Moore v. United States—a case in which CEI represents the Moore family—is likely to be the most important tax case of the 21st century. Yesterday’s decision by the Ninth Circuit Court of Appeals opens the door to Supreme Court review.
Charles and Kathleen Moore invested in a friend’s business, named KisanKraft, that serves low-income family farmers in India. KisanKraft sells modern tools to family farmers who typically cannot afford the high prices of industrial farming. In 2005, the Moores invested $40,000 in return for 11 percent of the company.
All of the company’s profits have been reinvested back into it. The Moores haven’t realized a penny in profits from their investment. They appreciate that their long-term investment went to help needy people overseas. In any event, as minority shareholders, there is no way for them to get any profits out of the business.
In 2005, when the Moores invested in KisanKraft, they had no tax obligations under the law until they received income on their investment. All of that changed in 2017. When Congress passed a tax reform package that year, it decided to “deem” the profits as having been returned to the Moore family and tax them on their (almost completely theoretical) gains. Even worse, the new law required tax payments to be made based on all profits by the company after 1986, even before the Moore family had invested. In other words, it isn’t quite true that the Moores never got anything out of their investment—what they got was a huge tax bill.
The Competitive Enterprise Institute and BakerHostetler have been representing the Moore family in federal court for the last few years. The Moores’ situation may strike you as deeply unfair. We agree—and it also strikes us as deeply unconstitutional.
Under the Constitution, the federal government’s ability to impose income taxes is fundamentally and categorically limited. We’ll explain the limits more in another blog post next week, but the bottom line is that there is roughly a century of precedent that says that the federal government cannot treat ownership as income.
If you own property that appreciates in value—for instance, a house, car, coin collection, or piece of art—Congress can’t tax you on that appreciation until you sell it. If you hold onto the appreciated property and don’t sell it, that means that there was no taxable event, no income, and no resultant income tax.
That has been the view of most courts for the last 100 years. It was the view of the First Circuit in 1996 and the view of the Fourth Circuit in 1961. The Moores live in a beautiful part of Washington state; sadly, the jurisprudence of the Ninth Circuit, their local judicial district, is not quite so beautiful.
A few months ago, a three-judge panel of Ninth Circuit determined that the 2017 tax reforms—which allowed income taxes to be levied on unrealized gains—were legal and constitutional. Yesterday, the Ninth Circuit refused to reconsider its earlier decision by en banc review (which means that a majority of the Ninth Circuit judges voted against reconsidering it). The scope of the Ninth Circuit decision is breathtaking. In fact, it is reasonable to interpret its decision as finding that an array of past Supreme Court decisions holding that realization must precede income tax liability have all been silently and implicitly overruled.
Notably, four Ninth Circuit judges criticized the decision in sharp terms. In their dissent, they noted that the Ninth Circuit has “become the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income’ under the Sixteenth Amendment.” The judgers further note:
In other words, we allow a direct tax on the ownership interest of a taxpayer—even when the taxpayer has yet to receive any economic gain from the interest and has no ability to direct distribution of gain from the interest. (p. 2) …
While the Supreme Court has allowed flexibility in identifying “incomes,” it has never abandoned the core requirement that income must be realized to be taxable without apportionment under the Sixteenth Amendment. (p. 3)
As the dissent noted, the Ninth Circuit’s decision has radical implications—as observers of Elizabeth Warren and the battle over “wealth taxes” will doubtless recognize. Due to this ruling, “any tax on property or other interests can be categorized as an ‘income tax’ and elude the requirement of apportionment.” (p. 3) “Divorcing income from realization opens the door to new federal taxes on all sorts of wealth and property without the constitutional requirement of apportionment.” (p. 19)
We intend to ask the Supreme Court to consider this case. It will decide whether to do so sometime next year.
We also challenged the tax because it’s a 30-year retroactive tax. Our basis for this is the Supreme Court’s decision in United States v. Carlton (1994), which approved “only a modest period of retroactivity” of one year, during which people are on notice that their actions may be taxed. A 30-year retroactive tax goes well beyond what the Supreme Court has allowed. Taxing people on income they have not and may never receive is precisely the kind of “arbitrary” and “illegitimate” extraction of wealth that the Supreme Court warned about in Carlton.
Furthermore, we will ask the Supreme Court to review the Ninth Circuit’s decision that the Supreme Court’s own decisions in Eisner v. Macomber (1920), Helvering v. Horst (1940), C.I.R. v. Glenshaw Glass Co. (1955), and James v. United States (1961) are now dead letters—which seems to be the Ninth Circuit’s view.
In order for our case to be heard by the Supreme Court, four Justices out of nine will have to vote to hear it. We like our chances.