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July 15, 2012 The Tax Lawyer

Bar the Exit (Tax)! Section 877A, the Constitutional Prohibition Against Unapportioned Direct Taxes and the Realization Requirement

Vol. 65, No. 2 - Winter 2012

Mark E. Berg


    Tax practitioners wade into the deep waters of constitutional law at our peril. Indeed, a leading constitutional scholar, Professor Bruce Ackerman of Yale, has characterized even the efforts of respected tax professors along these lines as “not generally backed by an elaborate analysis of the constitutional issues,” suggesting that their “impoverished analysis” is a matter of “benign neglect” that is “par for the course for modern tax lawyers.” With this in mind, the prospect of mounting—or even articulating—a constitutional challenge to Congress’s recent imposition of an exit tax on deemed asset sales by expatriates and certain long-term green card holders under section 877A on the basis that it is an unapportioned direct tax imposed on something that is not “incomes” within the meaning of the Sixteenth Amendment seems daunting. This is particularly so given Professor Ackerman’s eloquent and spirited—albeit zealously partisan—argument that the changes in the legal landscape wrought by the Thirteenth through Sixteenth Amendments and the Supreme Court’s later embrace of the New Deal effectively nullified the prior constitutional prohibition against unapportioned taxes on wealth. Nonetheless, a careful review of the relevant provisions of the Constitution and the Supreme Court’s decisions interpreting and applying them indicates that there is a compelling argument that the exit tax on deemed sales under section 877A (1) is a “direct tax” within the meaning of Article I, Sections 2 and 9 of the Constitution; (2) is not a tax on “incomes” within the meaning of the Sixteenth Amendment to the Constitution; and (3) therefore, because it is unquestionably not apportioned among the 50 states—that is, the tax is not borne by the citizens of each state in proportion to the states’ respective populations—is unconstitutional.

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