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

Supreme Court briefOct 19, 2023

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No. 22-800

In the

Supreme Court of the United States

CHARLES G. MOORE AND KATHLEEN F. MOORE,

Petitioners,

UNITED STATES OF AMERICA,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE AMERICAN TAX

POLICY INSTITUTE AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT

LAWRENCE M. HILL

STEPTOE & JOHNSON LLP

1114 Sixth Avenue

New York, NY 10036

STEPHEN B. LAND

Counsel of Record

ADLER & STACHENFELD LLP

555 Madison Avenue

New York, NY 10022

(212) 883-1700

sland@adstach.com

DAVID M. SCHIZER

COLUMBIA LAW SCHOOL

435 West 116th Street

New York, NY 10027

PHILIP WAGMAN

CLIFFORD CHANCE US LLP

31 West 52nd Street

New York, NY 10019

TABLE OF CONTENTS

Page

Interest of Amicus Curiae...........................................1

Summary of Argument ...............................................2

Argument.....................................................................4

I. The Outcome in This Case Does Not Depend

on Whether the Sixteenth Amendment

Requires Realization..............................................4

A. The MRT Is Imposed on Income That Has

Been Realized by KisanKraft. ..........................5

B. This Court Has Long Recognized That

Congress Has the Power to Tax an Owner

on Income Realized by an Entity. ....................7

C. Eisner v. Macomber Does Not Bar Congress

From Attributing Income Realized by

KisanKraft to Petitioners. ..............................11

D. Petitioners’ Argument that the MRT is a

Tax on Property is Wrong, and is Just a

Repackaged Version of Their Unsuccessful

Due Process Arguments Below. .....................14

II. A Ruling for Petitioners Would Needlessly

Disrupt Much of the Tax Law. ............................19

A. Many Longstanding Provisions Tax Income

That Is Not Realized by the Taxpayer in

the Year When Tax Is Imposed. ....................20

B. Invalidating the MRT Could Raise

Questions about the Constitutionality of

Other Provisions in the TCJA........................26

C. Invalidating the MRT Would Likely

Embroil the Courts in a Lengthy Cycle of

Constitutional Tax Litigation. .......................28

Conclusion .................................................................30

iii

TABLE OF AUTHORITIES

CASES

Page(s)

Barr v. American Ass’n of Political Consultants,

Inc., 140 S. Ct. 2335 (2020) ............................. 26, 27

Burk-Waggoner Oil Ass’n. v. Hopkins, 269 U.S.

110 (1925) ................................................................ 8

Burnet v. Leininger, 285 U.S. 136 (1932) .................. 7

Burnet v. Wells, 289 U.S. 670 (1933) ....................... 16

Cottage Savings Ass’n. v. Comm’r, 499 U.S. 554

(1991) ..................................................................... 12

Dougherty v. Comm’r, 60 T.C. 917 (1973) ............... 18

Eder v. United States, 138 F.2d 27 (2d Cir. 1943) .... 9

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

..............................................................11, 12, 13, 14

Flint v. Stone Tracy Co. 220 U.S. 107 (1911) .......... 27

Garlock v. Comm’r, 489 F.2d 197 (2d Cir. 1973)..... 10

Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) ....... 20

Goesele v. Bimeler, 55 U.S. 589 (1852) ...................... 7

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

Helvering v. Bruun, 309 U.S. 461 (1940) ................ 12

Helvering v. Clifford, 309 U.S. 331 (1940) .............. 22

Helvering v. Griffiths, 318 U.S. 371 (1942)

..............................................................10, 12, 13, 14

Helvering v. Horst, 311 U.S. 112 (1940) .................. 25

Helvering v. Nat’l Grocery Co., 303 U.S. 282 (1937) . 9

Hoeper v. Tax Comm’n of Wis., 284 U.S. 206

(1931) ..................................................................... 16

Ivan Allen Co. v. United States, 422 U.S. 617

(1975) ..................................................................... 12

Koshland v. Helvering, 298 U.S. 441 (1936) ........... 12

Marr v. United States, 268 U.S. 536 (1925) ............ 12

Reinecke v. Smith, 289 U.S. 172 (1933)................... 16

Seila Law LLC v. Consumer Financial Protection

Bureau, 140 S. Ct. 2183 (2020) ............................. 27

Taft v. Bowers, 278 U.S. 470 (1929) ........................ 22

United States v. Arthrex, 141 S. Ct. 1970 (2021) .... 26

United States v. Basye, 410 U.S. 441 (1973) ............. 7

United States v. Phellis, 257 U.S. 156 (1921) ... 16, 17

Whitlock’s Estate v. Comm’r, 494 F.2d 1297 (10th

Cir. 1974) ............................................................... 18

CONSTITUTIONAL PROVISIONS AND

STATUTES

U.S. Const. art. I ...................................................... 30

U.S. Const. amend. V ............................................... 14

U.S. Const. amend. XVI

................................ 1, 3, 5, 11, 13, 19, 20, 27, 28, 29

26 U.S.C. § 164 ......................................................... 27

26 U.S.C. § 245A .................................................. 6, 27

26 U.S.C. § 301 ......................................................... 16

26 U.S.C. § 305 ......................................................... 23

26 U.S.C. § 311 ......................................................... 25

26 U.S.C. § 316 ......................................................... 16

26 U.S.C. § 334 ......................................................... 22

26 U.S.C. § 336 ......................................................... 25

26 U.S.C. § 362 ......................................................... 22

26 U.S.C. § 448 ......................................................... 23

26 U.S.C. § 451 ......................................................... 23

26 U.S.C. § 467 ......................................................... 24

26 U.S.C. § 475 ......................................................... 24

26 U.S.C. §§ 553–557 (former) ................................... 9

26 U.S.C. § 671 ......................................................... 21

26 U.S.C. § 691 ......................................................... 22

26 U.S.C. § 723 ......................................................... 22

26 U.S.C. § 732 ......................................................... 22

26 U.S.C. § 817A ...................................................... 25

26 U.S.C. § 951 ................................................. 2, 6, 10

26 U.S.C. § 951A ........................................................ 6

26 U.S.C. § 956 ......................................................... 18

26 U.S.C. § 959 ........................................................... 3

26 U.S.C. § 1015 ....................................................... 22

26 U.S.C. § 1041 ....................................................... 22

26 U.S.C. § 1256 ....................................................... 24

26 U.S.C. § 1259 ....................................................... 25

26 U.S.C. § 1272 ....................................................... 23

26 U.S.C. § 1275 ....................................................... 24

26 U.S.C. § 1366 ....................................................... 21

26 U.S.C. § 7852 ....................................................... 26

American Jobs Creation Act of 2004, Pub. L. No.

108-357, 118 Stat. 1418 .......................................... 9

vii

Deficit Reduction Act of 1984, Pub. L. No. 98-369,

98 Stat. 494 ........................................................... 24

Economic Recovery Tax Act of 1981, Pub. L. No.

97-34, 95 Stat. 172 ................................................ 24

H.R. Con. Res. 71, 115th Cong. (2017) .................... 28

Revenue Act of 1916, Pub. L. No. 64-271, 39 Stat.

756 ......................................................................... 12

Revenue Act of 1937, Pub. L. No. 75-377, 50 Stat.

813 ........................................................................... 9

Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131

Stat. 2054 (2017). .............................................. 3, 27

REGULATIONS

26 C.F.R. § 1.451-1 ................................................... 23

26 C.F.R. § 1.1275-4 ................................................. 24

26 C.F.R. § 301.7701-3 ......................................... 8, 21

OTHER AUTHORITIES

Staff of the J. Comm. on Tax’n, Estimated Budget

Effects of the Conference Agreement for H.R. 1,

the “Tax Cuts And Jobs Act” (2017) ...................... 28

INTEREST OF AMICUS CURIAE 1

The American Tax Policy Institute, a section

501(c)(3) organization, supports nonpartisan research, analysis and discussion of U.S. federal, state

and local, and international tax policy issues. Its

Trustees are leading experts on taxation from the

fields of law, accounting, and economics.

The views expressed here are based on the extensive practical and technical experience of members of

many of the nation’s leading law and accounting

firms. They are mindful that the Court’s decision

could have a momentous impact on numerous areas

of the tax law, which they analyze and apply every

day for their clients. Depending on the Court’s holding, the outcome of the case could severely, and

unnecessarily, disrupt the orderly administration of

the tax laws for years to come, having ripple effects

throughout the economy for individuals, small businesses, and large corporations alike.

ATPI believes this disruption can be avoided

through a focused ruling that affirms the decision below, without addressing whether the Sixteenth

Amendment requires realization. That question is not

presented here. It is best left for another day.

____________________

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

part; and no such counsel, any party, or any other person or entity, other than amicus curiae and its counsel, made a monetary

contribution intended to fund the preparation or submission of

this brief.

SUMMARY OF ARGUMENT

Petitioners’ case is not about realization, notwithstanding their claim that it “squarely and cleanly”

raises that issue. Cert. Pet. 26. The income taxed by

the mandatory repatriation tax (MRT) was, in fact,

realized by an Indian limited liability company

(KisanKraft) while petitioners owned a stake in it. So

the question here is not whether there was realized

income, but who can be taxed on it.

The Court has long recognized the constitutional

power of Congress to tax the owners of an entity on

income realized by that entity. Just as Congress has

the power to tax a partner on the income earned by a

partnership, Congress has the authority to tax U.S.

shareholders on their share of income realized by a

foreign corporation.

Indeed, petitioners concede that Congress has this

power for some of KisanKraft’s income. Congress has

long treated a company like KisanKraft as a controlled foreign corporation (CFC), which generally

means that more than 50% of its shares are owned by

U.S. shareholders, each of whom owns a significant

block of its stock. Accordingly, before Congress enacted the MRT in 2017, Subpart F of the Internal

Revenue Code (IRC) already taxed KisanKraft’s U.S.

shareholders, including petitioners, on certain categories of (mostly passive) income when earned by

KisanKraft. 26 U.S.C. § 951(a). Petitioners do not

challenge the power of Congress to impose that tax.

Moore Br. 44–45, 51 (“The MRT’s invalidity . . . does

not cast doubt on the facial constitutionality of Subpart F’s other provisions.”).

By comparison, under pre-2017 law, the IRC did

not tax petitioners on KisanKraft’s income that fell

outside the categories covered by Subpart F, until

KisanKraft distributed that income. In general, Subpart F covered passive income, not income from active

business operations. U.S. shareholders thus had an

incentive to locate business operations outside the

United States in CFCs, and to delay as long as possible receiving dividends from those CFCs. Doing so

would allow the shareholders to defer—and thus reduce the economic impact of—taxation on active

business income. In response to these perverse incentives, which discouraged investment in the United

States, in 2017 Congress ended tax deferral on most

income earned by CFCs.

As part of the transition to new rules requiring

current taxation to U.S. shareholders of most income

earned by CFCs, Congress enacted the MRT. Tax

Cuts and Jobs Act (TCJA), Pub. L. No. 115-97

§ 14103(a), 131 Stat. 2054, 2195 (2017). To prevent

further deferral, the MRT taxed income that had previously been realized by CFCs abroad but had not yet

been distributed to U.S. shareholders. Once taxed by

the MRT, this income could then be distributed taxfree, thus eliminating the incentive to keep the income abroad. 26 U.S.C. § 959(a). Just as it would have

been permissible under the Sixteenth Amendment to

tax the U.S. owners on this income when the CFC

earned it, or when the income was distributed to

them, logically it was also permissible to tax the owners at an intermediate time, i.e., at the end of 2017.

Petitioners claim the MRT was a tax on property,

arguing that it was triggered solely by ownership of

shares on a specified date. But that is not correct:

ownership of the shares alone did not trigger the

MRT. Rather, the MRT was computed by reference to

the income, if any, the corporation had realized. If the

foreign corporation had not realized any income, no

tax would have been imposed, no matter how valuable

the corporation’s shares were.

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. By contrast,

finding that the MRT violates a constitutional shareholder-level realization requirement could be profoundly destabilizing: there will be a flood of litigation

about the constitutionality of a host of other provisions.

Petitioners have expressed concern about a possible future wealth tax. Cert. Pet. 22, 25. But the

constitutionality of a wealth tax is best judged on its

own merits, and not in a case that deals with a tax on

realized income, like the MRT.

ARGUMENT

I. The Outcome in This Case Does Not Depend

on Whether the Sixteenth Amendment Requires Realization.

Petitioners presented their question as “Whether

the Sixteenth Amendment authorizes Congress to tax

unrealized sums without apportionment among the

states.” They argued for a grant of certiorari because

“This case is an ideal vehicle for the Court to address

the question presented. This case presents only that

question, and it presents it squarely and cleanly.”

Cert. Pet. 26.

In fact, this case does not present that question at

all. KisanKraft undisputedly realized income from its

business, and these realizations occurred while petitioners owned shares in the company. The outcome

turns on whether attribution of that realized income

from KisanKraft to petitioners is constitutional. It is.

Thus, notwithstanding petitioners’ claim to the

contrary, this case actually does not present a “clean”

opportunity to address the question presented to the

Court. The Court accordingly might consider whether

to dismiss the petition as improvidently granted. If it

does not, the Court should affirm the Ninth Circuit in

a manner that addresses the actual issue in the

case—the permissibility of attributing the CFC’s realized income to petitioners—without an unnecessary

detour (arising from gratuitously broad language in

the Ninth Circuit opinion, Pet. App. 12) into whether

the Sixteenth Amendment allows taxation of unrealized gains.

A. The MRT Is Imposed on Income That Has

Been Realized by KisanKraft.

1. A foreign corporation is generally subject to

U.S. federal income tax only on income that either is

earned from sources in the United States, or is effectively connected with the conduct of a trade or

business in the United States. When a foreign corporation earns income outside the United States, the

United States can tax this income only by taxing the

corporation’s domestic shareholders. If tax is not imposed until the income is distributed to them, then

they can defer tax indefinitely by accumulating income inside the corporation.

To limit this deferral of U.S. tax, the tax law has

long contained rules that subject U.S. owners to current tax on income realized by the foreign corporation.

The Subpart F rules historically taxed shareholders

of CFCs on some categories of (mostly passive) income

as soon as it was realized by the CFC, 26 U.S.C.

§ 951(a), but deferred tax on the remaining income of

the CFC until it was distributed to the shareholders.

In 2017, Congress revamped these rules, in part

because the pre-existing rules allowed large amounts

of income to remain offshore and thereby escape U.S.

tax indefinitely. The pre-existing rules also created

incentives for taxpayers to shift business activities

from the United States to low-tax jurisdictions. The

revamped regime eliminated tax deferral on most income realized by CFCs after 2017. Instead, U.S.

shareholders are now taxed as soon as income is realized by the CFC, either at normal rates, 26 U.S.C.

§ 951(a), or at reduced rates, id. at § 951A(a). A limited category of income is not taxed at all (in the case

of corporate owners of a foreign corporation), id. at

§ 245A(a), or is taxed only when repatriated (in the

case of individual owners).

2. When Congress eliminated deferral of tax on

income realized by CFCs after 2017, it decided to also

eliminate deferral of U.S. shareholders’ tax on income

that CFCs had realized in periods before the end of

2017: this was the purpose of the MRT. Without the

MRT, the tax system would have needed to decide

whether each distribution a CFC made was out of

post-2017 earnings, or earnings from earlier periods.

Post-2017 earnings could mostly be distributed taxfree, because tax generally would have already been

imposed when the earnings were realized by the CFC.

But U.S. shareholders would have needed to pay tax

on earnings from earlier periods, when those earnings

were distributed. The MRT eliminated the need for

this complexity: it ensured that all earnings already

had been taxed by the time they were distributed. By

imposing this tax, the MRT also eliminated the tax

incentive to keep trillions of dollars of earnings offshore rather than investing them in the United

States.

B. This Court Has Long Recognized That

Congress Has the Power to Tax an Owner

on Income Realized by an Entity.

1. Congress has the power to pursue the goals of

preventing tax deferral and preventing disinvestment

in the United States, by taxing U.S. shareholders on

the realized earnings of a foreign company. Indeed, in

the century since the Sixteenth Amendment was

adopted, this Court has consistently acknowledged

the power of Congress to tax an owner on income that

an entity has realized. For example, in the case of income earned by a partnership, the Court has

concluded that the Constitution allows Congress to

tax either the partnership or its partners. Burnet v.

Leininger, 285 U.S. 136, 142 (1932). Moreover, Congress can tax this income even if there are legal

barriers to distributing the income to the partners.

See United States v. Basye, 410 U.S. 441, 453–54

(1973); Heiner v. Mellon, 304 U.S. 271, 280–81 (1938).

Even petitioners acknowledge that partners can

validly be taxed on their shares of the partnership’s

income. Moore Br. 41–42. But petitioners claim that

partners can be taxed on the income of a partnership

only because “partners personally ‘own[] the property’

of the partnership, Goesele v. Bimeler, 55 U.S. 589,

591 (1852), such that its income is by definition their

income.” Moore Br. 41 (alteration in original). For

that proposition, petitioners rely on a 170-year-old

non-tax case and quote from the arguments of the losing party, not from the opinion itself. They argue that

a corporation should be treated differently, because it

is a legal person distinct from its shareholders. Id.

But the vast majority of entities treated as partnerships for tax purposes are legal persons distinct

from their owners under local law. These typically are

limited partnerships, limited liability companies, limited liability limited partnerships, or private limited

companies. They take these legal forms to provide a

limited liability shield for some or all of their owners,

and their owners often play no role in their management. The Court has found that the treatment of an

entity under local law has no bearing on the power of

Congress to determine how income of the entity is

taxed: to the entity, or to its owners. See Burk-Waggoner Oil Ass’n v. Hopkins, 269 U.S. 110, 114 (1925);

Heiner, 304 U.S. at 278–79.

In implementing this principle, Treasury Regulations allow most business entities to elect their

treatment for tax purposes. 26 C.F.R. § 301.7701-3. A

domestic limited liability company with more than

one owner is treated as a partnership for tax purposes

unless it elects to be taxed as a corporation; and absent the election, the income earned by the entity is

attributed to its owners. A foreign limited liability

company such as KisanKraft is treated as a corporation for tax purposes, unless it elects to be treated as

a partnership, in which case all its income is attributed to its owners.

In other words, petitioners’ claim that partnerships and corporations are inherently different as a

legal matter—and that this difference explains why

they are taxed differently—is simply not persuasive.

It is therefore impossible to see how this purported

difference somehow gives Congress the constitutional

authority to tax owners of partnerships but not owners of corporations, as petitioners allege.

2. To the contrary, just as Congress can tax the

owners of partnerships, it also has the authority to

tax U.S. owners on income realized by a foreign corporation. Because the corporation itself is typically

outside U.S. taxing jurisdiction, as described in Part

I.A above, a tax on the U.S. owners is necessary to

reach earnings that otherwise could escape tax by remaining offshore.

Thus, under the former foreign personal holding

company rules, first enacted by the Revenue Act of

1937, Pub. L. No. 75-377 § 201, 50 Stat. 813, 818–24,

U.S. shareholders were taxed on certain kinds of income earned by a foreign corporation, 26 U.S.C.

§§ 553–557, before repeal by the American Jobs Creation Act of 2004, Pub. L. No. 108-357 § 413(a)(1), 118

Stat. 1418, 1506. The constitutionality of these rules

was upheld even when the income could not be legally

distributed to shareholders. Eder v. Comm’r, 138 F.2d

27, 28–29 (2d Cir. 1943).

Although the Court was not itself called on to determine the constitutionality of the foreign personal

holding company rules, it referenced this regime more

than once as an example of a constitutional use of the

taxing power. In Helvering v. Nat’l Grocery Co., 304

U.S. 282 (1937), the Court described constitutionally

permissible methods of taxing an owner of a closely

held business. After referring to the tax rules for partnerships, the Court added that the owner “could not

by conducting [his business] as a corporation, prevent

Congress, if it chose to do so, from laying on him individually the tax on the year’s profits,” id. at 288, and

then specifically noted the taxation of shareholders of

a foreign personal holding company on the company’s

undistributed net income. Id. at 288 n.4. A few years

later, in Helvering v. Griffiths, 318 U.S. 371, 390

(1942), the Court characterized the foreign personal

holding company rules as crafted “to conform with the

authority of Eisner v. Macomber.” The Court elaborated that the rules responded to “the abuses incident

to the employment of this device” (i.e., a foreign corporation in which income could be accumulated taxfree), and that in enacting the rules Congress had

looked to the United States’ jurisdiction to tax its citizens on income to them, together with the power to

protect its tax revenues. Id. at 392 n.37.

In addition, for over sixty years, Subpart F has

taxed U.S. shareholders of a CFC on certain kinds of

the CFC’s realized income, as noted above. 26 U.S.C.

§ 951(a). Garlock v. Comm’r, 489 F.2d 197, 202–03 (2d

Cir. 1973) upheld the constitutionality of this regime,

citing Eder. Petitioners accept the constitutionality of

Subpart F. Moore Br. 44–45. They do not challenge

the power of Congress to tax them on this portion of

KisanKraft’s income, even though it was not distributed to them.

These anti-avoidance measures are needed (and,

indeed, have been upheld), regardless of whether any

particular U.S. shareholder controls the foreign corporation, or can force a distribution of its income.

Thus, petitioners’ status as minority shareholders is

no bar to taxation under these rules.

C. Eisner v. Macomber Does Not Bar Congress From Attributing Income Realized

by KisanKraft to Petitioners.

The precedents cited so far confirm Congress’s

power to tax owners on income realized by an entity,

and Eisner v. Macomber, 252 U.S. 189 (1920), does not

stand in the way. Petitioners imply that holding

against them must involve overruling Macomber, urging that “there is no conceivable justification to depart

from stare decisis at this late date,” Moore Br. 14, but

in fact that case does not bar Congress from imposing

the MRT on petitioners.

There is a critical difference between this case and

Macomber: instead of a foreign corporation, Macomber involved a U.S. corporation. So unlike this

case, the corporation in Macomber was subject to U.S.

corporate income tax on its earnings. In deciding

whether Congress could constitutionally impose a

shareholder-level tax, Macomber was not considering

whether at least one tax on the earnings was permissible—as is the case here—but whether a second tax

was constitutionally warranted. Specifically, Macomber addressed whether an event had occurred at the

shareholder level that was sufficient under the Sixteenth Amendment to justify this second tax.

The event triggering this tax was a pro rata distribution of common stock. Since the Court found the

stock dividend to be a non-event that did not meaningfully change the shareholders’ economic or legal

position, the stock dividend did not constitute income

and therefore could not be taxed.

While dicta in Macomber questioned whether Congress had the ability to tax a shareholder on a

corporation’s accumulated earnings, the holding was

much narrower, since the tax before the Court was not

imposed on these earnings, but on a stock dividend.

Revenue Act of 1916 § 2(a), Pub. L. No. 64-271, 39

Stat. 756, 757 (a “stock dividend shall be considered

income, to the amount of its cash value”).

In subsequent cases, the Court has consistently

adopted this narrow interpretation of Macomber, construing it as about stock dividends, not whether a

stockholder’s share of the corporation’s earnings can

be taxed. Cottage Sav. Ass’n. v. Comm’r, 499 U.S. 554,

563 (1991); Ivan Allen Co. v. United States, 422 U.S.

617, 633 (1975); Griffiths, 318 U.S. at 373; Helvering

v. Bruun, 309 U.S. 461, 468–69 (1940); Koshland v.

Helvering, 298 U.S. 441, 444 (1936); Marr v. United

States, 268 U.S. 536, 540–41 (1925).

Petitioners’ case does not involve a stock dividend,

and these decisions have declined to extend Macomber’s approach to other contexts. In Bruun, for

example, a landlord was taxed on the value of a building a tenant had constructed on the landlord’s

property. Since the building had not been sold, the

landlord invoked Macomber to argue that this tax was

unconstitutional, but to no avail. The Court dismissed

the taxpayer’s reliance on “expressions found in the

decisions of this court dealing with the taxability of

stock dividends . . . [about] the necessity that the gain

be separate from the capital and separately disposable.” In upholding the tax on the landlord, the Court

determined that these expressions were “not controlling” in transactions apart from stock dividends. 309

U.S. at 468–69. Rather, the “realization of gain” could

take many forms, and need not involve receipt by the

taxpayer of a new, separately transferable asset. Id.

Indeed, although petitioners refer to Macomber as

a “landmark,” Moore Br. 1, the Court has construed

Macomber narrowly. When the government asked the

Court to overrule Macomber in Griffiths, the Court

concluded that the issue was not presented, finding

that the statute under review was consistent

with Macomber. 318 U.S. at 393. The Court noted,

however, that subsequent cases had rejected the dicta

in Macomber requiring a “severance” or “receipt of

money or property” to pass muster under the Sixteenth Amendment—that is, the very ideas for which

petitioners are citing Macomber:

Helvering v. Bruun, 309 U.S. 461 . . . rejected the concept that taxable gain could

arise only when the taxpayer was able to

sever increment from his original capital. It

preceded by ten days the decision in Helvering v. Horst, 311 U.S. 112, which held that

there was no exemption from taxation

where economic gain is enjoyed “by some

event other than the taxpayer’s personal receipt of money or property.” Id. at 116. Each

of these decisions undermined further the

original theoretical bases of the decision

in Eisner v. Macomber.

Id. at 393–94.

Especially given the narrow reach of Macomber, it

should not prevent Congress from imposing the MRT

on KisanKraft. Not only is there no stock dividend at

issue here, but KisanKraft is a foreign corporation.

Congress has a particular need to tax U.S. shareholders on the earnings of a foreign corporation; otherwise, these earnings might never be taxed. As noted

earlier, this Court has been mindful of that consideration. Griffiths, 318 U.S. at 390–92 n.37.

In this respect, foreign corporations are like partnerships: if Congress cannot tax the owner, no tax will

be collected. In contrast, the domestic corporation in

Macomber already was subject to tax. As a result, Macomber’s dicta on whether Congress can tax

shareholders on their share of a corporation’s earnings does not apply here.

D. Petitioners’ Argument that the MRT is a

Tax on Property is Wrong, and is Just a

Repackaged Version of Their Unsuccessful Due Process Arguments Below.

In the lower courts, petitioners unsuccessfully argued that the MRT was an impermissible retroactive

tax that violated the Due Process Clause of the Fifth

Amendment. Petitioners did not seek certiorari on

that argument. Yet they have now revived it, in

slightly altered form, in their merits brief. Their reasoning on this point is flawed, just as it was in the

courts below.

1. In the District Court and the Ninth Circuit, petitioners claimed Congress could not constitutionally

enact the MRT to tax a shareholder in 2017 on income

earned by a foreign corporation as early as 1986. Pet.

App. 17–19, 28–34. Now, petitioners have reframed

that contention, saying that the constitutional problem with the MRT is that it taxes a person who owned

shares of a foreign corporation in 2017, “even if he or

she purchased the shares . . . long after the corporation earned the sums being taxed.” Moore Br. 45. This

feature of the MRT, petitioners contend, transforms it

from a tax on realized income into a tax on property:

a tax on their ownership of KisanKraft stock in 2017.

Id.

This is an odd argument for petitioners to make,

not only because it is not the issue on which they requested certiorari or upon which certiorari was

granted, but also because petitioners owned shares in

KisanKraft since it was founded. They are the wrong

parties to raise this issue. And in any event, their retooled argument collapses on examination.

2. To classify the MRT as a tax on property instead of income, petitioners mischaracterize this

provision, alleging that “[t]he sole event that triggers

MRT liability is ownership of specified property [a foreign corporation’s shares] on a specific date in 2017.”

Moore Br. 44.

Yet share ownership is not the “sole event”: the foreign corporation also must have realized income. If

KisanKraft had no earnings, the tax would be $0, regardless of the value of the shares owned by

petitioners in 2017. The tax is imposed on income the

corporation has realized.

3. As a result, petitioners’ real complaint is not

that the MRT is a tax on property, but that it taxes

the corporation’s income to the wrong owner, at least

in some cases: “the MRT tags a shareholder with taxable ‘income’ even if he or she purchased the shares

in 2017, long after the corporation earned the sums

being taxed; conversely, a taxpayer who owned shares

in the same corporation for years as it retained earnings but sold before the trigger date in 2017 has no

liability under the MRT.” Moore Br. 45. That is, the

shareholder being taxed may not have owned the

shares until after the income was realized.

The constitutionality of a tax law that attributes

realized income to one taxpayer, rather than another,

is tested under the Due Process Clause. Burnet v.

Wells, 289 U.S. 670, 677–78 (1933); Reinecke v. Smith,

289 U.S. 172, 177–78 (1933); Hoeper v. Tax Comm’n

of Wis., 284 U.S. 206, 218 (1931). Under these cases,

if Congress makes a choice that is rational and not

arbitrary regarding which person to tax, the provision

passes constitutional muster.

In the case of the MRT, it was rational for Congress to attribute a foreign corporation’s income to the

U.S. persons owning shares in 2017. Logically, inclusion of this income by the U.S. shareholder in 2017

was needed to transition from the old international

tax regime to the new one which eliminated deferral,

and to encourage repatriation of pre-2018 earnings

from abroad, as described in Part I.A above.

This result under the MRT is consistent with

longstanding rules on the taxation of cash dividends.

Since 1921, when the Court upheld those rules as constitutional in United States v. Phellis, 257 U.S. 156,

171–72 (1921), shareholders routinely have been

taxed under those rules on income the corporation

earned long before they acquired their shares. A

shareholder who buys shares shortly before payment

of a dividend is taxed on the full amount of that dividend, even if the shares have not appreciated in value

and the dividend economically represents a return of

part of the shareholder’s capital investment.

The tax law contains rules that determine when a

corporate distribution is a taxable dividend, 26 U.S.C.

§§ 301(c), 316(a). Those rules measure a taxable dividend by reference to the corporation’s earnings that

have been realized since 1913, regardless of the shareholder’s holding period for the stock. Thus, the

dividend tax is a tax on the corporation’s current and

past income, imposed on the particular shareholders

that own shares when the dividend is paid. That does

not make the dividend tax a tax on property, or otherwise create constitutional infirmities. Phellis, 257

U.S. at 171. Likewise, it is permissible to treat a U.S.

shareholder acquiring shares of a foreign corporation

in 2017 as “stepp[ing] into the shoes,” id. at 172, of the

prior shareholders and paying the MRT on the income

associated with those shares.

Otherwise, there would be a time limit on Congress’s power to tax shareholders on the earnings of a

foreign corporation. To tax the “right” shareholder,

Congress would have to impose this tax immediately.

But if Congress were to wait—and, as petitioners

urge, Congress could not constitutionally treat current shareholders as stepping into the shoes of their

predecessors—then, under petitioners’ theory, Congress would miss the chance to tax this income until

it was distributed.

There is no such “use it or lose it” principle in the

Constitution. If Congress does not tax income in the

year it is realized by the foreign corporation, it can do

so—not just when the income is distributed—but also

at any other time after it was earned, as long as Congress acts rationally in doing so.

Indeed, Subpart F has a longstanding practice of

taxing U.S. shareholders on income realized by a foreign corporation in previous years. Even though, prior

to the TCJA, U.S. shareholders generally were not

taxed on active income of CFCs until it was distributed, Subpart F carved out an exception from that

approach: active income was taxed to U.S. shareholders not only when a CFC distributed the income, but

also before that time if the CFC invested it in U.S.

property. For decades, Subpart F imposed this tax regardless of when the earnings funding the investment

in U.S. property were realized, and regardless of

whether the shareholders at the time of the investment in U.S. property had owned their shares at the

time the CFC realized the earnings in question or

whether those shareholders received any cash or

property as a result of the investment in U.S. property. 26 U.S.C. § 956; see Whitlock’s Estate v. Comm’r,

494 F.2d 1297, 1301 (10th Cir. 1974); Dougherty v.

Comm’r, 60 T.C. 917, 927–30 (1973) (both upholding

the constitutionality of § 956).

Similarly, it was rational to impose the MRT on

the income that KisanKraft had realized between

2006 and 2017. As noted, this timing facilitated an effective transition to the revised regime for taxing

income earned through foreign corporations. The fact

that the MRT covered the years since petitioners invested in KisanKraft is a measure of how much tax

deferral petitioners had already enjoyed on

KisanKraft’s realized income. To say that this past deferral gives them a vested right to indefinite future

deferral defies common sense. The Constitution does

not require it.

4. Although the imposition of the MRT thus

would be constitutionally permitted even if the taxpayer had not owned shares when the underlying

income was earned, petitioners in fact did own shares

in KisanKraft at all times since its formation. Pet.

App. 40. Accordingly, even if the MRT were limited to

shareholders who owned their shares throughout the

period when the income was earned, petitioners

would still owe tax.

Moreover, although the argument that petitioners

make in their brief implicates the Due Process questions described above, those questions are not

properly before this Court. Petitioners sought (and

were granted) certiorari only on the question whether

the Sixteenth Amendment contains a realization requirement, Cert. Pet. i; Moore Br. i, not on the Due

Process issues they raised below; and they have not

addressed the relevant authority on Due Process issues in their briefs to this Court.

II. A Ruling for Petitioners Would Needlessly

Disrupt Much of the Tax Law.

As we have emphasized, we disagree with the way

petitioners frame this case. It is not about whether income has been realized (since KisanKraft clearly

realized income), but about who can be taxed on it.

In addition, we disagree with the way petitioners

characterize the realization rule. They present it as

an all-or-nothing proposition: either “realization is

what makes income income,” Moore Br. 36; or “realization is not a constitutional requirement,” as

petitioners quote the Ninth Circuit, id. at 13 (quoting

Pet. App. 12). But the logical possibilities are broader

than that. Realization could be construed to require

different things in different circumstances, or to be required in some cases but not others.

Petitioners dance around this issue by saying that

only “constructive” realization is required in some

cases. Id. at 47–53. They invite the Court, in effect, to

consider what counts as a realization on a case by case

basis.

But this is the wrong question. The word “realization” never appears in the Sixteenth Amendment or

elsewhere in the Constitution. Rather, the relevant

word is “incomes.” As this Court has emphasized, constitutional analysis should focus on “the language of

the instrument.” Gibbons v. Ogden, 22 U.S. (9 Wheat.)

1, 186–89 (1824). Here, the key question is the meaning, not of “realization,” but of “incomes.”

The tax law defines income in various ways, depending on the context. In many cases, income is

measured upon unambiguous realization events (such

as a sale of property or receipt of a salary payment),

because the amount of income is easy to determine

and cash is available to pay the tax. Nevertheless,

many provisions measure income differently, not requiring realization as a precondition for tax, other

than a realization event that is created only through

legal fictions. We canvass some of these rules below.

Notably, these provisions are far more widespread

in the tax law than petitioners have indicated. As a

result, a decision invalidating the MRT could have a

very broad reach. Such a holding would create doubts

about the constitutional status of many provisions,

generating a wave of tax refund claims and litigation

in the coming years.

A. Many Longstanding Provisions Tax Income That Is Not Realized by the Taxpayer in the Year When Tax Is Imposed.

While property sales and paychecks are straightforward, in other contexts defining and applying the

concept of “realization” is much harder.

1. Many longstanding tax rules require a person

to pay tax on income realized through an entity, rather than directly. As Part I.B noted, this is the rule

for partnerships, as well as for foreign corporations in

some circumstances.

The same is true of “S corporations,” where the

owners, rather than the entity, pay tax on the entity’s

income, 26 U.S.C. § 1366(a). Petitioners claim that

S corporation shareholders can be taxed because they

elect this treatment. Moore Br. 51. But this is true

only of a person who owned shares when this one-time

election was made. A subsequent purchaser of shares

never makes this election (unless the purchase of

shares itself is considered to be an election of sorts).

More fundamentally, the constitutional issue here is

not a right of the shareholders to make elections, but

the power of Congress to tax shareholders. It is difficult to see how shareholders can choose to give

Congress a power that it does not otherwise have under the Constitution, especially in a way that binds

future shareholders who did not make the relevant

election.

Like S corporations, many other entities are not

taxed, but instead “pass through” this liability to their

owners. For example, when certain types of entities

(such as domestic limited liability companies) have a

single owner, they are disregarded for tax purposes,

and the owner is taxed on the entity’s income. 26

C.F.R. § 301.7701-3(b)(1)(ii).

Likewise, for many trusts, the grantor is taxed on

the trust’s income, 26 U.S.C. § 671, even in cases

where the grantor is no longer the beneficial owner,

and has no power to control beneficial ownership.

These rules implement the Court’s decision in Helvering v. Clifford, 309 U.S. 331 (1940).

2. Just as some rules attribute income from an entity to an owner, others attribute income from one

owner to another; that is, to successors in interest,

who come on the scene after the income was earned.

This is the issue raised by petitioners: the MRT can

be imposed on a person who, unlike them, bought

their shares after the income was realized by the foreign corporation.

Striking down the MRT on this basis would cast

doubt on these other provisions as well. For example,

the recipient of a dividend is taxed even if the dividend is paid out of income earned before the recipient

purchased the stock, as discussed in Part I.D above.

Likewise, when property is transferred tax-free

from one taxpayer to another, the transferee typically

becomes responsible for gain accrued while the transferor owned the property. This happens because the

transferee takes over the transferor’s basis in the

transferred property. This rule governs transfers to

(or from) corporations or partnerships. See 26 U.S.C.

§§ 334(b), 362, 723, 732(a).

A similar rule applies when individuals give gifts

of appreciated property to friends and family, 26

U.S.C. § 1015(a); Taft v. Bowers, 278 U.S. 470, 482

(1929), as well as to transfers between spouses incident to divorce. 26 U.S.C. § 1041(b)(2). In the same

vein, when a person dies having earned income that

had not yet been received, the heir who receives the

income must treat it as taxable income in respect of a

decedent. 26 U.S.C. § 691(a).

In all these cases, the tax is imposed on the transferee who receives proceeds in some subsequent

transaction, so in a sense a realization is still required. But in each case what is realized by the

transferee is the transferor’s accumulated income or

gain—something petitioners claim is not permissible.

3. In any event, the main thrust of the realization

rule is to determine—not who is taxed—but when

they are taxed. When the realization rule applies, it

postpones tax until a sale or other realization event.

But many provisions of the tax law diverge from a

strict realization rule by imposing tax before that

time.

For example, most businesses are required to use

accrual accounting. 26 U.S.C. § 448(a). This means

they report income as soon as they become entitled to

it, even if they have not yet been paid. Id. at § 451(a);

26 C.F.R. § 1.451-1(a).

A similar rule applies to so-called “original issue

discount” bonds, in which investors receive a larger

payment at maturity than the amount they have

loaned to the borrower. Since this discount compensates investors—in effect, as a replacement for

periodic interest they otherwise would have received—the tax system requires this discount to

accrue over time. These accruals can occur many

years before the discount actually is paid. 26 U.S.C.

§ 1272(a). Similar rules apply to preferred stock that

is issued at a discount. 26 U.S.C. § 305(c)(3).

In cases where the amount of principal or interest

payable on a debt instrument is not fixed, Treasury

Regulations require accrual of interest income at an

assumed yield that reflects the borrower’s cost of borrowing. Eventually, adjustments are made—often

years later—to reflect difference between the assumed and actual payments. 26 U.S.C. § 1275(d); 26

C.F.R. § 1.1275-4(b).

Similarly, rental income on a long-term lease is

generally taxed as it accrues, even if the relevant cash

rent payments have not yet been paid. 26 U.S.C.

§ 467(b)(1). Moreover, regardless of the accrual and

payment schedules, the parties can be required to report the rental income on a level basis each year

during the lease, when there are indications of tax

avoidance. 26 U.S.C. § 467(b)(2).

Some financial contracts are taxed on a “mark to

market” basis, which means they are treated as sold

and then repurchased at the end of each taxable year,

even though they have not actually been sold. The

point of this rule is to tax unrealized gain (and allow

a deduction for unrealized loss) every year. 26 U.S.C.

§ 1256(a). As originally enacted, this rule applied only

to regulated futures contracts. Economic Recovery

Tax Act of 1981, Pub. L. No. 97-34 § 503(a), 95 Stat.

172, 327–28. As noted by petitioners, Moore Br. 52,

those contracts are subject to this rule only if the parties are required to make margin payments, which

cause them to receive (or pay) daily amounts of their

profits (or losses). 26 U.S.C. § 1256(g)(1)(A). However,

this rule was subsequently broadened to include other

types of financial contracts, Deficit Reduction Act of

1984 § 102, Pub. L. No. 98-369, 98 Stat. 494, 620,

which do not necessarily require daily margin payments, 26 U.S.C. § 1256(g)(2)-(9).

Similarly, securities dealers, and electing securities traders and commodities dealers and traders, are

taxed on a mark to market basis on their trading portfolios. 26 U.S.C. § 475. Life insurance companies also

are required to use mark to market accounting for

segregated asset accounts that underlie guaranteed

contracts. 26 U.S.C. § 817A(b).

Petitioners note the existence of these rules, but

claim that they “are not necessarily ‘taxes on incomes’

at all,” Moore Br. 53, and suggest that these rules

might be defended as excise taxes, rather than as income taxes under the Sixteenth Amendment. Yet

these provisions are part of a unitary regime, which

imposes a single income tax on a base that includes

these mark to market amounts as well as unrelated

items of income and expense. Having to justify some

of these items as an excise tax illustrates the contortions a broad realization requirement could entail.

4. Instead of a mark to market rule, some provisions tax unrealized income by deeming a realization

event to have occurred, even when the taxpayer never

receives any cash or property. For example, an assignor of income can be taxed on it, even though the

cash or property goes to the assignee. Helvering v.

Horst, 311 U.S. 112 (1940).

In addition, unrealized gain on an appreciated financial position is taxed as a “constructive sale” if the

holder takes steps to avoid exposure to subsequent

market fluctuations (for instance, by hedging with derivative securities). 26 U.S.C. § 1259(a). Taxpayers

can trigger this rule even if they remain the legal

owner of the appreciated property and do not receive

any cash proceeds.

Likewise, a corporation pays tax on the gain in appreciated property it distributes to shareholders, even

though the corporation itself receives nothing in the

transaction. 26 U.S.C. §§ 311(b), 336(a).

B. Invalidating the MRT Could Raise Questions about the Constitutionality of Other

Provisions in the TCJA.

1. Striking down the MRT would create uncertainty not just about the many tax provisions that

arguably diverge from the realization rule, but also

about other measures in the TCJA, including several

that reform the taxation of U.S. owners of foreign corporations.

When one element of a statute is deemed unconstitutional, the Court generally leaves the others

intact. United States v. Arthrex, 141 S. Ct. 1970, 1986

(2021). This is especially true when the statute contains a severability clause, such as the one in the IRC:

If any provision of this title, or the application thereof to any person or circumstances,

is held invalid, the remainder of the title,

and the application of such provision to

other persons or circumstances, shall not be

affected thereby.

26 U.S.C. § 7852(a); see Barr v. American Ass’n of Political Consultants, Inc., 140 S. Ct. 2335, 2349 (2020).

This broad clause not only severs one provision from

another; it also allows a single provision to apply in

some circumstances, even if it is unconstitutional in

others.

Thus, if the MRT were deemed unconstitutional,

two questions would arise about the scope of this holding. First, would it apply only to individual taxpayers?

Regardless of whether the MRT is constitutional for

individual taxpayers, the MRT should survive for corporations, since the corporate income tax has been

upheld as an excise tax, and thus does not require the

Sixteenth Amendment to authorize it. Flint v. Stone

Tracy Co., 220 U.S. 107 (1911).

Second, was the MRT unconstitutional only for individuals who acquired their shares after the income

subject to the MRT was earned? This result, which arguably follows from petitioners’ theory, would not

grant relief to taxpayers who (like petitioners) owned

a stake throughout the relevant period.

2. Also, the MRT was one of numerous international tax provisions in the TCJA that were designed

to work together. If the MRT were severed, would the

TCJA’s other international tax provisions be “capable

of functioning independently,” Am. Ass’n of Pol. Consultants, 140 S. Ct. at 2352 (quoting Seila Law LLC

v. Consumer Financial Protection Bureau, 140 S. Ct.

2183, 2209 (2020))? This is a hard question. For example, under the TCJA, a U.S. corporate shareholder

generally is not taxed on distributions from a foreign

corporation. 26 U.S.C. § 245A. If the MRT could not

constitutionally be applied to a U.S. corporate shareholder, distributions of pre-2018 income to that

shareholder would never be taxed. Obviously, this

tax-free result is very different from the one Congress

enacted, so this provision arguably cannot function

independently without the MRT.

3. Other provisions of the TCJA, such as the limitations on state and local tax deductions, 26 U.S.C.

§ 164(b)(6), added by TCJA § 11042(a), 131 Stat. at

2085–86, are capable of functioning independently.

Nevertheless, taxpayers might challenge these provisions, arguing that the TCJA could not have been

enacted without the MRT. The Concurrent Resolution

authorizing the TCJA capped the deficit it could generate at $1.5 trillion. H.R. Con. Res. 71, 115th Cong.

§§ 2001(a), 2002(a) (2017). The MRT was projected to

raise $338.8 billion in revenue. Staff of the J. Comm.

on Tax’n, Estimated Budget Effects of the Conference

Agreement for H.R. 1, the “Tax Cuts And Jobs Act” 6

(2017). Without the MRT, the TCJA could not have

been passed unless Congress found a way to replace

that revenue. It is unclear whether this could have

been done without losing critical political support.

C. Invalidating the MRT Would Likely Embroil the Courts in a Lengthy Cycle of

Constitutional Tax Litigation.

1. Uncertainty from invalidating the MRT would

not be limited to the TCJA. As noted above, many tax

provisions arguably impose tax without a realization

event. Some of them might ultimately withstand constitutional attack, for instance, if courts treat some

events as adequate substitutes for realization or otherwise deem a realization to have occurred.

Nevertheless, uncertainty would be rampant and the

ensuing litigation could prove protracted and costly.

In an effort to allay these concerns, Petitioners invent the concept of “constructive realization” and

argue that it rescues a number of provisions of the tax

law. Moore Br. 47–53. Petitioners seem to imply that

it is an established principle, but “constructive realization” actually is a new, amorphous phrase of

petitioners’ devising.

Their awkward use of a novel term to try to prevent the realization principle from disrupting the tax

law is telling. It serves as a reminder that at some

point the notion of realization becomes a distraction,

rather than a solution. Again, the Sixteenth Amendment does not use the word “realization,” nor do the

other constitutional provisions dealing with taxation.

Rather, the Sixteenth Amendment refers to “incomes.” Articulating the boundaries of realization is

thus, of necessity, an exercise dependent on the

courts, not on constitutional text.

The uncertainty created by having to rely on

courts to explicate the meaning of realization would

likely give rise to a wave of constitutional tax claims.

Many of those would likely lack merit. Aggressive taxpayers would file returns based on plausible claims of

non-constitutionality. The IRS would need to identify

and challenge each claim as appropriate, and the

courts would need to decide a great many of these

cases.

2. This process inevitably would shift influence on

tax policy from Congress to the courts. While courts

obviously need to ensure that Congress operates

within permissible constitutional bounds, tax policy

otherwise should be left to Congress because of its

greater expertise and electoral accountability. This is

important because the formulation of sound tax rules

involves balancing fairness, behavioral effects, administrability, and susceptibility to tax avoidance.

Congress will have greater discretion to make these

judgments if, as we urge, the Court upholds the MRT

as a tax on a stockholder’s share of a foreign corporation’s realized income.

3. Petitioners and some amici have voiced the

concern that a decision for the government would support the constitutionality of a wealth tax. Pet. 2–3, 9,

25; Landmark Legal Found. Amicus Br. 13.

Yet this is simply not so. This case interprets the

Sixteenth Amendment. By its terms, the Amendment

authorizes taxes only on income, not on wealth.

Wealth describes what taxpayers own, while income

describes what they earn. Accordingly, the constitutionality of a possible future wealth tax would turn,

not on the Sixteenth Amendment, but on Article I.

The issue would be whether the wealth tax is a direct

tax subject to apportionment. That question is not

presented here.

Rather, the issue here is quite narrow: Does Congress have the power to tax U.S. shareholders on the

realized income of a foreign corporation? The answer

is clearly yes.

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted,