The famous words “no taxation without representation” echo in the minds of every student of American history; the phrase encapsulates the core American values of democratic governance and individual liberty. These values remain vital to our government today, driving many legal battles over the limits of Congress’s taxing power. Moore v. United States (2023) is one such case that questions Congress’s authority under the Sixteenth Amendment, which invests Congress with “the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
Background
In 2006, Charles and Kathleen Moore invested $40,000 in KisanKraft in return for 11% of the shares. KisanKraft operates in India, but is majority-owned by U.S. shareholders, which qualifies it as a Controlled Foreign Corporation (CFC). Before the Tax Cuts and Job Acts (TCJA) was passed in 2017, shareholders of CFCs were only taxed on foreign earnings upon their repatriation. However, the TJCA introduced the Mandatory Repatriation tax (MRT), which retroactively taxed the shareholders on their earnings after 1986, regardless of repatriation. Put simply, the MRT taxes shareholders for profits realized by the corporation, even if the shareholder’s stock in that company has not been liquidated. The MRT increased the Moore’s tax liability by $15,000, which they paid in full, but later sued on the grounds of its unconstitutionality. This case made its way up to the Supreme Court, and centers around the question: Does the 16th Amendment authorize Congress to tax unrealized sums without apportionment among the states?
Legal Argument
The issue surrounding this case lies within the semantics of this central question. In their petition to the Court, the Moore’s argue on the Constitutional basis of the Mandatory Repatriation Tax, rather than whether or not repatriation is required for income to be taxable As per an amicus brief provided by the Tax Law Center at NYU Law, the issue brought before the Court is a narrow one, one that specifically brings to question whether or not Congress is authorized to tax unrealized sums as income under the 16th Amendment. In their petition, the Moores relied heavily on the outcome of Eisner v. Macomber (1920), which ruled that stock dividends are not constitutionally liable to taxation as they do not qualify as realized income. They use this case as a legal precedent to support their claim that the Mandatory Repatriation Tax is unconstitutional because it taxes shareholders on company profits that have not been distributed to them. This framework is limiting, because it operates on the assumption that Macomber has consistently been held up in court as legal precedent and that the context of the MRT is the same as the Revenue Act of 1916, which was overturned and ruled unconstitutional by Macomber.
Since its decision, the Court has consistently and purposefully declined to apply the ruling of Macomber to any context beyond that of stock dividends. Even within this realm, Macomber does not ensure that stock dividends are always protected from taxation. In United States v. Phellis (1921), the same Court that decided Macomber extended the definition of income to include dividends received as part of corporate reorganization and authorized a tax on these dividends. In the century following this decision, the Court has continuously distanced itself from Macomber. Koshland v. Helvering (1936), Helvering v. Bruun (1940), and Helvering v. Horst (1940) were all landmark cases that undermined the parameters of income outlined by Macomber, which shows that this case cannot be reliably used as legal precedent in the Supreme Court.
The context in which Macomber was decided is also significantly different to that of Moore. In the case of Macomber, Congress had already taxed the corporation with respect to its realized income, and taxed the corporation’s stock dividends to its shareholders. This justified the consequential definition of income (outlined above), and the subsequent reversal of the Revenue Act of 1916. In the case of Moore, however, the Mandatory Repatriation Tax directly attributes realized corporate-level income to shareholders, and the corporation had not previously been taxed on realized income. If Macomber is already sparingly used as legal precedent, it certainly does not hold up in a situation such as this, where the context is materially different.
Relevantly, KisanKraft is a Controlled Foreign Corporation, which is regarded by Congress as a “pass-through” entity. Pass-through corporations are entities in which the corporation’s income, deductibles, and credits are passed through to its shareholders, who receive the tax instead of the corporation itself. The Court argues that because CFCs are treated as pass-through entities, any tax imposed on its shareholders by Congress is upheld. Because the MRT qualifies as a tax on a pass-through entity, it is not unconstitutional.
The Court ruled correctly on this case given the facts and information that was presented to them in this appeal. The issue lies in the fact that this ruling does not answer the question that the petitioners should have centered their case around: is realization required for income to be taxable? The framework with which the Moores present this case is flawed, precisely because it focuses on the constitutionality and legal precedent of the tax rather than the rationale of the tax itself. By framing the question in such a way, they have less legal justification to back their argument, and it is easy for the court to dismiss the issue surrounding the MRT. As Justice Ketanji Jackson writes in her concurring opinion, “Congress’s power to attribute income of closely held corporations to their shareholders is a difficult question – and unfortunately, the parties barely addressed it. Without focused briefing on the attribution question, I would not resolve it.” It is not that the challenges that the Moores levy against the MRT are not substantiated—on the contrary, these are valid concerns that are worthy of explanation. It is that the way in which they structure their argument against the tax ignores the fundamental question of attribution and shifts attention towards constitutional precedent, which is not as relevant to their claim.
Conclusion:
The Supreme Court’s decision on Moore v. United States demonstrates the necessity of clear structure and framework when delivering a legal argument. Based on the evidence presented in their petition, the Court was rightfully persuaded to rule against the Moores. But this ruling fails to account for the real question that lies within this case: can unrealized income be taxed? As Justice Jackson outlines in her opinion, there is not enough evidence presented in this case to justify the repeal of the Mandatory Repatriation Tax. By focusing so heavily on the precedent established in Macomber, the case fails to convince the Court of other arguments that would substantiate their claim and persuade them in their favor. In other words, this case did not lose because it made an invalid claim, but because it was structured incorrectly.