Argument in a case involving the taxation of earnings de by americans from a foreign company. The ca focuses on an indiabased company with more than half of its ownership held by americans. It was brought forward by a plaintiff who objected to a clause in a 2017 change in tax law that would have required a onetime repatriation test. This is about two hours. The court squarely held us much just a few years following adoption of the amendment. The it is undpud that the petitioners realedothing froms are stock investment. They were taxed not because they have no income but because in 17hey happened to owe shares in a corporation carrying retained earnings on its bks this is a tax on the ownership of property and therefore must be apportioned. The government cannot identify a single thing congress could not tax income underts position that reazation is unnecessary. Thout realization there is no limiting principle. Excepting the governments position on income would make a hash of the current law. The tax code definition of gross income exerts the full measure of congresss taxing power under the 16th amendment by reaching all income from whatever source derived. The governments posionn this case is right, then current law only requires taxpayers to record and pay tax under appreciation of value of all their assets under corporate earningsor any stocks they own and on any paper gamesrom their contracts and loans. At is not how the income tax has ever worked, going back to 1913. The reason the law does not work that way is the obvious one, realized gains are not income. The only way tmake sense of the income tax as it is existed for a centurys to sck with the original meaning of the 16th amendment. The court should reaffirm there is no income without realization. I welcome the courts questions. When you say realization, do you have a definition or explanation as to exactly what it is . How is it different from, say, attribution . Thank you, Justice Thoma realization in the main will be receipt, but in other instances it will be other types o enjoyment of an economic gain such that e xpayer can put that gain to his or her owus and benefits. That might be forgiveness of a loan, or might be assime of income to a third party. Thereerinly is realization he by the corporation, if not the taxpayers, right . It isnt a ca like appreciation of property where nothing has hped. You buy propey,ou are holding it for 20 years, you have not sd it, nothing happened. Here, something has happened, d income has gone to the corporation, isnt at right . Yes. The corporation has income we dont dispute that the corporation realized incomover the decades plus years it being taxed by the mrt, but think it is like the instance of appreciation of property from the point of view from t shareholders. The shareholders interest in the corporation is solely a capital interest, a property inrest, so the value of their capital has increased, but as shareholders,o,hey have not realized any income. So tell me, why do we permit taxingf individual partners when either state law or their Partnership Agreement doesnt realize the income to them . In my ates, a partner doesnt have personal ownership, doesnt get the valuof the partnership, yet we have permitted that tax. A partnersh ia fundamentally different form of organization that a corporaon. The law is always recognized that corporation is a person serate from the shareholders in that corporation, and there simply isnt that separate personhood that applies to partnerships, the partnerships are simply a group of people that undertake a business activity, and when they do so the income is there income direct. What do you do wh subpart s or all of the other ways in which we have attributed Corporate Income to individuals . The challenge, you dont challee e constitutionality of subpart f. That nt an issue in this case. In your brief you dont appear to behallenging it. We think subpart f follows the commonly accepted th that congress has used to address situations when a taxpayer has interpose a Corporate Structure between themselves and income that i otherwise that is the whole purpo o a Corporate Structure, people do that all the time, particularly for that purpose. You dont incorporate unless you want the corporate shield, unless you want the benefs the corporate protection. Sunr your theory, subpart f, subpart s, these are longstanding taxing mechanisms by the government. Your theory woulunrmine those as well. Mr. Grossman i dont think thats right. Subpar f works on simply categories of income on a rrt basis, where those categories of income are properly viewed as being earned the shareholders due to the nature of the categories of income that are adessed sorry, go ahead. You can see subpart s is cotitional. I want to be sure i understand your answer. Mr. Grossman we think the efctf the mrt does not really apply to subpart f. The court has never considered the constitutionality spart f so what is the distention . Is it other parts of subpar f to the extent that they tax income do it on an annual basis, and the mrt was a one shot that went backwards . Mr. Grossman that is part of it. What it is is that subpart f addresses this fundamental income shifting concept, whea the mrt doesnt. Firstf all, subpart f operates aurrent basis while the corporation is subject to the control of the Controlling Shareholders whereas the mrt takes no account im sorry, there is no question you meet the definion of subpart f. You need in subpart ft least 10 of the Company Share andhe company has to be owned more than 5 b u. S. Owners. So it is identical in terms of the percentage of nehip or percentage of shares. Mrgrossman thats right, but subpart f unlike the mrt aligns the control and ability to redirect income with the year that it is applicable to y. It sounds to me tt what you are attacking is only as process issue of how long the taxes for, not the abilitto tax is for, not the ability to tax. Mrgrossman i dont think that is right. Whether you owned a particula piece of property on a given date is hereas subpart f looks at incomehile the Controlling Shareholder has the ability to redirect attream of income. Isnt it a question of whether it is fair to attribute the income generated, which is a stinct question of whether there is income in the 1h amendment. It comes down to a 1h amendment question for the same reason the court faso, court thought so in macomber. So if there is some reason to look beyond that a attribute incomeo e shareholder, that would necessarily raise the qution of income and why it is the shareholder is not the and taxable on what otherwise is property interest. I think the cot has already addressed this questi as terms of income and that inclus the assignment of income cases that the court decided over the years. Can i go back to First Principles . The concept of realization was very well established at the ti the 16th amendment was adopted, but the amendmentoe not reference realization. All th t draft servers had to do was add the word realize after iome, delay and collect taxes on income realized, but they never used the wo realized. Then i looked at this history both before and after the ratification. As far back as 1864, not so far back, cgrs taxed from the ratification, congress taxed gains and profits of all companies, whether incorporated or partnerships, in estimating the annual gains, profits or income of any person entitled to the same, whether divided or undivided. In 1913, eight months after the ratificationf e 16th amendment, congress included undistributed coore earnings certain shareholders. Yet brief tries to distinguish all the claims, i ce ck to the main point, both sides can point to congressional actions that taxed some realized iom some that didnt, but we have examples of congress taxing unrealized income. Why doni ke it that the plain text of the amendment doesnt make reference to realation . Mr. Grossman i tnk there are two centrafeures of the text of the amendment that reflect that it does apply only to realize gains. The first is simply th use of the word income. I bring to the us attention the amicus brief filed by the professors of law and linguist asked which analyzes the use of the word incomen period text. All of this goes back and forth. The government has other definitions. We are back at square one if ate are doing is weighing historicalefitions. Mr. Grossman the weighing in this case is quite lopsided. The government relies principally on t definitions put forward by economists in the years following the amendments adoption, neither of which reflects the common understanding of the time. One of the economists recognized that he was mply espousing his own economic views divorced from any question ofaw andhe second economist realized that thcommon understanding of income is what we say that it s, a realized gain. So far as the coon understanding of the term was concerned, the oy indication that the crtas before it aside from dictionaries, which loided lee favor o position, is the link with sticks and analysis of the ofsors of law and liquid sticks, which looks at how the word was used in everyday languaget at time, and it conclud tt unanimously where it is possible toisnguish income meant realed gains. Eres also in the amendment thlauage from whatever source derived. Derived was generay meant to refer to concepts like receipts. And indeed, the amicus brieof the professors of law and liquid sticks recognized that when income was described as being derived, it was always used in that fashion. Im not sure o ahead. Ihought that was just a response to pollock, which distinguished between income on rsal property and other kinds of income, and all the 16th amendment authors were doing was to make the distinction that public drew pollock drew, we dont approve of that distention. Mrgrsman right, what i think the 16th ameme did was remove the necessary the necessity. Bu in so doing, it necessarily required as a precedent that the amounts being taxed impact the income and not Something Else. Why should we take the common meaning of incomraer than the legal meaning, given the ntt that justin kagan points out . If the 16th amendment wast specifically responding to this courts legal precedent related to the meaning of income, i guess im curious as to why u think the common meaning of income is what we should be focused on when we try to understand what the 16th amenen meant when it used that term. That is the approach the court takes in addressing questions of orina meaning, but that is what the court have says have said again d again, that the 16th andnt is to be construed according to its ordinary meaning. T court were to depart from that and say personal property was not subject to apportionment , taxes on personal pperty that is, that would upend pretty much entire line of the courts 16tdment jurisprudence over the past century. But why . Im sorry, go ahead. If what we do is to think about a particular tax, which seems to behawe have been doing for 100 years, to see whether that tax is income as understood by attribution aan excised tax or by other principles, we wouldnhave to ge we would consid eh t on its own. You are asking us to just nounce what realization is out of context, and for the last 100 years we have been studiouy avoiding doing that becae recognize that it is dangerous to do that, to state a word like realization, we have to comep with a working technician a working definition that applies to every piece of property. It doesnt seem logical to me. Why dont you just concentrate on w congress cant say that ctain situations it is going to ignore the corporate rm and attributeo e individual shareholder certain income. That is att has been doing all along. And here, it dont need realization because congress has attributed this to the individual owners of the corporation. Respectfully, the court has already said in multiple occasions that realizaons required for there to be income under the 16th amendment. It is not only comer, it is clhlan versus alliance insurance, it is theafy car heating yes, certain tys property, but not all. But we also said partnerships can be taxed individually, even when the partners are not receiving the property. We have subchapter f and s. We have had l rts of different forms of wealth that we have attributed to individuals rather than to the legal forms ofwnship. And all of those taxes rely on the principle that the court expressed, which is that income should be taxed to he who earns it and enjoys s nefit. Putting aside whether there is any rlition requirement, there iquite the history in this country of congress taxing american shareholders on their gains from Foreign Corporations. You can see why. The u. S. Goveren cant tax those foren corporations dictly, and they wanted to make sure that americans are not trying t stash their money in the Foreign Corporations, watched their money grow and never pay taxes on them. There is a long century old history of the kinds of taxes on gains from your holdings in a Foreign Corporation. Why is this any different and why shouldnt we understand that to be subtle that to be well settled that congress can enforce those taxes for those purposes . Mr. Grosan the tes in that area have followed the pattern i described of simply a taxpayer interposing a corporation using themselves in income that would otherwise be theirs. Those provisnsrom the beginning these are the shame shareholders same shareholders as in spa f. Mr. Grossman tse provisions typically addressed things like passive incomendelated already transactions that are properly attributable to a Parent Corporation. A Parent Corporation could own an income generating asset itself or simply shift that into a corporation into a foreign corporatn and thereby avoid the income. What the law has recognized is atust as in cases like course and banks, that is effectively an assignment of inme and that it can be attributed to the pers who the pantorporation for that reason. The parent corpatn is the one that controls the fl o the income as its coming in. The mrt does not take into cot any power the shareholder had over the income as it was coming into the rporation, only ownership that seems to be an argument about timing. We have realizatioinhis case, the entity realized. The question tn is attribution. We have long held that cones may attribute the income of the company to thehaholders or the partnership to the partners, and the only real wrinkle i think here is that it goes back and captures prior years income. Mr. Grossman i think there are two wrinkl. One is that wh spect to prior years, the statute ds not require the shareholder is being taxed. That is a fundamental distinction. The second is that that is not true for the fas this case, corre . Mr. Grossman it is not true for the facts of this case. You are saying generally. Mr. Grossman i think it motrates this is a tax on property, do you own something on a particular date . Did you have that power in the past . If it was taxed year by year, would that be permissible . Mr. Grossman no, that is the second wrink. The mrts the inverse of its predecesrsn the statutes. All of the predecessors like the foreign personal holngompany provisions as well a subpart f focus on categories of income that are susceptible to being realized into the corpat form. Congre ner text shareholders of fei cporations on the active busesincome of those corporations. Why is that different analytically . This was all part of a big change from a worldwide tax system to a territorial tax system and this is one piece of that, but i guess im not sure which kind of income is at issue matters for the ultimate alysis of whether the attribution is permissible. Mr. Grossman because all of these attributions goes back to the beginning, focused on the improper of ailment of t corporate form to avoid income. They have always done that historically by fosi on categories of income that are suscepblto that. Abuse. Congress took that to theax as it amended subpart f to capture more types of that st income avoidance. What is interestg that subpart f says you captured in the field, nols get Everything Else. The everyinelse is the active business inme attributable to the Foreign Corporations, only legitimate Business Activities overseas shareholder in a forei corporation stands in no position with respect to that income rather than microsoft or anotr corporation. This is e income that shareholdern a matter of reality woulde able to shift arou io a corporate form and avoid receiving in tmsves. I also want to address the difficulties the governments interpretation would raise with respect to theurnt tax code. As i noted, e x code already reaches the full extent of congresss authority under the 16thmendment. If the government is right that certain novel categories of income, of what had hereto en reported as unrealized appriaon were subject to taxation under the 16th amendment, this would already be subject to taxation under existing law can i ask you a question about your argument before you go on with the government . If we agrewi you that the 16th amendments use of income requires realization and thatt he mrt that the mrt does not meet realization, those are two dierent steps of your analysis, it seems that all we have done is demonstrate that the 16th amendment does not justify the mrt. Dont you still have to justify that the m i a direct tax in order to eablish that the constitution has been violated . Mr. Grossman if the mrt is not a tax on income, then it stands to reason it would be a tax on the ownership of shares because otrwise the governmen offers that it could be an exse tax. My point is just a indirect tax i ulhink just has to be uniform under the constitution, so it seems as though it is more burden regardless of this issue about realization t establish that this tax is a direct t in order to sustain your nstitutional argument. Mr. Grossman welleged it was a direct tax. The government argued iwain fact a tax on income. It did not dispute. I appreciate people have not argued this. Would we send back to the nin circuit to determine whether or not it is a direct tax . Is your argument that we can suain iconstitutionality just because we have not had briefing on this particular aspect of it . Mr. Grossman with the court cod do is answer the question presented as to whether there would be anything left. I think it is at the courts discretion as to whether it wishes to reach th governments excise tax argument. Th text of the statute operates based on ownership of a particular piece of property and takes no account of any type of Business Operations of the people whom itaxing. That is the sort t that flint that is e high watermark