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Federal Tax

Moore Attorney: Supreme Court ‘Validated’ Income Realization Arguments

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

In the wake of the Supreme Court’s decision upholding the constitutionality of the one-time mandatory repatriation tax (MRT), an attorney who represented the couple that challenged the tax said the Court did not necessarily disagree with their arguments.

On June 20, the Supreme Court affirmed the Ninth Circuit’s ruling that the MRT does not violate the Sixteenth Amendment as argued by Washington state couple Charles and Kathleen Moore, who were assessed an additional $15,000 on their 2017 tax bill based on their shares in an Indian farm equipment manufacturer.

The Moores were represented by a team of BakerHostetler attorneys led by partners Jeffrey Paravano and Andrew Grossman and maintained that the MRT was invalid because it taxed unrealized income. The Court’s majority opinion authored by Justice Brett Kavanaugh explicitly stated the Court did not “need to resolve” this point, nor did it need to address the “distinct issues that would be raised by (i) an attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed income, (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.”

Paravano, speaking with Checkpoint in an interview, said the Moore camp was “surprised that the Court granted cert to answer” whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment to the states “and then decided, ultimately, in the majority opinion, not to answer it.”

At the same time, however, Paravano was “pleased” that the Court “reaffirmed our reading” of Eisner v. Macomber (3 AFTR 3020 (40 Sup.Ct. 189), (S Ct), 3/8/1920), a case involving a corporation’s distribution of additional stock to existing shareholders. The Court in Moore “said that their precedent requires realization,” according to Paravano. Despite not aiming to address the realization issue, the majority opinion did provide an answer, he continued. “It was just in a backwards way by doubling down on Macomber … which seems a bit odd.”

Paravano cited Justice Clarence Thomas’ dissenting opinion, which agreed with the Moores that “incomes” under the Sixteenth Amendment “include only income realized by the taxpayer.” Four justices held this view. Only Justice Ketanji Brown Jackson offered “a concurrence that says realization is not required,” said Paravano.

Because of this, Paravano would not expect the government “to have any success” in future litigation that realization is not required because lower courts “are bound to follow MacComber.” This means that, according to the Supreme Court, “wealth taxes would be a direct tax on property and therefore subject to apportionment,” Paravano said. He suspects that “the question of realization is unlikely to make it back to the Supreme Court” even though the majority opinion indicated it could be addressed another time.

An unexpected implication of this resolution to Moore, Paravano explained, is the majority opinion’s view of what a pass-through entity is. Subject to due process, Congress can choose to “attribute income of any entity to its owners as long as it doesn’t double-tax or arbitrarily attribute — and that’s new,” he said. “[C]orporations were always treated as separate taxpayers. No one really thought about attribution of that income in non-abusive situations.”

Paravano pushed back against the notion that the Tax Code would have been upended if the Moores prevailed. “[L]ook, the sky has not fallen. Every other provision in the Tax Code that we read we think is fine for various reasons,” he commented. They had argued the MRT was a tax on property and introduced the concept of “constructive realization.” According to Paravano, this term “is just a short way of explaining that a concept of realization is not black and white” and should be treated on a “case-by-case analysis.” Realization, the Moore team concluded, does not have a rigid definition, as illustrated in Justice Amy Coney Barrett’s concurring opinion.

“I would say the Supreme Court agreed with us in a sense because they say Macomber requires realization,” Paravano stated. “And they say all these other provisions of the existing Code, not listing expatriation, that the Constitution does not require a fiscal calamity of finding that they’re invalid. So the opinion in a way validated our arguments.”


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