Note: this post was updated on November 29, 2023 with additional briefs.
This week we filed our amicus brief in the U.S. Supreme Court case of Moore v. United States, this term’s blockbuster tax case challenging the constitutionality of the Mandatory Repatriation Tax (MRT), part of the Tax Cuts and Jobs Act (TCJA) of 2017. Charles and Kathleen Moore own 13 percent of a corporation and India and had to pay the MRT despite no profits being distributed to them. The U.S. Court of Appeals for the Ninth Circuit upheld the tax on broad grounds that would allow virtually any type of federal tax, including retroactive tax increases and even a federal wealth tax.
As we explained, our brief lays out why the Ninth Circuit’s analysis was wrong but also why this particular tax wouldn’t be unconstitutional (at least as to businesses). Other key points we make:
The business in question is a controlled foreign corporation, and the Moores’ tax returns intermix their personal income with the business’s income. The Moores already owed U.S. tax on their company’s profits, but could defer paying those taxes so long as they didn’t bring the money back to the United States. This “temporary” fix persisted from 1962 until 2017, when the Tax Cuts & Jobs Act (TCJA) reformed large portions of the tax code, including moving away from a “worldwide” tax system to a “territorial” tax system that only taxes income earned in the United States.
Part of the reforms ended deferral, instead enacting a one-time lower-rate Mandatory Repatriation Tax (MRT) on the accumulated deferred taxes. The Moores argue that it is a type of wealth tax, since they have not cashed out their stock in KisanKraft. (The Moores argue they do not control the company, but Congress in 1962 defined control of a foreign company as owning 10% of a foreign company where at least 50% is owned by U.S. shareholders.)
The Ninth Circuit ruled against the Moores, but by shredding most constitutional limits on federal taxing power: they rejected realization as a constitutional requirement, ok'd retroactive taxes, and opened the door to a federal wealth tax. This broad analysis is dangerous to taxpayers. Eisner v. Macomber and Commissioner v. Glenshaw Glass have not been overruled and an unapportioned federal wealth tax would be unconstitutional.
The TCJA reduced tax burdens and boosted economic growth. If the Court does rule for the Moores, it should be focused in doing so. Invalidating the entire TCJA would raise taxes for hundreds of millions of people. Everyone with a Roth or Traditional IRA could be impacted by the Supreme Court invalidating tax deferrals. Reversing the TCJA's international tax reforms would also make U.S. business uncompetitive, invite retaliatory measures by other nations, and actually might increase the Moores’ tax bill in the end.
But we aren’t the only organization filing a brief in this case. At current count, 25 organizations have filed briefs so far in the case. Nearly all of these are in support of the Moores, as the deadline for briefs supporting the government is still a month away. Here are some notable arguments raised in the 688 pages of amicus briefing submitted thus far:
The U.S. Chamber of Commerce asks the Court to reaffirm realization as “as important for business and the economy,” writing that “when businesses are uncertain about taxes, they adopt a cautious stance.” The Court should then, they write, “require that the constitutionality of the Moores’ tax…be adjudicated against that requirement.”
Philanthropy Roundtable writes that “it would be odd if the attendees of the Constitutional Convention, who were deeply attuned to issues surrounding taxation, were so flippant about the meaning of direct taxes.” They explain that taxes on wealth and unrealized gains would create “cataclysmic” consequences to private charities.
SEAT (Stop Extraterritorial American Taxation) and the Association of American Residents Abroad write that the U.S. switch from worldwide to territorial corporate taxation violates the Equal Protection Clause because it applies only to corporate income, not individual income, and therefore it “discriminates against nonresident U.S. nationals solely because of their U.S. nationality.” They note the U.S. is the only country to apply corporate tax rules to individual shareholders.
Americans for Tax Reform reviews numerous contemporaneous definitions of “income” that do not include unrealized gains.
The Manhattan Institute and Professors Erik Jensen and James Ely write that holding the MRT unconstitutional as applied to individuals like the Moores will have a very limited practical impact.
The Southern Policy Law Institute writes that “the MRT exercises United States taxation power over assets and property located extraterritorially in another nation,” violating “both general principles of international law and the specific tax treaty in effect between the United States and India.”
The Atlantic Legal Foundation writes about the consequences of taxation of unrealized gains, including deterring entrepreneurship, disrupting the housing market, and harming foreign investment in the United States.
Southeastern Legal Foundation and Young America’s Foundation write that Treasury Department rulings from 1909 that suggest “income” does not require realization were rejected by courts at the time.
The Buckeye Institute and National Federation of Independent Business (NFIB) write that “the MRT is not an excise tax, it is an unconstitutional tax on property–specifically, on ownership of shares in certain types of corporations.” They warn that Congress would not “limit the scope of taxation of unrealized gains to high-wealth individuals.” While the TCJA had no severability clause, they write, the Court should sever the MRT from the remainder of TCJA.
Cato Institute writes that the MRT “subjected the Moores to a tax on their investment” not their income, and other taxes on shareholders are limited to the current taxable year.
Landmark Legal Foundation quotes Justice Oliver Wendell Holmes: “The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.”
Liberty Justice Center writes that the word “derived” is key to defining income.
Hank Adler, a professor of accounting at Chapman University and former tax partner at Deloitte, writes that the MRT’s two rates and bases (15.5% on cash and 8% on non-cash assets) itself is unconstitutional, as it “enables Congress to implement a differential tax structure based on virtually any characteristic.”
New York attorney Mark Berg writes that a ruling for the Moores would not invalidate U.S. taxation of controlled foreign corporations.
Sixteenth Amendment Insights and New York attorney Jeffrey Schwartz discusses the history of the income tax’s adoption, including the observation that then-New York Governor (and future Chief Justice) Charles Evans Hughes resisted ratification until he was reassured that it would not extend to new categories of income.
FreedomWorks, in a brief signed by Professors Richard Epstein and John Yoo, rejects the federal government’s use of the Haig definition of income (accession of wealth) as “unworkable because it creates ruinous difficulties of valuation and liquidity for the holders of all productive assets.” The brief suggests upholding the MRT “but still allow those caught in petitioners’ situation to be taxed at the time of receipt of a cash distribution.”
Independent Women’s Law Center writes that taxes on unrealized gains would especially harm women entrepreneurs, as women statistically hold investments longer than men and are more likely to rely on their own capital rather than outside investment.
Pacific Research Institute writes that taxing unrealized gains “might well be deemed a taking” and that the Moores’ situation is different from other legal structures such as a “wholly-owned corporate entity functioning as a mere waystation or bank account.”
Former Senator John Breaux (D-LA) and Saving America’s Family Enterprises, in a brief signed by former Obama Administration Acting Solicitor General Neal Katyal, write that allowing taxation of unrealized capital gains would impose a “guess tax” on small businesses, forcing them “to sell assets–that is, part of their business–or take on debt to meet their tax bill.”
A brief submitted by anonymized individual taxpayers write how they “were left scrambling and confused when the IRS came to assess the MRT.”
A group of law and linguistics professors, in a brief in support of neither party headlined by former D.C. Circuit Judge Thomas Griffith, warns against the use of contemporaneous dictionaries to determine the meaning of “income,” instead offering a corpus linguistics approach (reviewing contemporary public usage of the term) and conclude that unrealized gains were not part of the meaning of income at the time.
The Small Business & Entrepreneurship Council filed in support of neither party, taking no position on the Ninth Circuit’s decision but writing that if the MRT is held invalid, it should be severed to allow the rest of TCJA to remain in effect: “[t]he more territorial regime ushered in by the TCJA can function fully without the Repatriation Tax.”
Additionally, Justice Samuel Alito this morning issued a statement declining to recuse himself in the case. Senator Richard Durbin (D-IL) had urged the recusal, noting that David Rivkin, an attorney in the case, co-wrote two Wall Street Journal articles on Justice Alito. Alito writes that justices “are required to put favorable or unfavorable comments and any personal connections with an attorney out of our minds and judge the cases based solely on the law and the facts. And that is what we do.”
Briefs in support of the government were due by October 23. In total, 43 outside briefs have been filed in the case: 22 in support of the Moores, 18 in support of the federal government, and 3 (including NTUF’s) in support of neither party. Key points raised by the briefs in support of the government:
Professors Reuven Avi-Yonah, Clinton Wallace, and Bret Wells argue taxing unrealized income is essential to prevent tax shelters.
Professor Calvin Johnson at the University of Texas argues that any tax that cannot be apportioned is therefore indirect and that Pollock should be overruled.
Professor Theodore Seto at Loyola Law School argues that realization can be both direct and indirect, and this case involves indirect realization.
Professor Amandeep Grewal of the University of Iowa argues that the mandatory repatriation tax is itself not a tax, but instead increases a taxpayer’s subpart F income that is then taxed.
Professor Alex Zhang of Emory Law School argues there are five types of realization events, and the absence of income is not the only factor.
Professors Akhil Reed Amar and Vikram David argue that only head taxes and real estate taxes are direct taxes.
Professors Donald Tobin and Ellen Aprill argue that historically income has meant more than cash income.
Professors Bruce Ackerman, Joseph Fishkin, and William Forbath argue that Pollock was wrongly decided.
Professors John Brooks and David Gamage argue that 1913-era scholars who discussed realization did not believe it was a necessary element of income.
The American Tax Policy Institute argues that the tax constitutionally taxes the entity.
The American College of Tax Counsel argue that the case involves taxing of the business’s realized income.
Economists at the American Enterprise Institute argue that an external tax cannot be a direct tax.
The NYU Tax Law Center argues that Macomber should be limited to its facts.
A group of professors of tax law, legal history, and computational science respond to the corpus linguistics approach suggested in one of the briefs supporting the Moores.
A group writing on behalf of small businesses argues that the predictability in pass-through taxation is important.
An investment firm argues that if Congress had structured the tax a different way, it may have violated the Fifth Amendment’s Takings Clause.
Former congressional staffer George Callas and Professor Mindy Herzfeld argue that the curtailment of a previously conferred benefit is not a new tax.
16 states and DC argue that the mandatory repatriation tax does not harm their states.