Tuesday, March 28, 2023

All hands on deck

 The Supreme Court has asked for amicus briefs regarding whether it should grant certiorari in the case of Moore v. United States, in which taxpayers challenged the constitutionality of the transition tax in the 2017 tax act regarding undistributed earnings from controlled foreign corporations (which were taxed at a low rate in combination with the repeal of deferral, under which they would have been taxable upon repatriation).

The taxpayers' challenge is based on the view that Eisner v. Macomber (1920) makes realization  a constitutional prerequisite to taxing income (without apportionment between the states) under the Sixteenth Amendment. The Ninth Circuit rejected this challenge, based on extensive post-Macomber precedents, and held forthrightly that realization is not a constitutional prerequisite to taxing income. 

Macomber has never been expressly overruled by the Supreme Court, but by 1940 (in Helvering v. Bruun) it was very openly refusing to follow it outside of its particular facts, which related to stock dividends. There has probably been no time since, until the right-wing takeover of the court accelerated in the last few years, when there would have been any chance of the Court's relying on it to block a provision such as the 2017 transition tax. But Chief Justice Roberts cited Macomber as apparently still good precedent in his 2012 opinion upholding Obamacare (National Federation of Independent Business v. Sebelius) - a sly nudge that (to mix my metaphors) may now be on the verge of bearing fruit.

It is difficult to exaggerate how destructive a Supreme Court decision reviving Macomber's constitutionalized realization requirement could potentially be. In addition to ruling out efforts to tax unrealized appreciation (e.g., through new legislation such as that proposed by Senator Wyden), it might also conceivably, depending on how broadly it was worded, make impossible the taxation of original issue discount (OID) bond interest until the due date. This, in turn, could unleash tax sheltering that might cost the federal government billions of dollars in revenue, most or all of it from the upper income brackets. That prospect, however, may actually be enticing to several members of the Supreme Court, who appear to want to blow things up.

Not that it would necessarily make much of a difference, but responsible members of the legal tax academy ought to weigh in on this issue if the Supreme Court grants certiorari in Moore v. Harper.


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