Today, the United States Supreme Court heard oral arguments on the blockbuster case of Moore v. United States. As we explained, this case deals with whether the Mandatory Repatriation Tax (“MRT”) of the Tax Cuts and Jobs Act is constitutional.
Today, the Moores’ attorney Andrew Grossman opened oral arguments, arguing income is considered the gains which come to a taxpayer, and the MRT does not tax income. He stressed appreciation in value is not actually income until it is realized by the taxpayer, and that this realization requirement is what acts as a limiting principle upon taxation.
The Justices all grappled with how to precisely define realization and the extent it is required. Justice Thomas started oral arguments with the first question, inquiring into the difference between realization and attribution. Plaintiffs-Appellants’ attorney responded realization is the receipt of an economic benefit a taxpayer can enjoy. Justice Jackson queried over what governmental entity has the authority to define “realization.” Justice Sotomayor pointed out that the Sixteenth Amendment to the United States Constitution could have, but chose not to, include the qualifying term “realization” in its language. Moreover, she explained both before and after the enactment of the Sixteenth Amendment, Congress has taxed undistributed corporate earnings. Consistently, the Moores’ attorney stressed realization is inherent in the definition of income.
In response, Solicitor General Elizabeth Prelogar argued for the Government that the MRT is covered by the Sixteenth Amendment. She explained that the MRT is not novel, as shareholders are taxed on their undistributed earnings just as with pass-through taxation. Specifically, she stressed the Court should cabin Eisner v. Macomber, 252 U.S. 189 (1920), to the types of stock dividends therein. She warned a ruling for the Moores would fundamentally change the U.S. tax code and result in significant revenue loss. She concluded by saying the Court does not need to resolve the question whether the Sixteenth Amendment requires realization, as the income taxed was already realized by the foreign corporation, and attributed to the shareholders by Congress.
Justice Thomas grappled with this concept, inquiring whether an increase in real property value without the sale of such could be taxed. Justice Alito was also concerned with the implication of the Government’s argument, asking whether changes in value of security and mutual fund holdings, which are sometimes not distributed, could be taxed. The Government responded that, in their view, if Congress enacted taxes along those lines it likely would be permissible under the Sixteenth Amendment.
A few of the Justices were also hesitant about various calls to ignore or limit its precedent in Macomber. Justice Sotomayor inquired if the Government would like the Court to rule that realization was a requirement for under the Sixteenth Amendment, or assume realization was obtained here. The Government favored the latter, explaining a presumed realization requirement under the Sixteenth Amendment is inaccurate. Finally, Justice Gorsuch raised concerns about the widespread effects on taxpayers should the Court adopt the Government’s position. Possibly referencing a future wealth tax, he asked, “Do you agree that when the Court opens a door, Congress walks through it?,” to which Prelogar replied, “That door is already open.”
NTUF filed our Amicus Curiae (“Friend of the Court”) Brief in Support of Neither Party, earlier this year. There, we explained “while the Ninth Circuit’s opinion below was dangerously wrong, we also don’t think the Tax Cuts and Jobs Act (TCJA) of 2017 should be declared unconstitutional.” A decision is expected by June; we will continue to monitor this case and provide analysis on any further developments.