Good news and bad news from the Supreme Court's Moore decision

 Today the Supreme Court released its decision in Moore v. United States, upholding the 2017 tax act’s mandatory repatriation tax (MRT) on foreign source income (FSI) of American-controlled foreign corporations. The MRT was eminently sensible in principle, although far from perfectly designed in practice, in that the applicable FSI had previously been subject to deferral – i.e., it would be taxed to the US shareholders upon repatriation. Cashing out the deferred tax when you eliminate it, even if at a reduced rate, is very difficult to argue against on policy grounds.

Right-wing activists nonetheless challenged the MRT here on the grounds that (a) the income was unrealized by the taxpayer, and (b) per the long-discredited 1920 Supreme Court case of Eisner v. Macomber, realization is constitutionally mandated for a tax on income to fall within the protective scope of the 16th Amendment.

While the Supreme Court may initially have granted certiorari in response to right-wing fulmination about shutting down the constitutionality of unapportioned wealth taxes and extension of the federal income tax to unrealized gains on publicly traded assets before such taxes were even close to adoption, it soon became clear that the case was a potential nuclear weapon wiping out trillions of dollars of revenue – e.g, from original issue discount (OID) bonds or the flow-through taxation of partnerships. And this was a nuclear weapon that even the likes of Paul Ryan thought it would be insane to set off.

The taxpayers’ advocates sufficiently sniffed the air around them to realize that they could only win the case (if at all) by making very limited claims that targeted the MRT in particular while distinguishing it from taxing partnerships, using subpart F to tax US corporations on their controlled foreign affiliates’ (mainly passive) income, etc. While this sufficiently limited their theory’s “blast radius” (as the majority opinion puts it) to keep its adoption by the court from being immediately catastrophic, it also fatally surrendered coherence and credibility. The provisions that the taxpayers agreed were constitutional simply could not be distinguished from the MRT.

Good news: the Supreme Court upheld the MRT in a quite sensibly written opinion by Justice Kavanaugh. The vote was 7-2. What the opinion does is say that the MRT is not about realization at all: the income being taxed unambiguously has been recognized at the entity level. So the case is merely about apportionment, not realization. The opinion notes longstanding precedents that permit an entity’s income to be taxed either at the entity level or directly to the owners. And, given the basis for decision, it holds that issues about taxing unrealized income simply aren’t reached here.

Bad news: the Supreme Court has at least 4 votes (and possibly as many as 6) in support of the proposition that Eisner v. Macomber‘s idiotic and long-renounced “realization / severance” requirement for treating economic income as taxable income is indeed binding constitutional law. Justice Thomas, joined by Justice Gorsuch, offers his usual brand of dishonestly cooked “history” in support of supporting the taxpayer in Moore on realization grounds. Meanwhile, Justice Barrett, joined by Justice Alito, concurs only in the judgment, and only on the ground that the taxpayers’ concessions in distinguishing the MRT made their position unsustainable.

Will the Court soon hold that it is unconstitutional to tax income from OID bonds, on the ground that it hasn’t been realized? Or if not income from OID bonds, then at least the unrealized gains of very wealthy individuals, as per a bill recently introduced by Senate Finance Chair Wyden? There may well be 4 votes for striking down one or both of such provisions.

Kavanaugh’s opinion expressly declines to reach that question, rightly noting that it’s unnecessary to decide Moore. One can reasonably presume that both he and Chief Justice Roberts are potential 5th and 6th votes for holding that realization is constitutionally required. Meanwhile, only Justice Jackson, in a concurring opinion that no other justice joined, stated forthrightly that there is no realization requirement in the 16th Amendment.

So let us express relief about the present, along with continued concern about the future.