Notice & Comment

Is the Indirect-Tax Argument Forfeited in Moore v. United States?, by Ben Silver

On Tuesday, the Supreme Court will hear oral argument in Moore v. United States, the Court’s first opportunity to squarely interpret the Sixteenth Amendment in the age of originalism. The Court granted cert on one question only: whether a provision of the 2017 Tax Cuts and Jobs Act called the Mandatory Repatriation Tax (“MRT”) is a “tax[] on incomes” under the Sixteenth Amendment and therefore exempt from the Constitution’s apportionment requirement. But a surprising amount of the briefing and commentary on the case hasn’t focused on the Sixteenth Amendment at all. Rather, some have argued—including the Government—that the MRT can be sustained on the ground that is not a “direct” tax to which the apportionment requirement applies in the first place. The parties traded blows—light ones—in their briefing over whether this argument is forfeited. So before oral argument, it’s worth asking: Can the Court resolve Moore on indirect tax grounds without reaching the Sixteenth Amendment question?

Some doctrinal background is useful. Broadly speaking, the Constitution divides federal levies into four categories: “Taxes, Duties, Imposts and Excises.” In two different places—in Article I, Section 2 (the Three-Fifths Clause) and Article I, Section 9—the Constitution speaks of a subcategory of “Taxes” called “direct Taxes,” and it requires that those taxes be apportioned among the states by population. By contrast, duties, imposts and excises need not be apportioned by population; they must, however, be uniform throughout the country. (Below, I simply refer to any levy that is not a direct tax as an “indirect tax.”) In Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429 (1895), the Court held that taxes on incomes derived from personal or real property are “direct” taxes subject to apportionment. The American people later repudiated Pollock—but did not squarely overrule its holding that taxes on such income are direct—by way of the Sixteenth Amendment. That amendment permits Congress to tax “incomes, from whatever source derived,” without apportionment. 

The MRT taxes American shareholders of certain foreign corporations on those corporations’ accumulated but undistributed earnings. The taxpayers in Moore invested in an Indian company selling agricultural tools to farmers, and the company did quite well, but never distributed earnings to investors. Yet the MRT required the taxpayers to include their portion of the corporation’s earnings in their income. The taxpayers argue that because they never received any money from the business, they have no “income” taxable under the Sixteenth Amendment. The Government spends much of its brief presenting a different interpretation of the Sixteenth Amendment. 

But towards the end of its merits brief, the Government suggests in the alternative that the MRT is really an indirect tax (specifically an “excise”) because it falls “upon the particular privilege of doing business through” certain foreign corporations as well as the “advantages which arise from that arrangement.” According to the Government, in other words, the MRT targets the use of a particular corporate form, not shares in the corporation or the income derived from such shares. Under the original public meaning of the tax clauses, then, the MRT would be an indirect tax not subject to apportionment.

Two amicus briefs make arguments to the same effect. Professors Akhil and Vikram Amar argue that only two taxes qualify as direct: capitations and land taxes. They contend that a very early and important case—Hylton v. United States, 3 U.S. (3 Dall.) 171 (1796)—settled the question. According to the Amars, Hylton rejected the proposition that there is a third species of direct taxes, and that that understanding prevailed for a century until Pollock. The MRT is neither a capitation nor a land tax, so on this view it would not be subject to apportionment in the first place.[1] Separately, Alex Brill and Kyle Pomerleau present evidence in their amicus brief that direct taxes, originally understood, are by definition domestic taxes.[2] Structurally, the proposition makes sense: If a direct tax must be apportioned among the states according to population, then an external tax cannot be a direct tax because (without exaggeration) it is impossible to apportion such a tax among the states. The MRT, roughly speaking, targets the accumulated earnings of certain foreign corporations, thereby reaching outside the United States, and so on this view the MRT cannot be a direct tax.

The Government’s excise tax argument, the Amars’ Hylton argument, and the Brill/Pomerleau thesis about domesticity all converge on the conclusion that the MRT is not a direct tax in the first instance, and therefore is not subject to the apportionment requirement to which the Sixteenth Amendment provides an exception. If five justices find any of these arguments persuasive, they’ll have a major offramp from confronting the thorny issues raised by the Sixteenth Amendment. 

So can the Court consider these arguments? Likely not. Federal courts routinely decline to consider parties’ arguments when those arguments are raised late, abandoned, or treated only cursorily. Those principles apply with added force in the Supreme Court because it may grant a cert petition in a case for some issues but not others. 

Before the district court, the Government did raise indirect tax arguments. The Government relied heavily on Hylton and observed that its “narrow view of direct tax[es] prevailed for 100 years” until Pollock.[3] And then the Government sought to narrow the applicability of Pollock, saying that although it had “never explicitly been overruled, every aspect of its reasoning has been eroded,” and so should not be used to decide the case.[4] That argument tracks, more or less, the Amars’ brief. The Government also highlighted that “direct tax[es] include[] only those taxes that are susceptible to apportionment in the first instance, for otherwise absurd results would attain,” which follows the Brill/Pomerleau brief, but without the specific point about domesticity.[5] Notably, the Government did not argue in its motion to dismiss before the district court—but as it now does before the Supreme Court—that the MRT is an excise tax on the use of a particular corporate form.

The problem is that the Government did not preserve any of these arguments before the Ninth Circuit. Rather, it encouraged the court not to “consider th[e] weighty issue” of whether the MRT is a direct tax (specifically, a tax on property). The Government invited the court to decide the case on Sixteenth Amendment grounds.[6] (The Ninth Circuit accepted the invitation.) The Government’s Ninth Circuit brief drifts toward an indirect-tax argument in only one place. After explaining that the MRT is an income tax that simply disregards the corporate form, the Government says:

The realization-requirement issue is irrelevant when the tax is considered from this perspective. Recall that the Sixteenth Amendment was only necessary to relieve taxes on income from certain property from the apportionment requirement that would otherwise, under Pollock have applied to such taxes. Even under Pollock, other types of income taxes, including taxes profit and gains from business are not direct taxes. Because the Sixteenth Amendment does not address or impact taxes on business income, any Sixteenth Amendment realization requirement would not affect such taxes.[7]

This is not an argument that the MRT is an excise tax because it falls on the “use” of a certain corporate form. It is not an argument that the MRT is not a direct tax because Hylton decided only capitations and real estate taxes are direct. And it is not an argument that direct taxes, by definition, must be domestic taxes or possible to apportion. It is instead an argument that the MRT can be sustained (in part) because it is not (in part) a direct tax even under Pollock. 

In other words, before the district court the Government relied on quasi-originalist arguments approximating those by the Amars and Brill/Pomerleau: that the MRT would not have been a direct tax at the founding. The Government therefore implicitly repudiated Pollock before the district court. But before the Ninth Circuit, the Government performed an about-face, suggesting that the MRT could (again, in part) be sustained under Pollock. These are different arguments. So the arguments raised before the district court were abandoned given they were not raised on appeal. The Pollock argument raised before the Ninth Circuit was forfeited because it was not raised below. Most troublesome for the Government, the argument presented in its merits brief before the Supreme Court—that the MRT is an excise tax on the use of a corporate form—seems never to have been raised below, at all. 

This is all to say that the most interesting arguments that the MRT is an indirect tax are, at this stage, not in play. It is true that the Court has discretion to consider forfeited arguments. But in this circumstance, where the Ninth Circuit did not have all the arguments before it and did not opine on indirect tax issues, it might be wiser for the Court to dismiss Moore as improvidently granted. Or it could conclude the indirect tax arguments are forfeited, decide the Sixteenth Amendment issue, and leave the indirect tax arguments to future cases.

Ben Silver is a Ph.D. candidate at the University of Chicago. He graduated from Yale Law School in 2021.

[1] Other amici argue that Hylton does not stand for such a narrow proposition. They point out that Justice Chase’s seriatim opinion in Hylton stated, “I am inclined to think, but of this I do not give a judicial opinion, that the direct taxes contemplated by the Constitution are only two, to wit, a capitation or poll tax, simply without regard to property, profession or any other circumstance; and a tax on land.” Hylton, 3 U.S. (3 Dall. at 175). Moreover, one of those amici—Steven Calabresi—has separately pointed out that the Amars’ view prioritizes “expected applications” of the Constitution’s meaning, rather than its text. Given that the Constitutional text refers to “Capitation[s], and other direct, Tax[es],” there is reason to infer that there are more than two categories of direct taxes.

[2] Brill and Pomerleau also make an argument along the same lines as the Government, that MRT falls on the use of applicable foreign corporations, so it is an excise tax.

[3] U.S. Mot. To Dismiss 15, ECF No. 26 (W.D.N.Y).

[4] Id. at 16.

[5] Id. at 16.

[6] Br. for the Appellee 21, ECF No. 21 (9th Cir.)

[7] Id. at 46.

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