Banana Split Court
... by their fruits you shall know them.
For the first time in over a century, the Supreme Court confronted constitutional issues concerning the Sixteenth Amendment, the authorization for federal income tax. The result should dismay us.
It’s best to approach the Supreme Court’s June 20, 2024, opinions in Moore v United States in reverse order, as it lessens the chance of your eyes glazing over (which may in fact have been the majority’s intent). But first let us set the scene.
Mr. and Mrs. Charles Moore used to have a neighbor who originated from India. This neighbor returned to his native country with the noble goal of establishing a non profit company, which brought modern farm tools to small subsistence farmers. The Moores, as an act of charity and friendship, invested in this privately held, India-based company. They have never sold the shares, and the company has never declared or paid any dividend. Instead, while the company has in fact been successful with profits, those profits have been reinvested into the company. The value of the Indian company, and accordingly the Moores’ shares, has grown over the intervening years.
The tax reform act passed during the Trump Administration (the only significant or positive legislation the so-called Republican leadership under Paul Ryan permitted to succeed) included an obscure provision called the Mandatory Repatriation Tax (MRT). Aimed at the large tech companies like Apple and MicroSoft, who held huge foreign cash deposits from overseas operations in bank accounts abroad beyond the reach of the IRS, this provision levied a one time tax on the value of American-owned assets parked overseas. The broad net caught the Moores’ investment in the Indian nonprofit company.
The Moores paid the MRT under protest and sued in federal court to recover the five-figure sum they had paid. The claim was that to make Americans pay tax on idle or stationary property, which had undergone no transaction such as sale or transfer, was a direct and not an indirect tax, and therefore subject to special restrictions in the Constitution.
Article I of the Constitution grants Congress only limited powers of taxation — direct taxes, such as on people or property, must be apportioned according to the population of the respective states; indirect taxes, such as transactions or sales taxes, excises, imposts and duties, may be imposed, but only if made uniform across the entire nation. “Income” can constitute monies from either type of source, and in the end of the Nineteenth Century, the Supreme Court ruled that dual nature of income made a federal income tax unconstitutional, because such a tax could reach property and persons without apportionment as required under Article I. The Sixteenth Amendment took effect in 1913 to clarify and correct that problem, deeming all “income,” from whatever source derived, taxable by the federal government without apportionment.
The Moores argued that, there having been no sale or transfer of the Indian shares, and their supposed gain in value really only existing on paper, there was no “income” to the Moores, and therefore any tax imposed was not “income” within the scope of the Sixteenth Amendment. The federal District Court in blue Washington state ruled against the Moores. The Ninth Circuit Court of Appeals upheld the District Court ruling. So the Moores petitioned the Supreme Court, which agreed to hear their case. The Question Presented to the Court was, “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”
It used to be well understood, and should be, that the Constitution sets apart a judicial branch embodied in the Supreme Court, whose duty and function is to interpret the laws and apply the Constitution. Under the Separation of Powers principle that safeguards our natural rights, the Court is bound to check and negate any acts of the other two branches, Executive or Legislative, that exceed their constitutional bounds.
Chief Justice John Marshall set the precedent and established the principle of judicial review in Marbury v. Madison, striking down a law passed by Congress that exceeds the boundaries of legislative power or otherwise violates a constraint set forth in the Constitution. Justices who have sworn the oath of office to preserve and uphold the Constitution are thereby beholden to enforce its provisions, even to the point of confronting the other branches. Let’s see how these nine jurists did.
As stated from the first, the case is best understood by turning first to the dissent of Justice Thomas, which Justice Gorsuch joined. Justice Thomas squarely faced the Question Presented: The broad requirements of Article I are still in effect and control the Congress in its tax power; Amendment Sixteen sets out an exception. Income, from whatever source derived, is taxable. So what makes something income?
Well, it must of course be derived. It can’t just be a thing or person in being, it has to come from somewhere to become in the possession or control of the persons taxed. And that translates into the taxation term of art, realization. So any unrealized rise in value of a foreign located asset is not income, because it was not yet realized, or translated into money and received. And if it’s not income, then it cannot fall within the excepting provisions of the Sixteenth Amendment, and if it is taxed, it must be by the process of apportionment across the States according to their respective populations. And most importantly, Justice Thomas is not afraid to say, The MRT is accordingly unconstitutional and must be struck down. period. However inconvenient to the administrative state, the spenders and collectors of taxes, that may be.
Justice Barrett, joined by Justice Alito, agreed with Justice Thomas that to be income, the gain must be realized. She even admits straight out, after quoting the question presented on which the Court granted review, “The answer is straightforward: No.” So why didn't she vote with Justices Thomas and Gorsuch, as that clearly answers the Question Presented? Well, she wrote, it is true that there must be realization for there to be income, but in just this one case and instance, its kinda okay to let the MRT tax stand, because the Government could, you know, tax the corporation in India directly on its accrued profits, because that corporation received income, so what does it matter if you are taxing the company in India or the shareholder Moores in Washington State? She lets it pass, with a stern note that next time, she might not be so forgiving….
[No one notices or points out that the company in India isn't and probably couldn't be taxed directly by the United States, even under the existing tax treaty with India. The company doesn't appear to do business in the U.S. or have any assets or accounts in the U.S. So this is a shiny bauble or red herring to distract… Not to mention, strictly speaking, if the United States is reaching into the territory of the nation of India to tax property and assets located there with no nexus to the U.S., it is a pure violation of national sovereignty and international law. But those concepts seem not to be cool these days with the in-crowd.]
Junior Justice Ketanji Brown Jackson wrote her own concurring opinion, demonstrating the arrogance born of ignorance. She believes the Court has always deemed Congress’s view of taxation to be controlling, and since Congress has been doing what it wants anyway, there is no reason to stop them from doing it now. To her mind, the Sixteenth Amendment created no exception from the limited and enumerated congressional taxing power; rather, the Sixteenth Amendment only corrected that one pesky Supreme Court ruling in the Pollock case that tried to stop Congress from passing an income tax. So now Congress can go back to what she thinks they always could do, which is tax whatever they want. “Pollock,” she writes, “teaches us that this Court’s role in such disputes should be limited.” The “remedy for such abuses is to be found [stuffed] at the ballot box.” This from the Justice who, during oral argument this Term of a free speech case, asked why the First Amendment should bar the Government from restricting or censoring speech, when that is what it wants to do?
Finally, examine the majority and prevailing opinion written by Justice Kavanaugh, joined by the Chief Justice and the three liberal Progressive Justices. Remember the Question Presented, and the issues of whether the income can be unrealized and if so can it be taxed without apportionment? Those issues are all in the writing Justice’s down-played left hand. But we are instead directed to focus only on his right hand, where we have a fulsome and tedious explication of the Internal Revenue Code, and how it always permitted taxation of pass through partnerships and corporations, especially elections of S Corporations, and therefore shareholders under the Code and IRS regulations related to Subpart F are taxable for the gains and income received by their corporations purely by virtue of their being shareholders and owning shares. You got that? It’s all quite normal and customary, and been that way for years. Who said anything about a Question Presented…?
Tellingly, Justice Kavanaugh wrote that the Moores’ argument, taken to its logical conclusion, “could render vast swaths of the Internal Revenue Code unconstitutional.” And it just wouldn’t be right to “deprive the U.S. Government and the American people [!] of trillions in lost tax revenue.” Correctly understood, the tax revenue collected is what deprives the American people, and not the other way around.
But even so, all these self-serving concerns of the faceless bureaucracy known as government are extrajudicial and not proper reasons to uphold or strike down a law. Yet there was that nut job who showed up outside Justice Kavanaugh’s house once last yer, was it…? Shame the Department of Justice can’t seem to find the money or resources to improve judicial protection.
In forthrightly facing the issues before them and taking the necessary, if difficult decisions brought before them, certain Justices demonstrate to us their worth. President Theodore Roosevelt appointed to the Supreme Court the legendary Justice Oliver Wendell Holmes. In one of Holmes’s first big cases, and one of the first test cases of the Sherman Antitrust Act, Holmes’s performance was awaited with much anticipation. Holmes voted contrary to Roosevelt’s desires, greatly disappointing him. The President thereafter reportedly complained, “I could carve out of a banana a judge with more backbone than that.”