I. Introduction
Moore v. United States is the most significant tax case to be argued before the U.S. Supreme Court in recent history. The petition for certiorari bluntly poses the question as: “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.” Several of the amicus briefs focus on the original meaning of the amendment phrase “taxes on incomes,” claiming that the public understanding of that phrase at the time of the amendment’s adoption necessarily limited an income tax to a tax on income derived from a narrowly interpreted realization event—when a taxpayer receives something of value such as cash or other property in exchange for goods or services provided or as a payment because of property ownership (for example, a dividend payment on stocks or rental payment on leased property). According to the Joint Committee on Taxation, such an expansive interpretation of the constitutional phrase would call into question the constitutionality of multiple significant tax provisions, including all of Subpart F and the GILTI regime, all of Subchapters K and S, the taxation of REMICs, the original issue discount (OID) rules and the rules for below-market and short-term loans, the mark-to-market rules for securities dealers and regulated futures contracts, imputed rental income, the Subchapter L mark-to-market rules, and section 877A, among others.
As noted by Caroline Rule, the Moore case approaches this substantial issue through a married couple’s challenge to the constitutionality of section 965’s mandatory repatriation tax (MRT)—a challenge that claims a purported “‘judicial consensus’ limiting the Sixteenth Amendment’s apportionment exemption to realized gains.” Rule suggests several possible outcomes for the case, including (i) a narrow victory for individual taxpayers holding that the MRT may be applied only to corporate taxpayers; (ii) a holding that the Sixteenth Amendment requires realization and the MRT satisfies that requirement; (iii) a clear holding for the government that the Sixteenth Amendment covers both realization-based and accrual-based taxation; or (iv) a narrow holding that accrual-based taxation is permissible but that the thirty-one year MRT look-back period is too long because it converts the tax from an accrual-based income tax into some sort of direct tax. Of course, there could also be a broad holding that limits income taxes to taxes on income as determined by narrowly defined realization events.
That broadly applicable outcome dependent on a narrow definition of realization appears to be the goal of those supporting the plaintiffs. More than thirty amicus briefs, available here, have been filed in the Moore case. Many focus on the original public meaning of the Sixteenth Amendment’s term “taxes on incomes” through review of historical court cases, legal treatises, and dictionary definitions to argue that the term clearly included a realization requirement. This article first provides a brief overview of the issues and procedural history in Moore, and then challenges that assumption about the meaning of the phrase directly by examining other historical documents from the time of the amendment’s adoption that clearly contemplated that an income tax would be imposed on a mark-to-market or accrual basis.
II. Substantive and Procedural History of the Case
In Moore v. United States, the taxpayers were 11% shareholders in an Indian company that was a section 957(a) controlled foreign corporation (CFC). The taxpayers obtained their CFC interest in 2006 and had never received any distribution of its earnings and profits. Any CFC income was reinvested into the CFC.
The 2017 tax legislation (TCJA) amended the Code’s Subpart F sections. Prior to the TCJA, CFC income was generally not taxed, providing a major deferral tax advantage until distribution or other repatriation. The TCJA made those earnings subject to current taxation and added the MRT as a one-time transition tax on CFC undistributed earnings and profits earned between January 1987 and December 2017 to ensure those past CFC earnings and profits did not permanently escape U.S. taxation. After passage of the TCJA, the Moores amended their 2017 tax return to include payment for the MRT, and then they sought an MRT refund in federal court. The Moores argued that the MRT is an unapportioned direct tax that violates the Constitution’s Apportionment Clause in Article I, Section 9.
The Moore district court reviewed Supreme Court precedent, decisions regarding foreign income, and statutory provisions outside of subpart F to hold in favor of the government. The Supreme Court in Eisner v. Macomber held that a stock distribution was not taxable income because the “shareholder [had] not realized or received any income in the transaction.” The Moore court noted, however, that Macomber did not set a bright-line rule defining all income—i.e., courts have not treated Macomber as establishing a realization requirement, as demonstrated by the Moore district court’s analysis of opinions from various federal appellate courts and the U.S. Tax Court establishing the constitutionality of Subpart F income inclusion. There are also a number of current statutes that tax deemed or indirectly attributed unrealized income. Based on the cases and statutes that appropriately interpret Macomber as not mandating realization, the Moore district court held that the MRT was a tax on income that did not violate the Apportionment Clause; accordingly, the Moores were not entitled to a refund.
The Ninth Circuit affirmed the district court decision, finding that the language of the Constitution, the Sixteenth Amendment, and previous court cases supported the conclusion that “the revised Subpart F is consistent with the Apportionment Clause.” The court also addressed the plaintiff’s cited caselaw on income and realization. First, it noted that the Moores’ reliance on Macomber and Glenshaw Glass to support the claim that the MRT violates the Apportionment Clause failed because Macomber provided a narrow, not universal, definition of income. Nor did Glenshaw Glass provide such a definition: the opinion made clear that the Macomber definition “was not meant to provide a touchstone to all future gross income questions,” as shown by the use of language noting “[h]ere we have instances of.” The Ninth Circuit noted that Horst provided a bit more detail about realization by explaining its foundation in “administrative convenience” but found that the lack of realization does not mean that a taxpayer can escape taxation permanently merely because no money was received.
A requested en banc review was denied, with four judges dissenting. The dissent claimed that the repatriation tax is an unapportioned direct tax on the Moores’ ownership interest in the CFC that “open[s] the door to expansion of the federal taxing power beyond the limits placed by the Constitution.” The dissent looked to the 1895 Pollock case, which reasoned that the “constitution divided federal taxes into two great classes—the class of direct taxes, and the class of duties, imports, and excises” and viewed taxes on income from personal property and real estate as direct taxes requiring apportionment. The dissent also relied on a 1910 legal dictionary definition of income as including “that which comes in or is received from any business or investment of capital.” As to Macomber, the dissent argued that realization is a requirement since income is “the gain derived from capital, from labor, or from both combined.” According to the dissent, the majority’s discussion of Macomber incorrectly characterized it as “merely an advisory example of ‘what income may be defined as’.” The dissent thus claimed that the Supreme Court has always upheld a realization requirement, stating that the description of the realization requirement as an “administrative convenience” does not establish that the definition of “income” does not require realization.
III. Originalism and the Search for Historical Meaning of Constitutional Language
The historical meaning of the Constitution’s terms, though sometimes hotly contested, is often used to justify a particular interpretation of constitutional language. Justice Gorsuch, for example, has publicly supported originalism—i.e., that “original meaning” should be the guiding constitutional interpretive principle. Justice Scalia said that contemporary writings, such as those of Hamilton, Madison or Jay in The Federalist, reveal “how the text of the Constitution was originally understood.” The late Judge Robert H. Bork was another early proponent of originalism.
[W]hat the ratifiers understood themselves to be enacting must be taken to be what the public of that time would have understood the words to mean. … . Law is a public act. Secret reservations or intentions count for nothing. All that counts is how the words used in the Constitution would have been understood at the time. The original understanding is thus manifested in the words used and in secondary materials, such as debates at the [state ratifying] conventions, public discussion, newspaper articles, dictionaries in use at the time, and the like.
Justice Scalia and Judge Bork both argue that a proper interpretation of the original public meaning of the Constitution, including any amendment, should incorporate not just legal materials such as cases, treatises, and dictionaries; but also the writings of the educated public and reports of public discussions found in newspaper articles and other available secondary sources.
A. Arguments on Historical Understanding in the Amici Briefs
1. Supporting the Moores’ claim
Surprisingly, given the broad range of items that Scalia and Bork suggest are necessary to arrive at the “original meaning,” none of the amicus briefs go much beyond discussions of legal materials, with the rare exception of a few citations to the work of Columbia Professor Edwin R.A. Seligman, a prominent American economist. The taxpayers and amicus briefs in their favor draw primarily on dictionary definitions and selective quotations from legal treatises to support a realization requirement.
For example, a few of the briefs cite Thomas Cooley’s 1876 treatise. The Manhattan Institute’s brief references Cooley’s statement that “one of the principal downsides of an income tax was the fact that ‘those holding lands for the rise in value escape it altogether—at least until they sell’.” This brief cites the same 1910 Black Law Dictionary definition of income cited by the Ninth Circuit en banc denial dissent. The Manhattan Institute brief characterizes Henry Campbell Black, original author of the dictionary and also of a 1913 treatise, as having “elaborated that ‘income’ was not synonymous with a mere ‘increase’ in the value of property, but was characterized by ‘acquisition[]’ or as ‘money coming to one.’” A few other dictionaries provide definitions of income cited by amicus briefs. For example, the Southeastern Legal Foundation brief quotes from six dictionaries (including both general and legal) published from 1856-1913. The brief emphasizes that several definitions use phrases like “proceeds from” or “comes in,” such as in “that gain which proceeds from labor, business, property, or capital of any kind.” Note that these phrases do not necessarily require realization—they can also apply to accrual or mark-to-market taxation.
The Americans for Tax Reform brief quotes Seligman’s statement that “‘income as contrasted with capital denotes that amount of wealth which flows in during a definite period and which is at the disposal of the owner for purposes of consumption, so that in consuming it, his capital remains unimpaired.’” This definition could similarly support an interpretation favorable to accrual or mark-to-market accounting. For example, an owner’s occupation of a residence is a form of consumption, can certainly be measured over a definite period, and does not generally impair the capital (the underlying value of the house, which may well increase). That brief also cites Robert H. Montgomery’s 1919 treatise’s statement that “‘the inquiry naturally extends itself into the right to tax any transaction unless there is an actual realization of income, as distinguished from the apparent income which may be and often is due to the temporary fluctuations in values’” and Charles Clark’s 1920 statement discussing Macomber noting that “‘[M]ere general appreciation in value of capital should not be deemed income so long as it is unrealized to the owner . . . .’”. Note that these latter two are prescriptive statements post-amendment, so they do not demonstrate that this understanding was dominant at the time of its adoption.
One of the strongest amici arguments is from a discussion of a Learned Hand opinion from the early years of the income tax. The Pacific Research Institute quotes Judge Hand as noting that “the meaning of the word ‘income’ was ‘not to be found in its bare etymological derivation,’ but was ‘rather to be gathered from the implicit assumptions of its use in common speech.’” Judge Hand defined “‘income’” with reference to “the current distinction between what is commonly treated as the increase or increment from the exercise of some economically productive power of one sort or another, and the power itself, and it should not include such wealth as is honestly appropriated to what would be customarily regarded as the capital of the corporation taxed.” Although the brief stresses the distinction between income and capital and the word exercise, this phrase from Judge Hand’s opinion could be read to support accrual or mark-to-market taxation: an “increase or increment” can exist because property, such as shares of stock, increased in value through the successful conduct of the business.
2. Supporting the government’s position
There are a number of briefs in support of the government. One of the most developed in favor of a broader reading of the Sixteenth Amendment that does not include a realization requirement is an amici curiae brief from Professors Brooks and Gamage that draws upon various sources contemporary to the Sixteenth Amendment’s adoption to respond to pro-petitioner arguments. Among the most telling points is that none of the dictionary definitions that taxpayers or amici curiae have found include the word “realize” or “realization” even though one or both of those terms were defined in the same dictionary. Brooks and Gamage also focus on the definition of “gain” as the most relevant term defining “income” in most of the dictionaries of the time: they show that “gain” was a broad term that included terms and concepts easily understood as not requiring realization—e.g., “increase,” “profit,” “amassing of profit,” “accumulation,” and “advantage.” Brooks and Gamage also show that the treatises relied on by petitioners (and many of the briefs in their support) do not, in fact, support a realization requirement, in part because the language has been quoted by petitioners and others without the full context that reveals a much broader concept of income. In an earlier version of their paper, Brooks and Gamage discuss Haig-Simons income: they demonstrate that the history of this broad definition of income as including consumption plus change in net worth—although articulated in its most commonly quoted form in 1938—can be traced back to earlier writings from 1921, 1899, and 1896 and so was clearly part of the public understanding of income at the time of adoption.
B. History of State Income Taxes
1. From colonies to statehood to the Civil War period
State income taxes demonstrate that states were not uniform in their understanding of the requirements of an income tax, the definition of income for the purposes of such a tax, or the acceptable means of measuring income. These uncertainties belie the certainty of those that argue that a realization requirement was clearly understood as a necessary part of an income tax by contemporaneous authorities at the time of the Sixteenth Amendment’s adoption. As Delos Kinsman notes, the American colonies were familiar with taxation from the days of English rule, and both colonies and new states instituted a “faculty” tax, lasting until about 1825, “characterized by a loose method of determining the taxpayer’s ability, the levy being made upon an estimated or assumed income of the individual.” The faculty tax—clearly not requiring realization since it was based on an estimate—can be seen as a precursor to today’s income tax. As the colonies became states, each state wrestled with creating the best method of providing revenue. Since the first taxes on income were based on a type of faculty tax, states continued relying on estimates. As the Civil War approached, many of the states that did not have any type of tax on income enacted one—on estimated or actual income—to aid in generating revenues to support the war. From 1776 to almost a decade after the Civil War, many of the northern colonies that became states kept some version of the faculty tax, using assessors to estimate taxpayers’ incomes. The early states struggled with enforcement because almost every locality had its own assessor(s) with their own methods of calculating an individual’s tax based on an estimated or assumed income.
Massachusetts was the first state with a tax that required the taxpayer to “carefully determine and report” their income tax to assessors; nonetheless, assessors “often made rough estimates” and the taxpayer had to pay the assessor’s estimated tax. Vermont continued its faculty tax until the 1850s. Connecticut’s faculty tax lasted until 1771, but assessors continued to calculate taxes on estimated income, with the addition of an appeals process for over-assessed taxpayers in 1819. An excerpt from the 1887 Connecticut Tax Commission describes an income-like tax on real estate with no realization requirement: the property was rated in “proportion to the annual income which, on average, it was deemed likely to produce” rather than according to its value or actual income generated. Starting in 1842 due to its increasing state debt, Maryland taxed all income “from all sources of revenue” and made assessors take oaths “that they would rate all offices, posts of profit, professions, and occupations at what they believed to be the yearly salaries, incomes, emoluments, or profits arising therefrom.” However, if a taxpayer swore that his income did not exceed a certain amount, the tax would be based on that amount.
A few of the southern states instituted a tax based on actual or reported income, but many states kept an estimated tax, including Massachusetts, Connecticut, Vermont, Pennsylvania, South Carolina, and Alabama. South Carolina’s tax on estimated income lasted from 1701 until the early 1900s, with a break between 1868 and 1897. Alabama, like many states needing revenues to cover the costs of the Civil War, began to focus on taxing profits related to businesses: it enacted a tax on estimated net profits, indicating that “the amount of capital actually invested and necessarily employed was to be considered and the profits were to include all gains made by sales or resales either directly or indirectly.” After the Civil War, an Alabama taxpayer had to pay taxes on income from investments in real estate: there was no mention of realization, suggesting that Alabama levied on incomes not received.
In addition to the widespread use of estimates of income that would not necessarily have a realization requirement, there are also specific cases of transactions generating recognized income regardless of realization. For example, Virginia taxed interest received from bonds from other countries, states, and international corporations even if the income was “converted into principal so as to become an interest-bearing subject.” Due to the expenses of the Civil War, Virginia enacted a new law in 1863 that taxed a businessman’s profits and calculated net income or profits by deducting “from his gross income all expenses of carrying on the business during the year, as well as all licenses and other taxes paid by him during the same period.” Notably, there was no realization requirement. Similarly, around 1855, North Carolina focused more on taxing profits: a 3% tax rate was charged “upon all net dividends or profits actually due, or if it was received from money invested in vessels.” The language “due or if received” makes clear that there was no realization requirement. In 1859, North Carolina’s law changed to explicitly state that income from interest was assessed “whether the interest had been received or had simply accrued.”
2. At the time of the adoption of the Sixteenth Amendment
Information for Massachusetts and Wisconsin provides a perspective of state taxes on income at the time of the Sixteenth Amendment’s adoption.
In 1911, Massachusetts Governor Foss focused the attention of the legislature on taxation to remedy the concerns about then-current taxes used to generate revenue using assessors who estimated taxes on incomes according to their own particular methods. He sent a letter in 1912 to the state senate creating a plan to cure the injustice and “intolerable conditions resulting from the present tax laws”, including laws regarding taxes on incomes. Governor Foss’s plan would “also make possible the successful enforcement of our ineffective tax upon incomes from professions, trades and employments.” The governor wanted much of his plan to be administered instead by the “State or under the strictest State supervision.”
In 1908, a statewide referendum in Wisconsin amended the state constitution to tax income and corporations. The goal of the Wisconsin income tax was to “distribute the tax burden” more evenly, not necessarily to generate more revenue. In 1911, Wisconsin enacted a statute in which there would be an assessment of taxes whereby taxpayers who “customarily estimate their income or profits on a basis other than of actual cash receipts and disbursements, may, with the consent and approval of the tax commission” use these estimations to determine their assessment. As part of these changes, the statutes define rent from real estate to include “the estimated rental of residence property occupied by the owner thereof.” They expressly state that the tax commission and county assessors “possess all powers now or hereafter granted by law to the state tax commission or assessors in the assessment of personal property and also the power to estimate incomes. In 1912, Wisconsin relied on the previous referendum and amendments to successfully introduce its first statewide income tax.