The Supreme Court’s Search For An Off-Ramp In The Moore Case
by Howard Gleckman · ForbesYesterday’s oral arguments in Moore v. United States made one thing clear: The Supreme Court has little interest in blowing up the tax code. While many lawyers and economists feared that a far-reaching opinion in an otherwise insignificant dispute could undermine the foundations of much of US tax law, the justices seemed to realize they had fired up an earthmover when a shovel would do.
They spent much of the more than two hours of oral argument thinking aloud about how they could narrow their opinion to the case at hand.
Why Take The Case?
The fears of many tax experts were not unfounded. After all, this was a case the Court had little reason to hear unless it had interests far beyond whether Mr. and Mrs. Moore owed $15,000 in tax on a foreign investment. But as their briefs made clear (see here), conservative advocates saw this case as an opportunity for the Court to use the 16th Amendment of the Constitution to substantially narrow Congress’s ability to define income under the tax code.
Some conservatives hoped the High Court would declare several forms of “billionaire taxes” unconstitutional, including wealth taxes proposed by senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA) or income taxes on the mega-rich proposed by President Biden and Senate Finance Committee Chair Ron Wyden (D-OR).
Other anti-taxers went even further. They wanted to use Moore to convince the Court to declare unconstitutional even existing taxes on unrealized capital gains or corporate retained earnings. To them income is taxable only when it is cash in an investor’s pocket. Income earned but not yet distributed would always be tax free.
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Seeking An Off-Ramp
Most justices seemed disinclined to use the Moore case to address a wealth tax. Indeed, while it was a critical subtext to the case, the justices had relatively little to say about it in oral arguments. Only Samuel Alito wondered, somewhat indirectly, “What about the appreciation of holdings in securities by millions and millions of Americans…over a period of time without selling the shares..?”
The justices seemed even more explicit about their reluctance to gut existing taxes on income as commonly defined, such as from original issue bonds, or the taxes US shareholders pay on unrealized gains in foreign companies, known as Subpart F.
Indeed, the Moore’s lawyer Andrew Grossman quickly acknowledged that Subpart F “isn’t an issue in this case.” Similarly, he agreed that it may even be permissible for Congress to impose mark-to-market taxes on increases in the value of certain futures contracts, even if they are not sold.
Realization Or Not
In their search for a way out of the mess they created by accepting the case in the first place, the justices explored a few routes.
One, embraced by Justice Sonia Sotomayor, would simply conclude that there is no constitutional requirement that income be realized before it is taxed. That’s what the Ninth Circuit Court of Appeals decided when it rejected Moore’s appeal in the first place.
US Solicitor General Elizabeth Prelogar argued, and several Justice seemed to agree, that in Moore, income was realized by a foreign company and that Congress could attribute that income to controlling US shareholders. In other words, since there was a realization, there is no need to argue whether the Constitution requires one.
A Tsunami Of Litigation
Another option, suggested by Grossman, got a positive response from Justice Neil Gorsuch. His idea: A concept he called “constructive realization.” As Grossman described it, “income should be taxed to the person who earns it and enjoys its benefits.”
The problem is the phrase ”constructive realization” appears nowhere in the tax code, according to my TPC colleague Steve Rosenthal, a long-time tax lawyer who knows how to look these things up. Adopting that undefined standard might allow the Court to finesse Moore, but it also would open the door to a tsunami of litigation.
Yet one more possible narrow solution, raised by Alito, would exempt the Moores from tax because the law arbitrarily denied them due process by attributing the income to them, rather than to the business they invested in.
We don’t know whether, or how, the Court will address the wealth tax. There are serious constitutional questions about such a levy, though they are only distantly related to the 16th Amendment and the Moore case. And even Prelogar seemed to acknowledge that a wealth-like tax might not pass constitutional muster.
The justices could ignore the issue entirely. Or, as Rosenthal and others fear, they could toss in a footnote that suggests the constitutionality of a wealth tax remains an open question. Those words could then be cited in some future case. But it seems clear that the High Court is not inclined to use Moore to upend the current tax law.