Amicus Curiae Brief — Charles G. Moore, et ux., Petitioners v. United States

No. 22-800

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In The

Supreme Court of the United States

---------------------------------♦--------------------------------CHARLES G. MOORE and KATHLEEN F. MOORE,

Petitioners,

v.

UNITED STATES OF AMERICA,

Respondent.

---------------------------------♦--------------------------------On Writ Of Certiorari To The

United States Court Of Appeals

For The Ninth Circuit

---------------------------------♦--------------------------------BRIEF OF AMICUS CURIAE

LANDMARK LEGAL FOUNDATION

IN SUPPORT OF PETITIONERS

---------------------------------♦--------------------------------RICHARD P. HUTCHISON

LANDMARK LEGAL FOUNDATION

3100 Broadway, Suite 1210

Kansas City, MO 64111

816-931-5559

MATTHEW C. FORYS

Counsel of Record

MICHAEL J. O’NEILL

LANDMARK LEGAL FOUNDATION

19415 Deerfield Ave.,

Suite 312

Leesburg, VA 20176

703-544-6100

matt@landmarklegal.org

Attorneys for Amicus Curiae

================================================================================================================

COCKLE LEGAL BRIEFS (800) 225-6964

WWW.COCKLELEGALBRIEFS.COM

i

TABLE OF CONTENTS

Page

STATEMENT OF INTEREST OF AMICUS CURIAE .................................................................

1

INTRODUCTION AND SUMMARY OF ARGUMENT ...............................................................

2

ARGUMENT ........................................................

3

I.

Income must be realized before it may be

taxed ..........................................................

3

II.

The MRT is a direct tax on the Moores’

shares of stock ........................................... 14

III.

The Apportionment Clause and Direct Tax

Clause require direct tax schemes like the

MRT to be apportioned by population ....... 20

CONCLUSION..................................................... 23

ii

TABLE OF AUTHORITIES

Page

CASES

Comm’r v. Glenshaw Glass Co., 348 U.S. 426

(1955) ..................................................................... 4, 6

Corliss v. Bowers, 281 U.S. 376 (1930) .......................12

Eder v. Comm’r, 47 B.T.A. 235 (1942), remanded

by 138 F.2d 27 (2d Cir. 1943) .............................. 9, 10

Eder v. Commissioner of Internal Revenue, 138

F.2d 27 (2d Cir. 1943) ............................................ 8, 9

Eisner v. Macomber, 252 U.S. 189 (1920) ...... 2-6, 11, 21

Garlock, Inc. v. Comm’r, 58 T.C. 423 (1972), aff ’d

by 489 F.2d 197 (2d Cir. 1973) ............................ 8-12

Heiner v. Mellon, 304 U.S. 271 (1938) ...................... 7, 8

Helvering v. Bruun, 309 U.S. 461 (1940) ................ 6, 13

Hylton v. United States, 3 U.S. (3 Dall.) 171

(1796) ...................................................... 14-16, 19, 20

Marbury v. Madison, 5 U.S. (1 Cranch) 137

(1803) .........................................................................3

Murphy v. United States, 992 F.2d 929 (9th Cir.

1993) .............................................................. 9, 11, 12

Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S.

519 (2012) ............................................................ 1, 14

Pollock v. Farmers’ Loan & Trust Co. (Pollock I),

157 U.S. 429 (1895) .................................................20

Pollock v. Farmers’ Loan & Trust Co. (Pollock II),

158 U.S. 601 (1895) .................................................21

iii

TABLE OF AUTHORITIES—Continued

Page

Springer v. United States, 102 U.S. 586 (1881) ..........14

Whitlock’s Est. v. Comm’r, 59 T.C. 490 (1972),

aff ’d in part, rev’d in part, 494 F.2d 1297 (10th

Cir. 1974) ............................................................. 8-11

CONSTITUTION

U.S. Const., amend. XVI ...........................2-5, 16, 20-22

U.S. Const., art. I, § 2, cl. 3............................................2

U.S. Const., art. I, § 8, cl. 1..........................................16

U.S. Const., art. I, § 9, cl. 4...................................... 2, 14

STATUTES AND REGULATIONS

Act of June 5, 1794, ch. 45, 1 Stat. 373 (1794) ...........17

Tax Cuts and Jobs Act of 2017, Public Law

(Dec. 22, 2017) ...........................................................2

The Revenue Act of 1938, Pub. L. No. 75-554,

54 Stat. 447,

§ 337(b) ......................................................................9

The Revenue Act of 1962, Pub. L. No. 87-834,

76 Stat. 1006, § 951,

26 U.S.C. § 305(a)-(b)(1) ..........................................10

26 U.S.C. § 951.........................................................10

26 U.S.C. § 957.........................................................10

26 U.S.C. § 965(a) ......................................................9

26 U.S.C. § 1256.........................................................9

iv

TABLE OF AUTHORITIES—Continued

Page

OTHER AUTHORITIES

The Federalist No. 21 (A. Hamilton) (Clinton

Rossiter ed., 1961) ...................................................17

Bruce Ackerman, Taxation and the Constitution,

99 Colum. L. Rev. 1 (1999) ......................................13

Barclay’s Universal English Dictionary (1792) .... 15, 16

T. Dyche & W. Pardon, A New General English

Dictionary (1781) ....................................................15

3 Jonathan Elliot, The Debates in the Several

State Conventions on the Adoption of the Federal Constitution (2d ed., 1836) ..............................15

2 Alexander Hamilton, Speech on the Revenue

System, in The Works of Alexander Hamilton

(Henry Cabot Lodge ed., 1904) ...............................17

Erik M. Jensen, Did The Sixteenth Amendment

Ever Matter? Does It Matter Today?, 108 Nw.

U.L. Rev. 799 (Spring, 2014)....................................22

Erik M. Jensen, Interpreting the Sixteenth

Amendment (By Way of the Direct-Tax Clauses),

21 Const. Commentary 355 (Summer, 2004) ............22

Erik M. Jensen, The Apportionment of “Direct

Taxes”: Are Consumption Taxes Constitutional?,

97 Colum. L. Rev. 2334 (December, 1997) .................19

Calvin H. Johnson, Fixing the Constitutional

Absurdity of the Apportionment of Direct Tax,

21 Const. Commentary 295 (Summer, 2004) .........13

Samuel Johnson, A Dictionary of the English

Language (1792)......................................................15

v

TABLE OF AUTHORITIES—Continued

Page

Alice Hanson Jones, Wealth of a Nation to Be:

The American Colonies on the Eve of the Revolution (1980) ..........................................................15

Diane Lindstrom, 56 Agricultural Hist. 588 (1982).......15

Sean P. McElroy, The Mandatory Repatriation

Tax Is Unconstitutional, 36 Yale J. on Reg.

Bull. 69 (2018) ................................................... 10, 11

Rodney P. Mock & Jeffrey Tolin, Realization And

Its Evil Twin Deemed Realization, 31 Va. Tax

Rev. 573 (Spring, 2012) .............................................7

Robert G. Natelson, What the Constitution

Means by “Duties, Imposts, and Excises”—and

“Taxes” (Direct or Otherwise), 66 Case W. Res.

L. Rev. 297 (2015) .............................................. 14, 15

National Archives, Founders Online, Letter from

James Madison to Thomas Jefferson (May 11,

1794), https://founders.archives.gov/documents/

Madison/01-15-02-0229 ..................................... 17, 18

Henry Ordower, Abandoning Realization and

the Transition Tax: Toward a Comprehensive

Tax Base, 67 Buff. L. Rev. 1371 (2019)......................5

Henry Ordower, Revisiting Realization: Accretion Taxation, the Constitution, Macomber and

Mark to Market, 13 Va. Tax Rev. 1 (1993) ....... 6, 7, 12

John Taylor, An Argument Respecting the Constitutionality of The Carriage Tax (1795) ...............18

Noah Webster, An American Dictionary of the

English Language (1828) ........................................16

1

STATEMENT OF INTEREST

OF AMICUS CURIAE1

Amicus Curiae Landmark Legal Foundation

(“Landmark”) is a national public-interest law firm

committed to preserving the principles of limited government, separation of powers, federalism, originalist

construction of the Constitution and individual rights.

Landmark has a unique perspective on this case. It

was one of the very few amici curiae who raised the

implications of the Apportionment Clause and Direct

Tax Clause in the main challenge to the Affordable

Care Act. Brief for Landmark Legal Foundation as

Amicus Curiae in support of the Respondents (Minimum Coverage Issue) at 18-35, Nat’l Fed’n of Indep.

Bus. v. Sebelius, 567 U.S. 519 (2012) (No. 11-393). This

area had been largely ignored in the Government’s

briefs. Id. at 669 (Scalia, Thomas, Kennedy & Alito, JJ.,

dissenting).

Landmark urges this Court to reverse the ruling

of the Court of Appeals for the Ninth Circuit because

left undisturbed it threatens to eviscerate any meaningful limitation on Congress’s taxing power.

---------------------------------♦---------------------------------

1

No counsel for a party authored this brief in whole or in

part, and no counsel or party made a monetary contribution intended to fund the preparation or submission of this brief. No person other than Amicus Curiae, its members, or its counsel made

a monetary contribution to its preparation or submission.

2

INTRODUCTION AND

SUMMARY OF ARGUMENT

This case concerns whether Congress can redefine

the text of the Sixteenth Amendment so that the Apportionment Clause and Direct Tax Clause are effectively removed from the Constitution. U.S. Const.,

amend. XVI; U.S. Const., art. I, § 2, cl. 3; U.S. Const.,

art. I, § 9, cl. 4. The Mandatory Repatriation Tax (MRT)

of the Tax Cuts and Jobs Act of 2017, Public Law 11597 (Dec. 22, 2017) (TCJA), treated the undistributed

earnings of a controlled foreign corporation (CFC) that

had accumulated over several years as income taxable

to minority shareholders like the Moores in a single

year. The MRT was not a tax of the Moores’ income

because the Moores realized no gain and received no

income. Instead, the MRT acted as a direct tax on the

Moores’ property. The MRT violated the Constitution

because this direct tax on shares of stock was not apportioned by population.

The Ninth Circuit’s opinion below interpreted the

taxing power too broadly and ignored the realization

requirement in this Court’s precedents such as Eisner

v. Macomber, 252 U.S. 189 (1920), a case directly on

point. Although the Sixteenth Amendment narrowed

the scope of the Apportionment Clause and Direct Tax

Clause, they are constitutional restrictions on taxation

that remain in force and cannot be ignored just to maximize revenue.

3

The Court should uphold the Sixteenth Amendment’s realization requirement and the Apportionment Clause and Direct Tax Clause.

---------------------------------♦---------------------------------

ARGUMENT

I.

Income must be realized before it may be

taxed.

In the Ninth Circuit’s view, which the Government

urges this Court to adopt, there are almost no principled limits to what Congress can define as taxable income. If this reasoning were taken to its logical end,

Congress would be free from one of the most important

constitutional restraints on the taxing power residing

in the Apportionment Clause and Direct Tax Clause.

Although some deference to Congress’s power may be

due, the court below went too far. In their view, Congress can disregard the plain meaning of the text of the

Sixteenth Amendment, define income as they see fit

without interference from the Amendment or the Supreme Court, and thereby avoid Article I’s apportionment requirement. This cannot possibly occur without

raising separation-of-powers concerns under Marbury

v. Madison, 5 U.S. (1 Cranch) 137 (1803). When this

issue arose in Eisner v. Macomber, 252 U.S. 189 (1920),

the Court wrote, “Congress cannot by any definition it

may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it

derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.” Id.

at 206.

4

In the opinion below, the court justifies its holding

by informing us that the concept of income itself is flexible. Pet. App. 11. Taxes like the MRT that deem realization of corporate income to shareholders have been

upheld in circuit courts, we are reminded. Pet. App. 1112. The court further states, “Whether the taxpayer

has realized income does not determine whether a tax

is constitutional”; taxable gain itself is broadly construed; and there has been no constitutional ban on the

disregard of the corporate form to allow taxing shareholder income. Pet. App. 12-13. The court below even

waved away this Court’s longstanding precedents,

Eisner v. Macomber, 252 U.S. 189 (1920), and Comm’r

v. Glenshaw Glass Co., 348 U.S. 426 (1955), establishing that the Sixteenth Amendment inherently requires

an event when income is realized before it may be

taxed. Pet. App. 14-16.

As shown below, the Ninth Circuit upheld the

MRT by citing tax statutes based on constitutionally

distinguishable theories of the constructive receipt of

income. Yet, quite remarkably, they still would not

cover shareholders like the Moores. The constructive

receipt cases are often distinguished from this case due

to the factor of control. Unlike the partners, individual

trader, and shareholders of closely held corporations in

these cases, the Moores did not have sufficient control

of KisanKraft to compel distributions, which would

supposedly justify the constructive receipt of income

to the Moores. And unlike the tax statutes cited below,

5

the MRT applied to corporate earnings accumulated

over a range of many years, far beyond the taxation

attributed to a shareholder of a company’s earnings

in a current, single year under Subpart F. This comparison of the lower court’s cases to the instant case shows

why the MRT is vastly worse and should be struck

down. The MRT is far more constitutionally suspect

than the statutes in the constructive receipt cases because it applies merely to shareholder ownership of

CFC shares in 2017, regardless of whether the shareholder had control when the corporation made the

earnings being taxed.

The Sixteenth Amendment grants Congress the

power “to lay and collect taxes on incomes, from whatever source derived, without apportionment among

the several States, and without regard to any census

or enumeration.” U.S. Const., amend. XVI. From the

beginning, this Court interpreted the Amendment to

mean that a realization of gain is inherent to the taxation of income. In Macomber, the Court considered

whether a shareholder’s receipt of a corporate stock

dividend constituted a taxable gain under or changed

“only the form, not the essence,” of his investment.

Macomber, 252 U.S. at 210. “Macomber expressly rejected taxing accumulated earnings and profits to a

corporation’s shareholders in the absence of a distribution.” Henry Ordower, Abandoning Realization and the

Transition Tax: Toward a Comprehensive Tax Base, 67

Buff. L. Rev. 1371, 1392 (2019). Ultimately, the shareholder “received nothing out of the company’s assets

6

for his separate use and benefit.” Macomber, 252 U.S.

at 211. The Court defined income as “the gain derived

from capital, from labor, or from both combined.” Id. at

207.

Macomber’s core principle stands—realization is a

requirement for the taxation of income. Helvering v.

Bruun, 309 U.S. 461 (1940), cited by the court below to

suggest the concept of taxable gain is malleable, also

involved a realization event. The taxpayer “realized

taxable gain from the forfeiture of a leasehold, the

tenant having erected a new building upon the premises.” Id. at 464. And in Comm’r v. Glenshaw Glass Co.,

348 U.S. 426 (1955), the Court devised a three-part description of income that is still commonly used: “instances of undeniable accessions to wealth, clearly

realized, and over which the taxpayers have complete

dominion.” Id. at 431.

Realization involves a change in the taxpayer’s

rights to his property. “[A]s the Court has decided each

case, it has held to the principles that realization is

essential to the imposition of tax and that alteration of

the taxpayer’s aggregate rights with respect to the

property is a condition of realization.” Henry Ordower,

Revisiting Realization: Accretion Taxation, the Constitution, Macomber, and Mark to Market, 13 Va. Tax

Rev. 1, 29 (1993). Furthermore, “while the cases [refining Macomber] may have all wrangled with the outer

limits of realization, they nevertheless required an

7

identifiable and actual event to occur.” Rodney P. Mock

& Jeffrey Tolin, Realization and its Evil Twin Deemed

Realization, 31 Va. Tax Rev. 573, 598 (2012). In the instant case, the Government never disputed that the

Moores realized nothing from their KisanKraft investment. Pet. Br. 7. But in most of the cases cited by the

Ninth Circuit, the taxpayers did realize their income,

or otherwise enjoy “an alteration of [their] relationship

to the property” being taxed. Ordower at 44.

The court below counters the realization requirement by arguing that whether a taxpayer has “realized

income does not determine whether a tax is constitutional.” Pet. App. 12 (citing Heiner v. Mellon, 304 U.S.

271, 281 (1938)). Mellon does not provide any support

for this argument. Mellon shows, they argue, that

whether a partner’s proportionate share of the partnership’s net income was distributable to the taxpayer

“was not material to whether it could be taxed.” Pet.

App. 12. That is technically true, but an oversimplification of the issues involved.

Mellon involved a partnership, a pass-through entity for tax purposes, not a corporation like KisanKraft.

The partnership had been involved in the sale of alcohol, but dissolved after the death of a partner. The two

surviving partners argued that they became liquidating trustees by operation of state law, so prior income

earned from operations of the dissolved partnerships

was income to the survivors only in their fiduciary positions as trustees. Mellon, 304 U.S. at 273. The Court

rejected that argument because the state law could not

control the federal law’s determination that the income

8

went to the partnership and not the trust. Id. at 279.

And the income tax required by federal law on partnership income was due whether the partners received

their distributions or not. Id. at 279-81. How the assets were disposed of and how proceeds were applied

might be a matter of state law, but however done, federal law required that taxes be paid in years when

profits were made. Id. at 280.

Mellon is easily distinguished from the instant

case. The past profitable sales of alcohol were realization events of income to the partnership and thus to

the individual partners, because the partnership did

not exist as a separate entity from the partners. Here,

the Moores are minority corporate shareholders, not

partners, and “it’s undisputed that the[y] . . . lacked

the authority to compel a dividend payment constituting realized income.” Pet. App. 41. To suggest that

Mellon allows the government to treat corporate income as constructively received and taxable to a shareholder the same way distributable partnership income

is taxable to a partner is not defensible as a matter of

first principles.

The court below also misapplies Eder v. Comm’r of

Internal Revenue, 138 F.2d 27 (2d Cir. 1943), which it

cites both for the idea that realization is not constitutionally required and as an example, along with Garlock, Inc. v. Comm’r, 489 F.2d 197 (2d Cir. 1973) and

Whitlock’s Est. v. Comm’r, 59 T.C. 490 (1972), aff ’d in

part, rev’d in part, 494 F.2d 1297 (10th Cir. 1974), of

taxes like the MRT that have been upheld. Eder involved the taxation of a foreign personal holding

9

company under The Revenue Act of 1938, Pub. L. No.

75-554, 54 Stat. 447, while Garlock and Whitlock’s

Est. arose under Subpart F. The Government adds

mark-to-market tax systems like 26 U.S.C. § 1256 for

commodity futures contracts, at issue in Murphy v.

United States, 992 F.2d 929 (9th Cir. 1993). Resp’t’s

Br. 11.

In Eder, a taxpayer who, with his wife and two

children, owned all the shares in a closely held foreign

corporation was at first prohibited under Colombian

exchange control laws and regulations from repatriating any of his firm’s earnings to the United States, and

then only in limited amounts per month. Eder v.

Comm’r, 47 B.T.A. 235, 236-37 (1942). The taxpayer argued that his domestic taxable income should be reduced to reflect his inability to access those foreign

funds. The Second Circuit ruled, however, that the “inability to expend income in the United States . . . by

operation of law, or by agreement among private parties, is no bar to its taxability.” Eder v. Commissioner

of Internal Revenue, 138 F.2d 27, 28 (2d Cir. 1943). This

situation, where a family-owned business was able to

ensure the shareholders received distributions, is fundamentally different from the instant case, where the

Moores have no power to compel KisanKraft to make

distributions here or in India. And the tax statute at

issue in Eder applied to a single year of the corporation’s income, Eder, 47 B.T.A. at 238 n.1 (1942) (citing

Revenue Act of 1938 § 337(b)), not the prior thirty-one

years under the MRT. 26 U.S.C. § 965(a). This is not

to suggest that the taxation of any year’s gains in the

10

absence of realization is appropriate. It just once again

underscores how the MRT’s linkage of ownership of

shares without a controlling interest to potentially decades of unrealized corporate gains is far more egregious in comparison.

As to the contention that laws similar to the MRT

have been upheld in Eder, Garlock and Whitlock’s Est.,

these cases were addressed by the circuit courts, not

this Court. And none of these cases actually claimed to

discard the realization requirement. The taxes in question were tailored to circumstances where Congress

determined that the taxpayers had achieved the “constructive receipt of income.” Garlock v. Comm’r, 58 T.C.

423, 438 (1972). “Subpart F singles out a specific class

of taxpayers—U.S. shareholders who have a substantial degree of control over a foreign corporation—and

subjects them to immediate taxation on the grounds

that they have the ability to treat the corporation’s undistributed earnings as they see fit.” Sean P. McElroy,

The Mandatory Repatriation Tax Is Unconstitutional,

36 Yale J. on Reg. Bull. 69, 73 (2018). And the taxable

income at issue in Garlock and Whitlock’s Est., both

Subpart F cases, was limited in time to the corporation’s annual earnings like in Eder, and not retroactive

for over three decades like the MRT. See The Revenue

Act of 1962, Pub. L. No. 87-834, § 951, 76 Stat. 1006.

Garlock and Whitlock’s Est. “all involved the currentyear attribution of current earnings. They do not address the novel issue presented here, which is whether

past, accumulated earnings are properly considered

to be income to the 10-percent shareholders of a

11

controlled foreign corporation without any dividend

being paid.” McElroy at 78.

The constructive receipt of income in systems like

Subpart F can only be justified if the shareholder has

some measure of control over where to direct the receipt of current income and chooses to direct it to a corporation simply to avoid taxes. This concept of control

was mentioned at the Tax Court level in both Garlock

and Whitlock’s Est. “In our opinion, the actual control

of [Garlock] S.A. at all times rested in the petitioner as

owner of the common stock. That was the intention,

and it was effectively carried out.” Garlock, Inc. v.

Comm’r, 58 T.C. 423, 438 (1972). In Whitlock’s Est., the

Tax Court stated that Macomber could not be read “as

denying to Congress the power to attribute a corporation’s undistributed current income to the corporation’s controlling stockholders.” Estate of Whitlock, 59

T.C. at 508 (1972). It continued, “it is safe to say that

the [Macomber] Court simply did not direct itself to

the situation of the tightly controlled corporation

where controlling stockholders are able to manipulate

the corporation’s profits and capital almost at will.” Id.

In Murphy, the circuit court held that, even though the

commodities trader “did not sell his futures contracts,

his gains could be treated as realized because he was

entitled to withdraw those gains daily.” Murphy, 992

F.2d at 931. The principle in these cases is best summarized by Justice Oliver Wendell Holmes: “The income that is subject to a man’s unfettered command

and that he is free to enjoy at his own option may be

12

taxed to him as his income, whether he sees fit to enjoy

it or not.” Corliss v. Bowers, 281 U.S. 376, 378 (1930).

Petitioners owned 13% of a controlled corporation

(CFC). Pet. App. 5. The MRT’s capture of income from

shareholders with less than a controlling share of a

corporation with no power to compel distributions in

the absence of any realization of income is simply

abusive to the Moores. Yet taxation imposed in the absence of realization is supposed to prevent abuse by

taxpayers. Professor Henry Ordower observed that

“[h]istorical departures from fundamental tax principles sometimes find their justification in a need to defend the integrity of the taxing system from avoidance

and abuse.” Ordower, Revisiting Realization, at 86. In

Garlock, the Second Circuit ruled against a taxpayer

who had taken intentional steps to avoid being classified as a CFC subject to Subpart F taxation. In that

case, the court noted the significance of bringing in preferred shareholders who “understood both [the taxpayer’s] motives and its situation” and “would have no

interest in disturbing the taxpayer’s continued control.” Garlock, Inc., 489 F.2d at 201. There is nothing in

the record to indicate the Petitioners have engaged in

such abuse that justifies treating KisanKraft’s earnings as their own.

Finally, Bruun provides a hint as to why much of

academia has doggedly tried to expand the concept of

income and downplay the realization requirement for

income. The Bruun Court noted that “economic gain is

13

not always taxable as income.” Bruun, 309 U.S. at 469.

Economic gain in the abstract, like the increase of the

value of a stock portfolio or home, is broad and cannot

be captured by a realization requirement. For supporters of a greater taxing power, realization is a frustrating impediment. For example, in Professor Calvin H.

Johnson’s view, “ ‘Income’ is . . . a malleable concept

that the Court can use to avoid apportionment.” Calvin

H. Johnson, Fixing the Constitutional Absurdity of the

Apportionment of Direct Tax, 21 Const. Commentary

295, 351 (Summer, 2004). Furthermore, he wrote, “not

only can the courts avoid apportionment by manipulative expansion of such terms as ‘excise’ and ‘income,’

but they have a duty to do so.” Id. See also Bruce Ackerman, Taxation and the Constitution, 99 Colum. L. Rev.

1 (1999).

In short, some attempts to make income a malleable concept and to bypass the realization requirement

are related to the effort to enact direct taxes on wealth

without the inconvenience of apportionment. But under this Court’s longstanding precedent, the MRT is

not a tax of the Moores’ income because the Moores received no income.

14

II.

The MRT is a direct tax on the Moores’

shares of stock.

The next issue is whether the MRT is a direct or

indirect tax under the Constitution. The early Supreme Court case considering the distinction between

direct and indirect taxes, Hylton v. United States, 3 U.S.

(3 Dall.) 171 (1796) was once read to suggest a narrow

interpretation of direct taxes, one limited to land and

capitation taxes, despite the Constitution’s broad reference to capitation “or other” direct taxes. U.S. Const.,

art. I, § 9, cl. 4. See Nat’l Fed’n of Indep. Bus. v. Sebelius,

567 U.S. 519, 571 (2012) (citing Springer v. United

States, 102 U.S. 586, 602 (1881)). But this narrow interpretation, rejected nearly a century later, conflicts

with the original understanding of direct taxes. A tax

on wealth is a direct tax.

Professor Robert G. Natelson shows that the term

“direct taxes” had a broader meaning in the founding

era than implied by Hylton. Robert G. Natelson, What

the Constitution Means by “Duties, Imposts, and Excises”—and “Taxes” (Direct or Otherwise), 66 Case W.

Res. L. Rev. 297, 297, 308-18 (2015). His review of

founding-era tax statutes reveals that taxes on several

categories were considered direct taxes: “Wealth employed in business and domestic life,” including taxes

on “land, improvements to land, inventory (stock in

trade), business equipment, and livestock”; “Personal

and business income,” including taxes on “rents, business profits, wages, interest, and other income”; “Business enterprises,” including taxes on “business profits”;

and “Heads,” meaning poll taxes or capitations. Id. at

15

315-16 (internal notations omitted). Professor Natelson suggests that the reason many believe direct taxes

were limited to land and capitation might be linked to

the fact that Parliament and some American jurisdictions referred to their omnibus tax bills as “land taxes.”

Id. at 312. The dominant focus on land as a source of

taxation makes sense since it was the overwhelming

source of wealth in the founding era. See Diane

Lindstrom, 56 Agricultural Hist. 588, 589 (1982) (reviewing Alice Hanson Jones, Wealth of a Nation to Be:

The American Colonies on the Eve of the Revolution)

(1980) (“Some two-thirds of nonhuman physical wealth

was held in the form of land and structures, another 22

percent in producer’s capital, 9 percent in consumer’s

durables and 1 percent in consumer perishables.”).

But, as he demonstrated, direct taxes in the founding era targeted more than land. They included business capital. At the Virginia ratification convention,

John Marshall said, “The objects of direct taxes are

well understood. . . . Lands, . . . stock of all kinds, and

a few other articles of domestic property.” 3 Jonathan

Elliot, The Debates in the Several State Conventions

on the Adoption of the Federal Constitution 229 (2d

ed., 1836). In the ratification era, “stock” in a business

context meant business capital, goods, and stock-intrade. Dictionaries defined “stock” as “a fund of money

or quantity of goods,” T. Dyche & W. Pardon, A New

General English Dictionary 512 (1781); “The principal;

capital store; fund already provided,” Samuel Johnson,

A Dictionary of the English Language 512 (1792);

“goods employed in trade,” Barclay’s Universal English

16

Dictionary (1792); “A fund; capital; the money or goods

employed in trade, manufactures, insurance, banking,

&e . . . ,” Noah Webster, An American Dictionary of the

English Language 794 (1828). Shares of stock, like the

Moores’ shares of KisanKraft, are merely units of ownership of the business and thus should be considered

“objects of direct taxes.”

The other type of taxes under the Constitution by

implication are indirect taxes, which include duties,

imposts, and excises. U.S. Const., art. I, § 8, cl. 1. They

do not have to be apportioned, but they must be uniform. Id. In the founding era, these types of taxes were

frequently laid on “consumption (especially of luxuries), domestic and foreign trade, and enumerated

business and official transactions.” Id. at 318. Luxury

items were, in some instances, subject to an annual tax

not just at the point of sale. Id. at 330. This blurs the

line between direct and indirect taxes in Hylton. Professor Natelson argues that the distinction between direct taxes and indirect taxes “seems not to have been

economic, but political and moral.” Id. at 330. Excises

and duties were more politically palatable than “the

levies on persons and production” found in omnibus

tax statutes. Id. He identifies three principles driving

popular sentiment at the time. Id. at 330. People believed that it was better to tax consumption than “living or producing” and to tax the luxuries of the wealthy

“than on the thrifty and productive or on the poor and

‘middling folk.’ ” Id. at 331. They also believed it was

appropriate to tax items of dubious social value like

alcohol. Id.

17

Alexander Hamilton highlighted the disparity in

popular feeling about taxes on consumption and production while addressing the New York legislature in

1787. “There is not a farmer in the State who would

not pay a shilling in the voluntary consumption of articles on which a duty is paid, rather than a penny imposed immediately on his house and land.” 2 Alexander

Hamilton, Speech on the Revenue System, in The

Works of Alexander Hamilton 191, 219 (Henry Cabot

Lodge ed., 1904). In Federalist No. 21, Hamilton

stressed that the voluntary nature of imposts, excises,

and duties on articles of consumption would limit the

excesses of such indirect taxes. The Federalist No. 21

at 142-43 (A. Hamilton) (Clinton Rossiter ed., 1961).

The boundaries of direct and indirect taxes came

into focus with the passage of a “duty” on carriages for

the conveyance of people, “kept by or for any person,”

either for his own use or to let out for hire by others.

Act of June 5, 1794, ch. 45, 1 Stat. 373, 374 (1794). This

duty was proposed by Treasury Secretary Alexander

Hamilton to the third Congress. The duty was levied

annually on carriages for transporting people and

specifically exempted any carriage “usually and

chiefly employed in husbandry, or for the transporting

or carrying of goods, wares, merchandise, produce or

commodities.” Id. (Note that the duty was on possession, and was not imposed at purchase or transfer, diminishing its voluntary nature.) James Madison was

appalled that the carriage duty passed as an indirect

tax “in spite of the Constitution” and saw it as “breaking down the barriers of the Constitution.” National

18

Archives, Founders Online, Letter from James Madison

to Thomas Jefferson (May 11, 1794), available at

https://founders.archives.gov/documents/Madison/0115-02-0229.

A challenge arose to the carriage tax in Virginia.

Former U.S. Senator John Taylor of Caroline, a Jeffersonian Republican, represented Daniel Hylton in the

middle Circuit in the Virginia District in 1795. In a

published argument, Taylor made the type of contention about Congress’s use of language that would be

relevant in this case, where Congress is trying to avoid

the Direct Tax Clause and Apportionment Clause by

calling accumulated assets “income.” He accused Congress of avoiding the restrictions on direct taxes by just

calling the carriage statute a duty. He suggested that

it was “an evasion, which would leave Congress unrestrained upon the subject of taxation, in violation of

the plainest words. They would only have to denominate every tax ‘an excise or a duty’ to invest themselves

with, an unlimited power of taxation, over every article

of human necessity.” John Taylor, An Argument Respecting the Constitutionality of The Carriage Tax 8

(1795). He contended that the point of the American

Revolution had been to bind taxation with representation and this principle had been a source of the constitutional distinction between direct and indirect taxes.

Id. He linked the carriage tax to an excise passed on

liquor and stills kept and made for a person’s own use.

He wrote that these taxes would set a precedent to

allow Congress to tax “the fruits of [a man’s] own manual labour” and every type of property he owned,

19

making apportionment meaningless. Id. In essence,

Taylor argued that the taxation of a person’s income or

property is direct. This may explain James Madison’s

initial vehemence about the Act.

The Supreme Court upheld the constitutionality

of the unapportioned carriage tax in Hylton in 1796 as

a tax on consumption. But its weak reasoning diminishes its authority limiting direct taxes just to land and

capitations. There are several unusual aspects about

the case. Only four of the six justices participated in

oral argument and only three issued opinions. Hylton

stipulated owning 125 chariots for his personal use,

an absurdly large number, in an apparent attempt to

meet jurisdictional requirements that still should have

failed. Erik M. Jensen, The Apportionment Of “Direct

Taxes”: Are Consumption Taxes Constitutional?, 97

Colum. L. Rev. 2334, 2351-52 (December, 1997).

Although Hylton is cited for limiting direct taxes

to capitation and land taxes, the justices’ language

on this point in dicta is heavily qualified. “I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the

Constitution, are only two, to wit, a capitation, or poll

tax . . . ; and a tax on LAND.” Hylton, 3 U.S. (3 Dall.)

at 175 (Chase, J.) (emphasis added). Justice Chase

argued for a functional test for apportionment, as did

the other justices. “The rule of apportionment is only

to be adopted in such cases, where it can reasonably

apply; and the subject taxed, must ever determine the

application of the rule.” Id. at 174. He raised the example of two states of equal population but with ten times

20

the number of carriages in one state than the other.

This would require a carriage owner in the second

state to pay ten times the tax paid by a carriage owner

in the first, causing great injustice. But this diminishes the restraint that the apportionment requirement placed on Congress’s taxing power. As Professor

Jensen asked, “Why not read the apportionment requirement as an attempt to make impractical—and

thus effectively to limit, if not forbid—direct taxes that

cannot be easily apportioned?” Jensen at 2356. Furthermore, the parameters of indirect taxes were only

lightly explored. Justice Chase wrote, “I believe some

taxes may be both direct and indirect at the same

time,” 3 U.S. at 174, while Justice Paterson declared,

“All taxes on expences or consumption are indirect

taxes.” Id. at 180.

In short, the justices’ reasoning in Hylton was at

times contradictory. See Jensen at 2354. The seriatim

opinions issued in Hylton find little support from the

Constitution’s text. Its narrow interpretation of direct

taxes as limited to land and capitation taxes was

rightly rejected in Pollock v. Farmers’ Loan & Trust Co.,

158 U.S. 601 (1895).

III. The Apportionment Clause and Direct Tax

Clause require direct tax schemes like the

MRT to be apportioned by population.

The Sixteenth Amendment was ratified in response to two opinions from 1895 that rejected Hylton

and its progeny. In the first, Pollock v. Farmers’ Loan

& Trust Co. (Pollock I), 157 U.S. 429 (1895), the Court

21

found that the taxation of income from real estate is

unconstitutional. After rehearing, the Court expanded

their reasoning to income from personal property and

held that the entire income tax statute at issue was

unconstitutional. Pollock v. Farmers’ Loan & Trust Co.

(Pollock II), 158 U.S. 601 (1895). Chief Justice Fuller

further wrote that “taxes on personal property, or on

the income of personal property, are likewise direct

taxes.” Id. at 637. The Ninth Circuit noted that the

Sixteenth Amendment overruled the second Pollock’s

holding that income from personal property was subject to the Apportionment Clause. This “reinforc[ed]

the narrow reach of the Apportionment Clause” in

their view. Pet. App. at 10. But the Sixteenth Amendment did not remove the requirement for personal

property itself.

The Macomber Court cautioned about attempts to

deny the reach of the Apportionment Clause and Direct Tax Clause altogether. “A proper regard for its

genesis, as well as its very clear language, requires

also that this Amendment shall not be extended by

loose construction, so as to repeal or modify, except as

applied to income, those provisions of the Constitution

that require an apportionment according to population

for direct taxes upon property, real and personal.” Macomber, 252 U.S. at 206. It continued, “This limitation

still has an appropriate and important function, and is

not to be overridden by Congress or disregarded by the

courts.” Id. Macomber confirms that taxes on personal

property should still be considered direct taxes. Id. at

217-19.

22

The Apportionment Clause and the Direct Tax

Clause were part of an important compromise at the

Constitutional Convention. Madison later wrote that

the direct tax and apportionment system was “one of

the safeguards of the Constitution.” 4 Annals of Cong.

730 (1794). Professor Jensen has provided a strong

defense of the clauses’ continued vitality in several

articles. First, and most obviously, “the Direct-Tax

Clauses are in the Constitution, twice, and they can’t

be dispensed with just because they’re inconvenient.”

Erik M. Jensen, Interpreting The Sixteenth Amendment (By Way Of The Direct-Tax Clauses), 21 Const.

Commentary 355, 368 (Summer, 2004). To those who

claim that the clauses are difficult to implement, he

responds that it is understandable because they intended direct taxes to be used sparingly, during emergencies. Erik M. Jensen, Did The Sixteenth Amendment

Ever Matter? Does It Matter Today?, 108 Nw. U.L. Rev.

799, 804 (Spring, 2014). Ordinarily, the founders intended that the federal government would be financed

by indirect taxes such as tariffs and excises. Id. Furthermore, “Apportionment was intended to make direct taxation difficult, particularly when the tax was

aimed at a sectionally concentrated base, and it largely

did so.” Id. And Professor Jensen specifically addressed

the attempts to read the clauses out of the Constitution

by redefining direct taxes. “[T]he case for applying a

substance-over-form principle is stronger when the result is to constrain, rather than to expand, congressional power.” Id. at 820.

23

In summary, the Apportionment Clause and the

Direct Tax Clause act in conjunction as an essential

safeguard of the Constitution by linking taxation and

representation. They should not be ignored to maximize revenue.

---------------------------------♦---------------------------------

CONCLUSION

The ruling of the court below should be overruled.

Respectfully submitted,

RICHARD P. HUTCHISON

LANDMARK LEGAL FOUNDATION

3100 Broadway, Suite 1210

Kansas City, MO 64111

816-931-5559

MATTHEW C. FORYS

Counsel of Record

MICHAEL J. O’NEILL

LANDMARK LEGAL FOUNDATION

19415 Deerfield Ave.,

Suite 312

Leesburg, VA 20176

703-544-6100

matt@landmarklegal.org

Attorneys for Amicus Curiae