUSTICE KAGAN: Well, I appreciate —

CHIEF JUSTICE ROBERTS: If you wanted to — if you wanted to defend the proposition that the government cannot tax the appreciation in property without — without any other event of realization, what would you cite given the fact that Macomber is not on the table?

GENERAL PRELOGAR: Well, the thing that I would cite if the Court were looking for a limiting principle that takes appreciation off the table at least in certain circumstances would be history.

I — I do think that there is a different historical foundation for that type of tax compared to what we have here, which is a pass-through tax on actually realized corporate income. So I think that the Court could reserve judgment on whether there might be principled lines based on the history of that type of tax scheme to suggest that it wouldn't be what the Framers of the Sixteenth Amendment had in mind.

But, again, I — I do want to emphasize the fundamental distinction between a tax base that focuses on actually realized income and then attributes it to a different taxpayer, which is a prevalent feature of the Tax Code and which involves many of the provisions my friend today —

JUSTICE KAVANAUGH: And — and your —

GENERAL PRELOGAR: — has conceded are —

JUSTICE ALITO: One of your strongest —

GENERAL PRELOGAR: — possibly optional.

JUSTICE ALITO: — one of your — the arguments that you press most strongly and, certainly, it has resonated a lot in the coverage of this case is that the adoption of the Petitioners' arguments would have far-reaching consequences, isn't that correct?

GENERAL PRELOGAR: That's correct.

JUSTICE ALITO: So do you think it is fair then to explore what the consequences of your argument would be?

GENERAL PRELOGAR: I am happy to talk about the consequences of our argument, although I — I want to say at the outset I think that the Court could resolve this case quite narrowly.

JUSTICE ALITO: Now the — the Ninth Circuit held that "The Supreme Court has made clear that realization of income is not a constitutional requirement but is instead founded on administrative convenience."

Is that correct?

GENERAL PRELOGAR: The Ninth Circuit was referring to this Court's decision in Cottage Savings where the Court did say that realization requirements are founded on administrative convenience.

JUSTICE ALITO: Well, not — not — not the question whether that's a correct interpretation of our prior precedents. Is it your position, as I understand you to argue in your brief, that realization is not required? The Sixteenth Amendment simply permits the taxation of income whether realized or not?

GENERAL PRELOGAR: We certainly think that there is no bright-line realization rule or requirement under the Sixteenth Amendment and that Congress is permitted to tax certain forms of unrealized gains.

I don't want to suggest that the Court here needs to set out to define "income" for all purposes or to announce any bright-line rules about realization. I think it's sufficient here for the Court to say that you have before you a particular type of tax on undistributed corporate earnings that were actually realized and to look at the history and tradition that demonstrates that that fits well within Congress's income tax authority.

JUSTICE GORSUCH: General — General —

JUSTICE ALITO: Well, what I'm trying to do is to understand the breadth of your argument just as we need to understand the consequences of — of Petitioners' argument.

So I take it what you've said is that realization is not a requirement. You say that explicitly in your — in your brief, unless you want to walk back from that.

GENERAL PRELOGAR: We think they're wrong to say it always is a requirement.

JUSTICE KAVANAUGH: We don't have to agree with you on that for you to prevail, I think, as you've said in your opening as well, because, even assuming or leaving open whether realization is a constitutional requirement, there was realized income here to the entity, and then it's attributed to the shareholders in a manner consistent with how Congress has done that in and this Court has allowed.

GENERAL PRELOGAR: That's correct, Justice Kavanaugh. We think that here the constitutional question is actually quite easy and it doesn't require the Court to consider some of the foundational questions about the meaning of the Sixteenth Amendment and other — other contexts, because here we have paradigmatic realized income at the entity level, and this functions just like the pass-through taxes on partnerships, the taxes on other types of corporate shareholders, S Corporation shareholders, and, particularly in the context of foreign corporations, the tax under Subpart F of which the MRT is just a part.

JUSTICE KAVANAUGH: General —

JUSTICE ALITO: So your answer is that there need not be realization by the taxpayer; it's sufficient if there is realization by some other entity, correct?

GENERAL PRELOGAR: Under the Sixteenth Amendment, that's correct, although there is a due process question in that context about the limits on Congress's ability to attribute income that was realized by one taxpayer to another taxpayer.

JUSTICE ALITO: All right. That — the due process question and that's a question of substantive due process.

GENERAL PRELOGAR: That's how this Court has analyzed it in cases like Burnet versus Wells, where it was looking at the limits on Congress's ability to make that kind of attribution decision.

JUSTICE ALITO: And anything under substantive due process involving an economic regulation like this, the only thing that would need to be shown is that it was rational for Congress to do what it did?

GENERAL PRELOGAR: Yes. The Court has looked at whether Congress has made an arbitrary choice, whether it's acted unreasonably. But I think that the Court's precedents reveal that the Court really has looked at whether the taxpayer who owes the tax liability has a relationship to the underlying —

JUSTICE ALITO: Well, if the — if it's a rational basis to review, then that's not much, right? So we could say the 30-year requirement here is a substantive due process issue, so we don't have to grapple with it here.

But, to be honest, we would be saying, you know, unless you can show it was irrational, that would be sufficient.

GENERAL PRELOGAR: Well, I want to be precise about the doctrine here. You mentioned the 30-year lookback period. I think that that actually has to do with retroactivity principles under the Due Process Clause, and I think that that's somewhat different than the attribution question that we had been discussing about whether Congress can fairly attribute tax liability to one person for income that was earned at the entity level.

I recognize that maybe there are some complicated questions out there that could exist in this space, but the important point is that here we have an enormous amount of history and tradition on our side to support the idea that this particular attribution decision falls well within constitutional bounds.

JUSTICE ALITO: Well, I — I understand you want to talk about this case, and ultimately we have to talk about this case, but I just want to understand how far your argument goes, how far does it logically go.

So under your argument, does the Sixteenth Amendment allow the taxation — it allows the taxation of income, and you define income as an increase in — an economic gain between two points in time. So let's say that somebody graduates from school and starts up a little business in his garage, and 20 years later, 30 years later, the person is a billionaire. Can Congress — under your argument, can Congress tax all of that on the ground that it's income?

GENERAL PRELOGAR: So if that has already been taxed, as I imagine it would through annual income taxes, then it sounds to me like the hypothetical is actually functioning as a property tax —

JUSTICE ALITO: All right.Let me —

GENERAL PRELOGAR: — insofar as looking —

JUSTICE ALITO: Let me change these.

GENERAL PRELOGAR: — at the total value of the assets.

JUSTICE ALITO: The appreciation in stock value over 20 or 30 years, could Congress say we want to reach back and tax all of that?

GENERAL PRELOGAR: So I think that's a hard —

JUSTICE ALITO: That's economic gain between two periods of time.

GENERAL PRELOGAR: Yes. I —

JUSTICE ALITO: Between two points in time.

GENERAL PRELOGAR: I think that's a harder question, and here's why. I do think that that would fit within an ordinary conception of income as covering economic gain between two points of time and focusing on the increment of gain, but we don't have the same tradition to support Congress levying income taxes in that manner.

Now, the Court might conclude —

JUSTICE GORSUCH: General — General, I'm sorry to interrupt, but on this point, in — in your brief at least, and I understand your argument is a little bit different here today, but in your brief at least, you confronted the — the question whether Congress could tax millions of Americans who hold small amounts of stock in their retirement investment accounts, and you say, yes, and you point to the 19 — 1864 Civil War laws. And then you say but that would be administratively unworkable.

So, as I understood, at least in your brief, the answer to Justice Alito's question, I think, is, yes, that could happen.

GENERAL PRELOGAR: So I think this is a really important point, Justice Gorsuch, and let me clarify that that statement in the brief was referring to the idea of pass-through taxation on all large — or — or all corporate shareholders.

That would function like the MRT. The basis for the tax would be the corporation's earnings. And then the shareholders would be responsible for a pro rata share of the corporation's earnings. That's a different type —

JUSTICE GORSUCH: I'm not sure —

GENERAL PRELOGAR: — of pass-through tax —

JUSTICE GORSUCH: — that — that —

GENERAL PRELOGAR: — than I understood —

JUSTICE GORSUCH: I'm not sure that's clear. I — it — it seemed to me, at least, that the argument was, that you were dealing with, was the change in value over time and stock prices increase. Could you tax that unrealized — otherwise — we would consider unrealized gain, treat that as realized gain? And the answer is yes because they did that in 1864 and because, if there's any limitation, it has to do with administrative workability.

GENERAL PRELOGAR: In 1864, they were doing a pass-through tax on the corporate earnings, and so the calculation of the tax was not based on the appreciation in the shares but rather was based on what the corporation had actually earned as its income. I —

JUSTICE GORSUCH: Okay.

GENERAL PRELOGAR: And I don't want to suggest that a tax on appreciation in stock would necessarily be invalid. As I had mentioned to Justice Thomas, there are provisions on the books today that my friends concede are constitutional.

But let me say that, to the extent that this question and Justice Alito's question is pressing on the idea that maybe this kind of appreciation should just be beyond the reach of Congress's taxing power —

JUSTICE GORSUCH: No. I'm just asking what the limits of your argument are. And — and it — it seems to me there are none.

GENERAL PRELOGAR: Well, I certainly think that Congress has broad taxing power. And what I was about to say is that here the relevant question is not whether Congress has the power to tax in the first place. The Court has said Congress has plenary power. It can tax people just for existing. The question is —

JUSTICE GORSUCH: And if I —

GENERAL PRELOGAR: — whether that's a direct tax that has to be apportioned —

JUSTICE GORSUCH: Sure.

JUSTICE PRELOGAR: — or whether it's subject to the rule of uniformity as an indirect tax.

JUSTICE GORSUCH: And if I might address what I now perceive to be kind of a backup argument, so the first argument, brief argument, is no realization requirement. Today I'm hearing, well, even if there is realization, there was somewhere-in-the-chain realization, and then Congress can attribute it freely as it wishes.

And I understand that argument, but I'm not sure how we fit it with our precedent. If we ditch Macomber, I understand your argument. But let's assume Macomber isn't completely misguided, okay? And I think those were your words, "misguided." I — I look at Phellis, I look at Bruun, I look at Horst, and it seems to me, at least as I read them, that they're all trying to work within Macomber's framework and talking about is it fair to say that there was realization to the taxpayer, not realization somewhere back in the chain of history and income realized by the corporation or a parent or subsidiary or whomever.

And just as a matter of precedent now, I'm talking, what — what's mistaken about that?

GENERAL PRELOGAR: So in those subsequent cases, I wouldn't say that the Court was mistaken there. It did happen to find a realization on the facts of those particular cases to the —

JUSTICE GORSUCH: For the taxpayer, right?

GENERAL PRELOGAR: For the taxpayer. Of course, they involve different types of tax. None of those cases involve a pass-through tax. And so I think, looking at what is maybe the closest precedent to the situation that we have here, I point to the Court's decision in Heiner versus Mellon, which considered the propriety of the tax on partners, even in a circumstance where they couldn't actually access the partnership income —

JUSTICE GORSUCH: Sure.

GENERAL PRELOGAR: — because state law prohibited a distribution to them. And the Court said —

JUSTICE GORSUCH: But you haven't made a —

GENERAL PRELOGAR: — that was perfectly fine.

JUSTICE GORSUCH: You haven't made an argument that there was realization to this taxpayer, though, have you?

GENERAL PRELOGAR: But the whole premise of pass-through taxation —

JUSTICE GORSUCH: I mean, just — just answer that —

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: — before you launch off. You haven't made that argument, right?

GENERAL PRELOGAR: We don't think that the tax's constitutionality depends on whether these taxpayers get a distribution because this is a pass-through tax just like the other contexts I've been mentioning. And I think that there are kind of two ways —

JUSTICE GORSUCH: I'll take —

GENERAL PRELOGAR: — to think about it.

JUSTICE GORSUCH: I'll take that as a yes.

(Laughter.)

GENERAL PRELOGAR: Well, I was about to say there are two ways to think about it. One is to say that there was a realized income at the entity level, and Congress can permissibly attribute that to the taxpayer. Another way to look at it would be to say that the taxpayer has a close enough relationship to that underlying income for Congress to permissibly treat it as income to the taxpayer itself.

JUSTICE GORSUCH: But we don't have that argument before us. What do we do about that? That argument hasn't been made.

GENERAL PRELOGAR: Well, we certainly intended to make that argument, and I understand our briefing to focus on both aspects of this issue. We, of course, joined issue with Petitioners on whether the Sixteenth Amendment requires realization because that —

JUSTICE GORSUCH: To the taxpayer or to anybody, and you say no, it doesn't require realization, and now today you're saying maybe it requires realization but not to the taxpayer.

The one argument that I'm missing is that there was realization here to the taxpayer. That's just not even in the briefs. It's not in the argument today. What do I do about that?

GENERAL PRELOGAR: Well, I think say that —

JUSTICE GORSUCH: If you think there is realization to this taxpayer, why didn't — why didn't — why didn't you make that argument?

GENERAL PRELOGAR: We are not suggesting that there's anything like strict realization in the sense of the taxpayer having received something in hand. But I don't even understand Petitioners now to be saying that's what's required, because —

JUSTICE GORSUCH: Well, of course —

GENERAL PRELOGAR: — they concede that any number of other —

JUSTICE GORSUCH: — not. And our cases, in — in — in Bruun and Horst, say that there can be something like a constructive realization in a partnership situation or a fraud situation or an S Corporation situation. We — we've been clear about that, that the — that there's some enjoyment that the taxpayer has over that money, some control. He may assign it elsewhere. He may choose to keep it in the S Corp, whatever, but he controls it.

And so there's some realization under Macomber's framework that's enough. But that argument, that this taxpayer had that kind of enjoyment, isn't in the briefs before us.

GENERAL PRELOGAR: That —

JUSTICE GORSUCH: And I just wonder what do I do about that.

GENERAL PRELOGAR: Well, I think we did make that argument because we made the point that, to the extent the Court goes down the road of recognizing some theory of constructive realization, then the MRT would fit within that same framework because Petitioners haven't identified any actual distinction between how those other tax contexts operate and how the MRT operates.

JUSTICE GORSUCH: Let's — let's just say I don't see that argument. Then what do you want me to do? Am I supposed to vacate and remand if — for — for consideration of that question? Is it waived? You know, what — what would you have me do?

GENERAL PRELOGAR: I — I certainly think that in our brief we argued that here, the taxpayers can properly be held accountable for the — the corporation's income and that the Court can say that in —

JUSTICE GORSUCH: I got that — I got that argument, General.

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: I got the argument that either there's no realization or, as a backup, there's realization and fair attribution. But. If I'm working within this Court's precedents, if I don't consider them wholly misguided, okay, if I'm not willing to overturn a hundred years' worth of precedent, which you're asking us to do, and — and the question is, is it fair to say this — this taxpayer constructively or actually realized this income, should I vacate and remand?

GENERAL PRELOGAR: No, you should affirm because, here, we made the argument that there is the same level of control and exactly the same relationship as in Subpart F.

So we did make this argument, Justice Gorsuch. We made the point that, if the Court is focused on things like control or influence, that there is no relevant distinction with Subpart F because this is taxing in precisely the same way as Subpart F operates.

JUSTICE BARRETT: And, General, what do you think is the significance of Petitioners' concession that Subpart F is constitutional to your point?

GENERAL PRELOGAR: I think that that is an incredibly significant concession here because it demonstrates that even if the Court were to apply a lens of control or influence, I think the right word to use would be relationship to the income, Petitioners have acknowledged that 10 percent U.S. shareholders have the requisite level of relationship in order to properly have income attributed to them.

Now my friend suggested that there's some fundamental difference with Subpart F because it taxes different types of income. I think he said it's income where you can interpose the corporate form.

I — I — I don't understand that distinction because, of course, the Sixteenth Amendment says that Congress can tax all income from whatever source derived. So the Sixteenth Amendment's text by its own terms makes clear that the different forms of income being taxed don't make a relevant constitutional difference.

And even if you look at it as a factual matter, my friend's argument doesn't withstand scrutiny because he suggested that, for example, all of this income could have been earned by the taxpayer himself, but that doesn't explain many important features of Subpart F, like ensuring risks outside the — the country of incorporation for the CFC or doing business in countries that are subject to U.S. sanctions.

Those are parts of Subpart F income, and I don't think that there is a relevant distinction with respect to whether it could be properly attributed to the taxpayer.

JUSTICE KAGAN: Justice Gorsuch said you were asking us to overrule a hundred years of our precedent. Sounds bad. Are you?

(Laughter.)

GENERAL PRELOGAR: I am not asking the Court to overrule any precedent in this case. I'm asking the Court to follow its precedent that postdates Macomber and makes clear that the discussion in that case was limited to the particular type of stock dividend at issue there.

I recognize that there is language in Macomber that seemed to have broader sweep, but this Court itself has already recognized that that is not the right way to read the language in —

JUSTICE KAVANAUGH: Which precedent —

JUSTICE GORSUCH: General — General, if I might, though, I mean, in — in Macomber, it said realization. You say that's misguided. In Fellis, we said that we were following — applying the tests laid down in Macomber. In Bruun, we said that — that — that it was — it was following Macomber's understanding of income. And in Horst, it said that we direct — it said much the same thing. I'm not going to bother with the quote. But, in each of those cases at least, it purported to be faithfully following Macomber.

GENERAL PRELOGAR: Justice Gorsuch —

JUSTICE GORSUCH: Now —

GENERAL PRELOGAR: — I just —

JUSTICE GORSUCH: — you just disagree with that, I guess.

GENERAL PRELOGAR: I disagree with that reading of those cases because I think, if you look at each of the cases you mentioned, the Court did find realization on the particular facts there but using different standards than Macomber itself had articulated.

Take, for example, Bruun. That was a case where I think you said the Court was — said it was faithfully applying its interpretation of income, but — but the Court in Bruun specifically disavowed the aspect of Macomber that said you have to be able to separate the economic gain from the underlying property.

JUSTICE GORSUCH: Certainly, it talked about control, but — but it — it — it — it spoke of applying Macomber. Now maybe you think it was deluding itself, but that's how the Court perceived what it was doing.

Shouldn't that count for something?

GENERAL PRELOGAR: But look at the Court's statements in Griffiths. There, the Court said that Macomber's theoretical bases had been undermined, that it had "in effect been limited to the particular type of stock dividend at issue" there and that it didn't have controlling weight even with respect to other types of stock dividends —

JUSTICE KAGAN: So what —

GENERAL PRELOGAR: — let alone other types of economic gains.

JUSTICE KAGAN: — so what do you understand to be the current state of our precedent? I mean —

JUSTICE GORSUCH: Yeah.

JUSTICE KAGAN: — at a certain point, you said, well, Macomber was confronting something that that stock dividend had no economic consequence whatsoever. And that was true, and that could have been. I mean, Macomber could have been decided in a paragraph saying that. But that's not what the Court did.

Then, as you say, there are many cases following Macomber which basically leave Macomber's own theory of realization in the dust, but what do you — what do you take to be the current state of our precedent that we need to pay attention to?

GENERAL PRELOGAR: I think that, if this Court had before it another stock dividend case that involved an economically substanceless split, then Macomber would control. That's what Griffiths said. Macomber is limited to that particular type of stock dividend.

But the Court itself in any number of follow-on cases has said that Macomber doesn't have controlling weight outside that context. The Court said in Glenshaw Glass the statements in Macomber were not intended to provide a touchstone for resolving all future gross income questions that could arise.

So I think, to the extent that that leaves Macomber as a bit of an island unto itself, that is just the natural effect of this Court's subsequent precedent, and we're asking the Court to follow that precedent here.

JUSTICE KAVANAUGH: And the precedent most on point for you I think you said is Heiner, right, the partnership case?

GENERAL PRELOGAR: That's right. I think it involved the most analogous tax to the MRT.

JUSTICE KAVANAUGH: And why — explain — explain why that dictates the result here or strongly supports the result here from your perspective since that's the one you're relying on most.

GENERAL PRELOGAR: It strongly supports the result in this case because, in Heiner, the Court confronted a situation where partners claimed they could not lawfully be taxed on partnership income on a pass-through basis because state law operated to preclude any distributions of that partnership income to them. So, by definition, under state law, the partners were not going to personally realize that income. State law prohibited the distribution.

And the Court rejected the claim from the partners and said that it didn't make a difference with respect to the permissibility of that pass-through tax from the partnership entity level to the partners themselves.

Now Petitioners have suggested that partnerships can just be distinguished down the line because they say that partnerships have a different legal status than corporations.

But it's not like partnerships have an innate legal status. Instead, they're creatures of state law, and there are any number of states out there that define a partnership as distinct from the underlying partners themselves.

We also have good case law that governs Subpart F in the lower courts. This has been applied in numerous additional contexts involving pass-through taxation and corporations in particular, and it's not just the modern laws, Justice Kavanaugh, it is all of the history here.

For virtually the entirety of this nation's experience with an income tax, there have been laws on the book other than the brief period when Pollock governed where Congress has taxed corporate income at the shareholder level. That is a classic pass-through tax and it's how the MRT operates.

JUSTICE KAVANAUGH: I — I agree with that history and your description of it. I was just isolating the — the case that's really kind of closest, I think, is Heiner, and I just wanted you to spell that out.

JUSTICE BARRETT: Apart from — I —

JUSTICE KAVANAUGH: What about the fact — I'm sorry.

JUSTICE BARRETT: Sorry, go ahead.

JUSTICE KAVANAUGH: Go ahead.

JUSTICE BARRETT: I was just going to ask you, if Heiner is closest on this pass-through point, what's your best federal case upholding a federal tax on appreciation, or do you have one?

GENERAL PRELOGAR: So I don't have a case from this Court that upholds a tax on appreciation. I think there are some — some lower court cases that have considered things like accrual accounting or other situations. There are fewer taxes that reach appreciation. I think the pass-through mechanism is the more common one when we're thinking about gains that aren't realized to the taxpayer himself. But there are, I think, a variety of — of taxes out there and have been through history.

JUSTICE BARRETT: Like the mark-to-market one you were referring to before?

GENERAL PRELOGAR: Exactly. And it's really important to recognize the importance of being able to tax in that context.

The situation that Congress confronted that prompted it to enact these mark-to-market taxes is the fact that taxpayers can often manipulate realization events.

So, for example, they can enter into offsetting futures contracts that don't really have any economic substance to them but allow the taxpayer to hold on to the one that has a gain, to defer taxation, maybe get favorable capital gains rates, and to sell that one that's a loss and thereby immediately have a taxable event. And Congress recognized that that was a — a loophole in the Tax Code that could enable this kind of — of abuse.

JUSTICE BARRETT: So there are taxes like the mark-to-market one that tax based on appreciation, but it's fair to say that we would be doing something new if we accepted your argument that income is any kind of economic gain, appreciation included?

GENERAL PRELOGAR: I appreciate the opportunity to clarify because we are not actually asking the Court to define "income" that way.

I think, if there is a lesson to be drawn from Macomber, it's that there's a real danger in trying to — to, as an abstract matter, define "income" for all purposes or to, you know, as — as Glenshaw Glass said, to provide a touchstone for all future cases, in part because our experience with the Tax Code is that taxpayers often latch onto those statements and use it as a basis to try to avoid taxation going forward.

So I don't think that the Court needs to approach this issue by adopting some global or universal definition of "income." The Internal Revenue Code itself doesn't define "income." Instead, it says that income is all income from whatever sources realized and then gives some illustrative examples.

I don't think my friends are offering the Court a definition of "income" because they say income is realized gains or maybe some category of unrealized gains that you can say are constructively realized. I don't think it's necessary for the Court to actually try to comprehensively define it here.

CHIEF JUSTICE ROBERTS: Thank you, counsel. I understood your answer to Justice Barrett to be the same as the answer that you gave me with respect to a unrealized increase in value from one time to another time in real property, that you didn't have any authority to support that.

GENERAL PRELOGAR: That's right. I'm not pointing to a case from this Court that I think would find that that's taxable. There's also nothing from this Court, other than reading Macomber for all it's worth, that I think would necessarily rule that out.

CHIEF JUSTICE ROBERTS: And when you just said that's the lesson of Macomber, you mean that's the lesson of Macomber's demise?

GENERAL PRELOGAR: Yes, exactly, that, ultimately, I think the Court recognized that those statements which were rendered as an abstract matter and opined on taxes that weren't directly presented there had untenable consequences and were also profoundly ahistorical.

So I think there's a lot of wisdom in following the approach the Court articulated in Griffiths, where the Court said we don't rule on the constitutionality of a tax until we find that Congress has actually laid that tax. I think the Court should take each tax as it comes for purposes of resolving these questions.

CHIEF JUSTICE ROBERTS: Thank you.

Justice Thomas?

Justice Alito?

JUSTICE ALITO: General, I still want to understand the limits of your argument. I am quite concerned by the potential implications of Petitioners' argument, and you stress that in your brief. You say that if we rule in Petitioners' favor, then large, important pieces of the Tax Code will also logically fall. And I think that's a fair argument. But I think it's also a fair argument to do the same thing with your position, and I want to understand the limits of your position.

Now, coming in, I understood your position to be that realization is not required and that the Sixteenth Amendment — realization to the taxpayer is not required, and, therefore, the Sixteenth Amendment allows the taxation of income.

And you seem to define "income" in your brief as economic gain between two points in time. You say it is that — those well-established principles that distinguish income taxes from property taxes.

So, if that is correct, then what about the appreciation of holdings in securities by millions and millions of Americans, holdings in mutual funds over a period of time without selling the — the shares in those mutual funds? Can those be taxed under the Sixteenth Amendment?

GENERAL PRELOGAR: I think, if Congress actually enacted a tax like that, and it never has, that we would likely defend it as an income tax. But you don't have to agree that that tax would be valid in order to uphold the MRT. So, if you think that —

JUSTICE ALITO: Well, I understand that. And in order to rule for Petitioners, we don't have to say anything about Subpart F or S corporations or partnerships or the accrual method of taxation. But your answer is that would probably — you'll at least go that far — that would probably be permissible under your interpretation of the Sixteenth Amendment?

GENERAL PRELOGAR: I think it probably would, but I think the Court could draw lines based on history, and if there truly were a widespread tax on all amount of appreciation for every taxpayer, that wouldn't look like anything Congress has done before. The Court has sometimes used history like that to draw principled lines.

Here, we have exactly the opposite situation where Congress has enacted a tax that looks exactly like any number of pass-through taxes through history. So, here, I think history functions as a rule of inclusion with respect to the propriety of this tax.

JUSTICE ALITO: Now, as to the — the Chief Justice's question, how about the appreciation in value of real property?

GENERAL PRELOGAR: I think it would be subject to the same analysis that would fit within a conception of income as economic gain between two points in time. But Congress hasn't traditionally taxed that, and so perhaps the Court, if it were confronted with that situation, would conclude that there is a historical line or limiting principle here.

JUSTICE ALITO: So, unless history rules that out, I'm not quite sure how Congress's failure to enact a tax in the past brings that outside the Sixteenth Amendment if the tax would otherwise fall within the Sixteenth Amendment, but you say that that potentially is also taxable as income under your theory?

GENERAL PRELOGAR: Yes. And I think it's clearly taxable under the Constitution. Again, this is not a question about Congress's power. It's about the mode of taxation and whether to apportion that tax or not.

JUSTICE ALITO: Now, if some sort of constructive realization or some test for attribution is required, what is your test? How far may Congress go in attributing income to someone who has not realized that income in the standard understanding of that term?

GENERAL PRELOGAR: I would apply the test the Court used in Burnet versus Wells, which presents the most closely analogous situation. A taxpayer argued that because he had been the grantor of a trust, he couldn't be held liable for the gains in the trust, it couldn't properly be attributed to him because he had no continuing control and wouldn't personally enjoy those gains, which instead went to the beneficiaries.

This Court rejected that claim, and what it said is that Congress had not acted arbitrarily in making that attribution decision. It looked at the taxpayer's relationship to the underlying income and concluded that there was good reason to tax the grantor in that circumstance, including to avoid shifting income to lower-income taxpayers.

But, if the Court were applying that kind of attribution analysis here, I think the MRT, like many pass-through taxes, is equally constitutional. Here, the income has never been taxed at the entity level, and there are real complications with trying to tax foreign corporations directly. So, in many respects, these large U.S. shareholders who, by definition, together collectively have a majority stake in a closely held corporation are in many senses the most suitable person or entity to tax.

JUSTICE ALITO: Well, have we ever said — and maybe we should in this case say — that the Sixteenth Amendment applies differently to income or property that is obtained abroad than it does to income or property possessed within the United States?

GENERAL PRELOGAR: The Court hasn't previously said that, but my friend himself suggests that in thinking about these issues, the Court should focus on the potential for tax avoidance or tax abuse. And I think that that concession just underscores the point that when you are using a foreign corporation, it provides a ready vehicle to shelter funds offshore, keep them out of the reach of U.S. taxing authorities, and, thus, complicate efforts to access those funds even when they have a really significant connection, as they do here, because these companies are majority owned by U.S. taxpayers.

And it's important to recognize too that this case is not the paradigmatic case of how the MRT applies. The overwhelming majority of taxpayers subject to this are domestic corporations, often parent companies of wholly owned foreign subsidiaries who have arranged their affairs to be able to keep this money offshore, to a period of long tax deferral. But I think that it would be anomalous to suggest that the money is forever out of the reach of U.S. taxing authority.

JUSTICE ALITO: Now the Petitioners were in on the ground floor with this corporation, but what if they had simply bought into the company the day before the MRT made taxes due? Wouldn't that look an awful lot like a tax on capital rather than a tax on income in any sense of the word?

GENERAL PRELOGAR: So I have three reactions to that. I think that the underlying nature of what's being taxed, which are the realized earnings of the corporation, wouldn't change. I do think that raises a harder attribution question because that taxpayer would have less of a direct relationship to the thing that's being taxed, and so maybe someone in that situation would have a better as-applied due process claim. As you mentioned, the Moores themselves aren't in that position.

The second thing I would say is that if the Court is interested in exploring this as-applied due process issue, it's important to note that the MRT is not unique in this regard. There are other taxes in other contexts where the Court has recognized that someone can be taxed on gain in property that happened before the ownership stake was obtained. That was the holding in Taft versus Bowers, where the Court considered this issue with respect to the gift tax. It's also how Subpart F itself can operate. You can buy shares in the controlled foreign corporation and be taxed under Subpart F with respect to earnings that happened before you bought your stake.

The third point I would make is that as a factual matter, this situation is unlikely to arise, and that's because Congress has enacted other provisions of the code that largely tie the gains to the person who owned the shares at the relevant time. This is 26 U.S.C. Section 1248, and it taxes gains at the time of sale. So, in your hypothetical, in — in 2017, when the person is buying the — the share in the company, it taxes gains to the seller as though they were paid out of the retained corporate earnings.

And then there's a parallel provision for the buyer under the MRT, 26 U.S.C. 965(d)(2)(B), that ensures that the buyer doesn't have to include that in his income through a cross-reference to Section 959.

JUSTICE ALITO: All right. But —

GENERAL PRELOGAR: So, in those ways, I think that Congress was trying to attribute the income to the person —

JUSTICE ALITO: Okay.

GENERAL PRELOGAR: — who owned the shares at the relevant time.

JUSTICE ALITO: Thank you. One — one last subject. I'm sorry to go on so long on this. Your brief makes an awful lot out of Collector versus Hubbard, decided in 1871. To what degree does your argument depend on that?

GENERAL PRELOGAR: Our argument doesn't depend on Hubbard. You know, ultimately, we think that what carries the day here is the overwhelming history that demonstrates that Congress has long taxed income at the corporate level to shareholders.

Hubbard upheld that exercise of authority, and so I think, if you're looking at the text of the Sixteenth Amendment and what those who drafted it would have in mind, they would have been well aware of this pass-through taxation and of the Hubbard precedent itself —

JUSTICE ALITO: Do you think that —

GENERAL PRELOGAR: — but —

JUSTICE ALITO: — do you think that — I'm sorry to interrupt. Do you think that Hubbard decided that the tax that was at issue in Hubbard satisfied Article I, Section 2, and Article I, Section 9, which draws a distinction between direct and indirect taxes? Do you think that the Court decided that question in Hubbard?

GENERAL PRELOGAR: So Hubbard's discussion of this issue is brief. I don't think that it parsed the constitutional text that way, although it did say that this was within Congress's power to enact. So I understand that to be a constitutional holding, but I acknowledge that it didn't get into the specific provisions of the Constitution or their interpretation.

JUSTICE ALITO: Do you think it was overruled in Pollock?

GENERAL PRELOGAR: So I think that — I don't think it would be right to say that Pollack was the last word on it, of course, because even if it was overruled in Pollock, the Sixteenth Amendment came along and it self-reversed Pollock.

JUSTICE ALITO: Well, do you think that the Pollack court understood itself to be overruling Hubbard?

GENERAL PRELOGAR: I think it's possible that yes, the Pollock court understood itself to be overruling Hubbard. It was obviously adopting an understanding of what constitutes a direct tax. That was a sharp departure from what had come before.

I guess what I would say, Justice Alito, is that it seems to me implausible that the drafters of the Sixteenth Amendment, in seeking to overturn Pollock and fully revive Congress's pre-existing income tax authority, would have meant to do so with respect to all the ways Congress had exercised that authority except for the type of pass-through tax that Hubbard specifically approved.

JUSTICE ALITO: Well, I mean, if — if the Court in Hubbard thought that it was overruling Pollock — Hubbard — I'm sorry, if the Court in Pollock thought it was overruling Hubbard, what do you make of the fact that it doesn't even mention Hubbard, and, as far as I can tell, Hubbard was never cited by the attorneys in that case?

And, you know, I looked back at Professor Fiss's volume in the Oliver Wendell Holmes Devise of the Supreme Court on what he has to say about Pollock, and he says, "Pollock was a special ceremonial occasion for the Court. The greatest lawyers of the day appeared for both sides."

So the greatest lawyers for the day didn't understand that there was Hubbard that had supported — you know, the — the — the — the attorney arguing for the government just didn't realize that they had Hubbard on the book that supported their position?

GENERAL PRELOGAR: Well, maybe they —

JUSTICE ALITO: And the Court entirely missed it?

GENERAL PRELOGAR: Maybe they missed an opportunity to make a good argument in that case. But I think, ultimately —

(Laughter.)

GENERAL PRELOGAR: — the important point is — is that relying on Pollock and trying to parse Pollock versus Hubbard ignores the effect of the Sixteenth Amendment.

You know, this was — this was an amendment to the Constitution that was specifically designed to restore a pre-existing power, and the right way to look at how that — what that power means is to look at how it had actually been exercised before.

JUSTICE ALITO: All right.Thank you.

CHIEF JUSTICE ROBERTS: Justice Sotomayor?

JUSTICE SOTOMAYOR: I don't fault the parties for shooting for the stars and — and — but I guess the tenor of the questions is that nobody's happy with anybody's definition of anything, okay?

(Laughter.)

JUSTICE SOTOMAYOR: You started by suggesting a narrow ruling. I think there are two ways to narrowly rule. Tell me if one is better than the other if at all, okay, but, first, we can say there is a realization requirement, and, here, it was realized because the corporation realized it. You have to deal with Justice Gorsuch's concern that you waived that argument. I may disagree with him, but that we can work out among ourselves.

But the bottom line, we could rule that way, or we could do it the way Justice Kavanaugh started his question, which is we assume that there's a realization requirement and — and it was met here.

So which of the two ways should we do it and — and how not — and why not?

GENERAL PRELOGAR: It would be critically important for the Court to do it through Justice Kavanaugh's approach. That is, I don't think the Court needs to resolve anything about whether the Sixteenth Amendment requires realization. Here, we happen to have it and this kind of tax corresponds to pass-through taxes we've had through history and that suffices to resolve this case. We have serious concerns with the Court —

JUSTICE SOTOMAYOR: Does that — the history is that Congress can attribute that realization?

GENERAL PRELOGAR: Correct, that Congress can attribute that realization by the corporation to the shareholders and there are taxes that look like that at virtually all points in our nation's history.

The reason why I would strongly caution the Court away from adopting a realization requirement is not only that we think that it is inaccurate, profoundly ahistorical, inconsistent with the text of the Sixteenth Amendment, but it would also wreak havoc on the proper operation of the Tax Code. I think that there are pass-through taxes that would withstand scrutiny if the Court affirms the attribution holding, but as I had mentioned to Justice Barrett, there are a number of critically important provisions of the code that don't actually have that kind of pass-through mechanism and don't turn on realization at all.

That includes the mark-to-market taxes, original issued discount on bonds that drives prices in bond markets and avoids what could otherwise be sheltering of income that should be taxable. It includes the expatriation tax when people renounce their United States citizenship.

So I think that there are various ways in which adopting any form of a realization requirement would have profound practical consequences, and it's unnecessary for the Court to go down that road in light of the serious legal arguments against that reading.

JUSTICE SOTOMAYOR: Thank you.

CHIEF JUSTICE ROBERTS: Justice Kagan?

JUSTICE KAGAN: And, General Prelogar, just to take you back to the implications of Mr. Grossman's argument, you know, he's made a number of statements in his brief and today as well about how he would distinguish this tax from many others, from Subpart F, from S Corporations, from partnerships, from accrual, from you name it. There — there might be more. What do you worry about and why?

GENERAL PRELOGAR: I worry that none of those proposals actually hold up and provide a basis to distinguish the MRT. So, at first, he suggests it has to do with control. But, as I had explained to Justice Barrett before, the level of control here is exactly the same as under Subpart F.

These are 10 percent shareholders, U.S. shareholders of closely held foreign corporations, and so control cannot be the relevant difference. It's also not the difference with respect to partnerships and S Corporation shareholders who might have even a lower than 10 percent stake and nevertheless can have income attributed to them.

Then he says maybe the answer is consent and he points to S Corporations and says that turns on a theory of consent. But I don't think that that works either because, to the extent there's any kind of realization requirement out there in the Sixteenth Amendment, consent couldn't cure that difficulty or give taxpayers a basis to allow Congress to tax things that are outside its authority, and it doesn't even work as a descriptive matter because the S Corporation shareholders might buy their interest in the company and never personally consent to pass-through taxation or they might change their minds and remove their consent and say I don't want to be taxed on it anymore, but if they have a minority stake in the company, they're stuck with it and continue to have pass-through taxation. So I don't think consent works.

Then he says maybe it has something to do with the type of income under Subpart F. But, as I've explained before, we don't think that the type of income matters under the Sixteenth Amendment, and, here, this is paradigmatic income. This is ordinary business income, substantial earnings realized by the company. And I think it would be a really anomalous result to say this type of income uniquely is exempt from pass-through taxation.

He also suggests that maybe it turns on the potential for abuse and maybe that explains some of these other taxes. But there again, I think that the — the MRT itself responds to the concern that these domestic corporations in the main, also some individual shareholders, have been able to keep the money offshore in the closely held foreign corporations and thereby defer taxation on them.

So, with respect to every possible point of difference, we just don't think it holds up as a descriptive matter, and so there's a real concern we have that if the Court goes down one of these roads and nevertheless invalidates the MRT, it's not a principled distinction.

JUSTICE KAGAN: And then, with respect to the furthest — the implications of the furthest reaches of your argument that Justice Alito was asking about, and you said with respect to a number of taxes, which we'll probably never see in our lifetimes, but you said, if we did see them, you would probably defend them.

I mean, when you say that, that's your job, right?

(Laughter.)

GENERAL PRELOGAR: Yes, we generally defend the constitutionality of statutes.

JUSTICE KAGAN: Yeah. So — so how should we think about that set of possibilities?

GENERAL PRELOGAR: So I think the important starting point is to recognize that those are hypotheticals, as you mentioned, that are unlikely to ever come to pass.

There's a really good reason that Congress frequently chooses to tax based on realization, and it's the administrative practicalities of the situation. Otherwise, it's complicated to track fluctuations in value over time or to engage in a valuation analysis for assets that might be hard to value.

So, in the main, Congress frequently does choose to rely on realization, and I think some of the hypotheticals about taxing all people who have shares or taxing all home appreciation are unlikely ever to come to pass.

But I also think that it's important for the Court to not rely on concerns about those types of far-fetched hypotheticals to announce bright-line rules about what the Sixteenth Amendment requires that could actually take down critically important provisions of the Tax Code and that respond to real-life concerns and very legitimate exercises of the taxing power.

In particular, many of the times when Congress has chosen to tax in the absence of realization, it's because taxpayers can abuse the rules. They can manipulate realization events, or they can make use of certain structures or financial instruments to shield assets from taxation. And any coherent or proper administration of the Tax Code has to be able to respond to that kind of taxpayer abuse.

JUSTICE KAGAN: Thank you.

CHIEF JUSTICE ROBERTS: Justice Gorsuch?

JUSTICE GORSUCH: Would you agree, General, that when the Court opens a door, Congress tends to walk through it?

(Laughter.)

GENERAL PRELOGAR: I don't want to overgeneralize on the back-and-forth between the Court and Congress, but — but, Justice Gorsuch, if I am anticipating correctly where you're going —

JUSTICE GORSUCH: I'm just — maybe you are, maybe you aren't. Probably are. You usually are.

(Laughter.)

JUSTICE GORSUCH: But, if — if the only bar to Congress from enacting a tax on millions of Americans' retirement accounts and mutual funds is administrability, they're pretty clever over there, aren't they?

GENERAL PRELOGAR: Well, Justice Gorsuch, I think that this goes to the point —

JUSTICE GORSUCH: They know how to get around administration concerns pretty well, don't they?

GENERAL PRELOGAR: I think that there would be good reasons for them to avoid the administrative complexities that would open up —

JUSTICE GORSUCH: Oh, sure, as a policy matter, but — but, you know, isn't it — isn't it the case that would open a big door?

GENERAL PRELOGAR: They — that door is already open. Congress can enact that tax. They just —

JUSTICE GORSUCH: Right. No, I understand your position —

GENERAL PRELOGAR: — might have to apportion it.

JUSTICE GORSUCH: It's been open forever in your view.

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: Yeah.Right.

GENERAL PRELOGAR: The Constitution gives Congress the power —

JUSTICE GORSUCH: Okay.

GENERAL PRELOGAR: — to tax that.

JUSTICE GORSUCH: And then, in terms of your argument here as well about there's no difference between income and that — and that kind of — that unrealized capital gain, you're familiar with, you know, the 1918 tax cases obviously. The government's brief in that case, one of my industrious law clerks pulled it, and there, the government does draw that distinction and says that that kind of capital gain is not income because the individual received, the taxpayer received, nothing, and that's not income. It's a mere gain or loss of capital value. Are you familiar with that?

GENERAL PRELOGAR: I'm not sure exactly which brief you're talking about. Do you happen to know the date?

JUSTICE GORSUCH: Yeah. It's the 19 — the Solicitor General's brief in the 1918 income tax cases, and it's pages 32 and 53.

GENERAL PRELOGAR: So I would have to look at the particular issue that was being considered there. There are a number of statutory realization requirements that could explain those statements. There have also been a lot of evolution in the — the thinking about these issues following Macomber.

I recognize that the — the government has sometimes taken a broader view of Macomber itself, for example, but that was in an era when the Court itself had been unclear about the reach of Macomber before the Court has sharply limited it.

JUSTICE GORSUCH: Okay. And then I do think there is room for some narrow ground, as — as Justice Sotomayor suggested. You — if one thinks that the question is attribution you call it — I think your friend on the other side would call it is it realized by the taxpayer. You say is it fairly attributed to the taxpayer. Potato/potato, I — I sometimes wonder.

GENERAL PRELOGAR: I'm from Idaho, so I — I love that.

JUSTICE GORSUCH: You totally get that.

(Laughter.)

JUSTICE GORSUCH: You totally get what I'm saying. If we're talking about the same thing, you make a pretty persuasive argument that under the MRT, the Moores do have constructive control, that it is fairly attributable to them because they're a 10 percent stakeholder and some other facts.

Again, I may be missing it. I don't see that argument in the brief. Assume — assume that argument hasn't yet been made, okay? What do I do?

GENERAL PRELOGAR: I agree, Justice Gorsuch, that we haven't made the argument expressly in terms of control because we don't think that's the right standard. But we very clearly did make the argument that the MRT is constitutional for the very same reasons —

JUSTICE GORSUCH: Sure.

GENERAL PRELOGAR: — Petitioners say that the Subpart F regime is constitutional.

JUSTICE GORSUCH: I — I — I understand that, but — but —

GENERAL PRELOGAR: Yeah.

JUSTICE GORSUCH: — but just answer my question. You know, if we — if we think that there's some constructive realization or attribution requirement required, but that hasn't been adjudicated yet, it hasn't been argued yet, what should I do?

GENERAL PRELOGAR: If you think it hasn't been argued yet, I of course disagree on the facts —

JUSTICE GORSUCH: No, I — I understand.

GENERAL PRELOGAR: — but the Court can affirm on an alternative ground, even one that the party didn't raise. The Court said that in Dahda versus United States, for example. So I think it would be open for the Court to affirm on that ground because we do think it's a very strong argument, and I would encourage the Court to do so.

JUSTICE GORSUCH: Okay.And then you — you've argued that attribution is a feature of due process rather than income under the Sixteenth Amendment. But all of our cases, whether we're talking about partnerships or you want to talk about S corps or — or Schedule F, have treated it as whether it's a form of income to the taxpayer under the Sixteenth Amendment. That's how we've grounded our analysis so far. It would seem quite a change to move it over to due process. Can you — can you react to that?

GENERAL PRELOGAR: Sure. So I think, actually, the Court's central case on attribution was a due process case. This is Burnet versus Wells. It involved the grantor of a trust. And the Court there put it explicitly in due proces terms.

JUSTICE GORSUCH: Well, you mentioned partnership earlier, and — and I went back and looked at that, and due process, those words don't —

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: You said that's the best case for you. Those words just don't appear anywhere in — in Justice Brandeis's opinion. It's all about whether it's — you can call it fairly attributable or realized by the partner.

GENERAL PRELOGAR: And I think that it's perfectly fine for the Court to look at this through the lens of the Sixteenth Amendment because you get to the same ultimate result, which is that, ultimately, the question then would be can Congress fairly attribute this income to you, the taxpayer. And, here, we have overwhelming history and tradition going all the way back to the 1860s and 1870s demonstrating that, yes, Congress can.

JUSTICE GORSUCH: And are some of those factors that you look at whether they control the — the entity, whether there's some evidence of fraud in its use of the entity? What else would you add to that list?

GENERAL PRELOGAR: I would look at the taxpayer's overall relationship to the income and the — and the entity. You know, I — I hesitate to try to put the gloss of control on it for a couple of different reasons. One is that I think that would incentivize taxpayers to try —

JUSTICE GORSUCH: Sure.

GENERAL PRELOGAR: — to argue in an individual case they don't have control.

JUSTICE GORSUCH: I'm not suggesting that's necessary.

GENERAL PRELOGAR: Right. That could be —

JUSTICE GORSUCH: I'm suggesting it might be sufficient.

GENERAL PRELOGAR: Yes. I would absolutely agree that might be the sufficient — that might be sufficient to establish that Congress made a fair attribution decision in that case. I would just caution the Court away from constitutionalizing that or saying it's necessary in every case.

JUSTICE GORSUCH: Roger that. What — what other factors would you have us look at?

GENERAL PRELOGAR: The other kinds of factors the Court has looked at or the statement it made in Burnet versus Wells was whether Congress has made an attribution decision that's unrelated to any privilege or benefit. I think using that standard, it works for us here as well because there are obvious benefits associated with doing business through a controlled foreign corporation which is closely held and could keep the money offshore for all of those years subject to tax deferral. So I think the —

JUSTICE GORSUCH: Let me pause you there.

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: So the — the foreign aspect of it and — and the difficulty of otherwise obtaining some kind of tax on it should factor in our analysis you think?

GENERAL PRELOGAR: Again, I think those are —

JUSTICE GORSUCH: Could.

GENERAL PRELOGAR: — conditions that could be sufficient. I wouldn't want the Court to say they are absolutely —

JUSTICE GORSUCH: Necessary.

GENERAL PRELOGAR: — necessary in every case.

JUSTICE GORSUCH: I got it.

GENERAL PRELOGAR: And, of course, we have things like partnerships where there's not necessarily —

JUSTICE GORSUCH: Sure.

GENERAL PRELOGAR: — any abuse. It's a convenient way to structure taxation with respect to certain types of entities.

JUSTICE GORSUCH: It was very helpful to me. Any other factors you'd have me consider?

GENERAL PRELOGAR: I think you have covered the waterfront of the things that have already emerged in the case law. I guess, if I step back to a 30,000-foot level, the one thing I would say is that I would urge the Court not to try to set down an explicit set of principles to govern all cases for the very reasons I was describing earlier, that we have seen taxpayers latch onto that —

JUSTICE GORSUCH: Roger —

GENERAL PRELOGAR: — and then seek to avoid taxes.

JUSTICE GORSUCH: — Roger that too, okay?

(Laughter.)

JUSTICE GORSUCH: And that would take care, though — if — if we wrote that that way, it would take care of all of your concerns about S corporation — Schedule F or, you know, the — the mark-to-market, and — and potentially the MRT?

GENERAL PRELOGAR: Yes. I — certainly, I think the MRT, in addition to all of those other taxes, satisfy the — the types of criteria that the Court has looked at that are relevant to this attribution question.

JUSTICE GORSUCH: Whether we call it attribution or constructive realization?

GENERAL PRELOGAR: Yes.

JUSTICE GORSUCH: Potato/potato.

GENERAL PRELOGAR: Well, on that one, I would — I would shy away from constructive realization just because I think it introduces an additional layer of ambiguity in the code. I mean, by definition, it means not actual realization, and so I think that —

JUSTICE GORSUCH: Well, no, I —

GENERAL PRELOGAR: — it's a term that doesn't appear in the code itself that Petitioners —

JUSTICE GORSUCH: — the way the way I read our precedent maybe — and I'll just — I'll stop, but the way I read our precedent at least is it's — it's fairly saying that this individual realized, gained control of, or could be reasonably adjudged to have done that by Congress. This person has control over these assets.

And you've given me a very helpful list of factors from this Court's history and practice, consistent with our precedent, rather than calling it all misguided, that might work. Fair enough?

GENERAL PRELOGAR: I don't think that it's right to say that this list of factors gives the taxpayer sufficient control over the assets just, again, because the concept of control can be inherently confusing here if it suggests a majority stake. You know, the S corporation shareholders —

JUSTICE GORSUCH: Right.

GENERAL PRELOGAR: — they might have a 1 percent stake in the company —

JUSTICE GORSUCH: I — I — I —

GENERAL PRELOGAR: — and not have any control.

JUSTICE GORSUCH: Okay.

GENERAL PRELOGAR: So I think that's — that's where I have a little bit of disagreement on how to describe what we're discussing.

JUSTICE GORSUCH: Okay. That's very helpful to me. Thank you, General.

CHIEF JUSTICE ROBERTS: Justice Kavanaugh?

JUSTICE KAVANAUGH: You don't want us to use the phrase "constructive realization"?

GENERAL PRELOGAR: Yes. I think that that phrase is inherently amorphous. It doesn't appear in the code.

JUSTICE KAVANAUGH: Right.

GENERAL PRELOGAR: It appears to be a phrase that Petitioners have —

JUSTICE KAVANAUGH: Right.

GENERAL PRELOGAR: — invented for purposes of trying to save these other taxes.

JUSTICE KAVANAUGH: On the —

GENERAL PRELOGAR: And I think it would open up immediate disputes about what exactly it encompasses.

JUSTICE KAVANAUGH: Right. And on the proverbial open door for Congress, members of Congress want to get reelected.

(Laughter.)

JUSTICE KAVANAUGH: So some of the hypos are — are —

GENERAL PRELOGAR: Yes, I think that there are huge —

JUSTICE KAVANAUGH: — that's why they're farfetched, although who knows how things would change.

On some of Justice Alito's hypotheticals, though, if — if things came to pass, I think you acknowledged, I just want to confirm, that unlike this case where you say that historical practice supports this, Congress's historical practice, the Court's cases, if there were something novel, that lack of historical support would at least be a strike against it, not dispositive necessarily. Is that an accurate summary of what you said about that?

GENERAL PRELOGAR: Yes. I think that the — the point I was trying to make is that, first, yes, there are huge practical and policy reasons why these taxes wouldn't be enacted. And, second, if it came to pass, then the Court could assess that tax on its own terms and it might look to history and think, hum, this is something new.

I do want to be clear that we don't think that the novelty alone would be dispositive, as you mentioned. Certainly Congress has some power to enact taxes that it hasn't enacted before, but it would certainly provide a reason to scrutinize that tax a little more carefully.

Here the Court doesn't have to go down that road because the history is all on our side.

JUSTICE KAVANAUGH: One hypo of my own, just to make sure it's covered, I think it's an easy one, but I want to make sure, if there were a federal tax on the value of someone's property, you agree that's a direct tax — or on the value of someone's holdings, you agree that's a direct tax that would have to be apportioned, correct, or not?

GENERAL PRELOGAR: Exactly. That's a quintessential tax on property because it's looking at the total value of the asset and it's doing it at a particular point of time. And maybe you could even levy it again and again on the same value, like any homeowner experiences with a property tax bill for the home. That's totally different from an income tax where you're taxing the increment of gain over time and generally only doing it one time with any future tax looking to a new increment of gain over a new period of time.

JUSTICE KAVANAUGH: Okay. Last question. Your position on the MRT, and you cite Heiner and subpart (f) and S Corps and say this is all similar in kind.

The one wrinkle — and I just want to make sure we're on the same page — is that this goes back a lot of years and rolls in income from many past years.

What should we say about that?

GENERAL PRELOGAR: So I —

JUSTICE KAVANAUGH: And, let me just add, and he says, ultimately, if you can just roll in, I think, income at any point in time, then that really becomes not much of a limit at all.

GENERAL PRELOGAR: So let me react to that in a couple of different ways. I think that the length of the lookback period here can't change the underlying character or classification of what's being taxed as income. This was actual earnings brought in by the company, kept in their coffers.

If it was income in year one, then I don't think there is any expiration date on classifying it as income in a future year, and I think it would be anomalus for Congress to lose its ability to tax that as income just because it's granted a period of tax deferral.

So instead, I think that the lookback period, instead of relating to the Sixteenth Amendment or any fundamental questions about what incomes constitutes is instead a retroactivity concern. It arises under the Due Process Clause and would turn on whether Congress had a legitimate purpose for having this kind of lookback period and used rational means.

Here we think that that is clearly satisfied. Petitioners raised a retroactivity due process argument below. The court rejected it in the Ninth Circuit. They haven't renewed it here. And I think it clearly fails under precedent, like United States versus Carlton, but ultimately I would urge the Court to — to recognize that that is not about the proper characterization of the underlying tax base.

JUSTICE KAVANAUGH: Thank you.

CHIEF JUSTICE ROBERTS: Justice Barrett?

JUSTICE BARRETT: I want to follow up on some of — on your factors to Justice Gorsuch.

So you've talked about how it could be fair, you know, Justice Kavanaugh just said, S Corps, partnerships, you know, an MRT, to — and the MRT tax, to say that this is attributable to the shareholders or to the partners or, you know, to the seller of the trust.

How do we know that? Is it because this is closely held? Because I assume what your friend on the other side is going to say is, well, they — they had 10 percent, they weren't majority holders, and so they couldn't force a distribution. So how — how would you articulate that when it can fairly be attributed?

JUSTICE BARRETT: If we're not talking due process, it we're talking about it from a Sixteenth Amendment point of view.

GENERAL PRELOGAR: Yes. So I think at the outset, the Court could rely on the lessons to be drawn from history and tradition here. This functions like the early income taxes that I pointed to from the 1860s and 1870 that taxed shareholders on corporate income.

At that point in our nation's history corporations were generally closely held. There were fewer Americans who owned stock, and so I think that they — they functioned quite analogously to the MRT insofar as they reached a distinctive category of shareholders generally in those closely-held corporations.

You know, at the end of the day I guess what I would say is that certainly we think it's a factor in our favor that this reaches relatively large U.S. shareholders. It's true it's 10 percent, so they don't have to have a majority stake, but the premise of Congress is that these kinds of large shareholders can usually work together with other shareholders in this closely-held corporation. There aren't going to be that many of them to direct the company's policy or to force a distribution as the case may be. And that kind of threshold, 10 percent, appears throughout the law, not just in the tax code, but in the securities context, for example, there are additional obligations imposed on 10 percent shareholders of companies.

So wherever the line might be drawn in thinking about it from this relationship to the funds and level of influence of the corporation's policy, I think 10 percent falls well within the line of what should be recognized as permissible.

JUSTICE BARRETT: Okay. Thanks.

CHIEF JUSTICE ROBERTS: Justice Jackson?

JUSTICE JACKSON: So are there drawbacks to setting this up in the way that Justice Gorsuch has articulated? I mean, I guess I'm a little concerned, because I heard you respond to Justice Sotomayor by saying that one of your primary concerns is that we not suggest that realization is required.

And would — would — would taking the approach that Justice Gorsuch has articulated require us to do that, or could we assume — or how — how do we get around the other caution that you put forward?

GENERAL PRELOGAR: So if I understood Justice Gorsuch's approach — and I hope I'm not getting it wrong — the idea behind this approach would be to recognize that here we actually have realized income, so the Court doesn't need to resolve the status of that under the Sixteenth Amendment and instead the pressure point is whether Congress could enact a pass-through tax on the 10 percent U.S. shareholders —

JUSTICE JACKSON: But is that fairly —

GENERAL PRELOGAR: — that are subject to this income.

JUSTICE JACKSON: Is that fairly encompassed by this question presented? I mean, this sort of goes to your discussions with Justice Alito, I think. I — I thought the question presented was about the extent to which the Sixteenth Amendment requires realization.

So if we're going now beyond that, are we out of — out of the territory that is fairly encompassed here?

GENERAL PRELOGAR: I don't think so because I think the answer to the question presented would be we don't have to decide in all contexts here there was a realization. And so, as we said in our brief in opposition to this case, we don't actually think that the case presents the question presented because here there was actual realization by the corporation. And the real dispute between the parties is whether Congress made a fair attribution decision.

JUSTICE JACKSON: Let me ask you just another question about the government's brief. Why did the government make an argument about excise taxes at the end?

GENERAL PRELOGAR: So we think that the MRT is clearly constitutional on an excise tax theory as well. There's been some — some suggestion and argument this morning that maybe we didn't present that argument below and that is incorrect.

In the Ninth Circuit we said that even if the MRT isn't properly characterized as an income tax, it's not a direct tax. And we said that therefore Congress had Article I authority to enact it and pointed to the Spreckels Sugar case, which is an excise tax case.

So I think we did preserve the argument. The Ninth Circuit didn't have occasion to reach it because it ruled in our favor on the primary income tax argument. But if this Court had any doubt about whether this is a proper income tax, we think the Court could affirm on the excise tax argument in particular.

And as I had mentioned in an earlier response, one of the important things for the Court to keep in mind is that 99 percent of the tax owed under the MRT is owed by domestic corporation shareholders, large U.S. companies, for example, that have these foreign subsidiaries where they have been holding money overseas for a number of years. And this would be a tax on the privilege of doing business with those corporate relationships and in that corporate form. So at the very least we would urge the Court not to invalidate the MRT and all of its circumstances without proper consideration of that argument.

JUSTICE JACKSON: And that's because the constitutional question is whether or not it is a direct tax, because that would be the circumstance under which apportionment is required?

GENERAL PRELOGAR: Yes, exactly. And I think this relates to your earlier questions Justice Jackson about the meaning of Hylton and about whether this can in any sense properly be considered a direct tax.

You know, ultimately I think one of the ways to understand the categories in the Constitution is in relation to one another. And at the very least, this is not a tax on land. This is not a tax on personal property. It's not a head tax. Therefore, it's not a direct tax. And we think it's either an excise or an income tax.

JUSTICE JACKSON: One final question about Macomber. Why — why shouldn't we take this opportunity to just put an end to it? I mean, if we were to apply the stare decisis factors that the Court goes through when it decides whether or not to formally overrule a precedent, doesn't Macomber fail anyway?

GENERAL PRELOGAR: I agree that Macomber would fail those factors in an appropriate case. The reason we haven't asked the Court to overrule Macomber here is because we just think it's inapplicable by the terms of subsequent precedent that have already said Macomber only has controlling weight with respect to that very specific type of stock dividend.

And so I think the Court has already done the work here of effectively leaving Macomber limited —

JUSTICE JACKSON: But if we disagree with you and we applied the stare decisis factors, you would say the government would still win on its view that Macomber is not good law or controlling in this case?

GENERAL PRELOGAR: If — if this Court thought it were necessary to walk through the stare decisis factors, then, yes, I think that in each instance, Macomber was egregiously wrong, that it didn't grapple with the text of the Sixteenth Amendment in a legitimate way or look at all of the history that I think is relevant to that question. It has been subsequently eroded by any number of additional precedents.

And in the end, with reliance interests, here Congress has relied on those subsequent precedents by enacting any number of taxes that wouldn't satisfy Macomber's realization framework. And Petitioners themselves acknowledge that Macomber's realization framework couldn't actually carry the day because the tax that they have said are constitutional wouldn't survive under Macomber.

JUSTICE JACKSON: Thank you.

CHIEF JUSTICE ROBERTS: Thank you, counsel.

Rebuttal, Mr. Grossman?

REBUTTAL ARGUMENT OF ANDREW M. GROSSMAN ON BEHALF OF THE PETITIONERS

MR. GROSSMAN: Thank you.

The government's recalibrated position, as explained by my friend, is not narrow and the Court should not mistake it as such. The government's view that a corporation's earnings can simply be attributed to a — to any corporate shareholder is staggeringly broad.

Corporations like Microsoft and Exxon Mobil have hundreds of billions of dollars of retained earnings on their books that they've invested in corporate assets, research and development, and — and other — and other activities. And in some cases, those retained earnings exceed the current value of shares.

Under the government's view, and I think as demonstrated by the MRT, apparently Congress could simply tax backwards, reaching back as far as — as — as it would care to do so, to attribute those retained earnings going back many years to current shareholders, again, in some instances in excess of the value of the — of their current holdings.

But I think the Court should also keep in mind that there is an impact to that position, that purportedly narrower position, under the existing code, which is that there is no carve-out for — against taxing shareholders in the current code on corporate earnings.

If those are Sixteenth Amendment earnings, then — I'm sorry, Sixteenth Amendment income to shareholders, then they are already subject to the income tax through the gateway definition of gross in — income that reaches everything that is income under the Sixteenth Amendment. So there's no carve-out. Those would already be subject to it.

I think this just demonstrates the way that the government's position would make a hash of existing law and cause enormous confusion with respect to how our tax system functions.

By consequence — by — by contrast, I — I don't think that there are any serious consequences of the realization principle that we've put forward in this case, because it is the thread that runs through the Court's jurisprudence, going back over a century, and is the glue that holds together the Tax Code as it exists today.

Every tax that my friend has mentioned falls into one of two categories. Some of those, particularly regarding the — the abuse of the corporate form, turn on theories of constructive realization or you might say assignment of income. I don't think there's much of a distinction.

The remainder of them are straightforward excise taxes that are supported by the history — the long history — long — long history of congressional practice. These include, for example, the original issue discount. It's simply an excise tax on the transaction regarding the transfer of a bond. Congress has been levying taxes like that for over 130 years at this point.

Others, like the mark-to-market taxes, are excise taxes, like in — like in Spreckels, on conducting business in a specified fashion. Again, those sorts of taxes predate the Sixteenth Amendment, and nobody has ever called into question their constitutionality as such.

There's also case law. If it was simply enough for the — for the — if it was simply enough to attribute income to anybody with a close relationship to it, all of the Court's corporate reorganization cases and cases involving shareholder rights and really pretty much all the Sixteenth Amendment cases involving trusts and everything else would have been about a sentence long, because it wouldn't really take much more than that for the Court simply to say, well, there's a close enough relationship, and so who cares whether or not the person realized income or not. Of course, that's not the inquiry the Court has undertaken.

And so far as Macomber's rule is concerned — and the Court has applied the dividing line recognized by Macomber — as recently as 1975 in Ivan Allen and it's carried forward the same principle in cases like Indianapolis Power & Light in 1990, as well as restating in Cottage Savings in 1991.

I don't think real — real — this concept of realization is anything unfamiliar to our law. And, indeed, it's the only way to understand the current Tax Code.

Every — Congress has — the — the — the anti-income, income avoidance provisions of the Tax Code are long, lengthy, reticulated. I don't envy anybody who has had to spend their time reading Subpart F and practices in that field. But the reason those are so complicated and reticulated is because Congress has tried to stay within the realization line.

It's done everything it can to fit that framework, where it would have been the easiest thing in the world, if — if Congress thought it had the power to do it, simply to say, well, if you own shares in a foreign corporation, whatever the ownership threshold, simply pay taxes on those earnings.

That's not the way the tax — that these sorts of taxing provisions have ever worked. Instead, they get at the idea who is really earning the income and — and — and receiving the benefit by it, and that person should be the one to pay taxes on it. We think they all fit that mold.

I'd like to briefly address the 1864 tax. The Court in Hubbard recognized that it was a tax on property. Subsequently, in Brushaber, the Court recognized that at the time, that wasn't really considered or thought about as being much of a defect with respect to the direct tax clauses under sort of the reasoning of Springer. And, of course, Macomber rejected the exact same argument.

We would ask the Court to reverse. Thank you.

CHIEF JUSTICE ROBERTS: Thank you, counsel, General.

The case is submitted.

(Whereupon, at 12:14 p.m., the case was submitted.)