Judge Rules in Favor of Retroactive Unapportioned Tax

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In 2006, Charles and Kathleen Moore invested in a business aimed at providing affordable equipment to small-scale Indian farmers. No dividends have been returned to the Moores for this, as any profits were reinvested in the company. But based on a new tax enacted in 2017—a decade after they invested their money—they were hit with an unexpected tax bill of over $15,000.

CEI and the law firm of Baker Hostetler are representing the Moores in challenging this tax on the basis that it violates the Constitution’s prohibition on unapportioned direct taxes and the Due Process Clause. Yesterday, the judge ruled against the Moore family.

Congress cannot issue direct taxes without apportionment, spreading the tax burden evenly between states, unless it is taxing income. This tax wasn’t apportioned, but in this case the Moores didn’t have any income. The U.S. Supreme Court already ruled that realization is normally required before it becomes income that can be taxed. So, it now seems shocking that this court would hold that lower courts would have the power to overturn Supreme Court precedent on the meaning of the U.S. Constitution.

Judge Coughenour recognized that plaintiffs relied on the Supreme Court’s decision in a 1920 case, Eisner v. Macomber, and that the Macomber “framework was generally affirmed” by the Supreme Court in a subsequent case, Glenshaw Glass.

But in the Moores’ case, the lower court noted that “subsequent decisions” have “routinely departed from Macomber.” For this, the court cites decisions of the Second Circuit, the 10th Circuit, and what it describes as the “most compelling post-Macomber decision,” a decision of the U.S. Tax Court—a non-Article III court that is not a part of the judiciary. Based on the claim that these other lower courts have repudiated Macomber, the court found that Macomber is not controlling.

The court also found that the 2017 law was not a new tax, and thus did not raise serious due process retroactivity problems, because it “modified subpart F” of the Tax Code. The problem is that, by that reasoning, no tax would count as “new” when Congress amends an existing taxing statute to add whatever new tax it wants.

We are examining the possibility of an appeal.