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Tax professionals and Supreme Court watchers expected a set of spirited oral arguments in Moore v. United States on Tuesday, Dec. 5, 2023—and they weren't disappointed. The two-hour session was filled with pointed questions, rapid-fire citations, an astonishing number of ways to pronounce Macomber, and some occasional laughter. Here's a look at the oral arguments presented in the case.
The case centers on a 2017 Tax Cuts and Jobs Act provision that requires companies to pay tax on previously untaxed foreign profits.
The petitioners, Charles and Kathleen Moore, own a 13% stake in an Indian corporation, KisanKraft Machine Tools Private Limited.
In 2018, the Moores learned that they were subject to a mandatory repatriation tax, or MRT, under the 2017 tax reform law (sometimes referred to as the Tax Cuts and Jobs Act, or TCJA). They had never paid tax on their earnings because previous tax law allowed income earned abroad to remain deferred until it was repatriated—they had never claimed their earnings. Under the new law, the Moores were subject to tax going back to their original investment at a 15.5% tax rate—netting them a tax bill of $14,729.
The Moores paid the tax and sued for a refund, claiming the tax is unconstitutional.
(You can read more about the facts of the case and the MRT in my previous article here.)
The official question in front of the Court was: Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.
MORE FROM FORBES ADVISORAt oral arguments, an attorney for each side of a case has an opportunity to present to the Court and answer questions posed by the justices. Lawyers for each side have time to make their best legal case, but most of the time is spent answering the justices' questions. That's because, before the argument, the justices have read briefs and familiarized themselves with the issues.
The petitioner is allowed to argue first, followed by the respondent. If the petitioner reserves time for rebuttal, the petitioner speaks again at the end (as happened here).
The petitioners were represented at oral argument by Andrew Grossman. Grossman serves as BakerHostetler's Appellate and Major Motions team co-leader.
Grossman clearly expected to field several questions and, as a result, didn't waste any time. His opening statement was short—just over 375 words—after which he said he welcomed questions. The justices were happy to oblige.
Justice Thomas asked, “When you say ‘realization,’ what—do you have a definition for that or an explanation as to exactly what it is, and how is it different from, say, attribution?” Grossman answered that it was essentially receipt, “but in other instances, it would be other types of enjoyment of an economic gain such that the taxpayer can put that gain to his or her own uses and benefits.” He went on to cite a few examples.
Chief Justice Roberts asked for further clarification, saying, “Well, there certainly is realization here by the corporation, if not the taxpayers, right?” That's because the foreign corporation, in this case, did receive income.
Grossman responded that the shareholders' interest increased, but they did not receive income, prompting Justice Sotomayor to ask about partnership tax (where owners are treated as receiving income when the partnership does, even if they do not have it in hand). She questioned whether that theory would undermine Subparts F (for partnerships, including LLCs taxed as partnerships) and S (for S-corporations). When pressed, Grossman admitted the petitioners were not arguing that Subpart F was unconstitutional. Justice Sotomayor then asked whether the petitioners were attacking a due process issue related to the length of the tax (the MRT was retroactive to 1986). After some back and forth, Grossman invoked Macomber—a Supreme Court stock dividend case from 1920 that largely stood for the proposition that income is not realized unless it “is available for actual distribution” and was notable for its Brandeis dissent.
The conversation returned to realization, which Justice Sotomayor pointed out does not appear in the Sixteenth Amendment. Grossman conceded that it didn't and responded by discussing the definition of income. After a short debate, Justice Sotomayor asked, “If what we do is to think about a particular tax, which seems to be what we've been doing for over a hundred years, to see whether that tax is—is income as understood by attribution or as an excise tax or by other principles, we wouldn't have to give — we would consider each tax on its own form,” adding, “You're asking us to just announce what realization is out of context.”
Grossman responded by arguing some historical context, to which Justice Kagan eventually replied, “And putting aside, Mr. Grossman, whether there's any realization requirement at all, I mean, there is quite the history in this country of Congress taxing American shareholders on their gains from foreign corporations and you can see why, right?” In his answer, Grossman attempted to distinguish those provisions from the MRT, saying that the MRT is a tax on property.
Justice Kavanaugh returned the discussion to timing, asking if the petitioners believed that if they had been taxed each year, would that have been permissible? Grossman answered no, attempting to distinguish how the MRT is taxed compared to the tax on a domestic shareholder. Justice Kavanaugh acknowledged the difference, noting that the entire international tax system was revised as part of the 2017 reforms.
Justice Jackson next asked if they conceded the realization issue, wouldn't the petitioners still have to demonstrate that the MRT is a direct tax to establish that the Constitution has been violated? Grossman noted that they had previously alleged that it was a direct tax.
After a few moments of back and forth on this issue, Justice Thomas asked whether the case would be any different or stronger if it involved real estate rather than owning stocks or an interest in a corporation. When Grossman said no, Justice Thomas clarified that he was interested in how the realization event impacted the property (in his example, he noted that real property, for example, might appreciate but only realizes income at the sale or other disposition). Grossman responded that he didn't think so, saying the Court “has applied the same principles across the sweep of its Sixteenth Amendment cases.”
Justice Sotomayor asked one more question, asking whether the petitioners' theory would put pass-through entities at risk (in terms of the government being able to tax those entities). Grossman answered, “We don't think that those provisions present any constitutional difficulty whatsoever. Again, a corporation is different. The Court's cases have recognized that.”
Justice Kagan then asked Grossman to distinguish the petitioners' situation from each of four kinds of taxpayers: Subpart F, S Corporations, partnerships, and those taxed on an accrual basis. After he answered, Justice Kagan followed up by reiterating Justice Thomas' question about realization, again, citing Macomber, and asking pointedly, “So what you're saying is basically we've left Macomber behind?” to which Grossman eventually answered no.
Justice Gorsuch then spent a few minutes questioning Grossman, eventually asking, “[I]f I understand it, the question is whether it's income to the taxpayer who's being taxed?” When Grossman answered yes, Justice Gorsuch returned to Justice Jackson's question, asking whether the government could call the MRT an excise tax. Grossman said (a resounding) no. Justice Gorsuch then asked about the consequences if the Court held that the only realization requirement is some realization somewhere along the chain by a corporation antecedent to the taxpayer. Grossman answered, “The consequences would be to open the door to taxation of practically everything.” The latter prompted me to tweet, “Who wants to tell him (about section 61)?”
(Section 61 states, in part, “gross income means all income from whatever source derived.”)
After some further discussion, Justice Jackson asked about the history of the Sixteenth Amendment and some associated cases before asking, “Are you asking us to adopt a particular definition of ‘realization’ under which your client wins in this case? If we disagree with you about what ‘realization’ means, do you lose?” Grossman didn't exactly answer, eventually saying, “We're simply asking the Court to say that realization is necessary as that concept has been espoused in the Court's decisions over the course of a century.”
The government was represented by Solicitor General Elizabeth Barchas Prelogar (that's why the Justices occasionally referred to her as “General,” a question raised by several people on social media during the oral arguments). Prelogar is the 48th Solicitor General of the United States and serves as the fourth-ranking individual at the Department of Justice. The Solicitor General usually argues cases in which the U.S. Government is a party, which is what happened here.
Prelogar's opening statement was a little longer and explored the history of the Sixteenth Amendment, saying, “Against all that history, Petitioners stake their case on Macomber… If the Court now extended Macomber's discussion to invalidate all taxes on undistributed business earnings, it would cause a sea change in the operation of the Tax Code and cost several trillions of dollars in lost tax revenue.” (That's the chaos that George Callas, who worked on section 965, referred to in our discussion.)
Justice Thomas posed the first question to the government, focusing on realization. Prelogar noted that the income in this case “has never been taxed at the corporate or entity level. Instead, what Congress did in the MRT is enact a pass-through tax that attributed the liability on that actual income that was realized to the U.S. shareholders.”
Justice Thomas followed up, asking, outside of the MRT, if there could be a justification for taxing appreciation. Prelogar noted that was a more difficult question but said that Congress has done just that—not only in the pre-Civil War era but also in the modern era—mark-to-market taxes, for example. (Mark-to-market taxes are imposed in some situations, including for certain foreign taxpayers and stock traders, and require taxpayers to recognize ordinary gains or losses at the end of a calendar year).
The discussion then turned to Macomber, with Chief Justice Roberts suggesting that the government had stabbed Macomber, resulting in some laughter. Prelogar replied that the government is merely following the Court's limited scope in the case.
Justice Alito then focused on a significant argument of the petitioners—that it would have far-reaching consequences. Prelogar responded, “I am happy to talk about the consequences of our argument, although I — I want to say at the outset I think that the Court could resolve this case quite narrowly.” That's a rather important add because it appeared that the Court was allowing the petitioners to narrow the case early on, and Grossman appeared to resist those efforts. Prelogar, in contrast, embraced that idea.
Justice Kavanaugh suggested that, in this case, the Court didn't have to agree with the government on all points to rule against the petitioners, noting there was “realized income here to the entity, and then it's attributed to the shareholders in a manner consistent with how Congress has done that in and this Court has allowed.” Prelogar agreed with that statement.
Justice Alito asked Prelogar to clarify whether the government's argument is that income need not be realized by the taxpayer if there is realization by some other entity. Prelogar confirmed that was correct under the Sixteenth Amendment but noted a due process question about limits on Congress's ability to attribute income realized by one taxpayer to another. The discussion then turned to the scope of the law, and lookback (keep in mind that the MRT is a tax that does precisely that).
Concerning the scope, the Justices offered some hypotheticals, prompting Prelogar to remark, “The Court has said Congress has plenary power. It can tax people just for existing.” I think we all felt that response.
In a subsequent discussion of precedent and case law, the Justices pressed Prelogar on the realization of income—where along the chain does it have to happen? Prelogar stressed that the government doesn't think that the tax's constitutionality depends on whether these taxpayers get a distribution because the MRT is a pass-through tax. That didn't completely satisfy Justice Gorsuch, who suggested that one argument the government was making—the taxpayer has a close enough relationship to treat it as income to the taxpayer—wasn't to be found in the government's brief. Prelogar responded by saying that the government certainly intended to make the argument, but it was their understanding that the petitioners were not focusing on strict realization as the basis of their claim. And, she noted, that point was included in the broader idea that this tax is not distinguishable from the underlying support for Subpart F, which the petitioners conceded was constitutional. Justice Barrett then asked how significant that admission was, resulting in Prelogar calling it “an incredibly significant concession.”
Justice Kagan then remarked, “Justice Gorsuch said you were asking us to overrule a hundred years of our precedent,” which she noted, sounded bad, before asking, “Are you?” After some laughter, Prelogar answered no, saying simply that the government is asking the Court to follow its post-Macomber precedent. Justices Gorsuch and Kagan then engaged Prelogar in some back-and-forth historical analysis, with Prelogar standing firm that she believed Macomber to be relatively narrow (involving stock dividends) and did not stand for a wider realization argument.
When asked which case most closely aligned with the government's position, Prelogar chose Heiner, a 1938 case focused on partnership tax.
When asked which case most closely aligned with the government's position on appreciated income, Prelogar conceded that she didn't have one but noted that similar taxes are on the books, like mark-to-market. Later, she clarified, “I think, if there is a lesson to be drawn from Macomber, it's that there's a real danger in trying to — to, as an abstract matter, define ‘income’ for all purposes…So I don't think that the Court needs to approach this issue by adopting some global or universal definition of ‘income’.”
“Even the Tax Code doesn't actually define income,” she added, citing back to section 61, which says that income is all income from whatever sources realized.
The Justices then retreated to the question of appreciated assets, saying they wanted to understand the limits of the government's arguments. Specifically, Justice Alito asked whether Congress could tax appreciated assets without selling or otherwise disposing of the assets. Prelogar indicated that she believed that Congress could tax it but hasn't so far (and she had no reason to think that would change).
Justice Alito then asked whether it mattered that the petitioners were initial owners of the company in this case, as opposed to someone who simply bought in later. Prelogar indicated that the underlying nature of what's being taxed (realized earnings of the corporation) wouldn't change but could raise due process issues (she again stressed that those facts did not apply here). Prelogar then cited several code sections including section 1248 (sales of foreign stocks), section 965(d)(2)(B) (the MRT), and section 959 (previously taxed earnings) all within the same breath, causing a flurry of remarks on social media—the Tax Code is vast and many tax professionals, myself included, can't always quickly move between sections on the fly.
What followed was more back and forth on historical cases, including Pollock v. Farmers' Loan and Trust Company. Pollock is an important case that found the existing income tax scheme at the time (1895) to be unconstitutional. As a result, Congress started over, creating the Sixteenth Amendment—and our modern tax system.
Eventually, the questions came back to Justice Sotomayor, who noted, to laughter, “I don't fault the parties for shooting for the stars…but I guess the tenor of the questions is that nobody's happy with anybody's definition of anything, okay?” She then asked Prelogar how the government believes the Court should rule. Prelogar again stressed that she thought it could be a narrow ruling, strongly cautioning the Court away from adopting a realization requirement because “not only that we think that it is inaccurate, profoundly ahistorical, inconsistent with the text of the Sixteenth Amendment, but it would also wreak havoc on the proper operation of the Tax Code.”
There was more discussion about what Congress had the power to do concerning taxes, with Prelogar arguing that Congress has broad powers to tax. Justice Gorsuch seized on this, asking, “Would you agree, General, that when the Court opens a door, Congress tends to walk through it?” He later suggested there was room for some narrow common ground, saying, “If we're talking about the same thing, you make a pretty persuasive argument that under the MRT, the Moores do have constructive control, that it is fairly attributable to them because they're a 10 percent stakeholder and some other facts.” He then noted that argument wasn't in the brief, which Prelogar conceded, adding that “we haven't made the argument expressly in terms of control because we don't think that's the right standard.” However, she says, the government has argued that the MRT is constitutional.
It was clear, from the arguments, that the government is concerned that a broad ruling could have wide-ranging circumstances, including causing chaos in the tax system and encouraging taxpayers to consider tax avoidance. Gorsuch noted the government’s argument, telling Prelogar, “Roger that,” and later, “Roger that, too, okay?:
Justice Kavanaugh asked about the phrase “constructive realization,” which the petitioners introduced in their arguments, but the government opposes. Prelogar called the phrase “inherently amorphous,” noting that it doesn't appear in the tax code.
Justice Jackson asked about excise taxes (with Prelogar noting that the government believes the MRT is clearly constitutional on an excise tax theory) before asking whether the Court should kill Macomber. Prelogar answered that “the reason we haven't asked the Court to overrule Macomber here is because we just think it's inapplicable by the terms of subsequent precedent that have already said Macomber only has controlling weight with respect to that very specific type of stock dividend.” However, she added that additional precedents have subsequently eroded Macomber.
Grossman delivered a lengthy rebuttal—much longer than his opening arguments—noting, “I don't think that there are any serious consequences of the realization principle that we've put forward in this case because it is the thread that runs through the Court's jurisprudence going back over a century and is the glue that holds together the Tax Code as it exists today.”
Petitioners again invoked Macomber, saying that realization is “the only way to understand the current Tax Code.” Grossman also said (and I agree) that he didn't “envy anybody who's had to spend their time reading Subpart F and practices in that field” (partnership law). But, he says, those laws are so complicated because Congress has tried to stay within the realization line.
So when will we have a decision? Expect to wait a while.
The Term of the Supreme Court begins, by law, on the first Monday in October and lasts until the first Monday in October of the following year—there is a recess in summer. Opinions of the Court are typically handed down by the last day before the Court recesses for the summer.
Typically, unanimous decisions are released sooner than those that have concurring and dissenting opinions. Some controversial opinions may not be handed down until the last day of the term.
SCOTUS decisions are made public by a written opinion. The Court used to issue separate opinions, a throwback to the English traditions. But Chief Justice John Marshall came up with the practice used today of issuing a single majority opinion to explain the Court's decision.
A justice may also write a concurring opinion, which means that they agree with the outcome of the case but differ in either the reasoning or approach of one or more parts of the decision.
A dissenting opinion, by contrast, means that a justice disagrees with the outcome of the case and wants to explain why. Sometimes they do this with the hope that the dissent will lead to a change in the law in the future.
Opinions are posted on the Supreme Court website. You can find them here.
Oral arguments were heard on Tues., Dec. 5, 2023, at 10 a.m. ET. The audio is available on the Supreme Court's website.
You can read my previous coverage of the case here and here. Check back for more coverage from the Forbes tax team.