Supreme Court Asked to Sidestep Question on Congress’s Tax Power

The US Supreme Court should avoid ruling on whether Congress has the authority to tax unrealized gains because a dispute over a 2017 tax law doesn’t require such a determination, the American Tax Policy Institute said.

But if it does so, reversing the Ninth Circuit’s decision to uphold a foreign earnings tax in the Tax Cuts and Jobs Act could incite a “flood of litigation about the constitutionality of a host of other provisions” in the Internal Revenue Code, the ATPI said in an amicus brief filed Thursday.

That’s because many income tax provisions don’t require realization as a precondition for taxation, ATPI said. Establishing a realization requirement “could severely, and unnecessarily, disrupt the orderly administration of the tax laws for years to come,” the brief said.

The tax law at issue here, known as the “mandatory repatriation tax,” was collected on earnings held offshore from 1987 to 2017 as though they were repatriated. It was challenged by a Washington couple, Charles and Kathleen Moore, who said that it violated the 16th Amendment by collecting on unrealized gains.

The Moores seek an approximately $15,000 refund because they say they were taxed on gains that were never distributed to them from an Indian farming equipment company, KisanKraft. The Ninth Circuit affirmed the dismissal of their case after holding the mandatory repatriation tax didn’t violate the Constitution’s apportionment clause.

According to ATPI, the Moores are wrong to call their gains unrealized because KisanKraft realized the income while the Moores owned a stake in the company. The question before the court, therefore, is “not whether there was realized income, but who can be taxed on it,” the brief said.

“Upholding the MRT as a tax imposed on realized income of the foreign corporation will fully dispose of the case, without taking on complicated questions like whether realization is always constitutionally required and what comprises realization,” the ATPI said.

Reuven Avi-Yonah, Clinton G. Wallace, and Bret Wells—who are all tax law professors—filed their own amicus brief on Thursday, also arguing that reversing the Ninth Circuit’s decision “would invalidate or at the very least cast considerable doubt over many sections of the Internal Revenue Code.”

“Nonrealization Rules are essential to prevent tax sheltering and create a level playing field for all taxpayers,” the professors wrote.

Law professors Bruce Ackerman and Joseph Fishkin and history professor William E. Forbath filed an amicus brief on Friday also urging the Supreme Court to affirm the Ninth Circuit’s decision. They said that the Moores’ argument would require the Supreme Court to repudiate the original understanding of the 16th Amendment. Historical sources show that the framers and ratifiers of the amendment were determined to restore broad congressional power over taxation, the brief said.

Steptoe & Johnson LLP, Adler & Stachenfeld LLP, Clifford Chance US LLP, and David Schizer of Columbia Law School represent ATPI. Kostelanetz LLP represents Avi-Yonah, Wallace, and Wells. Ahmad, Zavitsanos & Mensing PLLC represents Ackerman, Fiskin, and Forbath.

Baker & Hostetler LLP represents the Moores.

The case is Moore v. United States, U.S., No. 22-800, amicus briefs 10/19/23.