Supreme Court to consider ‘quadrillion-dollar question’ in major tax case
Story by Tobias Burns, The Hill, 11/28/23
EDITORIAL:
This case is ALL ABOUT the Sixteenth Amendment. Profit has to be realized or it isn’t profit.
The article is correct, however, that this case relates to foreign income and foreign affairs, and thus is not limited by the Sixteenth Amendment. The Sixteenth Amendment deals with apportionment and only regulates taxation within the exclusive jurisdiction of states. There are lots of things that don’t involve apportionment:
- Foreign commerce.
- Federal territories.
- Federal enclaves/areas
We predict this guy is going to lose because Congress has plenary (meaning EXCLUSIVE) jurisdiction over foreign affairs and because the Sixteenth Amendment doesn’t limit any of the above. In fact, ALL state income taxes are based on item 3 above, as we prove in the following:
State Income Taxes, Form #05.031
https://sedm.org/Forms/05-MemLaw/StateIncomeTax.pdf
If this case related to taxation within a constitutional state and they ruled against this, the income tax would have to split into two taxes: One for federal territory not based on profit but statutory “gross income”, and one for the states based on profit. Justice Harlan of the U.S. Supreme Court explained why in the landmark case of Downes v. Bidwell:
“These are words of weighty import. They involve consequences of the most momentous character. I take leave to say that if the principles thus announced should ever receive the sanction of a majority of this court, a radical and mischievous change in our system of government will be the result. We will, in that event, pass from the era of constitutional liberty guarded and protected by a written constitution into an era of legislative absolutism.
Although from the foundation of the Government this court has held steadily to the view that the Government of the United States was one of enumerated powers, and that no one of its branches, nor all of its branches combined, could constitutionally exercise powers not granted, or which were not necessarily implied from those expressly granted, Martin v. Hunter, 1 Wheat. 304, 326, 331, we are now informed that Congress possesses powers outside of the Constitution, and may deal with new territory, 380*380 acquired by treaty or conquest, in the same manner as other nations have been accustomed to act with respect to territories acquired by them. In my opinion, Congress has no existence and can exercise no authority outside of the Constitution. Still less is it true that Congress can deal with new territories just as other nations have done or may do with their new territories. This nation is under the control of a written constitution, the supreme law of the land and the only source of the powers which our Government, or any branch or officer of it, may exert at any time or at any place. Monarchical and despotic governments, unrestrained by written constitutions, may do with newly acquired territories what this Government may not do consistently with our fundamental law. To say otherwise is to concede that Congress may, by action taken outside of the Constitution, engraft upon our republican institutions a colonial system such as exists under monarchical governments. Surely such a result was never contemplated by the fathers of the Constitution. If that instrument had contained a word suggesting the possibility of a result of that character it would never have been adopted by the People of the United States. The idea that this country may acquire territories anywhere upon the earth, by conquest or treaty, and hold them as mere colonies or provinces — the people inhabiting them to enjoy only such rights as Congress chooses to accord to them — is wholly inconsistent with the spirit and genius as well as with the words of the Constitution.
The idea prevails with some — indeed, it found expression in arguments at the bar — that we have in this country substantially or practically two national governments; one, to be maintained under the Constitution, with all its restrictions; the other to be maintained by Congress outside and independently of that instrument, by exercising such powers as other nations of the earth are accustomed to exercise. It is one thing to give such a latitudinarian construction to the Constitution as will bring the exercise of power by Congress, upon a particular occasion or upon a particular subject, within its provisions. It is quite a different thing to say that Congress may, if it so elects, proceed outside of the Constitution. The glory of our American system 381*381 of government is that it was created by a written constitution which protects the people against the exercise of arbitrary, unlimited power, and the limits of which instrument may not be passed by the government it created, or by any branch of it, or even by the people who ordained it, except by amendment or change of its provisions. “To what purpose,” Chief Justice Marshall said in Marbury v. Madison, 1 Cranch, 137, 176, “are powers limited, and to what purpose is that limitation committed to writing, if these limits may, at any time, be passed by those intended to be restrained? The distinction between a government with limited and unlimited powers is abolished if those limits do not confine the persons on whom they are imposed, and if acts prohibited and acts allowed are of equal obligation.”
[Downes v. Bidwell, 182 U.S. 244 (1901); SOURCE: https://scholar.google.com/scholar_case?case=9926302819023946834]
More on the subject of this article at:
- Definitions of Insular Area Political Organizations, Dept. of Interior
https://www.doi.gov/oia/islands/politicatypes - Sixteenth Amendment Congressional Debates, Exhibit #02.007
https://sedm.org/Exhibits/EX02.007.pdf - Legislative Intent of the Sixteenth Amendment, Family Guardian Fellowship
https://famguardian.org/Subjects/Taxes/16Amend/LegIntent16thAmend.htm - Sovereignty Forms and Instructions Online, Form #10.004, Cites by Topic: “Income”
https://famguardian.org/TaxFreedom/CitesByTopic/income.htm - Sovereignty Forms and Instructions Online, Form #10.004, Cites by Topic: “Sixteenth Amendment”
https://famguardian.org/TaxFreedom/CitesByTopic/SixteenthAmendment.htm
BEGIN ARTICLE:
The Supreme Court will hear oral arguments in early December on a case that has the potential to broadly reshape the U.S. tax code and cost the government hundreds of billions of dollars in revenue.
At issue in Moore v. United States is the question of whether the federal government can tax certain types of “unrealized” gains, which are property like stocks or bonds that people own but from which they haven’t directly recouped the value, so they don’t have direct access to the money that the property is worth.
Large portions of the U.S. tax code require that income be “realized” before it can be taxed, but critics say it’s an inherently wishy-washy concept that courts have just been ignoring for years due to administrative impracticalities.
Even if the court limits the scope of its decision to the specific tax referenced in the case, known as the mandatory repatriation tax, a ruling in favor of the plaintiffs could cost $340 billion over the next decade, according to the Justice Department.
For comparison, that would cancel out all the extra revenue generated by the $80 billion IRS funding boost and then add $140 billion to the national deficit, which now stands between $26 and $33 trillion, according to various measurements.
But experts say the cost could be much higher than that if the court broadens out its definition of what counts as realization, pushing heaps of taxable income out of the government’s reach.
The decision could have implications for everything from potential wealth taxes, like the one the Biden administration proposed for billionaires in 2022, to large swaths of the international tax regime.
The U.S. solicitor general herself is scheduled to argue the case before the justices, underscoring how the Biden administration views its importance.
“It’s the million-dollar question, just with a few more zeros: the quadrillion-dollar question,” Harvard University tax law professor Thomas Brennan told The Hill.
“On one extreme, if the Supreme Court decides that a realization requirement is present in the 16th Amendment … then there are a number of code sections that arguably would be invalid or have to be reworked,” he said.
These sections could involve partnership tax rules, rules on the taxation of debt and commodities, taxes on futures contracts and the international tax rules that string these areas together between countries.
“On the other extreme, even if the Supreme Court finds in favor of the taxpayers, they could do so in a narrow way that’s limited to the particular situation at hand, or in a way that … forecloses the possibility of Congress enacting wealth taxes but that doesn’t disturb much of existing tax law,” Brennan said.
What is the Moore tax case?
The dispute arose from businesspeople Charles and Kathleen Moore’s investment in an Indian company that sells farm equipment.
Republicans’ 2017 tax bill imposed a one-time tax on Americans who owned shares in foreign corporations, even if the corporation hadn’t distributed any earnings to the taxpayer.
Avoiding taxes gets new scrutiny: IRS eyes partnerships in tax evasion crackdown
The Moores filed their lawsuit after paying a roughly $15,000 tax bill, court filings show.
Practical financial workarounds to realization
Whatever the decision of the court, which is expected before June of next year, there are in practice numerous, well-established workarounds for people who own a lot of “unrealized” property to access it before technically receiving it and having to pay taxes on it.
One famous strategy, known as “Buy, Borrow, Die,” involves using large, diversified stock portfolios as collateral for relatively low-interest loans.
Rather than selling the holdings and “realizing” the taxable income, wealthy taxpayers use them as collateral to take out low-interest loans. Since debt isn’t taxable, they can skip paying tax on the holdings.
As long as the portfolio appreciates faster than the rate of interest on the loan, payments can be made and the line of credit remains viable.
On the horizon: IRS establishes new pass-through division to tax high earners
A law allowing a “step up in basis,” which means that inheritors of assets get to claim their present-worth value as opposed to what they were worth when they were originally bought, permits this scheme to continue through generations.
That’s compared to taxes on workers’ wages and salaries, which are “realized” immediately upon being sent out and taxed before they even reach their recipients.
Conservative groups champing at the bit while critics cry foul
Conservative financial and economic groups have been rooting for a resounding endorsement of the realization requirement for tax purposes from the current court, which brushed aside decades of precedent in overturning the seminal abortion case Roe v. Wade last year.
“Realization has been the defining event that turns something from an asset holding value to income subject to federal tax under the Sixteenth Amendment,” lawyers for the Chamber of Commerce, the biggest business lobby in the U.S., exhorted the court in an amicus brief, filed in March.
“The framers [of the Constitution] intentionally created a system that makes it difficult to pass destructive taxes such as the [mandatory repatriation tax] or a wealth tax,” the Philanthropy Roundtable wrote in their own brief.
Critics of a blanket constitutional requirement for realization say the idea is trumped up, and it’s really just about the timing of when an asset is allowed to be taxed for accounting purposes.
They point to a 1940 decision in Helvering v. Horst finding that “the rule that income is not taxable until realized has never been taken to mean that the taxpayer … can escape taxation because he has not himself received payment of it from his obligor.”
This is because the taxpayer “has fully enjoyed the benefit of the economic gain represented by his right to receive income,” the court found. As such, the requirement was considered to be “founded on administrative convenience” and “not one of exemption from taxation.”
Calls for Alito to recuse have surfaced
Democrats have demanded that Justice Samuel Alito, one of the court’s leading conservatives, be recused from the case over his ties to one of the lawyers advocating for a realization requirement.
Alito participated in two interviews with the lawyer, David Rivkin Jr., that were published in The Wall Street Journal’s opinion section.
In a rare public response, Alito noted other justices who had interviewed with lawyers practicing before the court.
“There is no valid reason for my recusal in this case,” Alito said.
Tax lawyers worry the rules of the game are about to change
Tax lawyers are concerned that their jobs could change significantly due to the scope of the ruling.
“If [the court makes] a specific realization requirement, then it could have an impact on many other provisions of the Internal Revenue Code, because there are provisions currently … that arguably diverge from the realization rule,” Lawrence Hill, a partner at the Steptoe & Johnson law firm, told The Hill.
He described these divergences as “very significant,” saying the rules pertaining to taxation of partnerships, S corporations, grantor trusts, controlled foreign corporations and original issue discounts could be affected, in addition to entire accounting norms pertaining to tax accrual and adjusting valuations to a going market rate.
“That is the concern of the tax bar,” he said.
SCOTUS adopts code of ethics after scrutiny: Dems say it’s not enough
Kyle Pomerleau, a senior fellow at the American Enterprise Institute who filed an amicus brief supporting the government, said a broad ruling in favor of the Moores could lead others to file a deluge of lawsuits challenging those other portions of the tax code.
“A cloud is going to be cast over the U.S. economy, as there’s all this uncertainty about what the tax code is going to look like in five, 10, 15 years from now.”
Pomerleau instead suggested a narrower way for the Supreme Court to resolve the case that wouldn’t reopen the question of whether income must be realized for the federal government to tax it.
“Because this is a tax on business profits and a tax on the use of a certain type of foreign business entity, and because it’s a tax on foreign activity, not domestic activity, it falls under the umbrella of an indirect tax,” said Pomerleau.
“And indirect taxes don’t have the same limitation that direct taxes have under the Constitution, you don’t have to apportion them,” he continued. “Therefore, all of the Moores’ arguments kind of fall away.”