Last Week

Many of you, perhaps most, may have read about a case that will be heard by the U.S. Supreme Court during its current term.[i] The case, Moore v. United States, comes out of the Ninth Circuit Court of Appeals.[ii] The Supreme Court recognized the national significance of the case and granted cert in March of this year.[iii] Within less than two weeks of the taxpayer’s having filed its brief with the Court,[iv] about 25 amicus briefs were filed in support.[v]

For those of you who may not be familiar with the case, the issue before the Supreme Court may be described by some as one of quasi-existential[vi] significance to the federal government because it goes to the heart of its ability to impose many taxes. As stated by the Court, the question presented is “[w]hether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”

This post will try to address the component parts of this issue. For now, suffice it to say that, in recognition of the potentially far-reaching consequences of the Court’s ultimate decision in the case, the House Ways and Means Committee asked the Joint Committee on Taxation[vii] to delineate those provisions of the Code that may be affected thereby.

Last week, the Joint Committee released its analysis.[viii] Let’s just say that, in retrospect, I probably should not have read the Committee’s report on the same day that members of both parties of the House decided to act more irresponsibly than usual – a pretty tall order these days – by deciding to vacate the office of the Speaker.[ix]

Before reviewing the Joint Committee’s response, and to better appreciate the taxpayer’s position, let’s take a closer, albeit brief, look at the factual and legal context in which the dispute in Moore arose.

Basic Facts

Taxpayer was a U.S. individual who invested in Foreign Corp, a corporation organized under the law of a foreign country. Although Foreign Corp was profitable, it never distributed a dividend to its shareholders, including Taxpayer; instead, it reinvested its earnings in its business.

During the period in question, Taxpayer owned 11-percent of the foreign corporation’s issued and outstanding shares of stock. Other U.S. persons held enough of the remaining shares of the corporation’s stock to cause the corporation to be treated as a controlled foreign corporation (or “CFC”) under Subpart F of the Code,[x] thereby subjecting Taxpayer to its income inclusion rules[xi] as a “U.S. Shareholder.”[xii]

Basic Law

In general, the U.S. taxes its citizens and residents – natural persons and legal entities – on both their U.S. and foreign-sourced income.[xiii]

Passthrough

For example, the foreign-sourced income attributable to the foreign branch[xiv] of a domestic business is subject to U.S. income tax on a current basis; the same is true for a U.S. person’s share of foreign-sourced income realized by a domestic or foreign partnership of which the U.S. person is a member, whether or not such income is distributed.[xv]

Among these items of partnership income, there are some that each partner must account for separately on such partner’s return. The character of any such item of income included in a partner’s distributive share is determined as if such item were realized by the partner directly from the source from which realized by the partnership.

Foreign Corporation (non-CFC)

However, if the foreign-sourced income is realized by a foreign corporation in which U.S. persons own not more than 50-percent of the equity, such U.S. persons will not be subject to U.S. income tax with respect to their “share” of the corporation’s foreign-sourced income until such income is distributed to them by the foreign corporation as a dividend.

That said, the U.S. takes a different approach when the foreign corporation (as in the case of Foreign Corp) is controlled by U.S. persons.[xvi]

With this scenario in mind, many years ago Congress enacted an anti-deferral regime – found in Subpart F of the Code[xvii] – that requires a U.S. Shareholder (such as Taxpayer) to include in their gross income, for purposes of determining their U.S. income tax liability, their share of certain foreign-sourced income realized by a CFC of which the U.S. Shareholder is a 10-percent or more shareholder.

CFCs – In General

A stated earlier, a CFC is a foreign corporation in which U.S. persons own[xviii] more than 50-percent of the foreign corporation’s stock, measured by vote or value.

Any U.S. person who is treated as a U.S. Shareholder of a CFC (such as Taxpayer with respect to Foreign Corp) may be taxed currently on specified categories of mostly “investment” income, plus the income from certain related party transactions, realized by the CFC,[xix] regardless of whether or not the CFC’s income has been distributed to these shareholders as a dividend.

The foregoing rule seems to be predicated on the presumed ability of those U.S. persons to whom the CFC’s income is taxed to compel or withhold the distribution of such income by the foreign corporation.[xx] In effect, the Code treats the U.S. Shareholder of a CFC as having received a current distribution of their share of the CFC’s Subpart F income.[xxi]

TCJA

Before 2017, the above-described rules were the primary method used by Congress to impose federal income tax on U.S. persons with respect to a CFC’s foreign investment income that was held offshore.[xxii]

In other words, neither Subpart F nor any other provision of the Code permitted the Congress to tax U.S. persons with respect to the business (non-investment) income of a CFC attributable to the CFC’s own offshore business activities.[xxiii] Such income was only taxable by the U.S. when repatriated by the CFC to the U.S. through a distribution or loan to its U.S. shareholders, or through an investment in U.S. property.[xxiv]

However, with the enactment of the Tax Cuts and Jobs Act (“TCJA”) at the end of 2017,[xxv] the U.S. sought to shift its corporate taxation regime from a worldwide system, in which corporations were generally taxed regardless of where their profits were derived, toward a territorial system, in which corporations are generally taxed only on their domestic source profits.

As part of this change, the TCJA created a one-time transition tax: the Mandatory Repatriation Tax (“MRT”), pursuant to which the earnings and profits accumulated by a CFC after 1986 – which had never been taxed by the U.S. – were required to be included in income by certain U.S. persons for their 2017 tax year.[xxvi] Under this new rule, which was added to Subpart F, any U.S. person owning at least 10-percent of a CFC was required to include on their 2017 tax return their pro rata share of the CFC’s post-1986 earnings and profits.[xxvii]

The TCJA also modified the CFC rules going forward: effective January 1, 2018, a CFC’s income taxable to a U.S. Shareholder under Subpart F includes current earnings from its overseas business.

Taxpayer’s Reaction

As a result of the TCJA, Taxpayer’s 2017 U.S. tax liability was increased to account for the inclusion in Taxpayer’s gross income of Taxpayer’s pro rata share of Foreign Corp’s post-1986 earnings and profits.

Taxpayer challenged the constitutionality of the federal government’s ability to tax a CFC’s post-1986 income through the MRT. The federal district court[xxviii] granted the government’s motion to dismiss Taxpayer’s case for failure to state a claim.

After the district court’s dismissal, Taxpayer appealed to the Ninth Circuit Court of Appeals (the “Circuit Court”), where Taxpayer argued that the MRT violates the Apportionment Clause of the U.S. Constitution.

The Circuit Court

After explaining that the federal government is a government of “limited and specified powers,” the Circuit Court noted that one of the enumerated powers bestowed upon Congress is the power to “lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”[xxix]

Further, the Circuit Court continued, it has long been established that the federal government may adopt laws that are necessary and proper to effectuate its legitimate purposes. Thus, the Constitution gives Congress the power “[t]o make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”[xxx]

Apportionment Clause

Next, the Circuit Court considered the Constitution’s Apportionment Clause, which provides that “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”[xxxi]

In other words, any “direct tax” on an individual taxpayer must be apportioned so that each State (as an aggregate of its residents) pays in proportion to its population.[xxxii]

Before considering Taxpayer’s apportionment-based argument, let’s first consider what is meant by a “direct tax.”

Direct Tax?

A direct tax is one that the taxpayer pays directly to the government; for example, an income tax or a property tax.[xxxiii]

By contrast, an indirect tax is one that is levied on goods sold or services provided by a business; for example, a sales tax or value-added tax. Such a tax may be passed along to another person by the business that owes it.[xxxiv]

Sixteenth Amendment

If an income tax is a direct tax, why isn’t it subject to the Constitution’s apportionment requirement?

Because the Sixteenth Amendment to the Constitution, ratified in 1913, exempts from the apportionment requirement, and authorizes Congress to impose, taxes on “incomes, from whatever source derived.”[xxxv]

Thus, an “income tax” escapes the apportionment requirement.

This is where Taxpayer’s position on the MRT becomes troublesome for many in the tax community, including those members of Ways and Means who contacted the Joint Committee.

That’s because Taxpayer challenged the status of the MRT as an income tax and, in doing so, may have opened the proverbial can of worms.[xxxvi]

Taxpayer’s Argument

Taxpayer asserted that the MRT is a direct tax that is not an income tax; because it is not an income tax, Taxpayer contended, the MRT should not be protected by the Sixteenth Amendment and, thus, should have been apportioned; because it wasn’t apportioned, it is unconstitutional.

You may ask, on what basis did Taxpayer claim the MRT was not an income tax?

Specifically, Taxpayer argued that the Constitution requires income to be realized before it can be taxed; for example, a “mere appreciation in value in the absence of realization” was not “income” within the meaning of the Sixteenth Amendment.

According to Taxpayer, because the MRT does not require a realization event, it is not a tax on income; rather, “it taxes ownership of specific property on a specific date in 2017.”

Taxpayer urged the Circuit Court to adopt a definition of income which would require “[1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion.”[xxxvii]

Realization

When does an individual taxpayer “realize” income? This is, perhaps, the most fundamental question under the Code.

If an individual receives consideration for services rendered (such as wages) or for the use of their property (for example, rent or interest or royalties), they have realized income.

When an individual taxpayer sells or exchanges their property, they realize gain to the extent the consideration received exceeds the individual’s adjusted basis for their property.[xxxviii]

The individual also realizes income when they receive a return on the investment of their property or capital; for example, in the form of a dividend or other distribution.

If the consideration is not paid to the individual directly, such payment may still constitute a realization event under certain circumstances. For example, if a party to a transaction with an individual pays the consideration owing to the individual by satisfying a debt owing by such individual, such satisfaction is treated as the actual receipt of value by the individual – a realization event – because they have enjoyed an accretion in value equivalent to their having received cash with which they paid off the debt themselves.

Likewise, if the consideration is not paid to another for the benefit of the individual but is set aside for the individual’s use at any time without restrictions, there has been a realization event.[xxxix]

The common thread here – and, according to Taxpayer, the imposition of an income tax is predicated on this – is the individual’s actual receipt of something of value; in the words of the Sixteenth Amendment, there is no income until something of value is “derived” from the taxpayer’s property. Without such a “derivation” – i.e., realization – event, there is no income to tax – there is merely the ownership of property.[xl]

Several conclusions may follow from this premise; for example, the mere appreciation in value of a property – notwithstanding that it represents an accession to one’s wealth[xli] – is not an appropriate time to impose an income tax – the property has not been converted to cash or exchanged for property that is not of like kind.

With a Twist

However, Taxpayer takes this reasoning a step further.

Remember, the MRT was imposed upon U.S. Shareholders who owned shares of stock in a CFC in 2017. The tax was based upon the CFC’s post-1986 accumulated earnings and profits.

According to Taxpayer, these earnings and profits accrued before Taxpayer acquired shares of stock in Foreign Corp. What’s more, Taxpayer claimed there was no way for Taxpayer to access, or to cause the distribution of, such profits.

Under these circumstances, Taxpayer asserted the MRT was really a tax on the ownership of property, not a tax on income. The MRT was imposed upon Taxpayer because of their ownership of Foreign Corp stock. Because the MRT was a direct tax, it should have been apportioned among the States. Having failed to comply with the Apportionment Clause, the MRT is unconstitutional.

What, then, is there about Taxpayer’s argument that is worrying many tax professionals? To understand their concerns, we must return to the Circuit Court’s response to Taxpayer’s argument.

The Opinion

After conceding “the difficulty of categorically defining income,” the Circuit Court noted that the “courts have held consistently that taxes similar to the MRT are constitutional.”

Not content with the above response to Taxpayer’s assertion, the Circuit Court then stated that “[w]hether the taxpayer has realized income does not determine whether a tax is constitutional.” Further, it explained that “the Supreme Court has made clear that realization is not a constitutional requirement,” adding that the rule that income is not taxable until realized is founded on administrative convenience.

See the rabbit hole?[xlii]

In wrapping up its discussion of Taxpayer’s position, the Circuit Court observed – and this is the crux of the matter presented to the Joint Committee for its consideration – that “any holding that Subpart F is unconstitutional under the Apportionment Clause would also call into question the constitutionality of many other tax provisions that have long been on the books.”

Which brings us back to the Joint Committee’s letter.

Joint Committee

The Committee begins by summarizing Taxpayer’s and the government’s respective positions: Taxpayer asserts that the MRT is a tax on unrealized income and that Congress, for purposes of the Sixteenth Amendment, cannot tax unrealized income; whereas the government asserts that the Constitution “does not restrict Congress to taxing only realized gains” and that, even if it did, the MRT is a tax on realized income.

Where May It Lead?

Next the Joint Committee considered the possible implications for present law if the Supreme Court were to attribute significance to some variant of the realization concept suggested by Taxpayer.

For example, recognizing that “constructive” or “deemed” realization constitutes realization for purposes of the Sixteenth Amendment, Taxpayer argues that realization requires the taxpayer – not an entity in which the taxpayer holds an interest, absent special circumstances[xliii] – to participate in a transaction or to receive something of value during the relevant taxable period.

According to the Joint Committee, this requirement would call into question provisions of the Code that generally treat “look through” entities as separate from their owners for federal tax purposes and tax each of the entity’s owners on such owner’s share of the entity’s income, without regard to whether the income is distributed to the owner.

CFCs

Among the look-through provisions that a taxpayer might challenge if the Supreme Court finds that looking through an entity is constitutionally impermissible include the rules under Subpart F and GILTI with which Taxpayer was primarily concerned, as described earlier. These regimes impose tax on U.S. Shareholders in a taxable year even if there is no transaction or other income realization event at the level of the U.S. Shareholder in that year. Instead, certain income earned by a CFC is deemed to be income of the U.S. Shareholders of the CFC on a current basis.

Passthrough Entities

Likewise, under the partnership tax rules of Subchapter K of the Code, partners of a partnership are generally taxed currently on their distributive shares of the partnership’s income[xliv] and, under Subchapter S, shareholders of an S corporation are taxed on their pro rata share of the S corporation’s items of income,[xlv]in each case whether or not such income is distributed by the entity.

Other Rules

The Joint Committee then turned to an alternative argument proffered by Taxpayer; specifically, that the Sixteenth Amendment requires that a transaction be undertaken, or something of value be received, by a taxpayer during the taxable year before an income tax may be imposed on the taxpayer.

This framework, the Committee explained, might call into question the constitutionality of certain Code provisions that deem a taxpayer to have received an amount or to have engaged in a transaction giving rise to income.

Under the original issue discount (“OID”) rules, for example, holders of debt instruments that pay no interest until maturity, or less than a certain minimum level of annual interest, are taxed on a deemed interest amount each year.[xlvi] Similarly, interest payments are imputed between the borrower and lender parties on “below-market” loans.[xlvii]

Similarly, securities held by dealers in such property are deemed to be sold for their fair market value (that is, they are “marked to market”) each taxable year, and holders of these assets are taxed on the resulting gain or loss.[xlviii]

Imputed rental income is taxed when a rental agreement provides for prepaid rent, deferred rent, or increasing or decreasing rent.[xlix]

Finally, the Joint Committee considered another of Taxpayer’s alternative arguments that, even if the Sixteenth Amendment permits taxation of shareholders on corporate earnings or unrealized appreciation in value and allows deemed realization at the end of the tax year, income taxed under principles of “constructive” or “deemed” realization should be limited to earnings from or appreciation in value attributable to the current tax period.[l]

Again, the Committee determined that this reasoning would open to challenge other present law provisions that are similar to the MRT.

One example is the mark-to-market exit tax generally imposed on an individual who either renounces their U.S. citizenship, or who loses their status as a permanent resident. In that case, the departing individual is deemed to have sold all their property for an amount equal to its fair market value.[li] In other words, the expatriating individual is taxed on gains that accumulated over their holding period for each of their properties, not just during the current tax period.

What’s Next?

It’s too early to tell how the Supreme Court will rule in the Moore case – oral argument hasn’t even been scheduled yet.

That said, it’s not too early to ponder why the Court agreed to hear the case all.

The Circuit Court held for the government, meaning a denial of cert would have preserved the status quo.

Say “Yes” to Realization

Then again, the Circuit Court did make some statements about the “realization requirement” that some lawmakers may view as a green light for the imposition of new taxes that are not triggered by a realization event, including a wealth tax.

Did the Supreme Court accept the case so as to clarify the lower court’s statements that downplayed the importance of realization? Does it intend to affirm the prerequisite of a realization event?

As acknowledged by the Circuit Court, and as pointed out by the Joint Committee, query what such an affirmation would mean for those provisions of the Code pursuant to which income tax is imposed upon the owners of an entity (instead of the entity itself) or upon the deemed sale of property.

This may not pose an issue for passthrough entities. Under the aggregate theory (as opposed to the entity theory) of partnership taxation, for instance, the partnership may be viewed as the sum of its members rather than as a separate entity, with each partner “owning” a direct and undivided interest in the partnership’s property, etc. In that case, each partner is treated as directly realizing the income and gain realized by the partnership.

In the case of an S corporation, the shareholders have elected to be taxed on the basis of indirect realization of income through the corporation. The character of any item included in a shareholder’s pro rata share under Subchapter S of the Code is determined as if such item were realized directly from the source from which realized by the corporation.[lii]

But what about those Code provisions that impose tax based upon a mark-to-market (a deemed sale)?

Avoid the Issue

Then again, the Court may leave unanswered the question of whether the Constitution imposes a realization requirement if it finds that the MRT is a tax on realized income.

Query how contorted a theory the Court may be willing to adopt to find a realization event in the context of MRT.

No Realization Required

Alternatively, will the Supreme Court disagree with the lower court’s decision while at the same time taking that court’s comments about realization to an extreme? Will it hold that the Sixteenth Amendment does not require an individual taxpayer to directly experience a realization event before an income tax may be imposed?

Will such a holding open the constitutional door to an annual tax on any accretion in value of a taxpayer’s wealth – i.e., an appreciation in value – that are not realized through a sale? In other words, would it support the imposition of a wealth tax on the theory that such a direct tax is an income tax that is not subject to the Sixteenth Amendment’s Apportionment Clause?

We’ll know soon enough. Stay tuned.

The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] The Court’s term for a particular year begins on the first Monday of October and runs through the Sunday before the first Monday in October of the following year. Oral arguments are heard from October through April, with two weeks of each month being dedicated to this function.

[ii] 36 F. 4th 930. A petition for rehearing was denied by the Ninth Circuit on November 22, 2022. The opinion of the District Court for the Western District of Washington is unpublished.

[iii] Meaning it agreed to order the Ninth Circuit to send the record of the case to the Supreme Court for its review. Under the Court’s rules, four of the nine justices must vote to accept a case (to grant cert).

The taxpayer filed its petition for a writ of certiorari in February of this year. Soon thereafter, a number of think tanks filed amicus curiae briefs in support of the petition. An “amicus curiae” – literally a “friend of the court” – is someone, although not a party to the case, who seeks to assist the Court by presenting additional or alternative arguments to consider, or by analyzing the potential impact of the Court’s opinion in favor of one side or the other.

[iv] At the end of August.

The U.S. filed its brief in opposition to granting cert in May of this year.

[v] The case has not yet been set for argument. Some commentators say it will be heard in December.

[vi] Allow me some poetic license.

[vii] A nonpartisan committee of Congress that is closely involved with every aspect of the tax legislative process.

[viii] The October 3 analysis was sent to the Ranking Member of the Ways and Means Committee, Richard Neal. It was made public by Bloomberg.

Query why it was not sent to the Committee Chair, Jason Smith. Wasn’t he interested in its conclusions? Or can it be that he did not join in the request made to the nonpartisan Joint Committee?

[ix] Yes, last Tuesday was bad. However, Thursday may have been worse when Hillary Clinton – perhaps trying to remain relevant – suggested that Trump’s supporters, whom she defines as “extremists,” may need to be “deprogrammed.” (And here I was thinking all this time that Chairman Mao was long dead.) Frankly, I’m surprised she believes that these “deplorables” – as she characterized them during the 2016 presidential campaign – can be re-educated at all.

Maybe Beau Bridges’s character in the movie, “Airplane,” had it right when he said, “looks like I picked the wrong week to quit. . . [smoking, drinking, taking amphetamines, sniffing glue].” In some cities, folks have been penalized (taxed/fined) for ordering sugary drinks.

Not to worry, though, because they can legally purchase cannabis in one of its many forms to help them cope – or to forget, like those of Odysseus’s men who, having eaten “of the honey-sweet fruit of the lotus.” gave up all thought of returning home. Book Nine of Homer’s Odyssey.

[x] A “controlled foreign corporation” (“CFC”) is one in which U.S. persons own, or are considered as owning, more than 50 percent of the total combined voting power or of the total value of all classes of stock of the foreign corporation on any day during the taxable year of the corporation. IRC Sec. 957.

[xi] IRC Sec. 951 and Sec. 951A.

[xii] With respect to any foreign corporation, a “U.S. shareholder” is a United States person who owns or is considered as owning 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation. IRC Sec. 951(b).

[xiii] IRC Sec. 61(a) (“…from whatever source derived…”). (More on this later.) The sourcing rules are found in IRC Sec. 861 through 865.

[xiv] This includes a foreign “eligible” entity that is owned by a U.S. business and has elected to be treated as a disregarded entity for U.S. tax purposes. Reg. Sec. 301.7701-3; IRS Form 8832, Entity Classification Election.

[xv] Each is “transparent” for tax purposes – a passthrough. See IRC Sec. 701 and 702 as to partnerships.

[xvi] For a somewhat analogous provision, see the personal holding company rules under IRC Sec. 541 through Sec. 547. The Code imposes a 20% tax (same as the tax on a dividend distribution to an individual shareholder) on the undistributed personal holding company income of a personal holding company. The purpose of the tax, as in the case of the accumulated earnings tax (IRC Sec. 531 through Sec. 537), is to prevent the “improper” deferral of taxation of corporate income at the level of the corporation’s shareholders where the corporation fails to pay dividends.

[xvii] IRC Sec. 951 through Sec. 965.

[xviii] Directly, indirectly, or through the application of certain attribution rules.

[xix] For most U.S. Shareholders, Subpart F income generally includes “foreign base company income” [IRC Sec. 954], which consists of “foreign personal holding company income” (such as dividends, interest, rents, and royalties), and certain categories of income from business operations that involve transactions with “related persons,” including “foreign base company sales income” and “foreign base company services income.”

[xx] IRC Sec. 951(a). Query whether this premise has legs.

Still, it is stated elsewhere in Subpart F; for example, the Code provides that no part of the earnings and profits of a CFC for any taxable year shall be included in earnings and profits for purposes of determining Subpart F income if it is established to the satisfaction of the IRS that such earnings and profits could not have been distributed by the CFC to U. S. shareholders who own stock of such CFC because of currency or other restrictions or limitations imposed under the laws of any foreign country. IRC Sec. 964(b) – i.e., where there was no decision by the U.S. owners to forego a distribution and thereby intentionally defer U.S. tax.

[xxi] However, the pro rata amount that a U.S. Shareholder of a CFC is required to report as Subpart F income of the CFC for any taxable year cannot exceed the CFC’s current earnings and profits. [IRC Sec. 952(c)(1)(A).] After all, the purpose of Subpart F is to deny deferral of U.S. taxation; it cannot require that a U.S. Shareholder be taxed on amounts in excess of the dividends they would have received if all of the CFC’s income had been distributed currently. [IRC Sec. 964.]

[xxii] Not distributed to shareholders.

[xxiii] For example, when a CFC manufactures and sells products to a third party in a foreign country.

[xxiv] IRC Sec. 956.

[xxv] Pub. L. 115-97.

[xxvi] IRC Sec. 965. Also referred to as the repatriation tax.

[xxvii] These were taxed at a rate of either 15.5-percent for earnings that were held in cash, or 8-percent otherwise.

[xxviii] For the Western District of Washington.

[xxix] U.S. Const. Art. I, Sec. 8, cl. 1.

[xxx] U.S. Const. Art. I, Sec. 8, cl. 18.

[xxxi] U.S. Const. Art. I, Sec. 9, cl. 4.

[xxxii] The Supreme Court previously ruled that a tax on incomes derived from property was a direct tax and, as such, had to be apportioned among the states according to population. Pollack v. Farmers’ Loan & Tr. Co., 158 U.S. 601 (1895).

[xxxiii] These taxes cannot be shifted, as such, to another person.

[xxxiv] Whether direct or indirect, businesses may recover the cost of the taxes they pay by charging higher prices to customers, paying lower wages and salaries, paying lower dividends to shareholders, or accepting lower profits. In other words, businesses shift or pass taxes on to their customers, clients, patients, employees, and shareholders. There likely comes a point, however, at which this practice becomes counterproductive.

That said, ultimately, individuals probably pay almost all taxes.

[xxxv] IRC Sec. 61 repeats this language: “gross income means all income from whatever source derived.”

[xxxvi] Or should I say, Pandora’s box? After all, do we really know where this will lead?

[xxxvii] Citing Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).

[xxxviii] Reg. Sec. 1.1001-1 provides that the gain realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income sustained. The amount realized from a sale or other disposition of property is the sum of any money received plus the fair market value of any property (other than money) received.

[xxxix] Think of money credited to an account for an individual service provider with respect to which the individual has unfettered access.

[xl] Think of a painting on the wall of one’s house, or a bar of gold in one’s safe. Think of one’s equity in a closely held business. These may appreciate in value but one cannot seriously contend that such appreciation represents income in any conventional sense.

[xli] You’ll recall the argument made by Senators Warren, Sanders and Wyden that the “rich” are able to borrow against this appreciation, which is the equivalent on a conversion for all intents and purposes.

I guess they’ve forgotten that “common folk” often borrow against the equity in their homes to pay for their kids’ education, or to cover unexpected bills.

The reason no tax is imposed upon the leveraging of one’s property is because the borrowed funds have to be repaid. Until then, there is always the risk the property will lose value. There is also the opportunity cost associated with having to use other sources of income, or to sell other property, to service the loan.

[xlii] Senators Warren, Sanders, and Wyden certainly have.

[xliii] As in cases of “entire identity” between an entity and its owner.

[xliv] IRC Sec. 702.

[xlv] IRC Sec. 1366.

[xlvi] IRC Sec. 1272.

[xlvii] IRC Sec. 7872.

[xlviii] Under IRC Sec. 475(a).

[xlix] IRC Sec. 467.

[l] Not, as in the case of the MRT, on all post-1986 accumulated earnings and profits.

[li] IRC Sec. 877A.

[lii] IRC Sec, 1366(b).