Prologue – Taxation, Fairness And “The Man On The Street”
Something I think is sometimes lost in tax policy debates: public perceptions do not equate fairness to diminishing inequalities. Not all tax inequality decreasing measures will be perceived as fair.
Tax policy is as much about political economy, as efficiency and equity.
— Rita de la Feria (@delaFeriaR) September 24, 2023
Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:
1. Do you think that people should be forced to pay taxes on income never received?
2. Do you think people should be forced to pay taxes on income from the previous 30 years that they had never received?
The average person would be shocked by the possibility of this.
It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).
Moore and Retroactivity – The Readers Digest Version
"The Little Red Transition Tax Book" – Everything you need to know about the 965bmandatory repatriation tax but didn't know to ask. A horrific abuse of #Americansabroad in a @citizenshiptax and #FATCA world! https://t.co/j7v1Asreek
— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023
This history of the Moore case is described by Professors Brooks and Gamage as follows:
The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29
The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:
The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.
First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional limitation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”
How “retroactivity” was considered by the District Court and the 9th Circuit
The District court specifically found that the transition tax was a retroactive tax, but ruled that the retroactivity did NOT violate the 5th Amendment. The 9th Circuit “assumed” (without considering) the retroactivity of the tax and like the District Court ruled that the retroactivity did NOT violate the 5th Amendment.
The Supreme Court granted the cert petition based only on the question of whether the 16th amendment requires income to be “realized”. The issue in Moore is whether 30 years of income realized by a CFC, never distributed to the US shareholder, and never previously taxable to the U.S. shareholder (under Subpart F) in that 30 year period, can be deemed to be “income” and taxed directly to the U.S. citizen shareholder in 2017.
Can a current attribution to a shareholder, of income earned by a corporation 30 years ago, meet the constitutional requirement of “income” under the 16th Amendment?
A ruling that 30 years of retroactive income could not qualify as 16th Amendment income might allow the court to:
1. Provide relief to the Moores (and other individual shareholders of CFCs); and
2. Avoid ruling on the broader and more general issue of realization.
Arguably a finding of “retroactivity” could mean that (whether realized or not), income earned by the CFC in the past 30 years cannot be considered to be current “income” under the 16th Amendment.
The purpose of this post is to focus on the issue of retroactivity. I do not believe that “retroactivity” was properly analyzed by either the District Court or 9th Circuit.
This post is divided into the following parts:
Part A – Introduction – Thinking about taxation of income
Part B – What is it about the “transition tax” that raises the question of retroactivity?
Part C – Retroactivity and the “Carlton” standard
Part D – Discussion of retroactivity: District Court Decision Moore
Part E – Discussion of retroactivity – 9th Circuit – Moore
Part F – Concluding thoughts …
Appendixes – Excerpts from relevant cases and articles
Appendix A – Excerpt from Hank Adler interview discussing the retroactive nature of the MRT
Appendix B – Moore District Court
Appendix C – Moore the 9th Circuit
Appendix D – Quarty
Appendix E – Justice Blackmun’s majority decision in Carlton
Appendix F – Justice O’Connor concurrence in Carlton
Appendix G – Justice Scalia and Justice Thomas in Carlton