The Ramifications of Moore v. United States

By Jonathan D. Grossberg

Moore v. United States is the first time in many, many years that the Supreme Court has addressed the constitutional contours of the definition of income for the purposes of the Sixteenth Amendment. As the question was framed for the Court, “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states,” many were concerned that the Court would fully revive some kind of realization requirement following Eisner v. Macomber, an opinion that many thought was long since buried under a barrage of distinguishing opinions.

The Moores’ arguments primarily turned on their understanding of Eisner. While the majority opinion did cite Eisner for the proposition that “income requires realization,” it did so in the context of rejecting the Moores’ argument that Eisner required the Moores themselves to realize income before the income would be taxable to them.

The majority opinion, written by Justice Kavanaugh, initially avoids answering the question the Moores’ raised in their certiorari petition (whether the Mandatory Repatriation Tax (MRT) is a “tax on incomes.”) Instead, the majority opinion reviews the history of taxation of business entities, especially in the international context. After discussing the 19th century history of income taxes, the majority opinion describes the Sixteenth Amendment in a context that many scholars viewed as true but that the Supreme Court had not affirmed, that the “Sixteenth Amendment expressly confirmed what had been the understanding of the Constitution before Pollock: Taxes on income — including taxes on income from property — are indirect taxes that need not be apportioned.”

The majority returns to a discussion of passthrough taxation and concludes that longstanding precedent and congressional practice before and after the ratification of the Sixteenth Amendment support taxing “shareholders or partners of a business entity on the entity’s undistributed income.” However, Justice Kavanaugh’s majority opinion limits Congress’ attribution power by stating that “nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. In such a scenario, the entity would not simply be a traditional pass-through.”

While the majority opinion narrowed Eisner, four justices clearly preferred a more expansive realization requirement. These four justices all, to varying degrees, objected to the majority’s characterization of the Court’s precedents that give Congress the flexibility to determine whether to tax an entity (such as a corporation or a partnership) at the level of the owner or at the level of the entity itself. Only Justice Jackson, in her solo concurrence, clearly favors an understanding of the Sixteenth Amendment that does not include a realization requirement.

Justice Barrett’s concurrence and Justice Thomas’ dissent question the nature of this attribution rule. Justice Barrett’s concurrence begins by limiting the question to the facts of Moore. She notes that the majority focuses not on the realization question but on the question of whether “Congress can attribute KisanKraft’s income to the Moores.” Justice Barrett implies that she agrees with the majority’s conclusion because of the facts of the case involve the “Mandatory Repatriation Tax (MRT), a specific tax imposed upon the American shareholders of a closely held foreign corporation.” She then says that “A different tax — for example, a tax on shareholders of a widely held or domestic corporation — would present a different case.”

Justice Thomas’ dissent rejects the majority’s reading that income realized by an entity may be taxed to either the entity or the entity’s owners regardless of the legal status (e.g., corporation, partnership, LLC) of the entity. The dissent characterizes the precedents that the majority cites as a survey of “a scattered sampling of precedents — mostly about tax avoidance — to invent an attribution doctrine that sustains the MRT.”

In the time since the case was decided, the tax world has been ablaze with debate and commentary on the meaning, scope, and reach of the opinion. The implications of the opinion for future tax policy (especially with the upcoming expiration of many of the provisions of the Tax Cuts and Jobs Act) and future tax litigation have been hotly debated.

Some scholars read the majority opinion as giving Congress a wide berth for future tax policy. John Brooks, a tax law professor at Fordham and a coauthor of an amicus brief that Justice Jackson cited in her concurrence, said that the Supreme Court demonstrated a “more robust understanding of Congress’s taxing power than maybe even we thought before the Moore case.” Brooks points out that Justice Kavanaugh “explicitly calls the income tax an indirect tax. It’s not something that a lot of people had assumed that the Court would say. The apportionment requirement only applies to direct taxes…. A lot of things that people might think were in the direct tax category are actually in the indirect tax category. If Congress said tomorrow, all unrealized gain is income, that sort of law would be at high risk of a successful challenge. But if they’re focusing on things like certain types of financial instruments, certain types of financial transactions, certain types of taxpayers, something that’s a little more focused,” then it is simply an excise tax and, thus, it would be constitutional without apportionment.

Similarly, Kelsey Merrick of the Tax Law Center at NYU Law, said that the decision “really just upheld the status quo of the tax system [but] there’s a lot in the majority opinion to suggest that it will actually be harder for future litigants to bring constitutional challenges to taxes like the Moores tried to do, both because the court narrowed the cases on which the Moores relied, primarily Eisner v. Macomber, but also because the court really stressed the importance of the existing tax system and the need to avoid what they called a blast radius throughout the tax code.”

Brian Galle, a tax law professor at Georgetown and coauthor of an amicus brief that Justice Jackson cited in her concurrence agrees that, “the court did as much as was necessary to get to the obvious right result in the case. The court says that the reading of Macomber that requires realization at both the individual and corporate level was dicta. One fair reading of the Moore case is that they made Macomber a dead letter, because of the limiting of Macomber and the classification of income taxes as indirect taxes.”