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The end of GILTI? US Supreme Court to Decide if Tax on Unrealized Gains is Unconstitutional

All federal taxes are direct taxes or indirect taxes. Under the US Constitution, direct taxes must be “in Proportion to the Census,” and indirect taxes “shall be uniform throughout the United States.”[1] Unless tax provisions expressly differ by the state, such as a higher tax rate for Californians, the uniformity requirement is almost always satisfied.[2] For direct taxes the US Constitution mandates nearly the opposite resulting in the effective penalization of poor populous states as population rather than wealth is taxed. Under a direct tax Alabama would be taxed 29.4% more than Connecticut despite Connecticut’s 67.8% higher average income due to the larger population of Alabama. The first Supreme Court case interpreting the Direct Tax Clause, decided in 1797, derided apportionment as “absurd” with “oppressive and pernicious” results when applied to subjects other than land, which even then “is scarcely practicable.”[3] One constitutional scholar summarized academic sentiment regarding this reality by calling it “a botch in the core of the Constitution.”[4] Now, the Supreme Court has agreed to hear Charles G. Moore v. United States and decide: “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.” At stake is at least $340 billion.[5]

Subpart F of the Internal Revenue Code proportionally imputed a foreign corporation’s “particular categories of its undistributed earnings such as dividends, interest, and earnings invested in certain U.S. property” to U.S. persons owning at least 10% of a controlled foreign corporation (CFC), “a foreign corporation whose ownership or voting rights are more than 50% owned by U.S. persons.”[6] Such income is known as Subpart F income, and such a corporation is known as a “controlled foreign corporation.”[7] The Tax Cuts and Jobs Act of 2017 modified Subpart F to include a CFC’s “current earnings.”[8] That 2017 legislation also added the Mandatory Repatriation Tax (MRT), which is a “one-time tax” that changed “Subpart F by classifying CFC earnings after 1986 as income taxable in 2017.”[9] Shareholders of an Indian company dedicated to supplying “modern tools to small farmers in India” have now claimed that the MRT violated the Direct Tax Clause.[10]

The Direct Tax Clause

Clause 4 of Section 9 of Article I of the Constitution provides: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” Taxes are considered to be direct if they were “understood to be direct taxes when the Constitution was adopted.”[11] Nevertheless, “[e]ven when the Direct Tax Clause was written it was unclear what else, other than a capitation (also known as a ‘head tax’ or a ‘poll tax’), might be a direct tax.”[12] Even this is an understatement as it appears that those present at the constitutional convention who wrote the words themselves did not have a clear idea. Previous US Supreme Court justices have explored this ambiguity in previous opinions, stating, “[i]n the convention which framed the Constitution, Mr. King, on one occasion asked what was the precise meaning of ‘direct taxation,’ and Mr. Madison informs us that no one answered. That Mr. Madison took the pains to record the incident indicates that it challenged attention but that no one was able to formulate a definition.”[13] In Alexander Hamilton’s words, “[i]t is a matter of regret that terms so uncertain and vague in so important a point are to be found in the Constitution. We shall seek in vain for any antecedent settled legal meaning to the respective terms. There is none.”[14]

The 16th Amendment did not moot the mystery of the Direct Tax Clause when it may have had the chance to. Instead, that Amendment specifically exempted only taxation on income from apportionment: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” This “merely removed the necessity which otherwise might exist for an apportionment among the states of taxes laid on income.”[15]

The Direct Tax Clause was last discussed by the Supreme Court in 2012 when it upheld most of the Patient Protection and Affordable Care Act under the congressional power to tax.[16] As that legislation’s accompanying tax is not on income, it must be apportioned if it is a “direct tax.” The Court found that it is not. In explaining why the “tax on going without health insurance does not fall within any recognized category of direct tax,” Chief Justice Roberts demarcated three categories in writing for the Court: Capitations, taxes on the ownership of land, and taxes on personal property.[17] The inclusion of “personal property” in Chief Justice Roberts’ formulation is notable. As he observed, “direct taxes” were understood to include only capitations and land taxes from 1796 to Pollock v. Farmers’ Loan & Trust Co. in 1895.[18] Pollock ruled in a 5-4 decision that the income tax was unconstitutional because it was a direct tax on personal property, expanding what was the direct tax’s duo into a trio. When establishing an income tax in the US, the 16th Amendment achieves its desired effect directly—it does not restore Direct Tax Clause jurisprudence to its pre-Pollock state but bypasses it entirely to provide an outright exception for income. As Chief Justice Roberts implied, Pollock’s expansion to personal property remains sound. Yet if the Direct Tax Clause encompasses taxation on personal property, then what are the “Duties, Imposts and Excises” contemplated in the Taxing Clause?[19] Pollock declared that “the constitution divided federal taxation into two great classes,—the class of direct taxes, and the class of duties, imposts, and excises.”[20] Nevertheless, these classes may overlap.[21] In contrast, Justice Harlan’s dissent in Pollock contended that “[i]n the constitution, the words ‘duties, imposts, and excises’ are put in antithesis to direct taxes.”[22] This dispute seemingly became academic with the 16th Amendment.

Moore v. United States

The 9th Circuit decided Moore v. United States in the Justice Department’s favor.[23] Eisner v. Macomber rests as the center of the 9th Circuit’s reasoning. Eisner v. Macomber is most notable for its status as the Supreme Court’s first case to discuss 16th Amendment lexicology. Specifically, Eisner v. Macomber considered whether a stock dividend is income. As summarized several decades later by the Court: “At issue was whether the stock dividend constituted taxable income. We held that it did not, because no gain was realized.”[24] Eisner v. Macomber defined income as:

[G]ain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being “derived”-that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal-that is income derived from property. Nothing else answers the description.[25]

As assessed by the Court in 1943, the Court subsequently “rejected the concept that taxable gain could arise only when the taxpayer was able to sever increment from his original capital” and “held that there was no exemption from taxation where economic gain is enjoyed by some event other than the taxpayer’s personal receipt of money or property.”[26] These “decisions undermined further the original theoretical bases of” Eisner v. Macomber, and the Court seemingly considered overruling it but decided that the time was inopportune for such a change.[27] However, the decisions the Court reviewed clarified when realization occurs rather than denying that it must occur altogether.

Eisner v. Macomber unambiguously concluded what income is not: “[F]rom every point of view we are brought irresistibly to the conclusion that neither under the Sixteenth Amendment nor otherwise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder.”[28] The Supreme Court never unequivocally held that realization is always a requirement for income, although it seems to have come close.[29] The 9th Circuit seized upon this absence and Court criticism of Eisner v. Macomber to limit that case to its facts. For example, a 1955 Supreme Court case declared that Eisner v. Macomber “was not meant to provide a touchstone to all future gross income questions.”[30] Despite this statement, Eisner v. Macomber was cited by the Court as an authority regarding the nature of income on at least five subsequent occasions, most recently in 2012.[31]

The 9th Circuit’s decision in Moore v. United States did not contain a dissenting opinion. However, the 9th Circuit’s denial of an en blanc hearing prompted a dissent from four circuit judges.[32] The dissenting opinion was sympathetic to the taxpayers, the Moores. The dissenters stated that the Moores invested in KisanKraft “to improve the lives of small and marginal farmers in India” and reinvested all profits without realizing any income, yet “[a]s the Moores would find out, no good deed goes unpunished.”[33]

The definition of “income” in the 16th Amendment determines the fate of hundreds of billions of dollars. It is “the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment to the Constitution.”[34] According to the 9th Circuit’s dissent, “income” was understood to require realization when the 16th Amendment was ratified in 1913. Several citations buttressed this argument. Mr. Henry Campbell Black himself, “of Black’s Law Dictionary fame,” published a treatise soon after ratification, maintaining that income “is not synonymous with ‘increase’” and realization is a prerequisite.[35] 

The 9th Circuit emphasized the Supreme Court’s language in Helvering v. Horst that “the rule that income is not taxable until realized” is “founded on administrative convenience.”[36] However, the dissent responded, stating that  language did not necessarily carry constitutional connotations.[37] In light of this dispute it is worth noting that the first sentence of Helvering v. Horst appeared to fully accept the premise of a realization requirement: “The sole question for decision is whether the gift… is the realization of income taxable to the donor.”[38]

Taxes under Threat

While the Mandatory Repatriation Tax precipitated this case the 9th Circuit understood the challenge as threatening Subpart F’s whole scheme rather than simply this isolated tax. Notwithstanding its disclaimer that “it does not control our analysis,” the 9th Circuit cautioned that “holding that Subpart F is unconstitutional under the Apportionment Clause would also call into question the constitutionality of many other tax provisions that have long been on the books.”[39] Indeed, the Justice Department argued that the taxation of “regulated futures contracts,” “securities held by securities dealers,” certain life insurance company assets,  partnerships, S corporations, and expatriation would be jeopardized if realization is necessary for the 16th Amendment’s apportionment exception in addition to the threat to subpart F income.[40] As a result of the potentially far reaching implications, an audience before the Supreme Court for this Direct Tax Clause argument is far from the 2nd Circuit’s 1973 dismissal of it as one that “borders on the frivolous.”[41]

At present, neither party appears to have contemplated the implications for the estate and gift taxes should the Direct Tax Clause reawaken. These are not taxes on income. Yet according to the Supreme Court, these are not direct taxes either.[42] They tax some of the property rights rather than all of the property and are triggered by an event. “A tax laid upon the happening of an event, as distinguished from its tangible fruits, is an indirect tax.”[43] The gift tax taxes “[t]he power to give” which “cannot be said to be a more important incident of property than the power to use,” such as a “tax upon the use of foreign built yachts” or the “use of carriages,” both previously held to be indirect taxes.[44] The estate tax was held to be a tax on “the receipt in possession or enjoyment of the proceeds of a right previously acquired and vested.”[45] “A tax imposed upon the exercise of some of the numerous rights of property is clearly distinguishable from a direct tax, which falls upon the owner merely because he is owner, regardless of his use or disposition of the property.”[46] A tax on the whole value of the estate’s property rights is therefore justified because it is a tax on the exercise of some of those rights, and not on the property itself.

The estate tax’s pedigree influenced the Supreme Court as a feudal “payment exacted of the heir for the privilege of admission to possession of the land of his ancestor.”[47] “[T]his kind of tax always has been regarded as the antithesis of a direct tax; has ever been treated as a duty or excise, because of the particular occasion which gives rise to its levy. Upon this point a page of history is worth a volume of logic.”[48] For example, the Stamp Act of 1797 levied a legacy tax on testamentary transfers under the label of “duty.”[49] Ultimately, “Congress may tax real estate or chattels if the tax is apportioned, and without apportionment it may tax an excise upon a particular use or enjoyment of property or the shifting from one to another of any power or privilege incidental to the ownership or enjoyment of property.”[50] A tax on the ascension of wealth is a direct tax if triggered by a sale or payroll period, and an indirect tax if triggered by a gift or death. This classification’s survival under renewed scrutiny is not necessarily guaranteed and any changes to that classification could have far reaching impact.


The definition both parties target is that of “income.” Yet the Justice Department limits its options if it chooses not to change the term they seek to define from “income” to “direct.” If the Justice Department changes their fight, and the Supreme Court modifies Pollock’s holding that a tax on personal property is a direct tax, the Court could avoid defining income altogether. While the Supreme Court professes to loathe reversing its own precedent, deciding in favor of the Justice Department would effectively require overruling Eisner v. Macomber or Pollock. It appears that the Justice Department is aware of this reality, as they have relied on Eisner v. Macomber’s dissenting opinion by Justice Holmes to a considerable degree in its pleading to the Supreme Court. Whereas Eisner v. Macomber is usually well-regarded as the foundation of income tax jurisprudence, Pollock prompted a constitutional amendment to overrule its holding. Pollock was a departure from Direct Tax Clause caselaw bearing a pedigree from the Framers. Construing the Direct Tax Clause to exclude the tax of unrealized income from the scope of a direct tax while leaving its full definition ambiguous would maintain the status quo and permit challenges to any future tax on wealth itself rather than accensions to wealth.

Moore v. U.S. has the potential to revolutionize tax law. Realization is the predicate of income tax law, yet it is nearly an unwritten convention stemming from century-old caselaw. In defining “gross income,” Congress uses the language of the 16th Amendment to “the full measure of its taxing power.”[51] If “income” of the 16th Amendment includes unrealized gain or increase in wealth, then “income” as used in section 61 of the Internal Revenue Code does as well.[52] Theoretically, that would mean every rise in stock price would be a taxable event as unrealized income. On the other hand, if the taxpayer wins, Subpart F, the expatriation tax, and other provisions would be nullified. Depending on the scope of the Supreme Court’s Direct Tax Clause observations, the estate and gift tax may also be jeopardized. Incidentally, Moore v. U.S. will be decided in a presidential election year in which President Joseph Biden may make his proposed tax on unrealized income a significant policy issue further adding to the significance of this upcoming decision. 

[1] U.S. Const. art. I, § 8, cl. 1; U.S. Const. art. I, § 9, cl. 4.

[2] “[T]he uniformity in excise taxes exacted by the Constitution is geographical uniformity, not uniformity of intrinsic equality and operation. The Constitution does not command that a tax have an equal effect in each state. It has long been settled that within the meaning of the uniformity requirement a tax is uniform when it operates with the same force and effect in every place where the subject of it is found.” Fernandez v. Wiener, 326 U.S. 340, 359 (1945)(omitting internal quotation marks and citations).

[3] Hylton v. United States, 3 U.S. (3 Dall.) 171, 179-80 (1797) (Paterson, J.).

[4] Calvin H. Johnson, Apportionment of Direct Taxes: The Foul-Up in the Core of the Constitution, 7 Wm. & Mary Bill Rts. J. 1, 11 (1998).

[5] Moore v. United States, 36 F.4th 930, 933 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[6] Moore v. United States, 36 F.4th 930, 933 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[7] Moore v. United States, 36 F.4th 930, 932 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[8] Moore v. United States, 36 F.4th 930, 932 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[9] Moore v. United States, 36 F.4th 930, 932-33 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[10] Moore v. United States, 36 F.4th 930, 932 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023).

[11] Bromley v. McCaughn, 280 U.S. 124, 137 (1929).

[12] Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 570 (2012).

[13] Bromley v. McCaughn, 280 U.S. 124, 139 (1929)(Justice Sutherland dissenting).

[14] Springer v. United States, 102 U.S. 586, 597 (1880)(quoting Alexander Hamilton).

[15] Eisner v. Macomber, 252 U.S. 189, 206 (1920).

[16] Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012).

[17] Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 571 (2012).

[18] Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601 (1895).

[19] “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” U.S. Constitution Art. I § 8, Clause 1.

[20] Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601, 617–18 (1895).

[21] “We do not mean to say that an act laying by apportionment a direct tax on all real estate and personal property, or the income thereof, might not also lay excise taxes on business, privileges, employments, and vocations.” Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601, 637 (1895). The contradiction of a geographically uniform tax in proportion to the states was not discussed.

[22] Pollock v. Farmers’ Loan & Tr. Co., 158 U.S. 601, 622 (1895)(Justice Harlan dissenting).

[23] The Justice Department is responsible for tax litigation outside of Tax Court. U.S. Dep’t of Just. v. Tax Analysts, 492 U.S. 136, 138 (1989).

[24] Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 563 (1991).

[25] Eisner v. Macomber, 252 U.S. 189, 207 (1920)(emphasis in original).

[26] Helvering v. Griffiths, 318 U.S. 371, 393 (1943)(omitting internal quotation marks).

[27] Helvering v. Griffiths, 318 U.S. 371, 393–94 (1943).

[28] Eisner v. Macomber, 252 U.S. 189, 219 (1920).

[29] “A gain constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.” James v. United States, 366 U.S. 213, 219 (1961)(omitting internal quotation marks).

[30] Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

[31] Ivan Allen Co. v. United States, 422 U.S. 617, 633 (1975); Lukhard v. Reed, 481 U.S. 368, 375 (1987); Comm’r v. Fink, 483 U.S. 89, 95 fn.6 (1987); Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 562 (1991); Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 571 (2012).

[32] Moore v. United States, 53 F.4th 507 (9th Cir. 2022). The dissenters were: Hon. Patrick J. Bumatay, Hon. Sandra S. Ikuta, Hon. Consuelo M. Callahan, and Hon. Lawrence J. C. VanDyke.

[33] Moore v. United States, 53 F.4th 507, 509 (9th Cir. 2022)(Judge Bumatay dissenting).

[34] Merchants’ Loan & Tr. Co. v. Smietanka, 255 U.S. 509, 519 (1921).

[35] Moore v. United States, 53 F.4th 507, 511 (9th Cir. 2022)(Judge Bumatay dissenting).

[36] Helvering v. Horst, 311 U.S. 112, 116 (1940).

[37] Moore v. United States, 53 F.4th 507, 514 (9th Cir. 2022)(Judge Bumatay dissenting).

[38] Helvering v. Horst, 311 U.S. 112, 114 (1940).

[39] Moore v. United States, 36 F.4th 930, 938 (9th Cir. 2022), cert. granted, No. 22-800, 2023 WL 4163201 (U.S. June 26, 2023)

[40] at 17-18.

[41] Garlock Inc. v. Comm’r, 489 F.2d 197, 202 (2d Cir. 1973).

[42] Bromley v. McCaughn, 280 U.S. 124 (1929); Fernandez v. Wiener, 326 U.S. 340 (1945).

[43] Tyler v. United States, 281 U.S. 497, 502 (1930).

[44] Bromley v. McCaughn, 280 U.S. 124, 137-138 (1929)(referencing Billings v. United States, 232 U.S. 261 (1914) and Hylton v. United States, 3 U.S. 171 (1796).

[45] Fernandez v. Wiener, 326 U.S. 340, 355 (1945).

[46] Fernandez v. Wiener, 326 U.S. 340, 362 (1945).

[47] Fernandez v. Wiener, 326 U.S. 340, 353 fn.13 (1945).

[48] New York Tr. Co. v. Eisner, 256 U.S. 345, 349 (1921)(omitting internal quotation marks and citation).

[49] Knowlton v. Moore, 178 U.S. 41, 50 (1900).

[50] Fernandez v. Wiener, 326 U.S. 340, 352 (1945).

[51] Helvering v. Clifford, 309 U.S. 331, 334 (1940).

[52] IRC § 1001 only governs the disposition of property.