DOJ Urges Supreme Court to Uphold Mandatory Repatriation Tax

CHARLES G. MOORE AND KATHLEEN F. MOORE,
PETITIONERS
v.
UNITED STATES OF AMERICA

In the Supreme Court of the United States

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES

ELIZABETH B. PRELOGAR
Solicitor General
Counsel of Record

DAVID A. HUBBERT
Deputy Assistant Attorney General

CURTIS E. GANNON
Deputy Solicitor General

EPHRAIM A. MCDOWELL
Assistant to the Solicitor General

FRANCESCA UGOLINI
MICHAEL J. HAUNGS
DOUGLAS C. RENNIE
Attorneys

Department of Justice
Washington, D.C. 20530-0001
SupremeCtBriefs@usdoj.gov
(202) 514-2217

QUESTION PRESENTED

The Sixteenth Amendment states that “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S. Const. Amend. XVI. In 2017, Congress passed and President Trump signed the Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97, Tit. I, 131 Stat. 2054. The TCJA included a one-time tax, which petitioners call the mandatory repatriation tax (MRT), to offset other tax benefits provided in the statute. The MRT increases certain income of a U.S.-taxpayer-controlled foreign corporation (CFC) in 2017 by the CFC's “accumulated post-1986 deferred foreign income.” 26 U.S.C. 965(a). Under the MRT, a U.S. shareholder owning at least 10% of a CFC may owe a one-time tax due to his obligation to “include in his gross income * * * his pro rata share” of the CFC's relevant “income for such year.” 26 U.S.C. 951(a)(1)(A). The question presented is:

Whether the MRT is a “tax[ ] on incomes, from whatever source derived,” U.S. Const. Amend. XVI, within the meaning of the Sixteenth Amendment.

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TABLE OF CONTENTS

Opinions below

Jurisdiction

Constitutional and statutory provisions

Statement

Summary of argument

Argument:

A. The Sixteenth Amendment authorizes Congress to tax shareholders' pro rata shares of undistributed corporate earnings as income

1. The Amendment's text and historical context show that it permits taxes on individuals' pro rata shares of undistributed corporate earnings

2. Petitioners' ratification-era sources do not support their asserted realization requirement

B. Post-ratification practice shows that Congress may tax individuals on their pro rata shares of undistributed business earnings

1. Congress taxed undistributed earnings immediately after the Sixteenth Amendment's ratification

2. Congress continued to tax undistributed business earnings in the decades following the Sixteenth Amendment

3. Petitioners' congressional-practice argument lacks merit

C. This Court has recognized Congress's power to tax individuals on their pro rata shares of undistributed business earnings

1. Macomber's dictum erroneously implied that Congress cannot tax shareholders on undistributed corporate earnings

2. This Court has abrogated Macomber's dictum

D. The MRT taxes income

Conclusion

Appendix — Constitutional and statutory provisions

TABLE OF AUTHORITIES

Cases:

Barclay & Co. v. Edwards, 267 U.S. 442 (1925)

Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926)

Brushaber v. Union Pac. R.R. Co., 240 U.S. 1 (1916)

Bufferd v. Commissioner, 506 U.S. 523 (1993)

Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110 (1925)

Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931)

Burnet v. Wells, 289 U.S. 670 (1933)

CFTC v. Schor, 478 U.S. 833 (1986)

City of Austin v. Reagan Nat'l Adver. of Austin, LLC, 142 S. Ct. 1464 (2022)

Collector v. Hubbard, 79 U.S. (12 Wall.) 1 (1871)

Commissioner v. Banks, 543 U.S. 426 (2005)

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)

Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203 (1990)

Commissioner v. Kowalski, 434 U.S. 77 (1977)

Commissioner v. Obear-Nester Glass Co., 217 F.2d 56 (7th Cir. 1954), cert denied, 348 U.S. 982 (1955)

Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554 (1991)

Dougherty v. Commissioner, 60 T.C. 917 (1973)

Eder v. Commissioner, 138 F.2d 27 (2d Cir. 1943)

Eisner v. Macomber, 252 U.S. 189 (1920)

Estate of Whitlock v. Commissioner:

Fernandez v. Wiener, 326 U.S. 340 (1945)

Flint v. Stone Tracy Co., 220 U.S. 107 (1911)

Forsyth v. Woods, 78 U.S. 484 (1870)

Garlock, Inc. v. Commissioner, 489 F.2d 197 (2d. Cir. 1973), cert. denied, 417 U.S. 911 (1974)

Goesele v. Bimeler, 55 U.S. (14 How.) 589 (1853)

Gray v. Darlington, 82 U.S. (15 Wall.) 63 (1872)

Heiner v. Mellon, 304 U.S. 271 (1938)

Helvering v. Bruun, 309 U.S. 461 (1940)

Helvering v. Clifford, 309 U.S. 331 (1940)

Helvering v. Estate of Enright, 312 U.S. 636 (1941)

Helvering v. Gowran, 302 U.S. 238 (1937)

Helvering v. Griffiths, 318 U.S. 371 (1943)

Helvering v. Horst, 311 U.S. 112 (1940)

Helvering v. National Grocery Co., 304 U.S. 282 (1938)

James v. United States, 366 U.S. 213 (1961)

Knowlton v. Moore, 178 U.S. 41 (1900)

Koshland v. Helvering, 298 U.S. 441 (1936)

Lynch v. Hornby, 247 U.S. 339 (1918)

Maryland Casualty Co. v. United States, 52 Ct. Cl. 201 (1917)

Merchants' National Bank v. Wehrmann, 202 U.S. 295 (1906)

Minot v. Paine, 99 Mass. 101 (1868)

Moore v. Harper, 143 S. Ct. 2065 (2023)

NLRB v. Noel Canning, 573 U.S. 513 (2014)

National Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012)

PPL Corp. v. Commissioner, 569 U.S. 329 (2013)

Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895)

Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020)

Spring City Foundry Co. v. Commissioner, 292 U.S. 182 (1934)

Springer v. United States, 102 U.S. 586 (1881)

Stanton v. Baltic Mining Co., 240 U.S. 103 (1916)

State ex rel. Bolens v. Frear, 134 N.W. 673 (Wis. 1912)

Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399 (1913)

Taft v. Bowers, 278 U.S. 470 (1929)

Thomas v. United States, 192 U.S. 363 (1904)

Trefry v. Putnam, 116 N.E. 904 (Mass. 1917)

United States v. Basye, 410 U.S. 441 (1973)

United States v. Burke, 504 U.S. 229 (1992)

United States v. Carlton, 512 U.S. 26 (1994)

United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1 (2008)

United States v. Galletti, 541 U.S. 114 (2004)

United States v. Hansen, 143 S. Ct. 1932 (2023)

United States v. Phellis, 257 U.S. 156 (1921)

United States v. Schillinger, 27 F. Cas. 973 (C.C. S.D.N.Y. 1876)

Walker v. Wait, 50 Vt. 668 (1878)

Weiss v. Stearn, 265 U.S. 242 (1924)

Constitution, statutes, and regulation:

U.S. Const.:

§ 8, Cl. 

§ 9, Cl. 4

Act of June 30, 1864, ch. 173, 13 Stat. 223:

Act of Mar. 3, 1865, ch. 78, 13 Stat. 480

Act of Mar. 2, 1867, ch. 169, § 13, 14 Stat. 478

Act of July 14, 1870, ch. 255, 16 Stat. 256:

Corporation Tax Act, ch. 6, § 38, 36 Stat. 112

Internal Revenue Code of 1986,

26 U.S.C. 11

26 U.S.C. 11(b)(1) (2012)

26 U.S.C. 61(a)

26 U.S.C. 245A

26 U.S.C. 245A(a)

26 U.S.C. 245A(c)(1)(A)

26 U.S.C. 305(c)

26 U.S.C. 446(c)(2)

26 U.S.C. 448(a)

26 U.S.C. 467(a)

26 U.S.C. 475(a)

26 U.S.C. 702(a)

26 U.S.C. 702(b)

26 U.S.C. 817A(b)

26 U.S.C. 877A(a)

26 U.S.C. 877A(a)(1)

26 U.S.C. 877A(b)(1)

26 U.S.C. 877A(b)(4)(A)

Subpt. F, 26 U.S.C. 951 et seq.

26 U.S.C. 951(a)(1)

26 U.S.C. 951(a)(1)(A)

26 U.S.C. 951(b)

26 U.S.C. 952-954

26 U.S.C. 957(a)

26 U.S.C. 965(a)

26 U.S.C. 965(a)(1)

26 U.S.C. 965(a)(1)-(2)

26 U.S.C. 965(a)(2)

26 U.S.C. 965(c)

26 U.S.C. 965(e)(1)(B)

26 U.S.C. 965(h)

26 U.S.C. 1001(a)

26 U.S.C. 1256(a)

26 U.S.C. 1256(b)

26 U.S.C. 1259

26 U.S.C. 1272(a)(1)

26 U.S.C. 1296(a)

26 U.S.C. 1362(a)

26 U.S.C. 1362(d)(1)(B)

26 U.S.C. 1366(a)

26 U.S.C. 1366(b)

Revenue Act of 1916, ch. 463, § 8(g), 39 Stat. 763

Revenue Act of 1918, ch. 18, § 218(e), 40 Stat. 1070

Revenue Act of 1937, ch. 815, § 337(a), 50 Stat. 822

Revenue Act of 1962, Pub. L. No. 87-834, § 12, 76 Stat. 1006-1031

Tariff of 1913, ch. 16, 38 Stat. 114:

Tax Cuts and Jobs Act, Pub. L. No. 115-97, Tit. I, 131 Stat. 2054 (2017)

§ 14103, 131 Stat. 2195

Acts of Assembly, ch. 496, § 1, 1897-1898 Va. Acts 527

26 C.F.R. 301.7701-3(a)

Miscellaneous:

Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts

Henry Campbell Black, A Law Dictionary (2d ed. 1910)

Henry Campbell Black, A Treatise on the Law of Income Taxation Under Federal and State Laws (1913)

Kimberly S. Blanchard, Cross-Border Tax Problems of Investment Funds, 60 Tax. L. 583 (2007)

Francis M. Burdick, Some Judicial Myths, 22 Harv. L. Rev. 393 (1909)

Charles E. Chadman, A Concise Legal Dictionary (1909)

Marvin A. Chirelstein & Lawrence Zelenak, Federal Income Taxation (14th ed. 2018)

Thomas M. Cooley, Treatise on the Law of Taxation (1876)

Noel B. Cunningham & Deborah H. Schenk, Taxation Without Realization: A 'Revolutionary' Approach to Ownership, 47 Tax. L. Rev. 725 (1992)

E. Merrick Dodd, Jr., Statutory Developments in Business Corporation Law, 1886-1936, 50 Harv. L. Rev. 27 (1936)

H.R. Rep. No. 409, 115th Cong., 1st Sess. (2017)

H.R. Rep. No. 1447, 87th Cong., 2d Sess. (1962)

Robert Murray Haig, The Concept of Income — Economic and Legal Aspects, reprinted in The Federal Income Tax (1921) (Robert Murray Haig ed.)

William Wallace Hewett, The Definition of Income and its Application in Federal Taxation (1925)

Jeffrey L. Kwall, When Should Asset Appreciation Be Taxed?: The Case for a Disposition Standard of Realization, 86 Ind. L.J. 77 (2011)

Robert H. Montgomery, Income Tax Procedure (1919)

1 Stewart Rapalje & Robert L. Lawrence, A Dictionary of American and English Law (1883)

Julie A. Roin, United They Stand, Divided They Fall: Public Choice Theory and the Tax Code, 74 Cornell L. Rev. 62 (1988)

Edwin R.A. Seligman, Are Stock Dividends Income?, 9 Am. Econ. Rev. 517

Staff of the Joint Comm. on Taxation, 115th Cong., 1st Sess., Estimated Budget Effects of the Conference Agreement for H.R.1, The Tax Cuts & Jobs Act JCX-67-17 (Dec. 18, 2017), https://perma.cc/NKU5-KKJ8

T.D. 1706, 14 Treas. Dec. Int. Rev. 75 (1911)

T.D. 1742, 14 Treas. Dec. Int. Rev. 127 (1911)

Webster's New International Dictionary of the English Language (1913)

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OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-20) is reported at 36 F.4th 930. The order of the district court (Pet. App. 21-34) is unreported but is available at 2020 WL 6799022.

JURISDICTION

The judgment of the court of appeals was entered on June 7, 2022. A petition for rehearing en banc was denied on November 22, 2022 (Pet. App. 35-36). The petition for a writ of certiorari was filed on February 21, 2023, and was granted on June 26, 2023. The jurisdiction of this Court rests on 28 U.S.C. 1254(1).

CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED

Pertinent constitutional and statutory provisions are reprinted in the appendix to this brief. App., infra, 1a-34a.

STATEMENT

In 2017, consistent with our Nation's longstanding framework for taxing Americans who own certain foreign corporations, Congress enacted a one-time tax on U.S. shareholders' pro rata shares of undistributed corporate income, which petitioners call the Mandatory Repatriation Tax (MRT). Petitioners attack (Br. 3) the MRT as a “novelty” for lacking a rigid realization requirement that they contend is constitutionally required. But as early as 1864, just three years after the first federal income-tax law, Congress enacted unapportioned income taxes reaching individuals' pro rata shares of undistributed corporate earnings — and this Court upheld Congress's authority to impose those taxes. After this Court temporarily undermined that power by holding that most income taxes had to be apportioned by state population, the Sixteenth Amendment overturned that precedent and reinstated the income-tax authority that Congress had previously exercised. Congress immediately resumed taxing some kinds of undistributed corporate income, and it extended that practice in various other instances throughout the twentieth century — including with so-called pass-through entities like partnerships, S corporations, and U.S.-shareholder-controlled foreign corporations. Petitioners concede the constitutionality of all those previous taxes and argue the MRT alone crosses a constitutional line. But the court of appeals found no principled way to distinguish the MRT from various “other tax provisions that have long been on the books.” Pet. App. 16.

A. Legal Background

1. The lack of an effective taxing power under the Articles of Confederation “was one of the causes” prompting “adoption of the present Constitution.” Springer v. United States, 102 U.S. 586, 595-596 (1881). The Constitution authorized Congress “[t]o lay and collect Taxes, Duties, Imposts and Excises,” U.S. Const. Art. I, § 8, Cl. 1 — an “authority” that “embraces every conceivable power of taxation.” Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 12 (1916).

The Constitution prescribes two “regulations” of that “plenary power.” Brushaber, 240 U.S. at 13. First is “'the rule of uniformity as to duties, imposts, and excises.'” Ibid. (citation omitted); see U.S. Const. Art. I, § 8, Cl. 1. Second is “'[t]he rule of apportionment as to direct taxes.'” Brushaber, 240 U.S. at 13 (citation omitted); see U.S. Const. Art. I, § 9, Cl. 4. “[A]ny 'direct Tax' must be apportioned so that each State pays in proportion to its population.” National Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 570 (2012) (NFIB).

For over a century, this Court held that the only direct taxes were “capitation taxes” (i.e., head or poll taxes) “and taxes on real estate.” Springer, 102 U.S. at 602. During that time, Congress enacted several unapportioned income-tax laws, some of which taxed individuals on “the gains and profits * * * whether divided or otherwise” of companies in which they held stock. Act of June 30, 1864, ch. 173, § 117, 13 Stat. 282 (emphasis added). But in 1895, the Court held that taxes on income “derived from * * * real or personal property” were also direct taxes requiring apportionment. Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601, 618.

In 1913, Pollock “was overturned by the Sixteenth Amendment,” NFIB, 567 U.S. at 571, which reinstated “the previous complete and plenary power of income taxation possessed by Congress from the beginning,” Stanton v. Baltic Mining Co., 240 U.S. 103, 112 (1916). The Amendment provides that “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S. Const. Amend. XVI.

2. To prevent Americans from avoiding U.S. taxes by keeping earnings offshore, Congress has long taxed some U.S. shareholders of foreign corporations on their pro rata portions of the corporations' undistributed income. In 1937, Congress taxed shareholders on the “undistributed * * * net income” of “foreign personal holding compan[ies].” Revenue Act of 1937, ch. 815, § 337(a), 50 Stat. 822. And in 1962, Congress expanded that approach by enacting Subpart F of the Internal Revenue Code, 26 U.S.C. 951 et seq. Revenue Act of 1962 (1962 Act), Pub. L. No. 87-834, § 12, 76 Stat. 1006-1031.

Subpart F applies to “United States shareholders” of a “'controlled foreign corporation'” (CFC). 26 U.S.C. 957(a). A CFC is “any foreign corporation” that is “more than 50 percent” owned “by United States shareholders.” Ibid. And a “'United States shareholder'” is a “United States person” who owns at least 10% of a foreign corporation's shares. 26 U.S.C. 951(b).

Subpart F requires “United States shareholder[s]” to “include in [their] gross income * * * [their] pro rata share * * * of the [CFC's] subpart F income for [the] year.” 26 U.S.C. 951(a)(1)(A). That requirement applies “even if the corporation does not distribute” the Subpart F income to its U.S. shareholders. 3 Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 69.1, at 69-2 (3d ed. rev. 2005) (Bittker & Lokken). But Subpart F income does not include all of a “CFC's active business income attributable to the CFC's own business held offshore.” Pet. App. 6. Thus, despite Subpart F, by 2015 CFCs had accumulated more than $2.6 trillion in offshore earnings that had not been subjected to federal taxation. Id. at 5-6.

3. In 2017, Congress passed and President Trump signed the Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97, Tit. I, 131 Stat. 2054. As relevant here, the TCJA reduced the corporate tax rate from 35% to 21%, 26. U.S.C. 11, and contained two provisions “Establish[ing] [a] Participation Exemption System for Taxation of Foreign Income” earned by U.S. shareholders of foreign corporations. TCJA, Subtit. D, Pt. I, Subpt. A, 131. Stat. 2189 (emphasis omitted).

First, 26 U.S.C. 245A provides that when a domestic corporation owning at least 10% of a specified foreign corporation receives a dividend from the foreign corporation, the domestic corporation is allowed a 100% tax deduction on the portion of the dividend attributable to previously “undistributed foreign earnings.” 26 U.S.C. 245A(c)(1)(A); see 26 U.S.C. 245A(a). Before the TCJA, a domestic corporation could have been taxed up to 35% upon the receipt of such a dividend. 26 U.S.C. 11(b)(1) (2012). Section 245A was projected to cost the government $224 billion over ten years. See Staff of the Joint Comm. on Taxation, 115th Cong., 1st Sess., Estimated Budget Effects of the Conference Agreement for H.R.1, The Tax Cuts & Jobs Act, JCX-67-17, at 6 (Dec. 18, 2017), https://perma.cc/NKU5-KKJ8.

Second, the TCJA includes a provision “[t]o avoid a potential windfall” for entities that deferred taxation through their ownership of foreign corporations and can now receive tax-free distributions of those foreign corporations' accumulated foreign income. H.R. Rep. No. 409, 115th Cong., 1st Sess. 375 (2017). That provision, entitled “Treatment of Deferred Foreign Income Upon Transition To Participation Exemption System Of Taxation,” TCJA § 14103, 131 Stat. 2195 (capitalization modified; emphasis omitted), has been called the MRT.

The MRT requires a CFC with “accumulated post-1986 deferred foreign income” to include that income as part of its Subpart F income in its “last taxable year” beginning before 2018. 26 U.S.C. 965(a).¹ Thus, in that year, U.S. shareholders owning at least 10% of a CFC may owe more taxes due to the obligation under Sub-part F to “include in [their] gross income * * * [their] pro rata share” of the CFC's “subpart F income for [the] year.” 26 U.S.C. 951(a)(1)(A). To mitigate the burden of that one-time tax, however, the MRT provides substantial deductions, 26 U.S.C. 965(c), and allows payment in interest-free installments over eight years, 26 U.S.C. 965(h). The MRT was projected to generate approximately $340 billion in revenue, Pet. App. 7, thus offsetting the cost of Section 245A's tax deduction for dividends.

B. The Present Controversy

1. In 2005, petitioners' friend, Ravindra Kumar Agrawal, approached them with a plan to start a company called KisanKraft Machine Tools Private Limited that would supply farmers in India. Pet. App. 70-71. Petitioners invested $40,000 in KisanKraft “at its inception,” which was 11% of its “start-up capital.” Id. at 71. In exchange, petitioners received 13% of KisanKraft's common shares. Id. at 74. Since KisanKraft's founding, petitioner Charles Moore has regularly spoken to Agrawal (the CEO) about KisanKraft's operations and visited India five times to tour operations. Id. at 72-73.

KisanKraft has generated profits every year since its founding. Pet. App. 5. But instead of distributing dividends to its shareholders, it has reinvested in the business. Ibid. As a result, from 2006 to 2017, neither petitioners nor KisanKraft paid U.S. taxes on the company's income. Id. at 23.

KisanKraft qualifies as a CFC because it is a foreign corporation majority-owned by U.S. persons who each own at least 10% of its shares. Pet. App. 5. Under the MRT, KisanKraft's 2017 Subpart F income was increased by its “accumulated post-1986 deferred foreign income.” 26 U.S.C. 965(a). Petitioners' “pro rata share” of that income — which they were required to include in their 2017 “gross income,” 26 U.S.C. 951(a)(1) — was $508,000. Pet. App. 74. “After receiving a deduction associated with the [MRT],” petitioners reported an additional $132,512 in 2017 taxable income and an additional $14,729 in taxes. Ibid.; see id. at 75.

2. Petitioners paid their MRT liability and then sued the government in the United States District Court for the Western District of Washington, seeking a refund. Pet. App. 85. Petitioners asserted that the MRT is an unapportioned direct tax, and that the MRT is impermissibly retroactive in violation of the Due Process Clause. Id. at 23-24.

The district court granted the government's motion to dismiss. Pet. App. 21-34. The court held that the MRT is an income tax under the Sixteenth Amendment. Id. at 25. It also rejected petitioners' due process claim, concluding that the MRT, with its 30-year “retroactive period,” “is a rational means of [e]ffecting a legitimate legislative purpose.” Id. at 31-32.

3. The court of appeals affirmed. Pet. App. 1-20. The court explained that “the Supreme Court has made clear that realization of income is not a constitutional requirement,” but instead is “'founded on administrative convenience.'” Id. at 12 (quoting Helvering v. Horst, 311 U.S. 112, 116 (1940)). And the court of appeals emphasized that “there is no constitutional prohibition against Congress attributing a corporation's income pro-rata to its shareholders.” Id. at 13.

Applying those principles, the court of appeals held that the MRT is an income tax under the Sixteenth Amendment. “[T]here is no dispute,” the court explained, “that KisanKraft actually earned significant income.” Pet. App. 13. And even “[b]efore the MRT, U.S. persons owning at least 10% of a CFC were already subject to certain taxes on the CFC's income.” Id. at 14. Such shareholders “were, and after the passage of the MRT continue to be, treated as individuals who have some ability to control distribution.” Ibid. “The MRT,” the court reasoned, simply “builds upon these U.S. persons' preexisting tax liability attributing a CFC's income to its shareholders.” Ibid.

The court of appeals also held that the MRT complies with due process, rejecting petitioners' contention that “the MRT's retroactive period” is unduly “long.” Pet. App. 18.

4. The court of appeals denied rehearing. Pet. App. 36-37. Judge Bumatay dissented, joined by three other judges. Id. at 37-56.

SUMMARY OF ARGUMENT

I. The MRT is an income tax.

A. The Sixteenth Amendment authorizes Congress to tax shareholders' pro rata shares of undistributed corporate earnings as income. The Amendment's Framers understood its reference to “taxes on incomes,” U.S. Const. Amend. XVI, as permitting taxes on undistributed corporate earnings. From 1864 through 1870, Congress repeatedly enacted income taxes of that nature — and this Court upheld its power to do so. Collector v. Hubbard, 79 U.S. 1, 18 (1871). Although the decision in Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895), temporarily undermined Hubbard, the Sixteenth Amendment overturned Pollock, thus reinstating Congress's power to impose the types of income taxes that predated Pollock.

Petitioners err in contending that the Sixteenth Amendment created a realization requirement. Realization was a well-established concept when the Sixteenth Amendment was adopted — yet the Amendment never references it. Petitioners cannot read that requirement into the term “income,” which encompasses all economic gains. Nor can petitioners read that requirement into the phrase “from whatever source derived,” U.S. Const. Amend. XVI, which was designed to overturn Pollock's source-based analysis of income taxes, not to restrict Congress to taxing only realized gains.

B. Post-ratification practice shows that Congress may tax individuals on their pro rata shares of undistributed business earnings. Within months after the Sixteenth Amendment's ratification, Congress included undistributed corporate earnings within certain shareholders' taxable income. That 1913 law also taxed partners on undistributed partnership income. And Congress soon applied the partnership-tax provision to personal service corporations.

Petitioners cannot distinguish Congress's longstanding method of taxing partners. From before the Sixteenth Amendment through today, many States have treated partnerships as entities separate from their partners — just as States have treated corporations as entities separate from their shareholders. Because Congress may (as petitioners concede) tax partners on undistributed partnership income, it likewise may tax shareholders on undistributed corporate income.

In the decades after the Sixteenth Amendment, Congress continued to enact income taxes that reached individuals' pro rata shares of undistributed business earnings. In 1937, for instance, Congress began taxing U.S. shareholders of foreign corporations on the corporations' undistributed income. And in 1962, it expanded that approach through Subpart F. Petitioners concede Subpart F's constitutionality but offer no principled distinction between Subpart F and the MRT.

C. This Court's precedents recognize Congress's power to tax individuals on their pro rata shares of undistributed business earnings. In arguing that the Sixteenth Amendment's grant of power somehow stripped Congress of the preexisting authority upheld in Hubbard, petitioners stake their case on dictum from Eisner v. Macomber, 252 U.S. 189 (1920). But that dictum was poorly reasoned and has been abrogated by many later decisions limiting Macomber to the stock-dividend context in which it arose. Stare decisis thus has no role to play. Under this Court's precedents considering the decision's reach, Macomber is not controlling in this case.

D. The MRT taxes income. It taxes U.S. persons owning at least 10% of a CFC on their pro rata shares of the CFC's undistributed income — materially indistinguishable from Subpart F and numerous similar income taxes dating back to 1864. Petitioners' contention that the MRT is a tax on property cannot be squared with the MRT's terms or longstanding historical practice.

II. The MRT is independently constitutional as an excise tax. In Flint v. Stone Tracy Co., 220 U.S. 107 (1911), the Court held that a tax on a corporation's income was “an excise upon the particular privilege of doing business in a corporate capacity.” Id. at 151. The MRT can be similarly viewed as a tax upon the privilege of doing business through a CFC. At minimum, the Court should remand for the court of appeals to consider that argument in the first instance, rather than prematurely invalidating the MRT, which could cost the government hundreds of billions of dollars in revenue.

ARGUMENT

I. THE MRT IS AN INCOME TAX

The Sixteenth Amendment's text and history show that Congress may tax shareholders on their pro rata shares of undistributed corporate earnings. Because the MRT does just that, it is a constitutional income tax.

In arguing otherwise, petitioners advocate for a strict realization requirement. But petitioners concede the constitutionality of various taxes that appear to violate that requirement — without offering any principled basis for distinguishing them from the MRT. They also stake their case on dictum from Eisner v. Macomber, 252 U.S. 189 (1920), which this Court has long since limited to Macomber's stock-dividend context. Petitioners' challenge to the MRT therefore fails.

A. The Sixteenth Amendment Authorizes Congress To Tax Shareholders' Pro Rata Shares Of Undistributed Corporate Earnings As Income

The Sixteenth Amendment empowers Congress to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.” U.S. Const. Amend. XVI. That authority encompasses taxes on a shareholder's pro rata share of undistributed corporate earnings. Congress had repeatedly laid such taxes before the Amendment's adoption, and the Amendment restored Congress's power as it existed before Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895). Petitioners' attempt to manufacture a realization requirement from various ratification-era sources lacks merit.

1. The Amendment's text and historical context show that it permits taxes on individuals' pro rata shares of undistributed corporate earnings

In the Internal Revenue Code, Congress has defined “gross income” in terms materially identical to the Sixteenth Amendment — as “all income from whatever source derived,” 26 U.S.C. 61(a) — which this Court understands as encompassing “the full measure of [Congress's] taxing power,” United States v. Burke, 504 U.S. 229, 233 (1992) (quoting Helvering v. Clifford, 309 U.S. 331, 334 (1940)). The Court has consistently read the statutory phrase as “sweep[ing] broadly,” so as to include “any 'accession to wealth,'” ibid. (quoting Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)) (brackets omitted), and “all economic gains not otherwise exempted,” Commissioner v. Banks, 543 U.S. 426, 433 (2005).

a. In light of Congress's earlier income-tax enactments, the Sixteenth Amendment's Framers necessarily understood its reference to “taxes on incomes,” as permitting taxes on individuals' pro rata shares of undistributed corporate earnings. As this Court has explained, the Amendment reauthorized those “familiar” income taxes that “had been in actual operation within the United States before its adoption.” Burnet v. Sanford & Brooks Co., 282 U.S. 359, 365 (1931).

In 1864 — only three years after the first federal income-tax law — Congress expanded that law to several specified categories of taxable “gains, profits, or income.” Act of June 30, 1864 (1864 Act), ch. 173, § 117, 13 Stat. 281. The 1864 Act provided that “the gains and profits of all companies, whether incorporated or partnership * * * shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise.” § 117, 13 Stat. 282 (emphasis added). Congress enacted materially identical provisions in 1865, 1867, and 1870. See Act of Mar. 3, 1865, ch. 78, 13 Stat. 480; Act of Mar. 2, 1867, ch. 169, § 13, 14 Stat. 478; Act of July 14, 1870 (1870 Act), ch. 255, § 7, 16 Stat. 258.²

In 1871, this Court sustained Congress's power to enact those provisions. In Collector v. Hubbard, 79 U.S. 1 (1871), the Court enforced Congress's 1864 tax against an individual shareholder who resisted inclusion of companies' undivided profits in his income. The Court held that “it is as competent for Congress to tax annual gains and profits before they are divided among the holders of the stock as afterwards, and it is clear that Congress did direct that all such gains and profits, whether divided or otherwise, should be included in estimating the annual gains, profits, or income liable to taxation under the provisions of th[e] act.” Id. at 18. In so holding, the Court recognized that “the owner of a share of stock in a corporation holds the share with all its incidents,” including “his proportional share of all profits not then divided.” Ibid.

In 1895, Pollock temporarily undermined Hubbard by holding that taxes on income derived from property must be apportioned. 158 U.S. at 618. But the Sixteenth Amendment overturned Pollock in 1913, reinstating “the previous complete and plenary power of income taxation possessed by Congress,” Stanton v. Baltic Mining Co., 240 U.S. 103, 112 (1916) — which included the 1864 income tax upheld in Hubbard. Nothing suggests that the Amendment's Framers intended a narrower income-taxing power than Congress had exercised before Pollock.

b. Other authorities contemporaneous with the Sixteenth Amendment's adoption show that, as a textual matter, “income” was used to refer to “all economic gains.” Banks, 543 U.S. at 433. Dictionaries defined “income” as “[g]ains, or private revenue, from business, labor, or the investment of property.” 1 Stewart Rapalje & Robert L. Lawrence, A Dictionary of American and English Law 644 (1883); see Charles E. Chadman, A Concise Legal Dictionary 199 (1909) (“[t]he profit or gains from business[,] property[,] or other sources of wealth”). And when interpreting the term “[i]ncome” under the Massachusetts Constitution, the Massachusetts Supreme Judicial Court explained that “[i]ts usual synonyms are 'gain,' 'profit,' [and] 'revenue.'” Trefry v. Putnam, 116 N.E. 904, 908 (1917).

Contemporaneous tax experts agreed. One prominent scholar, Professor Robert Murray Haig, defined income as “the money value of the net accretion to one's economic power between two points in time.” The Concept of Income — Economic and Legal Aspects 7, reprinted in The Federal Income Tax (1921) (Robert Murray Haig ed.) (Haig) (emphasis omitted). That definition was “the one generally adopted as the definition of income in modern income tax acts” (i.e., immediately after the Sixteenth Amendment). Ibid. Other scholars similarly defined income a s “the flow of commodities and services accruing to an individual through a period of time and available for disposition after deducting the necessary cost of acquisition.” William Wallace Hewett, The Definition of Income and its Application in Federal Taxation 22-23 (1925) (emphasis omitted).

2. Petitioners' ratification-era sources do not support their asserted realization requirement

Petitioners contend (Br. 40) that the Sixteenth Amendment created a “realization requirement.” Under petitioners' asserted requirement, even if a corporation realizes income, Congress may not tax a shareholder on his pro rata share of that income unless he receives direct “payment” through a monetary dividend. Pet. Br. 1. The Amendment imposes no such requirement.

a. The Sixteenth Amendment does not reference realization, even though the concept was well established when the Amendment was adopted. Dictionaries defined “realize” as “to convert any kind of property * * * into money, esp. rights or securities representing investments or speculations, as shares, bonds, etc.” Webster's New International Dictionary of the English Language 1778 (1913) (Webster's); see Henry Campbell Black, A Law Dictionary 993 (2d ed. 1910) (Black's) (similar). And some previous income-tax provisions had taxed certain “profits realized.” 1864 Act § 116, 13 Stat. 281 (emphasis added); see, e.g., 1870 Act § 7, 16 Stat. 257-258. The Amendment's Framers thus easily could have authorized taxes only “on incomes realized.” But they did not.

That omission is especially telling in light of the Treasury Department's contemporaneous understanding of “income” as including unrealized gains. In 1909, Congress enacted a corporate excise tax tied to the “net income” of covered corporations. Corporation Tax Act, ch. 6, § 38, 36 Stat. 112. Because the same Congress then proposed the Sixteenth Amendment, the Amendment's reference to “income” has “been taken to mean the same thing as used in ” the 1909 excise-tax law, Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 174 (1926). And the Treasury Department interpreted income under the 1909 excise-tax law to include an “increase in the value of [a corporation's] capital assets,” an “increase in [the] value of unsold property,” T.D. 1742, 14 Treas. Dec. Int. Rev. 127 (1911), and “an appreciation in the value of securities,” T.D. 1706, 14 Treas. Dec. Int. Rev. 75 (1911).

Lacking any textual reference to realization, petitioners attempt (Br. 26-27) to read their asserted realization requirement into the word “incomes” and the phrase “whatever source derived.” Those attempts are misconceived.

Petitioners cite definitions of “income” that reference gain that “proceeds from” or “derives from” particular sources, such as “labor, business, property, or capital.” Br. 29 (citations omitted). Those phrases do not support a realization requirement. Rather, they simply clarify that to be income, a gain must come from a certain type of source that renders it economic in nature. Absent such clarification, the word “gain” could refer to non-economic gains that may not qualify as income. Thus, petitioners ultimately acknowledge that the phrase “gains . . . derived from” does not provide “any guidance” about whether the gains must be realized. Id. at 38 (citations omitted).

Petitioners also rely on a statement in Black's Law Dictionary that “'[i]ncome' means that which comes in or is received from any business or investment of capital, without reference to the outgoing expenditures.” Black's 612; see Pet. Br. 29. But that statement is in an explanatory paragraph distinguishing “business” income from “profit.” Black's 612. The statement therefore does not purport to capture the ordinary meaning of “income,” which was separately defined as including “gains, profit, or private revenue.” Ibid.³ In any event, the MRT does tax earnings that “come[ ] in or [are] received from a[ ] business,” ibid. — it simply taxes shareholders on those earnings, rather than the business itself.

Petitioners further err in suggesting (Br. 27) that the phrase “from whatever source derived,” U.S. Const. Amend. XVI, establishes their asserted realization requirement. That phrase is instead designed to overturn “the principle upon which the Pollock Case was decided” — i.e., that a tax on income derived from property is direct — by “prevent[ing]” courts from assessing an income tax's constitutionality based on “the sources from which a taxed income was derived.” Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 18-19 (1916) (emphasis omitted); see Stanton, 240 U.S. at 113. In other words, the phrase restores Congress's pre-Pollock power to tax all income, “whatever” its source; it does not newly restrict Congress to taxing only realized gains.

Petitioners additionally contend (Br. 34-35) that without a realization requirement, Congress could “deem” “anything” income, thus “render[ing] Article I's apportionment requirement a dead letter.” That is wrong. “In determining what constitutes income[,] substance rather than form is to be given controlling weight.” Kerbaugh-Empire Co., 271 U.S. at 174. To fall within the Sixteenth Amendment, a tax must in fact target income, as that term has long been understood.

Petitioners and the amici supporting them raise the specter of taxes that Congress has not enacted. Petitioners emphasize (Br. 35) the possibility of taxes on “property * * * based on value,” while amici highlight “a slurry of proposed wealth taxes,” e.g., Americans for Tax Reform Amicus Br. 20. “Under [this Court's] judicial tradition,” however, “[it] do[es] not decide whether a tax may constitutionally be laid until [it] find[s] that Congress has laid it.” Helvering v. Griffiths, 318 U.S. 371, 394 (1943).

In any event, a hypothetical tax on “the net value of all covered assets” at a particular point in time, Americans for Tax Reform Amicus Br. 20, would be fundamentally distinct from a tax on income. That hypothetical tax would target “the amount of [property or] wealth which a person has on a fixed date.” Trefry, 116 N.E. at 907; see Webster's 1089 (explaining that “[c]apital is a static conception independent of time”); Hewett 35 (“Capital is a stock of wealth in existence at a point of time.”). By contrast, an income tax targets economic gain “between two points of time.” Haig 7; see Hewett 35 (“Income is a flow of commodities and services through a period of time.”); Trefry, 116 N.E. at 907 (explaining that income “involves time as an essential element of its measurement or definition”). It is those well-established principles — not petitioners' asserted realization requirement — that “distinguish[ ] income [taxes] from property tax[es].” Pet. Br. 36.

b. Petitioners also contend (Br. 27) that “[p]re-ratification precedent” supports their asserted realization requirement. But they ignore this Court's decision in Hubbard, which refutes that requirement. Petitioners instead rely on Gray v. Darlington, 82 U.S. 63 (1872), but Gray held as a matter of statutory interpretation that where a taxpayer sold bonds whose value increased over four years, that increase was not taxable because Congress “intended” to tax only gains “realized from a business transaction begun and completed during the preceding year.” Id. at 65, 67. In reaching that conclusion, the Court observed that the “[m]ere advance in value” of the bonds did not constitute “income specified by the statute.” Id. at 66. That observation does not suggest, however, that income requires realization — after all, realization was not at issue in Gray because gains there were “realized by th[e] sale” of the bonds. Id. at 65. Nor did Gray cite Hubbard, much less overrule it.

The lower-federal-court cases that petitioners cite (Br. 27-28) are equally unhelpful to them. Those cases indicate that “'income,' as used in revenue legislation,” means “the receipt of actual cash as opposed to contemplated revenue due but unpaid, unless a contrary purpose is manifest from the language of the statute.” Maryland Casualty Co. v. United States, 52 Ct. Cl. 201, 209 (1917). That principle does not apply to taxes (like the MRT) that target a corporation's “receipt of actual cash.” Ibid. Regardless, the cases recognize that Congress may tax “contemplated revenue due but unpaid” as income so long as it makes that intent “manifest.” Ibid.; see United States v. Schillinger, 27 F. Cas. 973 (C.C. S.D.N.Y. 1876) (No. 16,228) (approvingly citing such a provision).

Petitioners find no support in state authorities either. To the contrary, the Massachusetts Supreme Judicial Court's decision in Trefry interpreted income broadly under the state constitution, see p. 15, supra, and Virginia's 1898 income tax reached “the shares of the gains and profits of all companies * * * of any person who would be entitled to the same if divided, whether said profits have been divided or not.” Acts of Assembly, ch. 496, § 1, 1897-1898 Va. Acts 527. Meanwhile, petitioners cite (Br. 28) a Massachusetts decision interpreting only what a “testator intended” under his will. Minot v. Paine, 99 Mass. 101, 112 (1868). And one amicus relies on a Wisconsin Supreme Court decision that upheld a provision of that State's income-tax law reaching unrealized imputed rental payments, thereby contradicting petitioners' conception of income. See Americans for Tax Reform Amicus Br. 13 (citing State ex rel. Bolens v. Frear, 134 N.W. 673, 691 (Wis. 1912), which relied on longstanding “English income tax laws” counting a home's imputed rental value as “part of [the homeowner's] income”).

c. Contemporaneous scholarship also undermines petitioners' asserted realization requirement. Professor Haig explained that to be income, the relevant gain “must be realizable, ” but need not be “realized” in the “narrow[ ]” sense of “actual physical separation.” Haig 8. Professor Hewett likewise emphasized that “[t]he return from capital must be realizable to be considered income, but realization is unnecessary.” Hewett 28. And one of petitioner's sources acknowledged that “[i]t is hardly accurate to state without reservation that unrealized appreciation is not taxable under an income tax law.” Robert H. Montgomery, Income Tax Procedure 249. (1919).

Petitioners' other favored scholars sought to move the law in their preferred direction — while recognizing that their preferences did not accord with the status quo. For instance, Henry Campbell Black's treatise repeatedly posited what he thought “a proper definition of the word 'income' would be” in various scenarios, before acknowledging that actual practice had long been to the contrary. A Treatise on the Law of Income Taxation Under Federal and State Laws 78 (1913). Black argued that “a stockholder's interest in the undivided earnings or surplus of the corporation” should not “be called income,” while conceding that “the United States income tax law of 1870” did precisely that. Id. at 119-120. And he argued that “the undivided earnings of a partnership” should “properly constitute income of the firm but not of the individual partners,” while acknowledging that, “[n]evertheless,” the statute “subject[ed] [earnings] to taxation in the names of the partners.” Id. at 100.

Similarly, petitioners emphasize (Br. 31) a 1919 article making the arguments about stock dividends that the Court ultimately accepted in Macomber. Edwin R.A. Seligman, Are Stock Dividends Income?, 9 Am. Econ. Rev. 517. But as explained below, Macomber's (and thus Seligman's) discussion of income has been limited to the stock-dividend context — which is not at issue here. Seligman, too, admitted that his views ran counter to Congress's 1860s and 1870s income-tax laws and this Court's decision in Hubbard. Id. at 532-533 n.6.

B. Post-Ratification Practice Shows That Congress May Tax Individuals On Their Pro Rata Shares Of Undistributed Business Earnings

This Court has “long looked to 'settled and established practice' to interpret the Constitution.” Moore v. Harper, 143 S. Ct. 2065, 2086 (2023) (citation omitted). Even if the “constitutional text” were “ambiguous” as to whether income is limited by petitioners' realization requirement, such practice “offers strong support for [a] broad[er] interpretation” of that term. NLRB v. Noel Canning, 573 U.S. 513, 528 (2014).

1. Congress taxed undistributed earnings immediately after the Sixteenth Amendment's ratification

Contemporaneous practice provides “weighty evidence of the Constitution's meaning.” Seila Law LLC v. CFPB, 140 S. Ct. 2183, 2197 (2020) (citation omitted). Here, the laws that Congress enacted immediately following the Sixteenth Amendment's ratification reflect its understanding that taxable income can include individuals' pro rata shares of undistributed business earnings.

Congress's 1913 income-tax law — enacted eight months after the Amendment's ratification — included undistributed corporate earnings within certain shareholders' taxable income. Specifically, the law taxed individuals on “ the share to which [they] would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations, joint-stock companies, or associations,” when they had been “formed or fraudulently availed of for the purpose of preventing the imposition of [a] tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed.” Tariff of 1913 (1913 Act), ch. 16, § 2.A.2, 38 Stat. 166 (emphasis added). Congress enacted materially identical taxes in 1916 and 1918. See Helvering v. National Grocery Co., 304 U.S. 282, 288 n.4 (1938). And the Court later described the taxes as establishing that “the sole owner of [a] business[ ] could not by conducting it as a corporation, prevent Congress, if it chose to do so, from laying on him individually the tax on the year's profits.” Id. at 288.

Petitioners acknowledge the 1913 provision but emphasize its limitation to the context of “'fraudulent' abuse of the corporate form to avoid taxation.” Br. 32 (citation omitted). But Congress's taxation of shareholders on undistributed corporate earnings at all — even in a targeted manner to combat tax avoidance — belies petitioners' categorical realization requirement. And it likewise refutes three Senators' suggestion during a 1913 floor debate that Congress could not tax shareholders on undistributed corporate earnings. See ibid. Those Senators never mentioned that Congress repeatedly enacted such taxes in the 1860s and 1870s, or that this Court upheld that power in Hubbard.

The 1913 law further provided that “persons carrying on business in partnership shall be liable for income tax” based on “the share of the profits of [the] partnership to which [the] partner would be entitled if the same were divided, whether divided or otherwise.” 1913 Act § 2.D, 38 Stat. 169 (emphasis added). Five years later, Congress broadened that provision to state that “the individual stockholders” of “[p]ersonal service corporations * * * shall be taxed in the same manner as the members of partnerships.” Revenue Act of 1918, ch. 18, § 218(e), 40 Stat. 1070 (emphasis added). That is, “net income remaining undistributed at the close of [the] taxable year shall be accounted for by the stockholders of such corporation * * * in proportion to their respective shares.” Ibid.

This Court upheld the validity of the partnership provision, rejecting an argument that partners' “respective shares” of profits “could not be deemed taxable income” because “no distribution of profits could lawfully have been made” to them under state law. Heiner v. Mellon, 304 U.S. 271, 280 (1938). The Court explained that the tax is “imposed upon the partner's proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material.” Id. at 281.

Seeking to distinguish Congress's longstanding method of taxing partners, petitioners assert (Br. 51) that “partnerships hav[e] no existence separate from their partners,” which assertedly makes the partnership's income equivalent to the partners' income. But petitioners' premise is flawed.

The legal status of partnerships and corporations is not innate; it is governed by state law. Around the time of the Sixteenth Amendment's adoption, numerous States deemed “[a] partnership * * * just as distinct and palpable an entity in the idea of the law, as distinguished from the individuals composing it, as is a corporation.” Walker v. Wait, 50 Vt. 668, 676 (1878); see Francis M. Burdick, Some Judicial Myths, 22 Harv. L. Rev. 393, 395-396 (1909) (collecting authority from several States); Forsyth v. Woods, 78 U.S. 484, 486 (1870) (noting that a “partnership is a distinct thing from the partners themselves”). Today, many States still treat partnerships as entities separate from the partners. “Under California law,” for instance, “a partnership maintains a separate identity from its general partners, and the partners are only secondarily liable for the tax debts of the partnership.” United States v. Galletti, 541 U.S. 114, 116 (2004); see, e.g., Kimberly S. Blanchard, Cross-Border Tax Problems of Investment Funds, 60 Tax. L. 583, 609 (2007) (explaining that because “most state laws[ ] treat the partnership as a separate entity, it is clear that the partners do not own undivided interests in partnership property”).

Petitioners offer no contrary authority. They quote the reporter's paraphrase of the appellants' losing argument in Goesele v. Bimeler, 55 U.S. 589 (1853), that partners “personally 'own[ ] the property' of a partnership.” Pet. Br. 41 (quoting 55 U.S. at 591, though the Court's opinion begins at 602). The Court determined, however, that the persons at issue had “no right s to the [entity's] property, except its use.” Goesele, 55 U.S. at 607. And Merchants' National Bank v. Wehrmann, 202 U.S. 295 (1906), decided a question about national banks' powers, without suggesting that a partnership's property was necessarily that of its partners.

Because Congress may tax partners on undistributed partnership income — as petitioners concede (Br. 51) — there is no principled reason why Congress would lack authority to tax shareholders on undistributed corporate income.

2. Congress continued to tax undistributed business earnings in the decades following the Sixteenth Amendment

This Court has treated post-ratification practice “as an important interpretive factor.” Noel Canning, 573 U.S. at 525. In the decades after the Sixteenth Amendment, Congress continued — just as it had done before Pollock, and right after the Amendment's ratification — to enact income taxes that reached individuals' pro rata shares of undistributed business earnings.

a. Most relevant here, to prevent American taxpayers from using foreign corporations as a “tax avoidance device,” Congress has long taxed U.S. shareholders of foreign corporations on the corporations' undistributed income. Garlock, Inc. v. Commissioner, 489 F.2d 197, 201 (2d Cir. 1973), cert. denied, 417 U.S. 911 (1974). The Revenue Act of 1937 provided that the “undistributed * * * net income of a foreign personal holding company shall be included in the gross income of ” all of the company's U.S. shareholders. § 337(a), 50 Stat. 822. The Second Circuit upheld that provision under the Sixteenth Amendment, rejecting the “taxpayers' argument that inability to expend income in the United States, or to use any portion of it in payment of income taxes, necessarily precludes taxability.” Eder v. Commissioner, 138 F.2d 27, 28 (1943). And this Court cited the statute approvingly as an example of Congress's taxing shareholders on a corporation's “undistributed net income.” National Grocery, 304 U.S. at 288 n.4.

In 1962, Congress expanded that approach through Subpart F. 1962 Act, § 12, 76 Stat. 1006-1031. Subpart F requires a U.S. person owning at least 10% of a CFC's shares to “include in his gross income * * * his pro rata share * * * of the corporation's subpart F income for [the] year” — even if that income has not been distributed to him. 26 U.S.C. 951(a)(1)(A). The Second Circuit upheld Subpart F under the Sixteenth Amendment, just as it had upheld the 1937 provision. Garlock, 489 F.2d at 202; accord Estate of Whitlock v. Commissioner, 494 F.2d 1297, 1301 (10th Cir.), cert. denied, 419 U.S. 839 (1974).

Petitioners concede (Br. 47) Subpart F's constitutionality because, in their view, it “rests on a theory of constructive realization of income by those being taxed.” As an initial matter, petitioners' willingness to recognize such a theory shows that they do not genuinely believe the Constitution mandates a bright-line realization requirement. By acknowledging that the Sixteenth Amendment does not require actual “payment [or] exchange,” Pet. Br. 1, petitioners effectively concede Congress's authority to draw reasonable lines about what constitutes taxable income.

In any event, Subpart F's constitutionality is best understood to rest not on constructive realization, but on “the history of U.S. income taxation show[ing] that Congress has for decades been drafting income tax statutes which have bypassed the corporate entity” and taxed shareholders on undistributed corporate income. Estate of Whitlock v. Commissioner, 59 T.C. 490, 507 (1972), aff'd in relevant part, 494 F.2d 1297 (10th Cir. 1974), cert. denied, 419 U.S. 839 (1974); see Dougherty v. Commissioner, 60 T.C. 917, 928 (1973). That historical pedigree is particularly strong as applied to the undistributed income of foreign corporations — presumably because Congress has generally avoided taxing foreign corporations and instead chosen to tax their U.S. shareholders. See Barclay & Co. v. Edwards, 267 U.S. 442, 451 (1925).

By contrast, Subpart F does not naturally fit within petitioners' definition of constructive realization. According to petitioners, “the doctrine of constructive realization” allows Congress to “'treat[ ] as taxable income'” gains that are “'unqualifiedly subject to the demand of a taxpayer . . ., whether or not such income has actually been received in cash.'” Pet. Br. 47-48 (emphasis added; citation omitted). But petitioners admit that the 10% shareholders taxed by Subpart F and the MRT do not enjoy unqualified control over a corporation's income: Petitioners owned 13% of KisanKraft but disavow any ability to singlehandedly “force the company to issue a dividend.” Id. at 12.

Petitioners attempt to defend their constructive-realization theory by asserting that Subpart F taxes only “'movable income' that could have been earned directly by domestic controlling shareholders.” Br. 49 (citation omitted). But petitioners mention only three types of income taxed under Subpart F while omitting numerous others, such as income from “insuring risks outside the CFC's country of incorporation,” “paying illegal bribes or kickbacks,” “doing business in a country” under certain sanctions, and passive investments. 3 Bittker & Lokken ¶ 69.1, at 69-4; see 26 U.S.C. 952-954. Petitioners do not explain how any income taxed under Subpart F — let alone all forms of it — is subject to the “unqualified[ ]” control of a CFC's 10% shareholders. Pet. Br. 48 (citation omitted).

But if the Court were to recognize Subpart F's validity under some theory of constructive realization, the same theory would apply equally to the MRT. As elaborated below, the MRT and Subpart F's preexisting regime share the same essential features. See pp. 42-43, infra. Thus, if “defer[ence]” is warranted for Congress's “legislative determination” in Subpart F — as petitioners contend (Br. 51) — then the same is true for Congress's legislative determination in the MRT.

b. Beyond the context of foreign companies, Congress has long used other “pass-through” mechanisms to “attribute[ ]” undistributed income of business entities to “individual[s].” Bufferd v. Commissioner, 506 U.S. 523, 525 (1993). As noted above, since 1913 it has been “axiomatic that each partner must pay taxes on his distributive share of the partnership's income without regard to whether that amount is actually distributed to him.” United States v. Basye, 410 U.S. 441, 453 (1973); see 26 U.S.C. 702(a) and (b). Ever since it recognized S corporations, Congress has imposed an analogous requirement on their shareholders. See 26 U.S.C. 1366(a) and (b); Bufferd, 506 U.S. at 524-525. And LLCs may similarly elect to be taxed as partnerships. See 26 C.F.R. 301.7701-3(a). Those longstanding pass-through mechanisms — in conjunction with Subpart F — raise substantial revenues for the federal government.

Petitioners accept (Br. 51) the constitutionality of the S-corporation regime because an entity needs shareholder consent to become an S corporation. 26 U.S.C. 1362(a). But if (as petitioners posit) a tax on undistributed corporate income were a direct tax requiring apportionment, then Congress could not impose the S-corporation tax, as shareholder “consent” could not “cure the constitutional difficulty.” CFTC v. Schor, 478 U.S. 833, 851 (1986). Moreover, revoking S-corporation status requires the consent of “shareholders holding more than one-half of the shares.” 26 U.S.C. 1362(d)(1)(B). So if holders of 49% no longer wish to pay taxes on undistributed earnings, they still must do so. Consent thus cannot explain the S-corporation regime; instead, the explanation is that petitioners' realization requirement does not exist.

c. Although not directly analogous to the MRT, Congress has also taxed numerous other gains that do not appear to satisfy petitioners' rigid realization requirement, often enacting these regimes in response to abusive tax-avoidance behavior. See Noel B. Cunningham & Deborah H. Schenk, Taxation Without Realization: A 'Revolutionary' Approach to Ownership, 47 Tax. L. Rev. 725, 741-742 (1992). Beginning in 1916, for instance, Congress allowed individuals to pay taxes based on accounting methods “other than that of actual receipts and disbursements,” so long as the chosen method “clearly reflect[s] [their] income.” Revenue Act of 1916, ch. 463, § 8(g), 39 Stat. 763; see Helvering v. Estate of Enright, 312 U.S. 636, 643 (1941). Under accrual accounting, the mere “right to receive” — “not the actual receipt” — “determines the inclusion of the amount in gross income.” Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 184 (1934); see 26 U.S.C. 446(c)(2). In some circumstances, Congress has effectively required accrual accounting, and this Court has upheld such taxes as capturing “a fair reflection of income” even when the money had “not be[en] collected.” Estate of Enright, 312 U.S. at 641, 645; see 26 U.S.C. 448(a) (prohibiting “cash receipts” accounting for certain corporations and partnerships).

In addition, Congress taxes those who relinquish U.S. citizenship as if they sold all their assets the day before expatriation, even though no gain from any such sale was realized. 26 U.S.C. 877A(a). Although “the time for payment” of the tax may be deferred until the “year in which such property is disposed” if the taxpayer provides “adequate security,” 26 U.S.C. 877A(b)(1) and (4)(A), the tax liability itself arises “on the day before the expatriation date,” 26 U.S.C. 877A(a)(1) — i.e., before any realization occurs.

Congress also taxes numerous assets as if they had been sold for a realized gain at the end of a taxable year — even if they were not in fact sold — including regulated futures contracts, 26 U.S.C. 1256(a) and (b); securities held by securities dealers, 26 U.S.C. 475(a); certain assets held by life-insurance companies, 26 U.S.C. 817A(b); and certain stock in passive foreign investment companies, 26 U.S.C. 1296(a). And Congress taxes holders of discounted debt instruments on imputed interest payments, even though no interest was actually paid, 26 U.S.C. 1272(a)(1) — a factor that drives prices in bond markets. Other examples abound. See, e.g., 26 U.S.C. 305(c) (treating certain transactions, such as “a change in redemption price,” as deemed distributions to shareholders); 26 U.S.C. 467(a) (taxing lessors on accrued rental payments, even if the payments are not made during the taxable year); 26 U.S.C. 1259 (taxing persons on gains based on “a constructive sale of an appreciated financial position”). Even if those taxes differ from the MRT, see Pet. Br. 52-53, they show that petitioners' asserted constitutional realization requirement is irreconcilable with much of the current Code. Adopting petitioners' realization requirement therefore could put at risk billions of dollars in revenue and reinvigorate the abusive tax-avoidance schemes that Congress has addressed.

3. Petitioners' congressional-practice argument lacks merit

Attempting their own congressional-practice argument, petitioners contend (Br. 37) that in “the aftermath” of the Court's 1920 decision in Macomber, Congress “observed the need for realization of taxable income” and has “consistently” taxed realized gains since. But any “reconfigur[ation]” (Pet. Br. 39) of income taxes after Macomber only confirms that before 1920, Congress did not view the Sixteenth Amendment as restricting its power to tax unrealized gains.

And as explained below, this Court subsequently limited Macomber to the stock-dividend context in which it arose. Once it became clear that Macomber did not create the rigid realization requirement that petitioners assert, Congress resumed enacting taxes that disregard that requirement, including Subpart F. While Congress has not “redefin[ed] the Tax Code's central 'gain or loss' provision to include unrealized appreciation in property,” Pet. Br. 40, Congress's targeted decisions to tax unrealized appreciation demonstrate that it perceives no constitutional imperative — even as it often recognizes the “'administrative convenience'” of taxing gains upon realization, given the potentially “'cumbersome'” task “of valuing assets on an annual basis to determine whether the assets ha[ve] appreciated or depreciated in value.” Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554, 559 (1991) (citations omitted).

C. This Court Has Recognized Congress's Power To Tax Individuals On Their Pro Rata Shares Of Undistributed Business Earnings

Before the Sixteenth Amendment, Hubbard held that Congress may tax individuals' shares of undistributed corporate earnings as income. 79 U.S. at 18. Following the Amendment's adoption, this Court has consistently made clear that Congress may tax “all economic gains.” Banks, 543 U.S. at 433. And the Court has emphasized that the Amendment empowers Congress to choose “how taxes may be laid” on such gains, so long as its choice is “neither unreasonabl[e] nor arbitrar[y].” Taft v. Bowers, 278 U.S. 470, 481, 483 (1929).

In arguing that the Sixteenth Amendment's grant of power somehow stripped Congress of a preexisting authority recognized in Hubbard, petitioners stake their case on dictum in Macomber implying that shareholders must receive monetary distributions of corporate earnings before being taxed on them. But Macomber's dictum was poorly reasoned and has been abrogated by many later decisions. As it stands, this Court has limited Macomber to the stock-dividend context in which it arose.

1. Macomber's dictum erroneously implied that Congress cannot tax shareholders on undistributed corporate earnings

a. In Macomber, the Court considered whether a particular type of “stock dividend” was taxable income. 252. U.S. at 210. Standard Oil shareholders had received an additional 50% of their current number of common shares (e.g., a shareholder with 2200 common shares received 1100 additional common shares). See id. at 200-201. As the Court explained, such a “'stock dividend'” is a “book adjustment” that “does not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding.” Id. at 210-211. “The new [stock] certificates simply increase the number of the shares, with consequent dilution of the value of each share.” Id. at 211.

The Court thus held that “the essential nature of a stock dividend necessarily prevents its being regarded as income in any true sense” under the Sixteenth Amendment. Macomber, 252 U.S. at 205. The Court recognized that it could have “rest[ed] the * * * case there.” Ibid. But it proceeded to observe that “income” under the Sixteenth Amendment is “a gain, a profit, something of exchangeable value” that is “received or drawn by the recipient (the taxpayer) for his separate use, benefit, and disposal.” Id. at 207. According to petitioners (Br. 17-18), that dictum bars Congress from taxing shareholders on undistributed corporate income.

b. Macomber's dictum was misconceived in multiple respects. The Court began from the premise that “[i]ncome may be defined as the gain derived from capital, from labor, or from both combined.” Macomber, 252 U.S. at 207 (citation omitted). Citing no authority, it then read that definition of income to mean that the gain must be “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” Ibid. As Justice Holmes emphasized in dissent, that novel reading of income contradicted “the common understanding” of the term “'at the time of [the Amendment's] adoption.'” Id. at 220 (citation omitted); see id. at 237 (Brandeis, J., dissenting) (stating that the majority defied the “reasonable understanding” of what is fairly “regarded as income”).

Petitioners err in asserting (Br. 19) that Macomber's definition of income “was the logical consequence” of the Court's decisions in Brushaber and Lynch v. Hornby, 247 U.S. 339 (1918). Brushaber never attempted to define income; it held that the Sixteenth Amendment “prevent[ed]” courts from relying on “the sources from which a taxed income was derived” when determining whether apportionment was required. 240 U.S. at 19. Hornby observed that “Congress was at liberty to treat [certain] dividends” as “income when they came to hand,” without suggesting that Congress could tax shareholders only then. 247 U.S. at 344.

The Macomber Court also misunderstood the historical practice. It recognized that Hubbard had upheld taxes on shareholders' portions of undistributed corporate earnings, but it concluded that Hubbard  “must be regarded as overruled by Pollock.” Macomber, 252 U.S. at 218. That reasoning ignores that the Sixteenth Amendment overturned Pollock and “forbids” applying that decision to income taxes. Brushaber, 240 U.S. at 19. Under the Macomber Court's apparent view, the Sixteenth Amendment negated Pollock's income-tax holding except as applied to the income taxes at issue in Hubbard. Nothing in the Amendment's text or history supports that understanding. To the contrary, the Sixteenth Amendment authorized precisely those income taxes — like those taxing undistributed corporate earnings from 1864 through 1871 — that “had been in actual operation within the United States before its adoption.” Burnet, 282 U.S. at 365.

2. This Court has abrogated Macomber's dictum

Macomber “was promptly and sharply criticised.” Griffiths, 318 U.S. at 373 & n.4 (citing commentary). And the Court has steadily limited its reach. Macomber retains vitality only in its specific stock-dividend context and when Congress has expressly invoked realization.

a. One year after Macomber, the Court began limiting its force even in the stock-dividend context. In United States v. Phellis, 257 U.S. 156 (1921), the Court held that a stock dividend issued as part of a corporate reorganization was income under the Sixteenth Amendment, id. at 175, over a dissent suggesting a “conflict with” Macomber, id. at 176 (McReynolds, J., dissenting). The Court later observed that Macomber had led to an “erroneous belief ” by some (including in Congress) that “no stock dividend could be taxed.” Helvering v. Gowran, 302 U.S. 238, 242 (1937). In fact, Macomber “affected only the taxation of dividends declared in the same stock as that presently held by the taxpayer,” where “the preexisting proportionate interests of the stockholders remained unaltered.” Koshland v. Helvering, 298 U.S. 441, 444-445 (1936). By contrast, a stock dividend that “gives the stockholder an interest different from that which his former stock holding represented” remained “taxable as income,” id. at 446 — even though such dividends are not “received or drawn by the recipient (the taxpayer) for his separate use” as Macomber's dictum would have required, 252 U.S. at 207.

b. In the 1940s, the Court refused to apply Macomber beyond the stock-dividend context. In Helvering v. Bruun, 309 U.S. 461 (1940), a tenant erected a new building on a landlord's land and then defaulted on the lease. Id. at 462. When the government tried to tax the building's value as the landlord's income, he contended that the gain was not yet “realized within the meaning of the Sixteenth Amendment” and would become income “only upon [his] disposition of the asset.” Id. at 467. The Court disagreed, holding that the term income was “broad enough to embrace the gain in question,” even though the landlord could not “sever the improvement begetting the gain from his original capital.” Id. at 468-469.

The Bruun Court reasoned that Macomber's “expressions” about income being a gain “received by the recipient for his separate use” were simply “used to clarify the distinction between an ordinary [cash] dividend and a stock dividend.” 309 U.S. at 468-469; see id. at 468 n.8. The Court therefore deemed Macomber's understanding of income “not controlling.” Id. at 469.⁴

In Helvering v. Horst, 311 U.S. 112 (1940), the Court more directly undermined Macomber's dictum by deeming realization a “rule[ ] founded on administrative convenience” rather than constitutional imperative. Id. at 116. Thus, although Horst “addresses what counts as realization ” in the context of a gift, Pet. Br. 42, Horst viewed its realization analysis as implementing statutory and administrative principles alone.

Three years later, in Griffiths, the Court was asked to overrule Macomber but avoided the question by holding that the relevant statute did not tax the type of dividends at issue in Macomber. 318 U.S. at 394, 404. Before reaching its statutory holding, the Court recounted Macomber's erosion, explaining that Bruun and Horst had “undermined * * * the original theoretical bases of the decision,” id. at 394, leaving Macomber “limited * * * to the kind of dividend there dealt with,” id. at 375.

c. In 1955, the Court further vitiated Macomber in Glenshaw Glass, supra. There, the Court held that punitive-damages awards are taxable income, emphasizing that “income” refers to “all gains except those specifically exempted” by the Code. 348 U.S. at 430. The Court thus rejected the taxpayers' reliance on Macomber's “characterization of income” as “the gain derived from capital, from labor, or from both combined.” Ibid. (citation omitted). The Court explained that Macomber used that characterization when “determin[ing] whether the distribution of a corporate stock dividend constituted a realized gain to the shareholder, or changed 'only the form, not the essence,' of his capital investment.” Id. at 430-431 (citation omitted). And while “the definition served a useful purpose” “[i]n that context,” the Court made clear that “it was not meant to provide a touchstone to all future gross income questions.” Id. at 431.

Petitioners emphasize (Br. 24) the statement in Glenshaw Glass that punitive-damages awards constituted income because they involved “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” 348 U.S. at 431. But that statement simply listed elements that sufficed to create income on the facts of that case — not necessary elements of income in every case. See ibid. (prefacing statement with “[h]ere we have instances of”). Having just explained that Macomber's conception of realization was not “a touchstone to all future gross income questions,” the Court was not treating realization as essential. Ibid.

Petitioners cite (Br. 25) three cases quoting Glenshaw Glass's statement about realization, but none suggests that realization is a necessary element of income. Each involved economic gains far afield from those at issue here. See Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 209-210 (1990) (customer deposits); Commissioner v. Kowalski, 434 U.S. 77, 83 (1977) (meal-allowance payments); James v. United States, 366 U.S. 213, 218 (1961) (embezzled funds). And Kowalski recognized that Glenshaw Glass “is squarely at odds with” Macomber's “definition of income.” 434 U.S. at 94.

d. Finally, the Court's 1991 decision in Cottage Savings Ass'n reiterated that “the concept of realization is 'founded on administrative convenience.'” 499 U.S. at 559 (quoting Horst, 311 U.S. at 116). That realization concept — which applies only when Congress incorporates it — does not even derive from the statutory definition of “gross income.” 26 U.S.C. 61(a). Instead, the Court explained, it is rooted in separate provisions, such as one defining “'the gain or loss from the sale or other disposition of property' as the difference between 'the amount realized' from the sale or disposition of the property and its 'adjusted basis.'” Cottage Sav. Ass'n, 499 U.S. at 559 (quoting 26 U.S.C. 1001(a)) (brackets omitted). In those provisions, the Court observed, Congress has invoked the concept of realization for the “administrative purpose[ ]” of streamlining income reporting. Id. at 565.

When applying the statutory “realization requirement in § 1001(a),” the Court looked to Macomber's “treatment of realization.” Cottage Sav. Ass'n, 499 U.S. at 563, 565. But it never suggested that that treatment flowed from the Sixteenth Amendment rather than “Section 1001(a)'s language” prescribing “realization.” Id. at 559.

Lower courts have followed this Court's lead in recognizing that Macomber has been limited to the stock-dividend context. See, e.g., Commissioner v. Obear-Nester Glass Co., 217 F.2d 56, 60 (7th Cir. 1954) (“[Macomber] has been limited to its specific facts.”), cert. denied, 348 U.S. 982 (1955). That is how courts have regarded Macomber when upholding Subpart F in particular. See Garlock, 489 F.2d at 203 n.5.

Similarly, since Cottage Savings Ass'n, “[t]he scholarly consensus” is that “[t]he realization requirement is not constitutionally mandated.” Cunningham & Schenk, 47 Tax L. Rev. at 741 & n.69; see, e.g., 1 Bittker & Lokken ¶ 5.2, at 5-19 (3d ed. 1999) (explaining that “realization remains largely intact as a rule of administrative convenience (or legislative generosity)” but has been “badly eroded, if not wholly undermined, as a constitutional principle”); Marvin A. Chirelstein & Lawrence Zelenak, Federal Income Taxation 59 (14th ed. 2018) (Chirelstein & Zelenak) (“[R]ealization is strictly an administrative rule and not a constitutional, much less an economic requirement, of 'income.'”).

Even scholars cited by petitioners (Br. 37-38) agree that “[t]he view that realization is constitutionally mandated has dissipated,” and “[n]ow the realization requirement is generally regarded as a concession to the administrative burdens of * * * a system taxing asset appreciation as it occurs.” Jeffrey L. Kwall, When Should Asset Appreciation Be Taxed?, 86 Ind. L.J. 77, 80 (2011). And scholars have explained that the statutory concept of realization is laden with “ambiguities,” id. at 100, because “the Code contains no general rule or explicit set of criteria * * * [for] determin[ing] just when a realization has taken place,” Chirelstein & Zelenak 101. The amorphous nature of realization further refutes petitioners' contention that it is a bedrock constitutional requirement.

Petitioners thus err in invoking (Br. 14, 26, 36) stare decisis. While Macomber still governs whether the type of stock dividends at issue there are income and informs application of the statutory concept of realization, this Court has already abrogated its broader relevance as a constitutional precedent. Accordingly, Macomber is not controlling here.

D. The MRT Taxes Income

The MRT accords with constitutional text, history, and precedent. Petitioners' specific objections to the MRT are baseless.

1. The MRT is an income tax. It taxes U.S. persons owning at least 10% of a CFC's shares on their pro rata shares of the CFC's “accumulated post-1986 deferred foreign income.” 26 U.S.C. 965(a)(1) and (2) (emphasis added). As petitioners do not dispute, the MRT targets income that the CFC itself has plainly earned. And when a CFC has earned income, its 10% shareholders have enjoyed a corresponding “accession[ ] to wealth,” Glenshaw Glass, 348 U.S. at 431, and “economic gain[ ],” Banks, 543 U.S. at 433; see Hewett 32 (explaining that a corporation's “reinvested earnings must be counted as income” to the “stockholder”).

Foreign (or state) corporate laws may allow corporations to temporarily retain earnings, rather than immediately distribute them as dividends. And those laws may treat corporations as formally separate from their shareholders. But “the law of a particular [country or] State” cannot change the fact of the economic gain or restrict “the power of Congress to determine how * * * income * * * shall be taxed.” Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114 (1925); see PPL Corp. v. Commissioner, 569 U.S. 329, 335 (2013) (explaining that foreign and state law are “generally not controlling in [the] federal tax context”); Mellon, 304 U.S. at 279 & n.7. To the contrary, Congress has flexibility to target “all gain” and decide “how taxes may be laid thereon,” so long as it “act[s] neither unreasonably nor arbitrarily.” Taft, 278 U.S. at 481, 483 (emphasis added).

Far from being unreasonable or arbitrary, the MRT fits comfortably within Congress's consistent practice of taxing individuals on their shares of undistributed business earnings — and thereby accords with this Court's precedent holding that Congress is “competent” to tax an individual on “his proportional share of all [corporate] profits not then divided.” Hubbard, 79 U.S. at 18. The MRT follows in the footsteps of the income-tax laws in 1864, 1865, 1867, 1870, and 1913. It accords with the way Congress has long taxed partners and S-corporation shareholders. And it tracks Subpart F's taxation of U.S. shareholders' pro rata portions of undistributed corporate income.

Petitioners treat (Br. 3) the MRT as a “novelty,” but they cannot distinguish it from the decades-old Subpart F regime. They assert (Br. 50) that Subpart F applies only to “controlling U.S. shareholders.” But the MRT, like Subpart F, applies to U.S. owners of 10% or more of a CFC's shares. 26 U.S.C. 951(b), 965(a). Under the MRT and Subpart F alike, those persons are taxed on undistributed corporate income “irrespective of whether they have the power to force the corporation to make a distribution.” Pet. Br. 10.

There are only two genuine distinctions between the MRT and the Subpart F regime, but neither affects the Sixteenth Amendment analysis. First, the MRT and Subpart F tax different forms of income. See Pet. Br. 45. Whereas the MRT taxes “accumulated post-1986 deferred foreign income,” 26 U.S.C. 965(a)(1) and (2), Subpart F taxes various other categories of income, see p. 28, supra. Yet both taxes are equally consistent with the Sixteenth Amendment, which allows Congress to tax “incomes, from whatever source derived.” U.S. Const. Amend. XVI (emphasis added).

Second, the MRT and Subpart F tax income earned over different time periods. Whereas the MRT applies once and taxes certain income earned and retained since 1986, 26 U.S.C. 965(a), Subpart F primarily taxes income earned annually, 26 U.S.C. 951(a)(1). Petitioners contend (Br. 51) that the MRT's 30-year time horizon renders it suspect. But they identify nothing in the Sixteenth Amendment's text or history suggesting that Congress must tax income at any particular frequency — or that Congress relinquishes its power to tax income that has been retained for some unspecified amount of time. See PPL Corp., 569 U.S. at 341 (holding that a retroactive tax on several years of “actual, realized net income in hindsight” is an income tax). In theory, the MRT's time horizon could be relevant to an argument that it is an impermissibly “retroactive tax provision under the Due Process Clause.” United States v. Carlton, 512 U.S. 26, 30 (1994). But petitioners made that argument in the Ninth Circuit, the court correctly rejected it, and petitioners did not seek certiorari on it. See Pet. App. 18-19. Petitioners cannot now re-package their failed retroactivity argument as a Sixteenth Amendment one.

2. The additional objections to the MRT offered by petitioners and amici lack merit.

a. Petitioners label (Br. 44) the MRT a tax on “property” because, in their view, “[t]he sole event that triggers MRT liability is ownership of specified property on a specific date in 2017.” That is incorrect. To trigger MRT liability, a CFC must have earned and retained income between 1986 and 2017, and a U.S. person must have owned at least 10% of the CFC on the relevant date. That shareholder is then taxed not on the “value” of any “property,” Pet. Br. 35, but on his share of the CFC's deferred income. See Dougherty, 60 T.C. at 929 (upholding Subpart F's application to a shareholder's portion of a CFC's accumulated “income of a past year prior to the effective date of the statute”).

Petitioners also contend (Br. 45) that the MRT impermissibly “imposes liability on shareholders” for income earned by the “corporation, ” suggesting that the tax could be imposed only on the corporation. But that argument does not sound in the Sixteenth Amendment. So long as there is income, the Sixteenth Amendment empowers Congress to tax it. See Taft, 278 U.S. at 481. The Due Process Clause limits Congress's power to “arbitrar[ily]” “attribut[e] to” one taxpayer “the income” of another. Burnet v. Wells, 289 U.S. 670, 679 (1933). But there is nothing arbitrary about attributing a pro rata portion of a corporation's income to a 10% shareholder. To the contrary, Congress has long adopted that approach with pass-through entities like partnerships, S corporations, and U.S.-controlled foreign corporations.

Petitioners additionally object (Br. 45) to the MRT's potential application to a shareholder who first acquired 10% of a CFC “in 2017, long after the corporation earned the sums being taxed.” But Subpart F has the same feature: A shareholder who first acquired 10% of a CFC on the “last day” of the taxable year would be taxed on “his pro rata share * * * of the corporation's subpart F income for [that entire] year.” 26 U.S.C. 951(a)(1). Petitioners concede Subpart F's constitutionality and raise no concerns about that aspect of it. Nor could they: “There is nothing in the Constitution which lends support to the theory that gain actually resulting from the increased value of capital can be treated as taxable income in the hands of the recipient only so far as the increase occurred while he owned the property.” Taft, 278 U.S. at 484.

Even if petitioners' theory (Br. 45) had validity, it would apply only to persons who became 10% CFC shareholders “after the corporation earned the sums being taxed.” Petitioners are not such persons: They say they have owned over 10% of KisanKraft “[s]ince its inception.” Pet. App. 73. Because “litigants typically lack standing to assert the constitutional rights of third parties,” United States v. Hansen, 143 S. Ct. 1932, 1939 (2023), petitioners cannot assert the rights of share-holders who were taxed on a CFC's prior earnings.

b. Some amici assert that upholding the MRT would necessarily allow Congress to tax the “millions of Americans” who hold small amounts of stock “in their retirement and investment accounts.” Buckeye Inst. Amici Br. 15. Of course, Congress's 1864 income-tax law did tax individuals on the undistributed earnings of corporations in which they held stock — albeit at a time when corporations were smaller and shareholder control was greater than with most corporations today. See E. Merrick Dodd, Jr., Statutory Developments in Business Corporation Law, 1886-1936, 50 Harv. L. Rev. 27, 29-30 (1936).

In any event, that hypothetical tax — implausible in today's economy because it would be administratively unworkable — would present different questions because it would lack the same deep historical pedigree as the MRT. The MRT applies to the CFCs already covered by Subpart F, which are majority-owned by U.S. persons who themselves own at least 10% of the CFC's shares. 26 U.S.C. 951(b), 957(a), 965(a). Where a small number of U.S. shareholders have majority control of a foreign corporation, they can collectively “force dividend distributions” to help cover taxes imposed on them as U.S. shareholders. Julie A. Roin, United They Stand, Divided They Fall: Public Choice Theory and the Tax Code, 74 Cornell L. Rev. 62, 118 (1988).

In addition, the 10% share-ownership threshold in both the MRT and Subpart F ensures that the taxed shareholders generally possess a “degree of control over the corporation” that justifies imputing the corporation's income to them. Estate of Whitlock, 59 T.C. at 509; see H.R. Rep. No. 1447, 87th Cong., 2d Sess. 59 (1962). Here, for instance, petitioners were friends with KisanKraft's founder and CEO and “regularly” spoke to him “about KisanKraft and its business.” Pet. App. 73. Congress reasonably decided to tax, on a one-time basis, undistributed business earnings corresponding to the ownership shares of shareholders in petitioners' position.

II. THE MRT IS INDEPENDENTLY CONSTITUTIONAL AS AN EXCISE TAX

Regardless of whether the MRT is an income tax, it is a valid excise tax, and the Court may affirm the decision below on that basis.⁵

A. The Constitution empowers Congress “[t]o lay * * * Excises,” so long as they are “uniform throughout the United States.” U.S. Const. Art. I, § 8, Cl. 1. An excise is a tax on, inter alia, “privileges,” “particular business transactions,” Thomas v. United States, 192 U.S. 363, 370 (1904), or “a particular use or enjoyment of property,” Fernandez v. Wiener, 326 U.S. 340, 352 (1945). See, e.g., Knowlton v. Moore, 178 U.S. 41, 78-83 (1900).

After Pollock, this Court upheld excise taxes levied on the privilege of doing business in a particular capacity. In Flint v. Stone Tracy Co., 220 U.S. 107 (1911), for example, the Court considered an excise tax on corporations earning more than a certain amount of income. Id. at 146. The Court deemed the tax “an excise upon the particular privilege of doing business in a corporate capacity, i.e., with the advantages which arise from corporate or quasi-corporate organization.” Id. at 151. And the Court rejected the argument that the tax was a direct tax “upon property solely by reason of its ownership.” Id. at 150.

Regardless of whether the MRT is an income tax, it is a valid excise tax. It can be viewed as a tax “upon the particular privilege of doing business” through a CFC, “with the advantages which arise” from that arrangement, Flint, 220 U.S. at 151 — namely, the long-established ability to defer taxes on a significant portion of foreign income. Like the tax in Flint, the “amount of tax” required under the MRT is “measur[ed]” by “the income of the corporation.” Stratton's Independence, Ltd. v. Howbert, 231 U.S. 399, 414 (1913).

That the MRT is levied on a CFC's 10% U.S. shareholders, rather than on the corporation itself, does not preclude excise-tax status. After all, 10% shareholders presumptively possess a degree of control over the CFC and have enjoyed the privilege of deferring taxes on foreign income. The MRT's application to 10% shareholders is thus a reasonable means of taxing the privileges of “doing business” through a CFC, Flint, 220 U.S. at 151 — particularly given the potential difficulties of taxing a foreign corporation itself.

Petitioners contend (Br. 44) that the MRT is a direct tax because “it taxes shareholders on ownership of property.” But the correct standard is whether the MRT taxes “property solely because of its ownership.” Flint, 220 U.S. at 150 (emphasis added). It does not. The MRT is not triggered by “the mere ownership of property,” but by “the actual doing of business” through a CFC that earned and retained income abroad. Ibid. And the MRT is one element of the TCJA's broader scheme to afford new “advantages” to CFCs and their shareholders while taxing other “privilege[s]” they have long enjoyed. Id. at 150. Thus, the MRT is independently justified as “an excise tax,” and “nothing in the Constitution requir[es] such taxes to be apportioned.” Id. at 152. This Court may affirm the decision below on that basis.⁶

B. At minimum, the Court should remand for the court of appeals to determine whether the MRT may be sustained as an excise tax. Because the Ninth Circuit held that the MRT is an income tax, it had no occasion to consider the government's alternative argument. The Court often remands in similar circumstances. See, e.g., City of Austin v. Reagan Nat'l Adver. of Austin, LLC, 142 S. Ct. 1464, 1476 (2022).

A remand would be particularly prudent here because of the disruptive consequences that would arise from holding the MRT unconstitutional. Invalidating the MRT could cost the government approximately $340 billion over the next decade, see p. 6, supra — and potentially far more if the Court were also to call into question longstanding regimes like Subpart F, partnership, and S-corporation taxes. It would disrupt the balance that Congress struck in the TCJA by taxing shareholders of foreign corporations on the one hand and granting them dividend deductions on the other hand. And it would also require the government to adjudicate a flood of MRT refund claims — many of which would raise complex statute-of-limitations and administrative-exhaustion issues since the MRT is a 2017 liability. See United States v. Clintwood Elkhorn Mining Co., 553 U.S. 1, 14 (2008). Before unleashing those consequences, the Court should ensure consideration of all arguments for the MRT's constitutionality — including that it is a valid excise tax.

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

ELIZABETH B. PRELOGAR
Solicitor General

DAVID A. HUBBERT
Deputy Assistant Attorney General

CURTIS E. GANNON
Deputy Solicitor General

EPHRAIM A. MCDOWELL
Assistant to the Solicitor General

FRANCESCA UGOLINI
MICHAEL J. HAUNGS
DOUGLAS C. RENNIE
Attorneys

OCTOBER 2023