Moore v. United States
When conservative interest groups cheered Charles and Kathleen Moore’s suit against the government over a tax bill,1 they sought to “permanently put…to rest”2 progressive American lawmakers’ calls for a wealth tax.3 Instead, after the Supreme Court unexpectedly “changed the subject,”4 the justices reopened old wounds from the “most intense legal discourse” of an earlier era, resurrecting a dispute over corporate personhood that had “abruptly died down” a century ago, “leaving only traces for historians to follow.”5 Perhaps unaware of the revived old debates, five justices joined the “sect of heretics…emancipating the legal world from the bondage of a medieval superstition,” while four clung to the “teachings of the fathers…[i]n almost Athanasian terms.”6 In the late period, in Moore v. In Moore v. United States,7 the Supreme Court upheld the constitutionality of a tax that attributed income earned by foreign corporations to the corporations’ U.S. shareholders. In upholding the Ninth Circuit’s ruling, the Court held that the federal government’s tax treatment of legal entities created abroad was a “legislative choice.”8
Beyond blessing a Trump-era tax on shareholders of U.S.-controlled foreign corporations, Moore reveals a Supreme Court at odds over how the Sixteenth Amendment treats legal entities, such as corporations, that are “creatures of state law.”9 While some members of the Court viewed the federal government as having a choice in how to tax such entities, other members of the Court viewed Congress as constrained by the “essential truth” that corporations are real entities separate from their shareholders. 10 Although early twentieth-century commentators on corporation theory might not have predicted the practical importance of their debates for the twenty-first century,11 the ratification of the Sixteenth Amendment in 1913 made the instability of their century-old debates have new relevance for an originalist Court.
Before 1962, American taxpayers could defer or avoid paying U.S. taxes on certain “passive income,” such as dividends, by receiving that income through closely held “U.S. controlled foreign corporations” (CFCs) in low-tax foreign jurisdictions.12 Congress found this practice “inappropriate”13 and enacted subpart F of the Internal Revenue Code in 1962.14 But subpart F still did not tax U.S. shareholders on “active business income attributable to the CFC’s own business maintained abroad.”15
In 2005, Charles and Kathleen Moore invested $40,000 in KisanKraft, a CFC created by a friend that supplies tools to small farmers in India.16 Each year, KisanKraft kept its profits in India, and the Moores never received any distributions.17 Neither did the Moores Neither KisanKraft nor the Moores paid U.S. taxes on the company’s profits.18
By 2015, CFCs like KisanKraft had accumulated an estimated $2.6 trillion in offshore profits that had not been taxed by the United States.19 To remedy this problem, Congress passed the Tax Cuts and Jobs Act of 2017,20 which, among many other changes to the tax code, imposed a “one-time, retrospective tax” on CFCs’ undistributed income attributable to their U.S. shareholders,21 called the Mandatory Repatriation Tax (MRT).22 The Moores’ share of KisanKraft’s profits amounted to about $508,000, requiring them to report and pay $14,729 in MRT.23
The Moores then filed suit in the United States District Court for the Western District of Washington to recover the MRT they had paid. 24 They argued that the MRT violated the Apportionment Clause of the United States Constitution25 because it imposed an “undistributed direct tax.”26 While the Sixteenth Amendment allows for the taxation of income without apportionment, the Apportionment Clause requires that direct taxes, such as property taxes, be apportioned among the states based on population. 27 Alternatively, the Moores argued that the MRT was “a retroactive application of a new tax” that “violated the Due Process Clause of the Fifth Amendment.”28
The United States moved to dismiss for failure to state a claim, and the Moores moved for summary judgment. 29 The district court granted the government’s motion and denied the Moores’ motion. 30 It held that although the Moores had not received a claim, the court did not grant the government’s motion for summary judgment. distribution, the MRT taxed income earned by the corporation, and that Congress is permitted to “override the corporate entity.”31 The district court further held that the MRT was retroactive but nonetheless did not violate the Due Process Clause.32
The Ninth Circuit affirmed the ruling.33 Writing for the panel, Judge Gould34 held that “[d]espite the difficulty of defining income”35 under the Sixteenth Amendment, a taxpayer need not realize income for a tax to be constitutional.36 Furthermore, the court reasoned that even if there were a realization requirement, Congress could still attribute a corporation’s income to its shareholders.37 Then, assuming that the tax was retroactive, the court held that such retroactivity did not violate the Due Process Clause because it served a “legitimate purpose by rational means.”38
The Ninth Circuit then denied the Moores’ petition for rehearing en banc. 39 Justice Bumatay dissented,40 arguing that the court erred in dispensing with the realization requirement for income.41 The Moores sought review in the Supreme Court. Only the question remains “whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportioning them among the states.”42
The Supreme Court affirmed the ruling.43 In a brief for the Court, Justice Kavanaugh44 held that the MRT violated neither the Apportionment Clause nor the Sixteenth Amendment.45 The majority sidestepped the question of whether Congress can constitutionally tax unrealized income.46 Instead, it argued that the MRT taxes income realized by the corporation, so questions of whether income must be realized before being taxed were not relevant to the case at hand.47 For the majority, the real question requiring resolution was “whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their shares of that income.”48
The Court held that Congress can attribute entities’ realized income to those entities’ shareholders or partners, and drew on a long history of Congress doing exactly that. Before the Supreme Court declared unapportioned income taxes unconstitutional in 1895,49 the Court upheld an “income tax law which taxed individuals on ‘the profits and earnings of all enterprises, whether incorporated or partnerships,’ in which they were stockholders or partners.”50 After the Sixteenth Amendment made unapportioned income taxes constitutional again, the Court upheld taxes on partners on undistributed income earned by the partnership,51 on shareholders on undistributed income earned by “S corporations,”52 and on shareholders on undistributed income of CFCs taxed under subpart F.53 The Court therefore viewed pass-through taxation of legal entities as a “legislative choice” and held that the MRT was a permissible exercise of the legislature’s freedom of choice. 54 Finally, indicating the narrowness of its decision, the Court noted that the Due Process Clause55 “proscribes the arbitrary attribution” of income to taxpayers, such as when there is a lack of relationship between the taxpayer and society. 56
Justice Jackson agreed. 57 Perhaps anticipating a future fight over a wealth tax, she suggested that taxes on unrealized profits might not violate the Sixteenth Amendment58 and taxes on unrealized profits might not be direct taxes. 59
Justice Barrett concurred in the ruling. 60 The Moores conceded that subpart F was constitutional, and Judge Barrett thought that subpart F was not significantly different from the MRT. 61 But she suggested that, but for the Moores’ concession, she would have held that Congress cannot tax unrealized profits without apportionment among the states62 and that the Moores did not derive income from KisanKraft stock. 63 Judge Barrett disagreed with the majority’s language of “legislative choice” – in her view, only some legal entities can be taxed as transfers. 64
Justice Thomas dissented.65 In his opinion, the Sixteenth Amendment defines income as “only income earned by the taxpayer.”66 Because the Moores never received income from KisanKraft, “such unrealized gains could not be taxed as ‘income.’”67 He found that the Sixteenth Amendment created a “constitutional distinction between income and its source,”68 such that only income earned and separated from its source is taxable by Congress without apportionment.69 In his opinion, the cases the majority cited for the constitutionality of pass-through taxation simply demonstrated that Congress may attribute income to “the individual who actually controlled it when necessary to defeat attempts to evade tax liability.”70
Moore blessed the taxation of shareholders of closely held foreign corporations based on the corporation’s undistributed profits. But Moore also revealed divisions among the justices over whether Congress has “latitude…to ignore the corporate form” whenever it pleases,71 or whether it is obligated to treat corporations in certain ways. For the justices led by Judge Barrett, Congress’s tax decisions are limited by the “essential truth” of corporations: that they are entities separate from their shareholders.72 For the majority led by Judge Kavanaugh, Congress has a “legislative choice” in deciding how to tax various legal entities.73 Because there was no established understanding at the passage of the Sixteenth Amendment that corporations should be treated as entities separate from their shareholders, the Moore majority correctly held that the Sixteenth Amendment places no limits on the attribution of corporate income to the individual taxpayer.74
The disagreement among the Moore Court justices has ancient roots: just over a century ago, shortly after the proliferation of general statutes of incorporation, debates about the nature of the corporation raged in the legal academy.75 At the time of the passage of the Sixteenth Amendment by Congress in 1909 and its ratification in 1913, scholars debated whether corporations should be better regarded as legal entities.76 in their traditional sense—as grants awarded by the state76—or instead as entities separate from their shareholders. as “real” or natural entities possessing “legal personalities deserving of recognition.”77 Those who believed in the “grant theory” viewed corporate privileges as retractable and believed that the corporation and its shareholders could be regulated as the government chose.78 Those who believed in the “real entity theory” believed that the government had a mandate to provide the corporation with rights and privileges because corporations were a “natural[]” and “inevitable[]” part of society.79 The two sides engaged in a “controversy” so “heated” that it resembled a “guerilla war,” and it was “indeed difficult for any American lawyer writing on the subject of corporations to avoid taking a stand.”79 80 Although philosopher John Dewey “put an end to the debate” in 1926 by defaming the theories as indeterminate and “manipulatable” by judges,81 modern scholars consider the competing theories to have been more determinative and to have greatly affected the development of organizational law. 82
All of the opinions in this case expressed the belief that the original interpretation of the Sixteenth Amendment should answer the question of whether the corporation’s income can be attributed to its shareholders.83 The uncertainty of these debates at the time of ratification suggests that the Constitution does not limit Congress’s options regarding the taxation of members of different business associations or even draw clear distinctions between partnerships and corporations. As Professor Stephen Sachs has written, “The Constitution has no corporate law: it does not mandate any particular theory of the corporation one way or the other.”84
In Supreme Court jurisprudence, the fluctuation of corporation theories peaked during the drafting and ratification of the Sixteenth Amendment.85 The landmark 1906 Supreme Court case of Hale v. Henkel86 partially adopted the real entity theory by granting corporations Fourth Amendment protections.87 But by also refusing to grant the corporation Fifth Amendment protections,88 the Hale Court showed a “continued unwillingness” to treat the corporation as anything other than a state-created entity.89 Meanwhile, the grant theory persisted in another important doctrine: the power of states to prevent “foreign” corporations incorporated in other states from doing business in their states.90 An early and influential decision held that corporations had no constitutional privileges in foreign jurisdictions because the corporation “exists only in contemplation of law and by force of law” as “a mere artificial being.”91 It was not until 1910, a year after Congress passed the Sixteenth Amendment, that a series of decisions employing the real entity theory recognized corporations as protected by the Fourteenth Amendment in foreign jurisdictions.92 Finally, questions remained as to whether shareholders or directors had ultimate control of a corporation.93 The many ways in which the law had not yet separated corporations from their shareholders make it less likely that the original meaning of the Sixteenth Amendment prohibited the attribution of income from the corporation to its shareholders.
The Court’s opinions after passage of the Sixteenth Amendment continued to fluctuate between different theories of the corporation. Justice Kavanaugh and Justice Barrett looked to cases after the amendment’s ratification for a “settled and long-established practice” that “[might] bear ‘great weight in’ resolving constitutional questions.”94 Each claimed to have found such a practice, but their conclusions differed. In fact, the Court had vacillated between different theories of the corporation, leading to inconsistent precedents.
Justice Kavanaugh and Justice Barrett presented different interpretations of Eisner v. Macomber v. Macomber of 1920.95 Macomber adopted the real entity theory of the corporation: “We cannot ignore the essential revealed truth; ignore the substantial difference between corporation and stockholder; [and] treat the whole organization as unreal… We must treat the corporation as a substantial entity separate from the stockholder…”96 While Justice Kavanaugh dismissed this language as dicta,97 Justice Barrett took from it a duty not to “‘indulge the fiction [that stockholders] have received and realized a share of the company’s profits’ when they have not.”98
However, other cases after Macomber employed a theory of the corporation that gave Congress flexibility. For example, in Burk-Waggoner Oil Ass’n v. In Hopkins,99 the Court stated bluntly: “Neither the conception of unincorporated partnerships prevailing under local law nor the relationship under that law of the partnership to its shareholders . . . impinges on the power of Congress to determine how and at what rate the income of the joint venture shall be taxed.”100 In other words, the states’ grants to legal entities did not require Congress to concede its taxing powers. Justice Barrett dismissed this language as relating solely to the ability to tax partnerships as corporations, but not vice versa,101 but Justice Kavanaugh identified in it the beginning of a line of cases holding that “Congress could tax the income” of legal entities “as it pleased.”102 Although Justices Barrett and Kavanaugh each attempted to explain away prior conflicting rulings and reasoning, the different theories of the corporation adopted by competing lines of precedent gave rise to genuine doctrinal inconsistencies.
However, if doctrinal consistency is to be achieved, fewer originalist problems arise in proceeding with Burk-Waggoner and its derivatives. Judge Barrett dismissed the relevance of these cases by relegating them to the “unique context of partnerships, . . . without shedding any light on Congress’s power to tax shareholders on the income of a corporation.”103 But rather than considering historical evidence from the early twentieth century, she cited a contemporary corporate law treatise for the proposition that partnerships “have no legal identity distinct from partners” and “are instead ‘an aggregation of individuals operating the business as co-owners with individual rights and duties.’”104
The distinction between partnerships and corporations was not so clear at the time of ratification, however. As Justice Kavanaugh demonstrated, the law sometimes treated partnerships and their partners as separate entities. 105 In addition to the precedent and treaties of the near-ratification period he cited, evidence from the debates over the Uniform Partnership Act of 1914 reveals that partnership law was in flux, nearly collapsing into corporate law.
During the drafting of the Uniform Partnership Act between 1902 and 1914, theoretical debates about partnerships similar to those over corporations arose. Some viewed partnerships as “an association of . . . persons carrying on business as co-principals,” but many viewed partnerships as having a legal personality separate from the partners.106 When the drafters of the Act did not give partnerships a completely separate legal personality, one critic criticized them as antediluvian compared to “modern jurists” who “accept[ed] the view that any group of human beings united for a common purpose forms a real or natural entity distinct from its members.” 107 Despite the critic’s vitriol, the Act still treated the partnership as a separate legal entity “under a score of specific substantive provisions.”108 Indeed, the Act’s drafters did not “personify” the partnership further in part because the partnership was already too close to becoming indistinguishable from the corporation.109 Given the similar conceptions of partnerships and corporations that prevailed at the time of the Sixteenth Amendment’s passage, it is difficult to justify Congress’s power to tax partners but not shareholders.
Having “abruptly died out” a century ago,110 debates over the nature of corporations and partnerships flared up again in the Moore Court’s competing interpretations of the Sixteenth Amendment. While other areas of the Court’s constitutional jurisprudence take uncertain approaches to constitutionalizing a corporation theory,111 the majority held firm against constitutionalizing the real entity theory for tax purposes. Instead, the Court “emancipated” Congress from the “bondage”112 of the real entity theory and allowed it to make its own “legislative decisions.”113
0 Comment