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As the Supreme Court prepares for Dec. 5 arguments in Moore v. United States, uncertainty over the constitutional requirement for taxable income—called realization—is due in large part due to the court’s own incoherence on the issue.
Over the years, the court found realization events in situations that the ratifiers of the 16th Amendment might not have thought appropriate. Twice—in 1940 and 1991—the court referred to realization as a “rule of administrative convenience,” which falls short of constitutional.
In the 1991 case, Cottage Savings Association v. Commissioner, the court also referred to “the classic treatment of realization” in Eisner v. Macomber, the 1920 case widely considered the judicial genesis of realization.
This raises the question of whether there can be a classic treatment of a concept that relates only to administrative convenience. Chief Justice john Roberts gave a favorable citation to Macomber in 1992, in his controlling opinion in the first Obamacare case, NFIB v. Sebelius.
Tax experts can’t clean up this mess. The high court created the confusion about the constitutional status of taxable income, and it’s up to the court to straighten things out.
What Is Income?
Moore asks whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states. In other words, it’s about whether a tax can be considered “on income”—and exempt from apportionment that applies to direct taxes—if no realization has occurred.
The Moores, significant but minority shareholders in a foreign corporation, were hit with a $15,000 tax bill because of the mandatory repatriation tax, enacted as part of the Tax Cuts and Jobs Act of 2017. Mandatory repatriation was a one-time tax imposed on affected stockholders’ shares of the undistributed earnings, from as far back as 1987, of a controlled foreign corporation.
The petitioners’ argument is that they received nothing—that no realization had occurred—and that they should have income attributable to the retained earnings only if they receive a dividend or sell their shares.
The Moores lost on the realization question at the district court and at the Ninth Circuit, both holding that realization isn’t required to have income. The full Ninth Circuit rejected the Moores’ petition for rehearing en banc, with four judges dissenting, stating that of course realization is a constitutional requirement.
It was a surprise to some that the Supreme Court agreed to hear the case. For one thing, the mandatory repatriation tax isn’t recurring—the precise issue in the case won’t come up again. In addition, there’s no conflict among circuit courts requiring Supreme Court resolution on the realization issue (despite the conflict within the Ninth Circuit itself).
Distaste for Tax
Historically, the high court generally hates tax cases. Justice William J. Brennan Jr. once wrote on a cert petition, “This is a tax case. Deny.” Justice Harry Blackmun complained that Chief Justice Warren Burger would assign opinion-writing duties in the “crud” cases, including tax disputes, to those in his doghouse.
Justice David Souter claimed he sang along at Chief Justice William Rehnquist’s Christmas parties because “[o]therwise I get all the tax cases.” And before she became a judge, Justice Ruth Bader Ginsburg told her tax-lawyer husband that “I don’t read tax cases.”
Moore, at its core, is a constitutional case, not an exercise in parsing the boring federal tax code. But to decide the realization issue, the justices can’t ignore the tax code. They must develop some understanding of the way the complicated mandatory repatriation tax works—something one would assume most, if not all, justices would want to avoid.
So why did the court decide to review the case? The filings in connection with the cert petition, including a swell of amicus briefs, offer reasons why the realization issue is so important, including for tax policy purposes. Congress needs to know what it can and can’t do in enacting tax legislation (think: wealth tax).
Whether that will happen is uncertain. In recent weeks, substantial commentary has suggested the court might punt on Moore—deciding the dispute on the narrowest of grounds, sending it back to the lower courts for consideration of additional issues, or even dismissing the case.
None of that should happen; we need interpretive help. For the sake of clarity in tax law, we can only hope that the Supreme Court goes for it in Moore.
The case is Moore v. United States, U.S., No. 22-800, oral arguments 12/5/23
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Erik M. Jensen is professor emeritus of law at Case Western Reserve University and joined a brief in support of the petitioners in Moore v. United States.
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