As part of this year’s Constitution Day event at USD Law School, I took a closer look at Moore v. United States, the pending U.S. Supreme Court tax case with significant originalist implications. It turns out to be a harder case than I had thought at first.
The question presented in Moore is: “Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states.” Specifically in the Moore case, the question is whether Congress may tax as income the Moores’ pro rata share of the undistributed earnings of a corporation in which they are shareholders.
In the Ninth Circuit, Judge Patrick Bumatay wrote a dissent from denial of rehearing en banc in Moore, arguing that the original meaning of “income” in the Sixteenth Amendment did not include unrealized gains such as undistributed corporate earnings. In response, Professors John Brooks (Fordham) and David Gamage (Indiana) wrote an originalist defense of the tax: Moore v. United States and the Original Meaning of Income. Here I’ll summarize and critique the main arguments. (The parties’ originalist arguments largely track the Bumatay and Brooks/Gamage arguments; they also have extended arguments on more recent precedent that I’ll largely ignore.)
Judge Bumatay mainly relies on dictionaries and legal writing around the time of the Amendment’s ratification (1913), plus a Supreme Court case in the early post-ratification period. Briefly, the dictionaries say that income is something that “proceeds from” listed sources, or “comes in” to a person. Bumatay says that wouldn’t include unrealized gains, because gains don’t “come in” to a person until the person actually receives something tangible (money or in kind distributions). The treatises, by Henry Black and Robert Montgomery – both published shortly after ratification – say even more clearly that income requires a realization, not just an increase in asset value. And the Supreme Court took a similar view, invoking the “comes in” definition, in Eisner v. Macomber in 1920. On a first read, I thought the dissent made persuasive use of appropriate originalist authorities.
Brooks and Gamage try to undermine the force of these authorities (with mixed success, in my view), and invoke at least one very persuasive authority of their own. As to the dictionaries, they say Bumatay’s reading assumes its conclusion – the whole question is what it means to say a gain “comes in” to a person. Might that not include when an asset appreciates in value? How do we know it doesn’t? As to the treatises, they point out that both Black and Montgomery acknowledge the definition of income is contested; the claim that income requires realization is just their view of it, while others disagree. And Brooks and Gamage say the comments in Eisner are just dicta, and confused dicta at that.
Brooks and Gamage also show that later economics literature adopted a definition of income that included unrealized gains, based on the writings of Henry Simons (1938) and Robert Haig (1921). It’s not clear (to me, anyway) that this idea was generally available in 1913. (Brooks and Gamage say it was based on earlier works from Germany and Scotland.)
Up to this point, I didn’t find Brooks and Gamage all that persuasive, though they do show the sources are a little more ambiguous than Bumatay suggests. But the big Brooks/Gamage claim is that immediately pre-ratification Treasury Decisions implementing an existing tax on corporate income included unrealized gains in asset value as part of income. They quote one 1911 decision, for example, saying that the “increase in the value of unsold property, if taken up on the books of the corporation, [are] to be included in income.” Assuming that’s right (and I have no reason to think it isn’t), it seems strong evidence of original meaning. At least, if the drafters of the Amendment wanted to exclude unrealized gains from income, they should have been clear about it in light of the Treasury’s contemporaneous position to the contrary. (In fact, this seems so strong I’m puzzled as to why Brooks and Gamage don’t lead with it.)
The one weakness, which Brooks and Gamage acknowledge, is that a 1915 court of appeals decision rejected the Treasury view of income. But that was after ratification of the Amendment.
Apart from Bumatay and Brooks/Gamage, the most interesting originalist argument in the case comes from an amicus brief invoking the tools of corpus linguistics, filed by Thomas R. Lee, Lawrence Solum, James Philips and Jesse Egbert. The authors claim that they searched a database of writing around the time of drafting and ratification, and found no (zero!) instances of “income” being used to describe unrealized gains. If accurate, that seems very persuasive in favor of Judge Bumatay’s view – though I’m not sure whether it’s appropriate for the Supreme Court to rely on it. (I also don’t understand how it can be true if Brooks and Gamage are right about the 1911 Treasury decisions.)
Finally, and sadly from an originalist perspective, it may be that none of this gets resolved in the actual case. Moore isn’t a simple taxation-of-unrealized-gains case. Rather, everyone agrees that there were realized gains (and thus “income”) by the corporation. The only question is whether the Sixteenth Amendment allows Congress to tax the shareholders for the corporation’s income. That poses an entirely different question – whether Congress can disregard the corporate form for purposes of taxation. I have a hard time seeing that the Constitution speaks to that point. And for what it’s worth, the longstanding taxation of partnerships (as opposed to corporations) works in exactly this way. That doesn’t make it right, but it seems that a broad ruling in Moore would upset a lot of settled practice. So I doubt the Court would go that far (though it might well correct some loose language in the Ninth Circuit panel opinion, which is what I think Judge Bumatay mainly objected to).
NOTE: This post was originally published at The Originalism Blog, “The Blog of the Center for the Study of Constitutional Originalism at the University of San Diego School of Law,” and is reposted here with permission from the author.