Moore v. United States was supposed to be the “wealth tax” case because the question the Supreme Court was supposed to answer was whether income must be “realized” before it can be taxed. That is not, however, the question the Court answered. Or, at least, not clearly. The Court dodged the question even as it hinted at an answer.
The tax at issue in Moore was the Mandatory Repatriation Tax (MRT), part of the Tax Cuts and Jobs Act of 2017, which is a “one-time pass-through tax” on American shareholders of foreign corporations. Americans were taxed on their share of the corporation’s income, regardless of whether they received (“realized” in tax speak) any income themselves. The Moores, for example, found themselves on the hook for their share of the income earned by an Indian company even though they never realized a penny from their investment.
They paid the bill, but then sued arguing that the tax was not a tax on their income, but a direct tax on their shares of stock, which violates the Constitution’s requirement that direct taxes be “apportioned among the several States.”
It is undisputed that the Moores never received income, so the question whether the government could tax their unrealized gains — a common device in what are often called “wealth taxes” — seemed to be teed up. But Justice Brett Kavanaugh, who wrote the majority opinion, avoided it.
There was income here, he said. The Indian company realized income, so this is an income tax, not a direct tax subject to apportionment. The only question, then, is whether Congress has the power to “attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.”
Kavanaugh frames the case this way for two reasons. First, he seems unwilling to give a green light to wealth-tax proposals, which would tax either unrealized gains or the value of property. Although he twice expressly denies that the case is about those taxes, he peppers the opinion with legal rules that would undermine them. He reminds his readers that “income requires realization” and that taxes on net worth “might be considered a tax on property, not income.”
But — and this is the second reason why Kavanaugh frames the case this way — he worries that handing the Moores a victory would “deprive the US Government and the American people of trillions in lost tax revenue” and “require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it.”
This is what Justice Clarence Thomas, in dissent, rightly calls the “consequentialist heart” of Kavanaugh’s opinion.
In Kavanaugh’s view, there is no way to separate the MRT from other pass-through tax arrangements. Thus, to strike down that tax would be to strike down pass-through arrangements on partnerships, S Corporations, and similar entities. So, he must justify Congress’s power of attribution.
To do so, Kavanaugh points to four cases that, in his view, establish a “longstanding” attribution rule. One case held that Congress may tax a de facto corporation on its own income even if, under state law, it is called a “partnership.” Another held that the Due Process Clause does not prevent the government from taxing the “distributive share” of each partner in a partnership when one partner tries to hide his income by assigning to another. A third case held, as a matter of statutory interpretation, that there was a “distributive share” of partnership income even though distribution was impossible under state law. And the fourth held that when a sole shareholder of a company uses the company as his personal tax-free bank account to avoid taxes, the government may pierce the corporate form and tax him.
If these cases seem like thin reeds on which to build a heretofore unknown “attribution rule,” that’s because they are. Thomas in his dissent and Justice Amy Coney Barrett in her concurrence conclude that these cases only really stand for the proposition that Congress can attribute income to people trying to avoid tax liability through various corporate forms. The cases are so far afield from Kavanaugh’s attribution rule that it is hard to take seriously his use of them. In truth, though, it doesn’t seem like Kavanaugh expects the reader to do so. Kavanaugh appears much more concerned about the parade of horribles that the Moore’s case presents to him.
But Thomas disagrees with Kavanaugh’s claim that the MRT can’t be distinguished from other pass-through entities. Barrett holds out that possibility, too, but concludes that she needs more information before she can reach that conclusion for sure (thus, she concurs rather than dissents, despite her opposition to almost everything Kavanaugh says).
Partnerships, for example, “have no separate existence from their partners.” Likewise, the pass-through taxation of S corporations “is merely an extension of the pass-through taxation of partnerships.” And finally, Subpart F corporations include “some minimal requires to ensure that taxable ‘income’ belongs to the shareholder in some way.” By contrast, the MRT “abandons that effort entirely.”
Yet the majority did not see it that way and, afraid that the federal government will find itself suddenly trillions of dollars short of tax revenue, scrambled to avoid that risk without greenlighting taxes on unrealized gains and on net worth.
The question remaining is: will it work? Will the majority’s liberally sprinkled anti-wealth-tax dicta deter Elizabeth Warren or Bernie Sanders from enacting such a tax if they are able? Thomas doesn’t think so: “if the Court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.”
He may be right, but if past is prologue, another consequentialist decision by Kavanaugh suggests that he’ll likely come around in the end to block wealth taxes. When in 2020, the Centers for Disease Control and Prevention imposed an unlawful eviction moratorium on the nation, Kavanaugh cast the decisive vote to leave the moratorium intact for some time even though he agreed that it was unlawful because “the CDC plans to end [it] in only a few weeks” and “those few weeks will allow for a more orderly distribution of the congressionally appropriated rental-assistance funds.”
The CDC saw Kavanaugh’s vote for upholding the program, ignored his text saying that it was unlawful, and — to nobody’s surprise but Kavanaugh’s — renewed the program. When the moratorium came before the Supreme Court a second time, Kavanaugh did what he should have done the first time around and voted to strike it down.
As with the eviction moratorium, so likely with a wealth tax. Kavanaugh’s dicta probably won’t deter anyone, but once proponents power ahead, Kavanaugh will presumably vote to power it down. Adding his vote to Barrett’s (who was joined by Justice Samuel Alito) and to Thomas’s (who was joined by Justice Neil Gorsuch), that makes five. And at the Supreme Court, five is the magic number.
