Part 53 – Debriefing The December 5, 2023 – Moore @USTransitionTax Hearing – WHAT The Court Must Do And HOW It Will Do It

Slicing and dicing the issues – WHAT the Court must do and HOW will the Court do it …

Prologue – Threading the needle – The job facing the court

On December 5, 2023 the U.S. Supreme Court heard argument in the Moore Transition AKA MRT case. Both the audio and a written transcript of the hearing is available on the Court’s website here. Additional discussion and commentary about the December 5, 2023 Moore v. United States MRT hearing is here.

The disappointment: There was no discussion of the fact (save a brief reference by the Solicitor General) that the Moores are INDIVIDUALS and theat INDIVIDUAL shareholders were treated very differently from CORPORATE shareholders under the MRT AKA transition tax. This was disappointing.

The hope: There was discussion about whether retroactivity and attribution could conflict with “due process” issues.

The questions from the court were helpful in identifying and categorizing the issues raised in the case.

The purpose of this post is to define the task that faces the Court and to offer some thoughts on what the Court must consider to achieve the task.

The post is divided into the following four parts:

Part I – WHAT must the Court must do?
Part II – HOW will the court do what it must do?
Part III – The context in Moore is what matters most
Part IV – What does the Moore decision imply for Americans abroad?
APPENDIXES – Important excerpts from the decision

Part I – WHAT must the Court must do?

The objective(s) facing the court include the resolution of both 16th Amendment issues and “due process” issues including:

Primarily 16th Amendment Issues

– how to NOT leave the 9th Circuit decision (that “realization is not required”) intact

What would happen if the 9th Circuit decision (that “realization is not required”) would be either affirmed or “left alone”? Can the Court risk not ruling on this issue? Some Justices (Example Justice Kavanaugh) have suggested simply “assuming realization” and NOT ruling on whether “realization is required.

– to respond to the question in the cert petition – is “realization” required for there to be income under the 16th Amendment?

Can Congress simply impose taxation on the increase in value of retirement accounts without regard to whether there was a distribution?

– if realization is required – does the taxpayer have to be the person realizing the income?

If your neighbour realized income. Can that income be attributed to somebody else? Can that income be attributed to you? What about the “Kiddie Tax“?

Primarily “Due Process” Issues

– how to put limits on when income realized by an entity can be attributed for tax purposes to another taxpayer

The Solicitor General repeatedly cited the 1933 Supreme Court decision Burnet v. Wells as the appropriate standard for when there is a sufficient connection between income received by a third party and the attribution of that income to another taxpayer. The case appears to have held that income of a trust can “be attributed unless the taxpayer can show that, in attributing to him the ownership of the income of the trusts, or something fairly to be dealt with as equivalent to ownership, the lawmakers have done a wholly arbitrary thing”. This is NOT a high standard!

– how to determine whether income realized by a “nonresident alien” can be attributed to a U.S person generally and if so whether the attribution in the Moore case is defensible

Justice Alito raised the question of whether different rules (or a different standard) should be applied to income attributed from a nonresident alien (including a foreign corporation). Justice Kagan and the Solicitor General were predictably hostile to all things foreign.

– Why is 10% ownership of a CFC sufficient to attribute income to the shareholder? Why 10%?

Justice Barrett took steps to develop this issue. Assuming there must be a “sufficient connection to the income”, is the 10% standard sufficient? The Moores had no ability to compel a distribution of the company’s profits. Under these circumstances, why should this income be attributed to them?

– to consider whether the retroactive attribution of income (of this magnitude (31 years)) is allowable

The MRT is NOT a case of minimal retroactivity. It is 31 years of retroactivity. Although Carlton may the controlling standard, Justice O’Conner (in a concurring ruling) stated that Congress could not just create a new tax and apply it retroactively for long periods of time. There are surely circumstances where a law is unconstitutionally retroactive.

– whether there is a difference between the application of the MRT to corporate shareholders vs to individual shareholders

The SEAT/AARO amicus brief and the amicus brief of the individuals impacted clearly demonstrate how/why the MRT impacted individual shareholders from how it impacted corporate shareholders.

– each side argues that a ruling that upholds the 9th Circuit will lead to extreme results – how can the Court reach a reasoned decision that doesn’t award either side a complete victory and the other side a complete loss. Is this a “zero sum” game?

The MRT can be distinguished from ALL other instances of attribution because of its retroactivity. As the amicus by Mark E. Berg demonstrates all other forms of attribution (that the government and tax academics are hysterical about are based on the attribution of current income.

Part II – HOW will the court do what it must do?

Unpacking The Issues And The Implications Of The Issues

A. Introduction

The legal issue in Moore was whether the 16th amendment requires “realization”. (What does “realization” mean? Must an “accession to wealth” actually be received before it is treated as income for taxation?) The Biden Green book has been proposing a taxable income inclusion based only on an increase in the value of assets (without regard to actual sale).

B. Taxation based on the increase in value of MY asset

During the hearing Justices Alito, Gorsuch and Thomas questioned the Solicitor General about the possibility of income inclusions based on the increase in asset values without a sale of those assets. Could the government impose taxation based only on the increase in the value of an investment portfolio?

The Solicitor General stated the government’s position (agreeing with the 9th circuit) that:

1. There is NO constitutional requirement of income “realization” in order for there to be an income inclusion (yes, the increase in value of the investment portfolio could and always could have been taxed); and

2. That, as a matter of constitutional law the government could tax people “just for existing” (England did this during the Thatcher years. Why not America in the Biden years?).

The Solicitor General also said that it was unlikely that taxes would be imposed in the absence of a sale of assets. (Where would the money come from to pay the tax?) Yet, on November 30, 2023 (five days before the hearing) Senator Ron Wyden introduced his Billionaires Tax Act. The Act would impose taxation based only on an annual increase in the value of “tradeable assets” without regard to a sale.

Could/would the Government impose an annual capital gains tax based only the increase in value of your home?

C. Taxation of a “U.S. Person” based on income currently realized or deemed to be realized by a different “U.S. Person”

Is it ever reasonable to tax person A on the income (actually received or deemed to have been received) by Person B? Whether reasonable or not, there are instances where a person is taxed on income actually received by another person or legal entity. Examples include (but are not limited to): the grantor trust rules, Personal Holding Company rules, Chapter S corps, Partnership, etc. Note that these are examples of “income attribution” from one “U.S. Person” to another “U.S. Person”.

I believe that the preceding examples are all instances of the attribution of income actually realized by an entity to an individual.

D. Taxation of a “U.S. Person” based on non-US source income currently realized or deemed to be realized by a “nonresident alien”

The obvious example is the attribution of the current non-US source income of a foreign corporation to the “U.S. Person” shareholder. This is what the Subpart F and GILTI rules are about. Significantly both Subpart F (attribution of investment income) and GILTI (attribution of active business income) are concerned with the attribution of CURRENT earnings which have been realized by the corporation.

E. Taxation of a “U.S. Person” based on non-US source income earned in the past and realized in the past by a “nonresident alien” – a retrospective income attribution

This is a situation where active business income earned in the past by a foreign corporation, which was NOT attributed to the U.S. shareholder under Subpart F (and was therefore not subject to U.S. taxation) is now being attributed to the U.S. shareholder in real time. In other words, a requirement to pay current tax on a retroactive income inclusion without having received a distribution to pay the tax!

F. “The Final Frontier” – Taxation of a “U.S. Person based on the increase in value of property owned by a nonresident alien and attributing that increase in value to the “U.S. Person”.

Could/would the United States:

Assume a U.S. person has a sufficient connection to a nonresident alien who owns property that has increased in value but has never been sold. Could the U.S. say: the nonresident alien has a gain that has not been realized and we will attribute that nonrealized gain to the “U.S. Person” for the purposes of taxation?

Part III – The context in Moore is what matters most

What makes Moore difficult is the context. The Moores are U.S. individual shareholders of a foreign corporation (nonresident alien). They are being taxed on income received by that corporation from the period of 1986 to 2017. The Moores never received a distribution from the foreign corporation. The context raises issues that require analysis of (at least) the following questions:

– does realization require actual receipt of income?

– can the “active business” income of the corporation be attributed to the individual shareholder in the absence of a distribution to the shareholder?

– does it matter that the income is being attributed from a nonresident alien and that the U.S. does not have the right to tax directly the income attributed to the U.S. shareholder?

– does 31 years of “retroactivity” matter?

Part IV – What does the Moore decision imply for Americans abroad?

To be continued …

Read “The Little Red Transition Tax Book“.

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APPENDIXES – Important excerpts from the decision

Appendix A – Discussion of “Foreign” – the fact that that the corporation is a a “foreign entity”

Justice Kagan – page 19 (attitude toward the foreign corporation)

JUSTICE KAGAN: And putting aside, Mr. Grossman, whether there’s any realization requirement at all, I mean, there is quite the history in this country of Congress taxing American shareholders on their gains from foreign corporations and you can see why, right? Congress — the U.S. Government can’t tax those foreign corporations directly, and they wanted to make sure that Americans that kind of stash their money in the foreign corporations watch their money grow and never pay taxes on them.

So, you know, there’s a long century-old history of these kinds of taxes on gains from your holdings in a foreign corporation. Why is this any different and why shouldn’t we understand that to be quite well settled, that Congress can implement those taxes and enforce those taxes for those purposes?

Page 98 – Justice Alito asks about the significance of this being a “foreign corporation”. The Solicitor General acknowledges that this particular case involving individuals is NOT the same as U.S. multinationals. Should that make a difference in whether the income should be attributed to INDIVIDUAL U.S. shareholders?

JUSTICE ALITO: Well, have we ever said — and maybe we should in this case say — that the Sixteenth Amendment applies differently to income or property that is obtained abroad than it does to income or property possessed within the United States?

GENERAL PRELOGAR: The Court hasn’t previously said that, but my friend himself suggests that in thinking about these issues, the Court should focus on the potential for tax avoidance or tax abuse. And I think that that concession just underscores the point that when you are using a foreign corporation, it provides a ready vehicle to shelter funds offshore, keep them out of the reach of U.S. taxing authorities, and, thus, complicate efforts to access those funds even when they have a really significant connection, as they do here, because these companies are majority owned by U.S. taxpayers.

And it’s important to recognize too that this case is not the paradigmatic case of how the MRT applies. The overwhelming majority of taxpayers subject to this are domestic corporations, often parent companies of wholly owned foreign subsidiaries who have arranged their affairs to be able to keep this money offshore, to a period of long tax deferral. But I think that it would be anomalous to suggest that the money is forever out of the reach of U.S. taxing authority


Appendix B – The issue is NOT about the 16th Amendment of realization. It’s about the 14th Amendment issue “due process” issues of timing/attribution/retroactivity

Justice Kavanaugh – page 21 – expressing his view that there is realization and that this is about timing

JUSTICE KAVANAUGH: That seems to be an argument about timing. In other words, we have realization in this case. The entity realized income. The question then is attribution, and we’ve long held that Congress may attribute the income of the company to the shareholders or the partnership to the partners, and the only real wrinkle, I think, here is that it goes back and captures prior years’ income


Appendix C – Justice Barrett engages Mr. Grossman on the issue of attribution

Justice Barrett – Page 45

JUSTICE BARRETT: Except there are situations, you know, there are cases in which state law said that partners couldn’t have control over the property or pull it out unilaterally and which we’ve said it’s okay for that income to be attributed to the partner.

I understand that partnerships are a different kind of form because, as an ownership matter, the partners would own it equally, but I guess I don’t think our cases have established control as the linchpin. Can you kind of point me in the right direction if you disagree?

MR. GROSSMAN: With respect to partnerships, if you accept the view that simply a partnership’s income is directly the income of its partners, then restrictions on the use to which partnerships may put their income, such as distribution — distributing it in certain circumstances, is no different from a state law preventing an individual from using their own income in some particular fashion, spending it on a particular item that they might wish to purchase.

JUSTICE BARRETT: But I guess I just mean that control — you know, when we’re thinking about how to define “income,” I’m just questioning whether control can really be the — the word to use, as opposed to just some sort of distinction between capital and income, you know, the, you know, seed and its fruit, right? I mean, it seems to me that control might go a little bit too far.

MR. GROSSMAN: I don’t — well, I — control has always been an essential element of income attribution statutes because the general idea has to be that the taxpayer at issue has the ability to redirect that stream of income somewhere else and thereby avoid it and avoid taxes on it.

JUSTICE BARRETT: Why isn’t that a due process issue? I guess this goes back to Justice Gorsuch’s point about what would the consequences be and we would have to draw lines. You said that means that something that was earned income anywhere along the line ultimately lands in, you know, my bank account and then it can be considered income to me.

But is that a Sixteenth Amendment problem, or is that a due process problem where we have to draw lines about when it’s fair to attribute one person’s income to someone else?

MR. GROSSMAN: I think it can raise issues under both, but the Court has traditionally considered it to be a Sixteenth Amendment issue not only in Macomber but in trust cases like Corliss, where, again, the Court considered it a question of did the taxpayer have control over the — over the — its stream of income that he had in that case redirected into a trust for the benefit of his close family members.

I mean, that’s the way the Court has always analyzed it, from the point of view of the taxpayer and whether that taxpayer has actually received income or not.

JUSTICE BARRETT: And last questions about Subpart F. I just want to be sure that I understand your position.

You say that income is about whether the person has the ability to direct the income stream. Am I accurately repeating what you said when it’s about attribution?

MR. GROSSMAN: I think that is a necessary part of it, yes.

JUSTICE BARRETT: It’s a necessary part of it. And you’ve also said that Subpart F corporations in general, of which, you know, KisanKraft meets the definition, Subpart F corporations and Subpart F do not pose the same Sixteenth Amendment problem that you see here, right?

MR. GROSSMAN: We — we think that — oh, do you mean with respect to the application of Subpart F aside from the MRT?



JUSTICE BARRETT: Okay. And is that because — kind of going back to your point about control, is the distinction then between MRT and the rest of Subpart F this idea that in the other context, the shareholders have some more ability to direct the stream?

MR. GROSSMAN: Well, I think it’s two things. It’s not that they have more ability; it’s that they have any ability, because, again, under the terms of the statute, the MRT doesn’t take account as to whether or not a shareholder exercised control while that stream of income was coming in the door. It only focuses on ownership in 2017. But also, that degree of control has also been — has also been combined historically with the question of whether or not the types of income being taxed are those that are susceptible to that sort of abuse such that attribution is appropriate.

JUSTICE BARRETT: You mean so there’s some sort of like fraud overlay to this, like is this really functioning as a tax shelter, as Justice Kagan was pointing out?

MR. GROSSMAN: That’s how Congress addressed it in the very first —

JUSTICE BARRETT: And that’s a constitutional requirement?

MR. GROSSMAN: I think Congress — Congress certainly viewed it that way in the very first income tax statute. That provision regarding fraudulent availment of corporations to avoid income was specifically limited specifically by many of the chief proponents of the Sixteenth Amendment to avoid the precise question that we’re addressing — the precise defect that we’re addressing today.

Their view was that you could not ordinarily attribute corporate income to shareholders but could do so only in the instance where there was some sort of fraudulent abuse of a corporation to avoid income. And that’s —


Appendix D – Justice Gorsuch engages Mr. Growwman on aspects of “realization”: does the person responsible for paying the tax have to be the same person to whom the income was realized?

Justice Gorsuch – page 42:

JUSTICE GORSUCH: Sorry. One last question. Returning to my first one, apologies to shift you about. If the Court were to hold that the only realization requirement is some realization somewhere along the chain by a corporation antecedent to the taxpayer, what would be the consequences of a holding like that?

MR. GROSSMAN: The consequences would would be to open the door to taxation of practically everything. I mean, all property that a person owns is the fruit of income at some point in time, whether it might be income, you know, that they received long in the past.

I mean, ultimately, all property that we have is made up of flows of income that have then been invested. And so, if all that was necessary was some level of income, then Congress could simply point at anything and say, well, at some point, this was income to some person at some level and, therefore, can be subject to taxation without apportionment.

JUSTICE GORSUCH: I suppose we could and maybe would have to draw lines as to how far back in — in time one can go in assessing that chain of realization.

MR. GROSSMAN: That’s right. And I don’t really understand how the Court would do that based on the constitutional text. The government’s definition of “income” is simply the increase in a person’s wealth between two points in time. Well, if the time is set at a person’s birth or many decades in the past, that could reach some or potentially all of their property, and I don’t really understand what the limiting
principle would be.




Appendix E – Justice Alito: It’s fair that the Court explore the consequences of the Solicitor General’s position

Page 67 – Justice Alito discussion with the Solicitor General

JUSTICE ALITO: So your answer is that there need not be realization by the taxpayer; it’s sufficient if there is realization by some other entity, correct?

GENERAL PRELOGAR: Under the Sixteenth Amendment, that’s correct, although there is a due process question in that context about the limits on Congress’s ability to attribute income that was realized by one taxpayer to another taxpayer.

JUSTICE ALITO: All right. That — the due process question and that’s a question of substantive due process.

GENERAL PRELOGAR: That’s how this Court has analyzed it in cases like Burnet versus Wells, where it was looking at the limits on Congress’s ability to make that kind of attribution decision.

JUSTICE ALITO: And anything under substantive due process involving an economic regulation like this, the only thing that would need to be shown is that it was rational for Congress to do what it did?

GENERAL PRELOGAR: Yes. The Court has looked at whether Congress has made an arbitrary choice, whether it’s acted unreasonably. But I think that the Court’s precedents reveal that the Court really has looked at whether the taxpayer who owes the tax liability has a relationship to the underlying —

JUSTICE ALITO: Well, if the — if it’s a rational basis to review, then that’s not much, right? So we could say the 30-year requirement here is a substantive due process issue, so we don’t have to grapple with it here.

But, to be honest, we would be saying, you know, unless you can show it was irrational, that would be sufficient.

GENERAL PRELOGAR: Well, I want to be precise about the doctrine here. You mentioned the 30-year lookback period. I think that that actually has to do with retroactivity principles under the Due Process Clause, and I think that that’s somewhat different than the attribution question that we had been discussing about whether Congress can fairly attribute tax liability to one person for income that was earned at the entity level.

I recognize that maybe there are some complicated questions out there that could exist in this space, but the important point is that here we have an enormous amount of history and tradition on our side to support the idea that this particular attribution decision falls well within constitutional bounds.

understand you want to talk about this case, a

Page 44 – Justice Kavanaugh

JUSTICE KAVANAUGH: In your brief, to distinguish Subpart F and S corps and partnerships, you use the phrase “constructive realization,” and I would ask if you could define what you mean by “constructive realization.”

MR. GROSSMAN: Sure. We use “constructive realization” as a blanket term to encompass such concepts as constructive realization and assignment of income, and it just generally — it refers to the general principle espoused in cases like Banks and like Horst that income should be taxed to the person who earns it and enjoys its benefits. And Congress, when it has enacted cases relying on that sort of doctrine, you know, has approached it in that nature, in other words, assessing whether the income at issue is something that in the ordinary course of affairs could be attributed to the person, to — to the particular taxpayer at issue regarding, say, categories of income or abuse of the corporate form and so forth.




Justice Jackson – page 50

Appendix F – Justice Sotomayor engages with the Solicitor General – How should the Court craft a narrow resolution?

Starting at page 106 of the transcript in Moore – Note the dialogue between Justice Sotomayor and the Solicitor General


JUSTICE SOTOMAYOR: I don’t fault the parties for shooting for the stars and — and –but I guess the tenor of the questions is that nobody’s happy with anybody’s definition of anything, okay?

JUSTICE SOTOMAYOR: You started by suggesting a narrow ruling. I think there are two ways to narrowly rule.

Tell me if one is better than the other if at all, okay, but, first, we can say there is a realization requirement, and, here, it was realized because the corporation realized it. You have to deal with Justice Gorsuch’s concern that you waived that argument. I may disagree with him, but that we can work out among ourselves.

But the bottom line, we could rule that way, or we could do it the way Justice Kavanaugh started his question, which is we assume that there’s a realization requirement and — and it was met here.

So which of the two ways should we do it and — and how not — and why not?

GENERAL PRELOGAR: It would be critically important for the Court to do it through Justice Kavanaugh’s approach. That is, I don’t think the Court needs to resolve anything about whether the Sixteenth Amendment requires realization. Here, we happen to have it and this kind of tax corresponds to pass-through taxes we’ve had through history and that suffices to resolve this case. We have serious concerns with the Court —

JUSTICE SOTOMAYOR: Does that — the history is that Congress can attribute that realization?

GENERAL PRELOGAR: Correct, that Congress can attribute that realization by the corporation to the shareholders and there are taxes that look like that at virtually all points in our nation’s history.

The reason why I would strongly caution the Court away from adopting a realization requirement is not only that we think that it is inaccurate, profoundly a historical, inconsistent with the text of the Sixteenth Amendment, but it would also wreak havoc on the proper operation of the Tax Code.

I think that there are pass-through taxes that would withstand scrutiny if the Court affirms the attribution holding, but as I had mentioned to Justice Barrett, there are a number of critically important provisions of the code that don’t actually have that kind of pass-through mechanism and don’t turn on realization at all.

That includes the mark-to-market taxes, original issued discount on bonds that drives prices in bond markets and avoids what could otherwise be sheltering of income that should be taxable. It includes the expatriation tax when people renounce their United States citizenship.

So I think that there are various ways in which adopting any form of a realization requirement would have profound practical consequences, and it’s unnecessary for the Court to go down that road in light of the serious legal arguments against that reading.



Appendix G – Justice Kagan engages the Solicitor General on the question of what are and what are not likely taxes

Starting on page 110 – the Solicitor General claims that taxes on deemed gain and/or deemed sales are unlikely to come to pass (even though Senator Ron Wyden introduced a bill that includes these kinds of taxes on November 30, 2023.

JUSTICE KAGAN: And then, with respect to the furthest — the implications of the furthest reaches of your argument that Justice Alito was asking about, and you said with respect to a number of taxes, which we’ll probably never see in our lifetimes, but you said, if we did see them, you would probably defend them.

I mean, when you say that, that’s your job, right?
GENERAL PRELOGAR: Yes, we generally defend the constitutionality of statutes.

JUSTICE KAGAN: Yeah. So — so how should we think about that set of possibilities?

GENERAL PRELOGAR: So I think the important starting point is to recognize that those are hypotheticals, as you mentioned, that are unlikely to ever come to pass. There’s a really good reason that Congress frequently chooses to tax based on realization, and it’s the administrative practicalities of the situation. Otherwise, it’s complicated to track fluctuations in value over time or to engage in a valuation analysis for assets that might be hard to value.

So, in the main, Congress frequently does choose to rely on realization, and I think some of the hypotheticals about taxing all people who have shares or taxing all home appreciation are unlikely ever to come to pass.

But I also think that it’s important for the Court to not rely on concerns about those types of far-fetched hypotheticals to announce bright-line rules about what the Sixteenth Amendment requires that could actually take down critically important provisions of the Tax Code and that respond to real-life concerns and very legitimate exercises of the taxing power.

In particular, many of the times when Congress has chosen to tax in the absence of realization, it’s because taxpayers can abuse the rules. They can manipulate realization events, or they can make use of certain structures or financial instruments to shield assets from taxation. And any coherent or proper administration of the Tax Code has to be able to respond to that kind of taxpayer abuse.



Appendix H – Justice Gorsuch engages the Solicitor General on what would be permissible attribution.

Page 119 – Justice Gorsuch questions about what would be the factors to consider to determine acceptable “attribution” – Significantly the fact the entity is “foreign” to the USA is discussed as a factor

JUSTICE GORSUCH: Okay. And then you — you’ve argued that attribution is a feature of due process rather than income under the Sixteenth Amendment. But all of our cases, whether we’re talking about partnerships or you want to talk about S corps or — or Schedule F, have treated it as whether it’s a form of income to the taxpayer under the Sixteenth Amendment. That’s how we’ve grounded our analysis so far. It would seem quite a change to move it over to due process. Can you — can you react to that?

GENERAL PRELOGAR: Sure. So I think, actually, the Court’s central case on attribution was a due process case. This is Burnet versus Wells. It involved the grantor of a trust. And the Court there put it explicitly in due process terms.

JUSTICE GORSUCH: Well, you mentioned partnership earlier, and — and I went back and looked at that, and due process, those words don’t —


JUSTICE GORSUCH: You said that’s the best case for you. Those words just don’t appear anywhere in — in Justice Brandeis’s opinion. It’s all about whether it’s — you can call it fairly attributable or realized by the partner.

GENERAL PRELOGAR: And I think that it’s perfectly fine for the Court to look at this through the lens of the Sixteenth Amendment because you get to the same ultimate result, which is that, ultimately, the question then would be can Congress fairly attribute this income to you, the taxpayer. And, here, we have overwhelming history and tradition going all the way back to the 1860s and 1870s demonstrating that, yes, Congress can.

JUSTICE GORSUCH: And are some of those factors that you look at whether they control the — the entity, whether there’s some evidence of fraud in its use of the entity? What else would you add to that list?

GENERAL PRELOGAR: I would look at the taxpayer’s overall relationship to the income and the — and the entity. You know, I — I hesitate to try to put the gloss of control on it for a couple of different reasons. One is that I think that would incentivize taxpayers to try —


GENERAL PRELOGAR: — to argue in an individual case they don’t have control.

JUSTICE GORSUCH: I’m not suggesting that’s necessary.

GENERAL PRELOGAR: Right. That could be —

JUSTICE GORSUCH: I’m suggesting it might be sufficient.

GENERAL PRELOGAR: Yes. I would absolutely agree that might be the sufficient — that might be sufficient to establish that Congress made a fair attribution decision in that case. I would just caution the Court away from constitutionalizing that or saying it’s necessary in every case.

JUSTICE GORSUCH: Roger that. What — what other factors would you have us look at?

GENERAL PRELOGAR: The other kinds of factors the Court has looked at or the statement it made in Burnet versus Wells was whether Congress has made an attribution decision that’s unrelated to any privilege or benefit. I think using that standard, it works for us here as well because there are obvious benefits associated with doing business through a controlled foreign corporation which is closely held and could keep the money offshore for all of those years subject to tax deferral. So I think the —

JUSTICE GORSUCH: Let me pause you there.


JUSTICE GORSUCH: So the — the foreign aspect of it and — and the difficulty of otherwise obtaining some kind of tax on it should factor in our analysis you think?

GENERAL PRELOGAR: Again, I think those are —


GENERAL PRELOGAR: — conditions that could be sufficient. I wouldn’t want the Court to say they are absolutely —


GENERAL PRELOGAR: — necessary in every case.


GENERAL PRELOGAR: And, of course, we have things like partnerships where there’s not necessarily —


GENERAL PRELOGAR: — any abuse. It’s a convenient way to structure taxation with respect to certain types of entities.

JUSTICE GORSUCH: It was very helpful to me. Any other factors you’d have me consider?

GENERAL PRELOGAR: I think you have covered the waterfront of the things that have already emerged in the case law. I guess, if I step back to a 30,000-foot level, the one thing I would say is that I would urge the Court not to try to set down an explicit set of principles to govern all cases for the very reasons I was describing earlier, that we have seen taxpayers latch onto that —


GENERAL PRELOGAR: — and then seek to avoid taxes.

JUSTICE GORSUCH: — Roger that too, okay?

JUSTICE GORSUCH: And that would take care, though — if — if we wrote that that way, it would take care of all of your concerns about S corporation — Schedule F or, you know, the — the mark-to-market, and — and potentially the MRT?

GENERAL PRELOGAR: Yes. I — certainly, I think the MRT, in addition to all of those other taxes, satisfy the — the types of criteria that the Court has looked at that are relevant to this attribution question.

JUSTICE GORSUCH: Whether we call it attribution or constructive realization?


JUSTICE GORSUCH: Potato/potato.

GENERAL PRELOGAR: Well, on that one, I would — I would shy away from constructive realization just because I think it introduces an additional layer of ambiguity in the code. I mean, by definition, it means not actual realization, and so I think that —


GENERAL PRELOGAR: — it’s a term that doesn’t appear in the code itself that Petitioners —

JUSTICE GORSUCH: — the way the way I read our precedent maybe — and I’ll just — I’ll stop, but the way I read our precedent at least is it’s — it’s fairly saying that this individual realized, gained control of, or could be reasonably adjudged to have done that by Congress. This person has control over these assets.

And you’ve given me a very helpful list of factors from this Court’s history and practice, consistent with our precedent, rather than calling it all misguided, that might work. Fair enough?

GENERAL PRELOGAR: I don’t think that it’s right to say that this list of factors gives the taxpayer sufficient control over the assets just, again, because the concept of control can be inherently confusing here if it suggests a majority stake. You know, the S corporation shareholders —


GENERAL PRELOGAR: — they might have a 1 percent stake in the company —


GENERAL PRELOGAR: — and not have any control.


GENERAL PRELOGAR: So I think that’s — that’s where I have a little bit of disagreement on how to describe what we’re discussing.

JUSTICE GORSUCH: Okay. That’s very helpful to me. Thank you, General.


JUSTICE KAVANAUGH: You don’t want us to use the phrase “constructive realization”?

GENERAL PRELOGAR: Yes. I think that that phrase is inherently amorphous. It doesn’t


Appendix I – Justices Kavanaugh, Barrett and Alito engage the Solicitor General on the issue of retroactivity

JUSTICE KAVANAUGH: Page 129 – Okay. Last question. Your position on the MRT, and you cite Heiner and subpart (f) and S Corps and say this is all similar in kind. The one wrinkle — and I just want to make sure we’re on the same page — is that this goes back a lot of years and rolls in income from many past years.

What should we say about that?


JUSTICE KAVANAUGH: And, let me just add, and he says, ultimately, if you can just roll in, I think, income at any point in time, then that really becomes not much of a limit at all.

GENERAL PRELOGAR: So let me react to that in a couple of different ways. I think that the length of the lookback period here can’t change the underlying character or classification of what’s being taxed as income.

This was actual earnings brought in by the company, kept in their coffers. If it was income in year one, then I don’t think there is any expiration date on classifying it as income in a future year, and I think it would be anomalus for Congress to lose its ability to tax that as income just because it’s granted a period of tax deferral.

So instead, I think that the lookback period, instead of relating to the Sixteenth Amendment or any fundamental questions about what incomes constitutes is instead a retroactivity concern. It arises under the Due Process Clause and would turn on whether Congress had a legitimate purpose for having this kind of lookback period and used rational means.

Here we think that that is clearly satisfied. Petitioners raised a retroactivity due process argument below. The court rejected it in the Ninth Circuit. They haven’t renewed it here. And I think it clearly fails under precedent, like United States versus Carlton, but ultimately I would urge the Court to — to recognize that that is not about the proper characterization of the underlying tax base.



JUSTICE BARRETT: I want to follow

JUSTICE BARRETT: I want to follow up on some of — on your factors to Justice Gorsuch.

So you’ve talked about how it could be fair, you know, Justice Kavanaugh just said, S Corps, partnerships, you know, an MRT, to — and the MRT tax, to say that this is attributable to the shareholders or to the partners or, you know, to the seller of the trust.

How do we know that? Is it because this is closely held? Because I assume what your friend on the other side is going to say is, well, they — they had 10 percent, they weren’t majority holders, and so they couldn’t force a distribution. So how — how would you articulate that when it can fairly be attributed?

JUSTICE BARRETT: If we’re not talking due process, it we’re talking about it from a Sixteenth Amendment point of view.

GENERAL PRELOGAR: Yes. So I think at the outset, the Court could rely on the lessons to be drawn from history and tradition here. This functions like the early income taxes that I pointed to from the 1860s and 1870 that taxed shareholders on corporate income. At that point in our nation’s history corporations were generally closely held. There were fewer Americans who owned stock, and so I think that they — they functioned quite analogously to the MRT insofar as they reached a distinctive category of shareholders generally in those closely-held corporations. You know, at the end of the day I guess what I would say is that certainly we think it’s a factor in our favor that this reaches relatively large U.S. shareholders. It’s true it’s 10 percent, so they don’t have to have a majority stake, but the premise of Congress is that these kinds of large shareholders can usually work together with other shareholders in this closely-held corporation. There aren’t going to be that many of them to direct the company’s policy or to force a distribution as the case may be. And that kind of threshold, 10 percent, appears throughout the law, not just in the tax code,
but in the securities context, for example, there are additional obligations imposed on 10 percent shareholders of companies. So wherever the line might be drawn in thinking about it from this relationship to the funds and level of influence of the corporation’s policy, I think 10 percent falls well within the line of what should be recognized as permissible.


JUSTICE JACKSON: So are there drawbacks to setting this up in the way that Justice Gorsuch has articulated? I mean, I guess I’m a little concerned, because I heard you respond to Justice Sotomayor by saying that one of your primary concerns is that we not suggest that realization is required. And would — would — would taking the approach that Justice Gorsuch has articulated require us to do that, or could we assume — or how — how do we get around the other caution that you put forward?

GENERAL PRELOGAR: So if I understood Justice Gorsuch’s approach — and I hope I’m not getting it wrong — the idea behind this approach would be to recognize that here we actually have realized income, so the Court doesn’t need to resolve the status of that under the Sixteenth Amendment and instead the pressure point is whether Congress could enact a pass-through tax on the 10 percent U.S. shareholders —

JUSTICE JACKSON: But is that fairly

GENERAL PRELOGAR: — that are subject to this income.

JUSTICE JACKSON: Is that fairly encompassed by this question presented? I mean, this sort of goes to your discussions with

Justice Alito, I think. I — I thought the question presented was about the extent to which the Sixteenth Amendment requires realization.

So if we’re going now beyond that, are we out of — out of the territory that is fairly encompassed here?

GENERAL PRELOGAR: I don’t think so because I think the answer to the question presented would be we don’t have to decide in all contexts here there was a realization. And so, as we said in our brief in opposition tothis case, we don’t actually think that the case presents the question presented because here there was actual realization by the corporation.

And the real dispute between the parties is whether Congress made a fair attribution decision.

JUSTICE JACKSON: Let me ask you just another question about the government’s brief.

Why did the government make an argument about excise taxes at the end?

GENERAL PRELOGAR: So we think that the MRT is clearly constitutional on an excise tax theory as well. There’s been some — some suggestion and argument this morning that maybe we didn’t present that argument below and that is incorrect. In the Ninth Circuit we said that even if the MRT isn’t properly characterized as an income tax, it’s not a direct tax. And we said that therefore Congress had Article I authority to enact it and pointed to the Spreckels Sugar case, which is an excise tax case.

So I think we did preserve the argument. The Ninth Circuit didn’t have occasion to reach it because it ruled in our favor on the primary income tax argument. But if this Court had any doubt about whether this is a proper income tax, we think the Court could affirm on the excise tax argument in particular. And as I had mentioned in an earlier response, one of the important things for the Court to keep in mind is that 99 percent of the tax owed under the MRT is owed by domestic corporation shareholders, large U.S. companies, for example, that have these foreign subsidiaries where they have been holding money overseas for a number of years. And this would be a tax on the privilege of doing business with those corporate relationships and in that corporate form. So at the very least we would urge the Court not to invalidate the MRT and all of its circumstances without proper consideration of that argument.

JUSTICE JACKSON: And that’s because the constitutional question is whether or not it is a direct tax, because that would be the circumstance under which apportionment is required?

GENERAL PRELOGAR: Yes, exactly. And I think this relates to your earlier questions Justice Jackson about the meaning of Hylton and about whether this can in any sense properly be considered a direct tax.

You know, ultimately I think one of the ways to understand the categories in the Constitution is in relation to one another. And at the very least, this is not a tax on land. This is not a tax on personal property. It’s not a head tax. Therefore, it’s not a direct tax. And we think it’s either an excise or an income tax.

JUSTICE JACKSON: One final question about Macomber. Why — why shouldn’t we take
this opportunity to just put an end to it?

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