TaxProf Blog

The tax is a single tax on the profits of controlled foreign corporations, and “essentially considers[s] all those profits repatriated to US shareholders” even though they were never paid.

Taxpayers have challenged the law as a “non-prorated direct tax.” (The Sixteenth Amendment authorizes Congress to tax income, but direct property taxes are prohibited unless apportioned among states.) The district court dismissed his lawsuit, and the 9th Circuit upheld the dismissal. Taxpayers petitioned the Supreme Court for certiorari, arguing that the Ninth Circuit’s decision contradicted the original meaning of income, which they say included a realization requirement. Professors John Brooks and David Gamage disagree. In a new Essay, the authors identify “significant errors and omissions” that taxpayers, Ninth Circuit dissenters, and amici have made in their historical arguments about the original meaning of income.

The authors begin their critique of the taxpayers’ arguments with an analysis of the dictionary definitions that existed when the Sixteenth Amendment was ratified in 1913. In their writings, the taxpayers, Ninth Circuit dissenters, and amici cite dictionary definitions that refer to earnings proceed of work, business, property or capital; income that comes in to a person as a gain from a capital investment; or win than a person drift of property They argue that these phrases—proceeds, enters, and drifts—refer to realization. However, Brooks and Gamage show that “if we dig into these dictionaries, we can see that words like ‘derived’ do not describe some action but rather they are describing sources from income.” In other words, they do not imply a performance requirement. Furthermore, the authors show that the same dictionaries include separate dictionary entries for the term “realization”, which was “a clearly defined and unambiguous concept, but was not used to clarify the meaning of income or profit”. For these reasons, the authors argue that the language cited by contributors is misleading, and that contemporary dictionary definitions of income did not unambiguously include a performance requirement.

The authors then turn to an analysis of contributors’ citations to contemporary treatises such as Black’s. Treatise on the income tax law (1913) and Montgomery’s Income Tax Procedure (1919). Taxpayers cite language from both treatises to suggest that there was a consensus among experts that the definition of income included a performance requirement. However, Brooks and Gamage show that the treaties were not that decisive. They explain that Black’s statements supporting the performance requirement reflected “his opinion, not black law”, and that Black himself noted “a division of authority”. Similarly, Montgomery appeared to be in favor of a performance requirement, but lamented that there was no “authoritative definition of ‘income’.” According to the authors, “what stands out most in a number of treatises is some real doubt and imprecision about the exact contours of the concept of rent, even in the days of the Sixteenth Amendment.”

Meanwhile, the authors argue that economic theories of rent that did not include performance requirements, similar to the Haig-Simons definition, were well known at the time the Sixteenth Amendment was ratified. They also identify several examples of laws enacted around the same time that taxed unrealized income. In fact, “[t]The 1913 income tax, the first after the ratification of the Sixteenth Amendment, also expressly included retained corporate profits in the income of at least some persons. Other opinions and sentences of the period “recognized that income accrues prior to its realization.” The authors argue that this context casts further doubt on the moore contributors’ interpretation of the original meaning.

The questions raised by the moore case extend beyond those discussed in this essay, and the authors have written several other articles with analyzes relevant to the case (see, for example, Taxation and Constitution, reconsidered76 Tax L. Rev. __ (forthcoming 2023); The constitutional meaning of rent (worksheet)). The goal of this Essay was modest: to correct the historical record in light of the misleading arguments put forward by the parties in the moore case. However, this Essay is important and timely, as it provides much-needed context for assessing the strength of the taxpayers’ arguments within an originalist framework that is favored by several Supreme Court justices. He also makes important theoretical contributions related to the definitions of income and the constitutional limits to taxation. I recommend this Essay to anyone who is following the moore case or interested in the theory of income tax.