Welcome to Scot dis Cast, a project of the Federalist Society for Law and
Public Policy Studies. Our contributors joined us from around the country to bring you
expert commentary on US Supreme Court cases as they are argued and the decisions are
issued. The Federalist Society takes no position on particular legal or public policy issues.
All expressions are those of the speaker. Hello, and welcome to scot
Discast. I'm your host, Kyle hammernis On, behalf of the Faculty division
of the Federalist Society. We are here today to discuss More versus the United
States, which was argued before the Court on December fifth, twenty twenty three.
Is my honor to introduce our guests today, Professor David Schizer. Professor
Schizer is Dean emeritus and the Harvey R. Miller Professor of Law and Economics
at Columbia Law School. So, Professor Schizer, this is a case about
constitutional limits on Congress's power to tax. What was the question presented and why
is it important? File? Thanks, it's great to do with you.
I have to say there aren't often cases about the Constitution and tax, so
for a tax guy like me, this is especially fun. And this is
a case about a really fundamental part of the tax system, so called realization
rule. And what that means is that if I have property and it's appreciated,
it's worth more than I paid for it, I don't usually pay tax
until I sell it. And that rule is called the realization rule. And
the question is whether Congress does that when it does it because they make a
policy judgment to do it, or does the constitution require it? In other
words, when the sixteenth Amendment said Congress could tax income, was the sixteenth
Amendment saying income means realized income income from a sale, but not just appreciation
before a sale. And in nineteen twenty, so over one hundred years ago,
the Supreme Court and case called eisnerby Macomber, suggested that that was true.
And then the Supreme Court over the years has pivoted away from that.
But in More versus the United States, the Court is considering whether maybe to
reaffirm that idea. And it's really important because a great deal of the US
tax system is based on the idea that realization is not constitutionally required, and
there are a lot of provisions that would potentially have to be reconsidered or abandoned
if the court rules for the taxpayer, depending upon how broad that ruling would
be. So, Professor, you really set this case up well for us.
Why do you think this issues come up now? So it's interesting.
Back in August of twenty twenty two, President Biden, as part of the
budget negotiations, proposed a tax on people with more than one hundred million dollars
of wealth. And the basic idea was that if they had appreciated stock,
they pay tax on the appreciation even without a sale. So Congress was considering
this idea of taxing so called unrealized gains for people who are very wealthy.
And then another somewhat related issue is that both Elizabeth Warren and Bernie Sanders,
when they were running for president, talked about something else. They talked about
a wealth tax. That's not taxing appreciation, that's just every year taxing the
value of what we have, kind of like a property tax does for our
house, but with all our assets. And it would be the federal government.
And so I think this question of the limits on federal taxing power is
very salient, in part because some people have proposed things that are different from
what we've seen before, and just to confirm that, just as Alito and
the argument asked the government, so what if I'm someone who started a business
in my garage while I was in college and it's thirty years later and I'm
a billionaire in Congress tax my appreciation. I think that was a pretty clear
reference to the Biden mark to market tax. And then later Justice Kavanaugh said
to the government, so let me ask you, what if the government tried
to impose a wealth tax? Would that be unconstitutional? And so they were
talking about this idea of taxing personal property. I think given the salience in
public policy circles of these possibilities, the Court got interested in the issue,
and certainly the taxpayers wanted the court to look at it. So do you
think this was a good vehicle to decide this issue? So it turns out
that I think it was not such a good vehicle to look at this issue.
And it would have been possible for someone to bring a case, and
it may still be possible for someone to bring a case that presents it really
cleanly. And one example that occurs to me is if someone wants to bet
on oil prices so they get an oil future from an exchange that is something
with a tax lawyer's technical name so called twelve to fifty six contract, which
means Congress taxes that every year, regardless of whether you sell. Tax lawyers
call that a mark to market rule, and this is the quintessential example of
taxing appreciation without a sale. So someone who's done one of those contracts,
who then pays tax at the end of the year could go to court and
say, give me my money back. I shouldn't be taxed. It's not
okay, and then the court would squarely face the question of whether Congress has
the power to tax unrealized gains. But this case doesn't quite present it.
And you can look at it in one way, and it does, but
I think, really it doesn't. And what's interesting is the court in the
argument seems to think it doesn't. So let me explain a bit about this
case, which I have to say is just a little bit complicated. But
the key point here is that the taxpayers owned shares in a foreign company company
organized in India. It had profits, the property has appreciated, the stock
is appreciated. They've held it for many years, and because of an international
tax reform that I'll explain in a minute. Congress said, you know what,
we're taxing shareholders on the earnings of the company. But that's the thing
is, it's not a tax on the appreciation in the stock per se.
It's a tax on the earnings of the company. So if you ask yourself
the question, did somebody realize gains here? The answer is yes, the
corporation did. The corporation has a realization. And the real question here is
can the realization of the company be attributed to the owner? So it's not
necessarily that we're taxing the owner on its appreciation so much as we're taxing the
owner on realized gains of the entity that it owns. Actually is a different
issue, which is why this case may end up not really giving an answer
to the question of whether unrealized gains can be taxed. And just two more
sentences on why this came up. So, for many years, the US
had the ambition to tax foreign companies on their earnings, but only when those
earnings are distributed to US shareholders. So no tax on the US shareholder until
she receives the dividend or unless she sells her stock, but she can't tax
the foreign company itself, and in twenty seventeen, Congress decided that it was
not a good idea to tax these dividends because it was encouraging companies to keep
cash overseas. The price of bringing money back to the US was that they
had to pay tax on it. So literally about two and a half trillion
dollars attacks of earnings that were not coming back. And so Cargres said,
we're not going to do that anymore. We're going to tax the earnings when
these companies earn them at a reduced rate. But since we haven't been doing
that before, we'll have a one time transition tax on the earnings that haven't
been taxed and haven't been brought back. And so that tax, which the
briefs referred to as the MRT or the mandatory repatriation tax, that's the tax
that was imposed on the taxpayers here, and it's about the earnings of the
company, which we're realized so long and the short of it is not a
clean vehicle to look at this issue. So we saw in the arguments many
competing visions of this case. So does the court have more than one way
to decide this case? During the argument, as I said there were clues
about which way the court would go. Do you see anything like that here?
Yeah, So there are really two ways the court can go in deciding
this case. One is the question presented, which is, does the sixteenth
Amendment allow Congress to tax unrealized gains gains from property that hasn't been told yet.
That's what I would call the broader issue, and they could resolve it,
and they might, but it's more likely that they're going to go with
a narrower issue, which is, we don't decide whether the Constitution requires a
realization. The issue is not presented here because there were realizations at the corporate
level. The company that they own had realizations, and our question here is
not whether a realization is required, because we have one, but whether the
realization can be attributed to the owner whose realization was it. I think is
a different way to decide the case. In the interest of full disclosure,
I joined some people writing an anvocates brief suggesting that theory for the American Tax
Policy Institute. But what's interesting is that that was the theory that basically dominated
the discussions in the argument, and it just started off the very first question.
Justice Thomas says, tell us, tell us about the difference between realization
and attribution, and it just went on from their. Justice Kavanaugh at one
point sort of followed up. The Chief Justice was saying, so are there
limits? Are there constitutional limits on taxing without realization? And Justice Kavanaugh jumps
in and said, well, you know, we really don't have to decide
that. Now, we can decide it more narrowly by just asking whether it's
okay to attribute to attribute this to the owners. So long way of saying,
it does seem like the court could decide this narrowly, and based on
the argument, I predict that they probably will, but only time will tell.
So you said, the court can decide the case narrowly or broadly.
If they decide narrowly, what are the competing arguments? Yeah, so,
look, there are different ways to look at this. But what is the
government saying. The government is saying it's fine for Congress to tax the owners
of a business instead of the business itself. That's all that they're doing here,
and they've done it since the beginning of the income tax with partnerships.
So I think the best argument that the government has here is this is just
like a partnership, and the Supreme Court said decades ago that that was okay.
So in the US when apart, when we operate a business through a
partnership, partnership earns money, but it doesn't pay tax on the money.
It's the owners that are taxed on the money the partnership earns. And this
is the same thing. Basically, treat this foreign corporation like a partnership.
Now the taxpayer is saying, but it isn't a partnership, it's a corporation.
And that brings us back to this case Eisnervy Macomber from nineteen twenty,
where part of the reasoning in the case was to say that was a domestic
corporation, but to say, yes, partnerships can be taxed that way,
but we don't do it for corporations. Corporations are a real solid legal entity.
Partnerships aren't, and so therefore you shouldn't do that, and we should
just tax a taxpayer on their own realizations. Just tax the owner and what
the owner does, not what the corporation does. Now, the truth is
that language in EISNERVW Macomber. It's very clear on the point, but it
also is dicta. It didn't really it wasn't really necessary for the holding,
and so in a whole bunch of other cases, the later courts have narrowed
the way eisnerv Macomber is read. The taxpayer's best hope here is to revive
eisnerby Macomber, not just the holding, but that language, and to say
yes, with a corporation it's different. We can't do that. But on
the other hand, they want to go with the partnership analogy, then the
government wins here. Okay, So that's if they decided narrowly. If the
court does decide to rule on the broader question, that is, does the
sixteenth Amendment require a realization? What are the compedian arguments there? So there
we're looking at that broader issue. Does the word income in the sixteenth Amendment
mean realized income? And so there are some interesting arguments on both sides there.
So the taxpayer emphasizes that the phrasing is income from whatever source derived,
and they focus on that word derived, suggesting that it isn't enough to be
income, it has to also be derived. And they say that the word
derived it applies a realization. And so that is one way to read from
whatever source derived, but the government has its own reading of that language,
which is different. They remind the court that US had an income tax,
and then in eighteen ninety five the Supreme Court said an income tax is not
constitutional, and they said, at least a certain income tax, an income
tax where the income is from property is not constitutional. Meanwhile, there was
still an argument that an income tax from labor was constitutional. And President Taft
was president at the time, or rather a few years later, not at
the time. A few years later, there was a strong political ground swell
to enact an income tax. Some people said, you know what, let's
just send it back to the court. They'll overrule themselves. It was five
to four last time they overruled a different case earlier. Maybe they'll swing back.
And Taft said, you know, I don't want to put the Court
in a position where it has to flip flop that way to lose credibility.
Let's just propose, you know, let's propose an amendment. And so they
did. They proposed the sixteenth Amendment. One of the interesting codas about that
is, of course Taff became a Chief Justice not that long after, so
his affection for the court was personal as well as institutional. In any event,
The argument the government makes is income from whatever source derived. The phrase
from whatever source derived refers to pollock. You know, they're saying, look,
you said income from property. Not okay. We're saying it is okay,
from whatever source derived, it's fine. So there's this textual issue.
The government has another textual argument, which is, hey, the word realization.
It doesn't appear in the amendment, and Congress could easily have said realized
income from whatever source derived. They didn't say that, and so as a
textual matter, don't add a word that isn't there is. The government's point,
also really interesting, is to look at contemporary practice to try to figure
out what the words meant the taxpayer. That focuses a lot on dictionaries,
some of which sort of imply that income involves some sort of severable gain.
But then there are other dictionary definitions that don't say that. There's some history
about a corporate income tax at the time where the Treasury was reading it not
to require a realization. One of the points that nobody seems to be making,
but I think is interesting, is there's a practice in the tax law
called depreciation, which basically allows you to take a deduction without selling so for
equipment that wears out, and so the depreciation rule is not consistent with realization.
The court was considering whether depreciation was okay, not under an income tax,
because we didn't have one then, but under some of these railroad regulation
cases, and the court initially said Nope, can't do it, and then
they later said, actually, no, you can. And that happened only
a few years before the sixteenth Amendment. And it may be that we can
shed some light on what income meant and meant to the court at the time
and what meant to lawyers at the time because of those cases. But I
would sum up what's interesting and challenging about the originalist analysis in the following way.
We'd love to know what the public meaning was, and I suspect that
the public meaning varies depending on whether you were to ask experts or the average
voter. And I think if you asked an expert, an accountant because income
was a word with a lot of significance in accounting at the time, or
a lawyer, my gut my read based on the sources, is that there's
a very strong argument that realization is not required On the other hand, if
we're trying to figure out what the word income meant to the average voter in
nineteen thirteen when the amendment was ratified, it was probably a pretty good argument
that they had no idea that unrealized gains were included there. And I say
that partly because most voters today don't generally think that that should count as an
income. So if the court reaches this issue, it has some very interesting
original sources and texts to analyze, and of course the number of the court's
own precedents as well. So over the course of this case, and including
in the briefs and during oral arguments, did we learn anything about the constitutionality
of a wealth tax like the kind proposed by Senators Bernie Sanders and Elizabeth Warren.
So there was one really interesting moment in the argument, and that was
when Justice Kavanaugh said to the government's lawyer, so tell me, what would
happen. Do you agree that a tax on wealth just a value of personal
property? Do you agree that that would be a direct tax subject to apportionment?
The government itself said yes, absolutely, that would be a wealth tax,
which is a concession in this case. Doesn't mean that the Court that
the government would be bound to take that position later. But it is interesting
that even the government is saying that would be a wealth tax. For what
it's worth. I certainly think it's a wealth tax, but there's a debate
about that, which brings us to Justice Jackson. At another point in the
argument, she mentioned a backup claim where she was sort of gesturing in the
direction of saying that the wealth taxes are kind of could possibly be okay.
And so let me say a word about the relevant background. The sixteenth Amendment
was enacted because without it, the Cordon Pollock said that an income tax is
what's called a direct tax under the Constitution that hasn't been apportioned. So what
is that all about. In let's go back to the Articles of Confederation.
The United States, brand new country founded within it founded because of a tax
revolt. The king was imposing taxes that were unpopular and perceived as illegitimate.
So what do you do when you're a new national government. You tried very
hard not to look like King George, and they went a little too far
because the national government had no tax in power. What they did is they
requested contributions, but those contributions were voluntary, and only about thirty seven percent
of the taxes they wanted actually were collected. But what is quite interesting is
how are they collecting these taxes not from individuals. They were billing the states.
So basically, think about the euarion. These are entities, sovereign entities,
joining together for a limited common purpose, and it would be the governments
of these entities that would contribute, not to people, because this was sort
of a union of governments, and that's the way the Articles of Confederation.
So it was conceived and it was a terrible failure. The biggest problem with
the articles is they were broke. They couldn't afford a military. They couldn't
you know, they had no money. And so Hamilton Addison, George Washington
or there were people who said, we have to do something, we have
to change this. But the anti federalists said, you know, we really
like the Articles of Confederation. Let's keep it limited, let's keep it the
way it is. But with one change, we will have a five percent
tax on imports for the national government and that's it, and otherwise the Articles
of Confederation will remain the way it is. Well, they could have gone
that way but they didn't go that way, and one of the since they
didn't was a concern about emergencies. So when do we need war? I'm
sorry, when do we need taxes? The most time of war? For
the young United States? What would trade look like during a war? Well,
trade would stop. We had no navy, which means if our only
source of revenue was taxes on imports, that wasn't going to happen. And
so Hamilton and Madison and others they said, we like taxes on imports and
what are called X sizes, which are consumption taxes, taxes on transactions.
We love those. Those are great. The people can decide not to do
the transaction, so it's sort of a voluntary tax almost, and the government
can't overtax. So we think those are great, but they're not enough.
We need to have these other taxes, direct taxes, which are which are
more like property taxes, taxes on real estate. But the only way those
are going to be allowed is if we do something called apportionment. An apportionment
means the amount of attax from each state has to correspond with its population.
So if Connecticut and Mississippi each represent two percent of the United states's population.
That means that with a direct tax that's apportioned, two percent of the revenue
has to come from Connecticut and two percent of the revenue has to come from
Mississippi. But there's a problem. Connecticut is the wealthiest state in the Union.
Mississippi, I think is the second least wealthy state in the Union,
and in order to collect the same revenue, ironically, you're going to need
a much higher tax rate in Mississippi. So a higher tax in the less
wealthy state not politically appealing, but it made sense to the framers because what
worried them is they didn't want some number of states ganging up on another state
and imposing this proportionate tax. So a direct tax has to be apportioned.
Politically unpopular, but it's necessary under the constitution. And only the sixteenth Amendment
allows for income taxes. At least that you could argue that an income tax
wasn't direct beyond the scope of our discussion today, But in any event,
that's why the sixteenth Amendment was enacted. But it didn't overturn this idea of
direct taxes that have to be apportioned. It just carved out income taxes from
that framework. So Justice Jackson raises the question, Hey, even if the
sixteenth Amendment doesn't apply, is it possible that the provision here, the income
tax provision here, could be justified as an excise tax? And so I
doubt the court will reach the question. But there were glimmers of this issue
about direct taxes and wealth taxes. Again, I think the most significant one
is the government, at least this week saying that they I think a wealth
tax would be direct and it would have to be a portioned but we don't
have one. And if Congress ever enacts it, I suppose the Court will
certainly have to appine on that. Okay, that's great. Typically, we
asked one last question, if you could read the tea leaves, how do
you think that this case will turn out? You already said that you believe
that they'll decide it narrowly. Do you see which way it could go?
So I think that the government is going to win here. It looks like
there are a number of votes for the idea that we don't have to reach
the question of whether realization is constitutionally required. We think there was a realization
here at the corporate level, and it can be attributed to the owners in
the same way we allow it with partnerships. I think that's what they'll do.
It would not surprise me if a pretty significant majority signs on. Maybe
even it'll be unanimous. It could be wildly wrong, but we'll see.
And I think the interesting question is whether there will be concurrences, with Justice
Jackson perhaps saying even if not, I think this could be an excise tax.
With Justice's Gorsa and Alito, and perhaps Thomas and Roberts also, they
sort of were interested in this, but perhaps them saying this doesn't mean that
unrealized appreciation can be taxed, and we await a case that allows us to
consider that. But we think that there are real issues there and so on,
so we may learn something in concurrences. But at least based on the
argument, it seemed quite plausible that the ruling itself will be pretty narrow.
All well, thank you so much for joining us today, Professor Schizler.
This was great, and I just wanted to say thank you from the Federalist
Society. Thank you, Kyle, my pleasure. Thank you for listening to
this episode of scot Discust. Discast is a project of the Federalist Society,
a not for profit educational organization of conservative and libertarian law students, law professors,
and lawyers, founded upon the principles that the state exists to preserve freedom,
that the separation of governmental powers is central to our constitution, and that
it is emphatically the province and duty of the judiciary to say what the law
is, not what it should mean. Don't forget to subscribe to our podcast
series, including SCO discasts and practice group podcasts, on iTunes or Google Play.
For an archive of past podcasts, as well as audio and video of
past Federalist Society events, please visit our website at fedsoc dot org slash multimedia.
That's fedsoc dot org slash multimedia. This has been a FEDSOC audio production.