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PaperclipPerfector  11mo ago (text post)   26074 thread views

Culture War Roundup for the week of December 4, 2023

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I definitely expect a narrow ruling; I don't know whether it will for or against the plaintiffs, but I expect it won't open the door too widely to more broad-based wealth or unrealized gain taxation, nor sweep away huge sections of the tax code.

There are two obvious ways of ruling for the IRS in this case without saying that a wealth tax is constitutional:

  1. Rule that income of a corporate entity imputed to a shareholder is "income" for the purposes of the 16th amendment. This isn't a stretch - it is how S-corps, LLPs and LLCs are already taxed. This is the main argument in the IRS brief, so it is actually the most likely result.
  2. Rule that the transition tax is a tax in lieu of an income tax, and therefore justified by the combination of the 16th amendment and the Necessary and Proper clause. This is essentially the same argument as in Wickard and Raich that justifies treating everything as interstate commerce. So it is a very obvious way of giving the IRS a broader win while still leaving the wealth tax question open.

Reading the executive summaries of the briefs, I think this is an easy case and the IRS wins 8-1 or 9-0 (Thomas possibly dissenting) on the basis that the transition tax is an income tax. Given the clear precedents for imputing corporate income to shareholders, Moore is trying to reverse-ferret into an argument that the transition tax is a wealth tax (as opposed to a tax on undistributed corporate profits) because it potentially (not in Moore's case) taxes the shareholder on profits that were earned before they bought the shares, and is therefore a tax on share ownership.

My read of this case is:

  • overreaching litigant gets deservedly benchslapped by the 9th circus
  • 9th goes overboard by saying that there is no realisation requirement at all (as opposed to the correct position that the realisation at the corporate level is imputed to the shareholder). This confuses the law and creates the false impression that a federal wealth tax is constitutional
  • SCOTUS take the case in order to clear up the mistake, but aren't going to change the law and rule in favour of Moore - they just want to bash some sense into the 9th and are using Moore's overenthusiastic litigation as a tool to do so.

Analogizing corporations to S Corp’s, LLCs, and Partnerships entirely misunderstands the Code.

There is a fundamental difference between pass through taxation on one hand and corporate taxation on the other. When it comes to a partnership, the theory of the case is that while there are entity level aspects it is an aggregate of the partners (ie the partners themselves are earning the income) and therefore there is no entity level tax. An LLC merely defaults to partnership taxation but of course with both partnerships and LLCs taxpayers can elect to treat them as corporations.

Contrast this with a corporation which is seen as a separate entity for US tax purposes. See Moline Properties. This entity is taxable on its income. Only in extremely limited situations are it’s shareholders taxable on its income (generally related to earnings of a foreign corporation — these rules are necessary to prevent a taxpayer from creating holes in the US tax system).

And the key constitutional point is that a taxpayer by and large has a choice what form to operate in. If he wants to be subject to phantom tax (but only one layer) then using a pass through. If he doesn’t want to be subject to phantom tax, then use a corporation (but now subject to so called double tax).

So it is easy to say “this is a slam dunk case” if you aren’t familiar with the august and long standing differences between pass through taxation and corporate taxation.

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