Transcripts For CSPAN Justices 20240705

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 of the taxurisprudence indicates it is a tax on opty and cannot be explained as a excise tax. I think the court could make short work of that argument. Going to the governments position isnt that argument in the question presented . Mr. Grossman no,ouhonor. Was it preserved . Mr. Grossman no, your honor. It w raised for the first time before ts urt. As far as the governmens position is concerned, think abt someone has a contract to sell widgets to a thd rty in a future year. If the price of widgets goes down so eyre less expensive to manufacture, then that person has received an onic gain. That would be taxable under governments position. Thank you. Justice thomas . Anything further . Would your argument be any stronger if we were talking about real estate rather than owning stocks in a corporation or iert in a corporation . Mr. Grossman no, your honor. Pretty much all of the courts 16thmement cases over the last century have concerned personal property in the form of investments. I think it is wellestablished at this time that taxes on personal propert wtm more interested in is not necessarily the distinction between real and personal property, but rather having an investment in a corporate form or partnership where you can there is an arment that the income had beenealized by the corporation or income had not been realized byhe partnership, and whether or not that ou then be attributed to those who invest in those organizatns whereas in real estate, unless the a transaction, a sale or lease or something, there is no taxable transaction. So would there be a difference between a stake in the corporatio or ptnship as opposed to real estate or other personal pperty . Mr. Grossman i dont think so. The early ones, applying the principle we put forward that the government argue resulted the ly difference. Tax. Isnt that, just based on the estions, it seems to be a vulnerability you dont have with Real Property for instance . I do not think it is a vulnerability given the genal principle required and given the nature of the tax. I think it would be more difficult case if the tax was structured in a different fashion that does not operate the way it does. Does your theory put at risk limited Liability Companies . Publicly Held Corporations . Limited partnership coorions . Therar all sorts of corporate forums that are there. Your definition, i think, would affect theovnments ability to tax those individual partners , these individual shareholders . No, your honor. Why not . We donthink those provisions present any constitutialifficult whatsoever. I dont know why. Whether it is limited liability or publicly held, is still a corporation. First of all u ve distinguishing a corporation from partnership, again, you have the doctorate of corporate personhoodhathe court has long understood does make difference in these circumstances. Where other types of corporations are concerned there is an election made by all the shareholders to those corporations to allow taxation. If someo wts to come to the government and say i am earning income andhais how i organizemyusiness and am operating in it, i think the gornment can accept that. You are going back to whether attribution iseg. The question of attribution is a question of shareholders. Why should they get to choose and not the government . Where to attribute the income . Justice kagan . At the risk of repeating me discussion, it seems to me there are four principles and may be others. But there are four principal kinds of taxation. That congress s repeatedly countenanced. This court has done nothing to get in the way of that. You have the distinguishing here. Wa to make sure i understand your disnctions. Anwhether there is a single distinction that covers all ese or whether each one has a different explanatio here are my four. Subpart f, s cpotions, its partnerships, and its taxing o an accrual basis. , give me why it is you think we can decide for you was outputting any of those kinds of very established taxation schemes at risk . At a 10,000 foot level they all you to the realization line as it has been developed in the court case and sen by historical pcent. I would have thought none o them wide. Would. That is why this is my question. Subpart f uses that familiar mechanism of simply attributing inco tthe person that earned itveif theyirted it somewhere else. Taxes of thatate have long been justified on that basis. Corporations are by election of shareholders. They can see this is their income and this is how they are operating your business. I do not think the government should have any basis to not take them at the word should the government nothoe to do so. As far as partnerships come in a separate psosits above the shareholders i am sorry, the partners of a partnership. Those have always been treated dierently going back to the Dartmouth College days and it wanot even you with that point. New at that point. Going back to income, recognizing it as wellestablished principle that corporations are different from partnerships. That was the basis on which macomber rejected the same argument. With respect to accrual, the court addressed that issue in the case safety car heating and liti case where it held standard 16th amendment realizatn principles applyo the accrual method. So whatever question there might be aboutha methodology and s nstitutionaltatus, at that point it has been long established and i water under the bridge. Can i go back to Justice Thomas question, yr n definition of realization . I will give you my cumbers. Tell me you disagree or disagree wheremccumber said, thh proceeds from the property, severed from the capalis received or drawn by the repient, the taxpayer, for his separate use. Is that your definition too . Subsequent case law has regned that the separation concept doesnnessarily apply to every circumstance, although it does apply in the rcstance of distinguishing shareholders versuS Corporations. Eah, so for example, in brunn, we basically ignored the separation requirement, correct . In that example, it was predhat it was not separable from the land. And that definition would not be very good to expln bpart f, is that te . With theou has recognized in subsequent cases, it is the concept of realization as pod to actual receipt. O basically, you are saying we have left mccumber behind . No. I think the courts case through gln aw glass, uto indianapolis power and light or banks, there is something needed for more than mere economic gain. I am not saying we have left entirely behind any concept of reizion, that is a different conversation. But we have left the mccumber denition of realization behind . Mccumber goes on to recognize regarding corporations, there may be appropriate circumstances for the court to work to asrtain the true rights of the shareholder. Macomber use the best language that occurred to the judges in the context of the case to express that look, in this case it will be receipts, but in other cases, Something Else may well qualify. Jti gorsuch . I think the argument we have heard from the other side is, there is a realizio requirement that is met here because the corporation realized the iom then ibecomes a question of the realized income. The congress has a free hand ere, the 16th amendment says nothing. Your response . The court has always looked at questions of income om the point of view ofhe shareholder. Cases involving gross income under the tax code, the court has looked a the individual circumstances of the sharehoer to ascertain as whether the sharolr has realized a gain. The court looked specifically theact of different types of Customer Security deposits. It was not an abstract inquiry were things might bessned and so forth, it was assneto decide shareholder income. I think the court wld certainly have to reverse mccumber,hich the government has not asked it to do, to get beyond the idea that some freefloating notion of income is sufficient for the governmen to point at something and tax it to a particular indivuaas their income. If i understand it, the question iwhether its income to the taxpayer that is being taxed . Correct. I would liktoo back to the discussion you had with justicjason. I understand your point that the ci aument has been forfeid perhaps even wait in this case waived in this case. We have the hilton cas from a long time ago. Terror carriages were not thought to be a direct tax. To the government call this an excise tax . The answer resoundinglyou be no. The whole point of the direct tax clause is to make it difficult for congress to levy these types of tesnd still leaving authitavailable in times oemergency. Taxes on personal property and things like where investments are concerned, that was addressed extensively during the ratification debates for the constitution. It was one of theriry arguments of the antifederalists against theatification of the constitution. Permitting congress to levy direct taxes would be a step too far and allow congress t destroy the states and reach family property across the country. So the way the framers address at was to render these types of taxes specifically subjt apportionment. This was addressed and discussed at the connecticut, pin pennsylvia ratifying conventionsy mes madison, chief justice marshall. This sort of investment is something where taxes on it were subject to apportionment one more question on policy. If the court were to hd that the realizatn requirement somewhere along the chain, what would be the consequences of holding like that . Open the door of taxation to practically everything. All propertyerns own, whether bincome they have received they have in the past, but all property we have is made up of forms income that have been invested. If this a necessary with some level of income, we can say at some point, this was income to some person at some level and can be subject to taxatn without apportionment. I suppose we would have to draw lines as to how far back in time one n in assessing theha of realization. Thats right. I dont understand how that is ne on the constitutional text. If the time is set aa persons birth or many decades in the past, that could reach all of their property. I dont undstd what the limiting principle would be. Thank you. Justice kavanaugh . In your brief, you used the phrase constructive realization. I am asking if y could define what you mean by constructive realization. We use this as a blanket term to encompass such concepts asssignment of income and refers to the general priip espoused in cases like banks, that income should be tax ta person thatnjoys its benefits. Congsswhen it has enacted cases relying on that doctrine, has approached it in that nature. Assessing whether the income at issue is something in the ordinary course of affairs that could be attruted to the person, the singular taxpayer at issue, regarding categories of income or use of the corporate form and so forth. Ok, thank you. There are casesn which state law sa that partners could not haveonol over the proper or pull it out unaterally, in which we said is ok for the income to be attributed to the partner. I understand partnerships are a different kind ofo. As an ownership matter, the partners would own it eqll but i dont think our cases have established controls the linchpin. Could you point me in the right direction if you disagree. If you accept of the view that Partnership Income is the income of its partners, restrictions such as distributing it in certain circumstances is used in state w prevent an individual from using their own income, spending it on a particular item th might wish to purchase. But when we think about how to define income, think about how control could be the wd use, despite disncon between capital andncome, the seed and itfruit, right . It seems like control might go a little bit too far. Control has always been an esntl element of income attributiostutes, because thgeneral idea has to be, the taxpayer at issue has the ability to direct that stream of income somewhere else and thereby avoid taxes on it. Why it isnt that a due procs sue . You said it mean sething that was earned income anywhere along the line ultimately lds in my bank accnt and can be considered income to me. Is that a 16th amendment problem or a due process pbl, where we have to draw lines about when it is fair to attribe e persons income to someone else . T court has traditionally considered it to be a 16th amendment issue. The Court Considered it a question of, did the taxpar have control over the stream of income thahe had in that case redirected into a trustorhe benefit of his close Family Member thas the way the court has always analyzedt,rom the point of vieofhe taxpayer andhether that taxpayer has receivednce or not. In the last question about subpart f you say income is about whether a person has an ability to direct e income stream. Mi accuratel repeating what you said when it is about attribution . It is a necessary part oit yes. And y said subpart f corporations in general, of whicth corporation meets the definition, these corporations in subpart f do not oppose the 16th amendment ayou see here, correct . Aside from the mrt, yes. And is that because, going back to your point about control, is th distincti between mrt and the rest of subpart f,hehareholders have more ability to direct the stream . Its two things. Its not that they have more ily, but any ability. Under the terms of the statute, they dont take into account ether or not a shareholder exercised control with that stream of income coming in the or it onlyocuses on ownership in 2017, but thategree of control has also been combined historically with the question of whether or not the types of income being taxed are those that are susceptible to that sort of abuse, such that attribution is appropriate . So there is a fraud overlay to this . Is this functioning as a tax shelr,s Justice Kagan was pointing out . Ths a constitutional requirement . Congress certainly viewed it that way the provision was limited specifically by man of the chief proponents of t 1h amendment to avoid the precise question, the precise defect we are addressing here today. Eir view was, you cannot ordinarily attribute corpote income to shareholders, but when there was fraudulent abuse of a corporion to provide income. I amntested in your converti with justus gorsuch about the original meaning of the direct tax clause. I am trying to understand whether it is your position that as an original matter, the dire t clause wa interpreted to include ince and all sorts of things, or was it narrow . I thought ogilly, as we said in the hilton case, that it was pretty narrowly [inaudible] hilton case had three opinions, two of them viewed them as a consumption tax. The last viewaiit was not subject to apportionment what about justice pattersons explanation, that i was designed to protect Southern States and slavery froferal interference . That that was what was going on here . When you look at direct taxes, as opposed tindirect, you are talking abt rtain kinds of things, in that it is not nessarily others income in that sense. I think that is a matterf individual meaning that is incorrect did theou until mccumber hold that income was direct . Not souc with respect inme sorry, sorry, pollock. That addresses the intpration of the normal tax clauses. Spoock was addressed by the 16th andment, and until then we had a very narrow conception of direct tax. Tubbs went to that, as i said, all of the 16th amendment cases over the past century have given certain tax opersonal property in the form of investmes. I think theou would have to upend its jurirunce if it were to decide theirect tax clauses ought to be given some other interpretation. Let me ask you about realization, going back to Justice Thomass fit question and what the definition is. Itrng to understand whether you thinkoness has the authority to define what constitutes realization or not. Is that something ure giving to the court through constitutional interpretatn, or who decides what the realizatn ne is . Yes, Congress Gets deference on that, but it definitely has to try to do that, which is not what it did in this case. This turns ownership and prer out on a particular date and does not ta io account i dont understand your awe could we find there is realizioin this case, that the is realization . Who makes the definitionf realization . Could the court determine there is realization here under a definition thawere appreciating . The government has never argued tt ere is realization in ts se. The government has presented the gument that realization is not required, so i think it would unusual for the court to reach out and decide a question of that import are you asking us to adopt a particuladenition of realization that your client needs in this case . If we adopt a particular position, do you lose . This is alied since the dawn oth16th amendment. Even though the 16th amendment ds not have realization in it. You are saying the implied realization requirement have a definition that you are asking the court to adopt . We are asking the court to say realization is necessary, as the contact has been espoused in the cs decision over the course of thury. Thank you. Thank you, counsel. Mr. Chi justice, and may it please the court,hert is firmly grounded in the 16th amendment text and history. Vindman help the amendment allows congress to iose taxes on incomes. Several of those taxes within mrt tad shareholders on undistributed corporate earnin, cluding the income taxes in 1864, 1865, 1867 and 1870. This court upheld congresss power to collect those taxes in bbard. Theyould have understood drafting of taxes on income the 13 law taxed sharelders on their pro rata shares of undistributed corpote earnings, and the trend that passed through taxation has contued throughout the next century, from taxes on partners to S Corporation shareholders, the foreign corporatns shareholders under subpart f. Against all at history, petitioners take their case on macomber. The court has limited macomber toaxes that are not on issue here. If the court extended macomber discussions to taxes on all undistributed business earnings, it would cause aeachange in the tax code and lead to several llion dollars of lost tax revenue. They dont provide a comprehensive definition of constructive rlition or explain why it would rescue every provision except the mrt. Myrid today said it is a blanket term defined by the circumstances, but that is simply circular. By conceding constructive realization, ty ve acknowledged congresss power to draw a reasonable lines about what counts as iome and whom can be taxed on it, which is what congress did t mrt. Finall the court does not need toesolve any fundamental questions about whether the 16th amendment requires reazaon. A number of passthrough taxes without our nations history. I welcome the courts questions. When you say realize it has been realized, whadoou mean by that . I think this is a paradigm attic case of realization, t underlying tax base for the mrt are the earnings that actually came into the corporation, the foigcorporations coffers. The tax base here was a substantial ordinary business owned income tt the foreign corporatn generated through its operations in a foreign country and had to date been subject t deferral. At income has never been taxed at the corporate or entity level. What congress did in the mrt contributed to the liability realizedo e u. S. Shareholders. Osi of the context of the mrt, do you inhat the crse of value in Real Property could be a taxable event . That raises a more difficult question this presses on the idea of whether you can characterize gaininhe term of apprecti and income that is taxae. The is a strong argument, that llinto a definition of income that looks definitions of income over time, some of the civil war era income tax laws i point tat the beginning of our introduction had appreciation based taxation forerin property like livestock, and there are important provisions of the tax code that effectively tax individuals on appreciation, for example, the market to market taxes treating a taxpayer as though there w a realizable event at the end of the tax year for certain futures conac, Life Insurance holdings, security dears holdings that marking amounts of the value to the market price, enn the absence of any kind of sale. There is strong support for the ideahat you contact certain formofppreciation newberry macomber, and that takes away a lot of the strong support for a pretty strong propositn at the government cant taxed as income to the Property Owner deed appreciation in value of the property. So what is left to defend at proposition without macomber . I disagree with the suggestion that macomber involved the tax on appreciation. I know your argument, it is limited to stock dividends, but it h also been recognized, at least in the beginnin bore it narrowed over time, as stding for the proposition that t gernment cannot tax the appreciation and property. You have taken that off the board in your presentation today. I wonder if you could give us a little more view, or assurance, and what isefto defend that proposition oe u have stabbed macomber. [laughter] we are invoking this own courts precedent about macombers scope and reach. They said it was limited to the stock dividend issue there, and it did not represent any economic gain to the taxpayer. In other words, theaxyer received additional shares from theomny, but it was a stock slip a h shares were diluted. The quartet from the taxpayers perspective, there was no difference in her nehip stake in the compan before orfty. What would you cite, given the facthat macomber is not on the table . If the court were looking for a limiting princip that takes appreciation off the table in certain circumstances, i would look a history. I think the i a different historical fndation for that type of tax comparedo at we have here, which is a passthrough tax on realized corpore income. It was not with the framers the 16th amendment had in mind, but i do want to focus on a tax base that focuses on realized income and attributes it to a different taxpayer, which is a prevalent feature of the tax code and involves many oth provisions one of the arguments that has resonated a lotn e coverage of this case, the adoption of petitioners arguments would vearreaching consequences. Isnt that correct . That is correct. Do you think it is fair to explore what the consequences of your argument would be . I want to say at e tset, i think the court could resol this case quite narrowly. Realization of income is not a constitutional requirement, but instead is founded on administrative convenience. Is that correct . The ninth circuit did say realization requirements were und thats not whether it is a correct interpretation of our prior precedents, is it your position that realization is not required . The 16th amendment permits the taxation of income, whether realiz onot . E think there is no rule or requirement under the 16th amendment, and congress is permitd tax certain forms of unrealized gains. The court doesoteed to set out here to define income for all purposes or announce any bright line rules. It is ffient here for the court to say, you have before you a particular type ofax on particular corporate earnings that were realized, and to look at the history and tradition that demonstrates it fits within congresses authority. So te it what you said, realization is not a requirement. Did you say that explicitly in your brief . We believe realization is always a requireme. We dont have to agree with you on that r u to prevail, i think you saidn your opening as well. Even leaving open whether realization is a constitutional requirement, there was realized income here to the entity, and it is attributed to the shareholders in a manner consistent with how coness has done that and the court has allowed. Thats correct. We think here, the nstitutional question is quite easy and does not require the court to consider some of the undational questions about the meaning of the 16th amendment in other contexts. We have realized income at the ti level, and it functions like the passthrough taxes on partnerships, other types of corporate shareholders, aS Corporation shareholders and in the context of Foreign Corporations, the tax under subpart f. So the answer, there need not be realization by the taxpaye there is realization by some other eity. Correct . Under the 16th amendment, that is correct, but there is also a due process question about congresss ability to limit realization on income. Thats a question of substantive due process. That is how the court has framed it in cases like burnett versus wells. Anything under substantiv due process involving an economic regulation like this, the only thing that would need to be shown is that it was rational for congress too at it did . The court has lood whether congress has made an artrary choice or acted unreasonably, buthe have looked at whetr e taxpayer whowethe Tax Liability has a relationship. F it is a rational basis, that is not much. We could say the thirtyyear requirement here is a substantive due pres issue, so we dont have to grapple with that here. To be honest, we would be saying, unlesyocan show it was a rational, that would be sufficient. I want to berecise about the doctrine here. You meiod the 30 year look back period. That has to do with retroactivity principles de the due process clause. Something that has en different is the attribution process wha been discussing, about whether congress can apply att the entity level. We have in nms amount of history and tradition on our side to support the idea that thisarcular attribution desi timately, we have to talk about this case, but i want to understand how far the argument goes . Under your argument, doeth 16th amendment allow the taxation of income . You define income as an increase in an economic gain between two points in time. So lets say somebody graduates from school and startsand 20 yes later the person is a billionaire. Can congrs tax all of that on the ground as ince . If that has aea been taxed as i imagine it would thugh annual income taxes, it soundso he hypothetical is functioning as a property tax. The appreciation in stock value over 20 or 30 years. Would congress say we want to reach back and tax all of that . Between two points in time. That is a harder question and here is why. I think that would fit within an ordinary conception of income as covering economic gain through two points of time. We dont have the same tradition to spo congress levying income tax in that manr. On this point in your brief and i understand your argument is different today but in your brief, you confronted th question whether congress could tax millions of americans. You sayes u int to the 1864 civil war laws. You say that would be administratively unworkable. As i understood in your brief, the answer to Justice Alitos question is yes. That could happen. This is an important point and let me clarify tha statement was referring to the idea of pass through taxation of largcorporate shareholders. That would function like the mrt. The shareholders would be responsible for a pro rata share of the earnings. Im t re that is clear. It seemed to me tharment was the change in value overim. Stock prices increase. Uld you tax that otherwise considered unrealized gain and thaner is yes because they did that in 1864. If there any limitation, it has to do withdmistrative workability. I18, they were doing a passthrough tax on corporate earnings. The calculation was not based on e appreciation in shares. I dont want to suggest a tax on appreciation would be invad. There are appreciations on the books that are constitutiol. Let me say to the qstion and Justice Alitos question is pressing on the idea maybe ts kind of appreciation should be beyond the reach. I am asking what e mits of your argument are. It seems to me there are none. I certainly think cones has brought taxing power. What i was about to say was here, the relevant questions not whether congress has the power to t ithe first place. E ard has said the court has said congress has plenary power. Thquestion is whether that is a direct tax that has to be a poio if i might address what i perceived to be a backup argument the first argument is no realization requirement. Today i ameang even if there is reazaon, there was mewhere in the chain realization and congress can attribute it freely as it wishes. I understand that argument b im not sure how we fit it with our president. If we ditch my cumber, i understand youarment. Lets assume momber is not completely misguided. I look at brun. I look at hearst. It seems to me as i read them they are all trying to work within macombers framework. Talkinabt is it fair to say therwa realization to the t payer, not realization somewhere ba in the chain of history and income realized by the corporation or a parent or subsidiary. Just as a matter of precedent, what is mistak about that . In those subsequent cases, i would not say the court was mistaken. D happen to find realization for those cases. For the taxpayer. For the taxpayer. None of those cases involved a passthrough tax. Looking at what may be the closest precedent, i point to the courts cision in hiner versus mellon which csired a tax on partners evenhethey cannot access the Partnership Income. The ursaid that was perfectly fine. You have not made an argument there s alization to the taxpayer. Just answer that before you launch off. You have not made that argument, right . We dont think the taxs constitiality depends on whether theaxpayers get a distribution because this is a passthrough tax. I think i will take that as a yes. There are two ways to think abou it. There was related income at the entity level. Congress can arite that to the tpar. Theaxpayer has a close enough relationipo the underlying income for congress to treat it asncome to the taxpayer. We dont have that argument before us. That argument has not been made. We intended to make that argument. I understand o befing to focus on both aspects of this issue. We join issue with petitioners on whether the 16th amendment requires relies asian. Requires realization. Now you are saying it requires realization but not to the taxpayer. When argument i am missing is there was realizaono the taxpayer. That is not in the brief. What do i do about that . If you think there is realization to this taxpayer, why didt you make that argument . We are not suggesting there is anything like strict realization in the sense of the taxpayer having received sothg in hand. I dont understand petitioners to be saying tha iwhat is required. Ouras in brun and rs sayhere could be constructive realization of partnership siatn or a fraud situation. We have been clear about that. There is some enjoyment the taxpayer has over that money. Some control. He may assign it elsewhere but he controls it. There is some reli aan under macomber some reazaon under macombers framework. The taxpayer having the interim and is not ith briefs. What do i do about tt . I think we did make the argument because we made the point because to the court goes down recognizing some realization, the m wld fit within that framework. The petitioners have not identified any distincti between how the other contacts operate and how the mrt opates. Lets just say i dont see that argument. Then what you want me to do . If i am supposed to vacate and remand for consideration of the question . What would you have me do . I certainly think in our brief we argued e taxpayer c properly be held accountable for the corporations income. I got the argument either there is no realization or as a backup there is realization and fair attribution. If i awoing within the precedence, i dont consider them wholly misguided, if i not willing to overturn 100 years worth of precedent, and e estion is is it fair to say this taxpayer constructively or actually realized this income, should i vacate and remand . You should affirm because here, we made the argument there is the same vel of control and exactly the sa rationship as in subpart f. We did make this argument. We made the point if the court is focused on things like control or influence, there is no relevant distinction because this is taxing in t se way as subpart f operates. What do you think is the significance of petitiers concession subpart f is constutional . I think that is an incredly significant concession because even if the court were to apply le of control or influence come i think the right word to use would be relationship to the come. Petitioners have acknowledged 10 of shareholders have the requisite level orelationship to have income which riveted to them. My friend suggested there is so fundamental difference with subpart f because it taxes different pes of income. He said it is income where you can impose the form. The 16th ameme saysoness contacts all income from whatever source derived. The tt by its own terms makes clear the different forms of income do not make revant constitutional difference. If you look at it as affeconal matter, my fen argument does not withstand scrutiny. He suggest all of this income could have been burned by the taxpayer himself. That is not ela many important features likensing risk outside the country of incooration for the cfc were doing business in couny subject to u. S. Sanctions. Those are part of subpart f income and i dont think there is a relevant distinction. Justice gorsuchaid you were asking us to overrule what hundred years of our precedent. Sounds bad. Are you . [laughter] i am not asking the court overrule any precedent. I asking the court to follow its precedent that postdates macomber and makes clear the discussion in that case is relevant to the thought issue there. I recognize there is language that seems to have broader sweep. This court has recognized th is not the right way to read if i might, in macomber, it said realization. You said thais misguided. In fallis, we said we we following the tesla down in macomber. Brun, we said it was foowing macombers understanding of income. In horst, it said much the same thing. Im not going to bother with the quote. In each of those cases, it purported to be ithfully following macomber. You disagree with that i guess. I disagreith the reading of the cases. If you look at each of the cases, the court did find realization on theacts there but using different standar than macomber had articulated. Take brun pure that was a case where you said the court was faithfully applying its interpretation of income but the court disavowed the aspect of macomber that said you have to be able to separate the economic in from the underlying property. Talked about control. But it spoke of applying macomber. The view think it was diluting itself but that is how the court perceived what it was doing. She that count for something . Look t statements in griffith. The court saiththeoretical bases had been undermined. Th ihad been limited to the particular type of thought dividend at issue and it did not have controlling weight even wi respect to other types of ocdividend. Hat do you understand to be the current state of our precedent . You said macomber was confronting something that stuck dividend had no economic consequence. That was true. Macomber could have beededed in a paragraph saying that but that is not athe court did as you say, there are many cases following macomber which leaves macombers own theory of realization in the dust. What do you take to be the current state of our precedent need to Pay Attention to. Ihink of this case had before it another stuck dividend case that involved another split, macomber would control. That is what griffith said. The court itself in any number of follow one cases macomber does not have contllg weight outside of the context. The cour said the statements were not iended to provide a touchton for resolving all future growth questions that uld arise. To the extent tt leaves macomber as an island unto itself, that is the natural effect of the precedent and we are asking the court to follow that. The president most pnt for you you said is high in her. The partnersp case. That involve the most analogouta. Expinhy that dictates the suer from your perspective since that is t one you are relying on most. Isupports the results because the court confronted a situation where partners claimed th could not lawfully be taxed on Partnership Income on the passthrough basis because state law operated to preclude any distributions to them. The partners wereotoing to personally realize the income. State law prohibited the dirition. Court rejected the claim from the partners and said it did not make a difference with respect to the permissibility of the passthroughaxo the partns themselves. Petitioners have suggested partners cane established on the le because they say partrsps have a different legal status. It is not like partnerships have an innate legal status. They are creatures of state law and there any number states that define a partnehias distinct from the partners themselves. We have good case l that governs subpart f funny the lower courts. This has been applied in nurous additional contacts additional contexts. It is not just the modern law. It is all of t htory here. Virtually the entirety of this Patients Experience with an income tax there have been balls on the book he than the brief time when pollock governed where congress has tedorporate income at the shareholder level. It is a cssic tax and how the t operates. I agree with your scription. I was i slitting the case that is the closest i think. I just wanted you to spell that out. I was jt ing to ask you heiner closest on the passthrough point, what is your best federal case upholding a federal tax on appreciation or doouave one . I dot have the case from this court that upholds a tax on appreciation. There are fewer taxes that have reached appreciation. There are a riy of taxes out there and theart one dark and it is importanto recognize the importance of being ae tax in that context. The situation that prompted this is the fact taxpayersan manipulate realization ent they can enter into futures contracts and allow the tpar to hold onto the one that has a gain. And to sellhene that is a loss and immediately have a taxable event. Congress recognized that was a loophole in the tax code that uld enable this kind of abuse. There are taxes like the mark to market onth is tax based on appreciation but ifair to say woulde doing something new if we accepted your argument thatnce is any kind of economic gain appreciation inud appreciate the opportunity crify because we are not asking the court to clarify income that way. If there is a lesson, it is there is a rea danger to define income for all purposes or to provide a touchtoneorll future cases in part because our exrience with the tax code is taxpayers latch onto those staten and use it as a basis to avoid taxation going forward. I dont think the court needs to approach this issue by adopting some universal definition of income. The Internal Revenue code does not define income. It says income is all income and gives some illustrative examples. I dont think my friends ar offering the court a definition because th say income is realized gains or some catory of unrealized gains you can say are constructively realized t it is not necessary for the court to comprehensivelyefe it here. I understoo your answer to justice rrt to be the same as the ansr u gave me with respect to unrealized increase vue from one time to another time in Real Property thatou did not have any authority to support that. I am not pointing to a case in this court i would find taxable. Y mn that is the lesson of macombers demise . Exactly. I think the court recognized those statements rendered as an abstract matter d ined on taxes not presentedad untenable consequences and were a historical there is a lot of wind a lot of sd in following the court. The crt said we do not will of the constuonality of the tax until we find congress has laid that tax. Iti want to understand the litsf your argument. I qte concerned by the potentiaimications of petitioners argument and you stress that in your brief. You say if we will in petitioners favor, large important pieces of the tax code will also logically fall. And i thinkhat is a fair argument but i think it is also a fair argument to do the same thing with your position and i want to understand the limits of your position. Coming in, i understood your position to be realization is not required and the 16th amendment, realization to the taxpayer is not required and the 16th amendment allows the taxaonf income and you seem to defe income in your brief as economic gain between two points in time. You say it is those wellestablished priips that distinguish income taxes from property taxes. If that is correct, then what about the appreciation of ldgs in insecurities by millions and millions of americans, holdings in mutual funds over a tim without selling the shares in those mutual funds . Can those be taxed under the 16th amendment . I think if congressnacted a tax like that and never has, we wod likely defend it as an income tax. Dont ve to agree the tax would be valid to uphold the mrt. I uerand that, in order to rule first to rule for petitioners, well have to same thing about subpart f or s corpatns, but your answer is that would probably be permissible under your interpretati o the 16th amendment . The court could draw lines based on sty and if there truly were a widespread tax on all ount of appreciation for every taxpayer, that would not look like Anything Congress has done before. The court has sometimes used history that to awrincipled lines. We have extlthe opposite situation where congress has enacted a tax that lksook any number of passthrough taxes throh story. Hiorfunctions as a rule of inclusion with rpect to the propriety of this tax. As to the chief justices question, about thapeciation of value in real ppey . Congress hasot traditionally text that. The court if it were confronted th that situation would conclude the ia historical line or limid inciple here. And ls story rules that out, im not sure how congresss failure to enact a tax in e past brings that outside the 16th amendment if the tax would otherwise fall within the 16th amendment. You say ats potentially also taxable as income under your theory. Yes and i thi iis clearly taxable dethe constitution. This is not a question about congresss power. It is about the motive taxation and with her to a portn the tax or not. If some sort of conruive realization or subtest f attribution is required, what is your tt . How far make congress go in trti income to someone who has not realized that income in the standard understanding of that term . New i would apply the test the court usein burnett versus wells which prevents which presents the most analogous situation. A taxpayerrgd because he had been the grantor of the trustee could not be held liabl for the gains. It could not properly be attributive him because he had no continuing control. The cot jected that claim and isa congress had not acted arbitrarily. It lookedt the taxpayers lationship to the underlying income and concluded there was odeason to tax the grantor in that circumstance including to avoid shifting income to lower incomeaxyers. If the court were applying that kindf tribution analysis, the mrt like manyassthrough taxes is equally constitutional. The income has never been taxed at the entity leve and there are complications trying to tax Foreign Corporations directly. These large u. S. Shareholders who by devastati together by definition together have a majority stake in closely Held Corporation are the most suitable person or entity to x. Have we ever said and maybe we should say the 16th amendment applies differently to income or proper tt i obtained abroad than it does to income or prerty possessed within the United States . The court has not previously said that but my friendimlf suggest in thinking about these issues the court should focus on the potential for tax avoidance orbu. At concession underscores the point when youre using a Foreign Corporation it provides ready vehicle to shelter funds offshore, keep tm t of the reach of u. S. Taxing authorities and couple g eorts to access those funds even when they have a significant connection because these companies are majorityoedy u. S. Taxpayers. Its important to recognize this case is not the paradigmatic case of how the mrt applies. The overwhelming majority of taxpayers subject to this are Domestic Corporations, often parent comni of whollyowned foreign subsidiaries who have arrange their affairs tbeble to keep this money offshore. It would be anomalous to suggest the mey is forever out of the reach of the u. S. Petitioners were in on the ground floor with thiS Corporation but what if they had simply bought into the company the day before the mrt made taxes due . Wouldnt that look an awful lot like a tax on capital rather than a tax onnce . I think the underlying nature of what is being taxed which are the realized eain of the corporation would nochge. I think ataises a harder attribution question becausehe taxpayer would have less of a direct ratnship to the thing being taxed. Maybe someone in that tuion would have a better as applied to process claim. As you mentioned, the moors themselves are not in that situatn. The second tng i would say is if the core is intertein exploring this as applies due process iue, the mrt is not unue in this regard. Their other taxes in other contexts where the court has recognized someone can be taxed on gain in property that happen beforehewnership was a and. In taft versus bowers t crt considered this issue with respect to the gift tax. Yo can buy shares in the controlled Foreign Corporation and be taxed under subpart f. The third point i would make it is as a factual matter the situation is uiky to arise and that is because congress has enacted other permissions of the code that largely tie the gains to the person who owned the shares athrelevant time. 26 usc section 1248 and it taxes gains at the times of sale. In 2017 with a person is buying share in the company, it tes gains to the seller as though they were paid out of the retained corporate earnings. There is a parallel pvion for the buyer unr e mrt. That ensures the buyeroe not have to include that in his income through a cross reference to section 959. I think congress was trying to attribute the income to th person who owned the shares at the relevant time. Your brief makes an awful lot out of collector versus hubbard decided in 1871. To what degree does your argument depend on that . Nde went ultimately we think what carries the day is t overwhelming histo cgress has lung taxed income. Cupboard upheld that exerce authority. If youre looking at the text of the 16th amendment, they wld have been aware of the pastor taxati. Do you think hubbard decided the tax w a issue satisfied article one, sectionwo and article one, section nine which draws a distinction between dire a indirect taxes . You think the court decided that question . Hubbards discussion is brief. I dont think it part the constitutional text that way althou idid say this was within congresss power. I understand that to be a constitutional holding. Diagnose that the dd not get to the provisions of the constitution. You think it was overruled in pollock . I dont think it woulbe right to say pollock was the last word on it. En if it was overruled, the 16th amendment came along and itself reversed. Do you thinthpollock court understood itself to be overruling hubbard . I think it is possiblehe court understood itself to be overruling. Was obviously adopting an understanding of what constitutes a direct tax that was a sharp depaurfrom what had come before. I guess what i would say iit seems to be implausib t drafters of the 16th amendment in seeking to overturn pollock and fully revive congresss preexisting income t already would have meant to do so with respect to all the ways congress had exercise that authority except f t type of passthrough tax hubbard specifically approved. If the courin hubbard thought it was overrin the court in public but it was overruling hubbard, what you ke of the fact itoes not mention hubbard at as far as i can tell hba was never cited the attorneys . I look back at professor fistss volume in the oliver window hos vise of the Supreme Court on what he haso y about pollock and he says pollock was a special ceremonial occasion forheourt. The greatest lawyers of the day appeared for both sides. The greatest lawyers for the day didnt understand that there was hubbard that had supported the attorney arguing for the government just didnt realize ey had hubbardn e book that supported their position . Maybe they missed an opportunity me a good argument in that case. [laughter] ultimately the important point is relying on llk and trying to parse plo versus hubbard ignores the effe othe 16th amendment. This was an amendment to the cotitution that was designed restore a preexisting power and the right way to look at what that power means is to look at how it had actually been exercised. Justice sotomayor. Dont fault the parties for shooting for the stars and but i guess the tenor of the questions is nobody is happy with anybodys denion of anhi, ok . You started by suggesting a narrow ruling. I think there e o ways to never really will. Tell me if one is better than the other if atll. First, we can say there is a realization requiren here, it was realized because the coorion realized it. You have to deal with justice gous concern that you waive that argument. I mayisree with him but that we can work ouamong ourselves. We could rule thatay. Or we could do it the way juste vanaugh starred his question which is we assume there is a realization requiremen and it was met here. Which of the two ways should we do it and how not and why not . It would be critically important r the court to do it through Justice Kavanaughs approach. I dont think the court eds to resolve about anything whether the 16th amendment requires realization. This kind of tax corresponds to ssthrough taxes we have had through history. That suffis resolve this case. The history is atongress can attribute that realization . That congress can attribute that reazaon by the corporation to the shareholders and or taxes that look likth at virtually all points in our nations history. Threason i would caution the court away from adopting a realization requirement is not only we think it i inaccurate, profoundly ahistorical inconsistent with the text of the 16th amendment but it would wreak havoonhe proper operation of the tax code. I think there are passthrough taxes that cld withstand scrutiny if the Court Affirms the attribution holding but as i mentne there are a number of tickly important permissio o the code that dont have that kind of mechanism and dont turn rlization at a. That includes mark to market taxes, original issued discount on bonds that drives prices in bo mkets and avoids shelteri of income that should be taxable. It includes the expatriation tax when people renounce their citizensp. There are various ways in which adopting any form of realizati requirement have profound practical consequences and it is uncessary for the court to go down that road in light of the legal arguments against that reading. Just to take you back to the implications of mr. Grossman argunthe has made a number of statemes his bef and today how he would distinguish this tax from many others. From subpart f, from S Corporations, from partnships, from accrual, from there might be more. What do you worry about and why . I wry none of those proposals hold up and provide a basis to distinguish the mrt. First he suggested has to with control. As i explained to justice barrett, the lel of control is exactly the sa aunder subpart f. These are 10 sharelders of closely held forgn corporations and so control cannot be the releva difference. It is not the difference with respect to partnerships and aS Corporation shareholders who might have a lower than 10 stake and can have income much riveted them. Then hsa maybe the answer is consent and he points to aS Corporations and says that turns on tory of consent. Idle think that works either because to any extent there is any kind of relays asian requirement, consent could not cu tt differently or give taxpayers a basis to allow congress ttathings outside its ahoty. The S Corporations shareholders ghbuy their interest in the company and never personally consent to passthrough taxation or they might change their minds and remove their consent. I dont think consent works. Then hsa maybe it has something dwith the type of income under subpart. As ive explained before, we dont think the typef come matters under the 16th amendment. This is paired pumatic income. Ordinary business income substantial earnings realized by the company. I think it would be an anomalous result to say this type of income uniquely is exempt from sshrough taxation. He suggests may be a turns on the tential for abuse and maybe that explains some of these other taxes. There again i think the mrt itself responds to the concern these domestic corpotis, also some individual shareholde have been able to keep the money offshore out of the osely held Foreign Corporations and deferred taxation. So with respect to every possible point of difference we dont think it holds up as a descriptive matter and so there is a concern we have if the court goes down one of thes roads and invalidates the mrt it is not a principal disncon. With respecto e implications of the furthest reaches of your argument that Justice Alito was asking about, you said with respect to a mb of taxes which will probably never see but you said if we did see them, you would probably defend them. That is your job, right . [lghter] we generally defend the constitutionality of statutes. How should we think about at set of possibilities . Themptant starting point is to recognize those are poeticals that are unlikely to eveco to pass. It is the administrative practilies of the situation. It is comiced to track fluctuations in value or engage in valuation analysis for assets that might be hard to value. Some of the hypotheticals about taxing all people who have shares or all home appreciation are unlikely to come. To pass. I also think it is important for the court to not ry concerns about those type of fafetched hypotheticals to announce bright line rules about what the 16th enent requires that could take down critically important provisions of the tax code and that rpond to reallife concerns and legitimate exercises of the taxing power. Many of the times we congress has chosen to tax in the absence of realization it is because taxpayers can abuse the rules. They can manipulate realization en. They can make use of certain structures or Financial Instruments to shield assets from taxation. Any coherent or Proper Administration has to be able to respond to that kind of abuse. Justice gorsuch . Would you agree that when the court opens a door, congress tends to walk through it . [lauter] i dont want to overgeneralize on the back and forth between the court and congress but if i am anticipating correctly where youre going maybe you are, maybe you arent. Usually are. [laughter] but if the only b to congress from enacting a tax on millions ofmecans retirement accounts and mutual funds is administrative ability, they are pretty clever over there, ar today . Arent they . They know how to get around administti concerns pretty well. I think they would be good reasons for them tavd the complexities. Sure is a policy matter but nt it the case that would open a big door . That door is already open. Congress can enact that tax. It has beenpeforever in your view. In termsf your argumentf theres no difference between income and that unrealized capital gain, you are familiar with the 1918 tax cases. The governments brief in that case, one of my industrious low er pulled it and the government does draw that distinction and says that kind of capital gain is not income because the individual received, the taxpayer received nothing. And that is not income. Its mere gain or loss of catal value. Are you familiar with tt . Im not sure exactly which ief you are talking about. The solicitor generals brief in the 1918 income tax ce. Pages 32 and 53. Ive he to look at the particular issue being considered. There are a number of statutory realization requirements that could explain the statements. There has been a lot of olion in the thinking about these issues following macomber. I recognize the government has taken a broader view of macomber itself but that was in an era when the court itself had been unclear about the reach of macomber before the court ha limited it. I do think there is room for some narrow ground as Justice Sotomayor suggested. If onehinks the question is attribution you call it, i think urriend on the others would call it, is it realized by the taxpayer . You say is it fairly attribute it to the taxpayer. Potootato. Im from idaho si love that. You totally get what im saying. If we are talking about the same thing, you make a persuave argument under the mrt, the more ore you have constructive control it is aritable to them because they are 10 stakeholder and some other facts. I may be missing it. I dont see that argument in the brief. Assume that arguntas not been made. What do i do . I agr tt we have not made the argument expressly in terms of control because we dont think that is the right standard. We did clearly make the argument the mrt is constitutional for the same reasons. If we think there is some constructive realizaonr attribution requime required but that has not bn argued yet, what should do . If you think it has not been argued yet, i have course disagree on the facts but the urcan affirm on a deterrent of ground, even one the party did not raise thcot said in dahda versus road states so i think it would be on r the court to affirm on background. You have argued the attribution is a feature of due process rather than income de the 16th amendment. All of our cases wheere are talking about partnerships or you want to talk about s corpse or schedule f, have treated it as whether it is a form of income to the taxpayer under the 16th amendment. At is how we grounded our analysis so fa it would seem que a change to move it over to due process. Theous central case on attribution was a due pcess case. This was burnett versus well. You mention partnership earlier. I looked at that and you said that is the best case. Those words dont appear anywhere in Justice Brandeis opinion. It is all about whether you can call it fairly attributable or realized by the partner. Ihink it is perfectly fine for the court to look at this through the lens of the 16th amendment. You get to the same result which is the questiowod be can Congress Fairly trute this income to the taxpayer and here we he overwhelmingistory and tradition going back to the 1860s and 1870s demonstrin congress can. Are some of those factors you okt whether they control the entity, whether there is evidence of fraud . What else would you add to the list . I would lk the taxpayers relationship to the income in the entity i hesitate to try p the gloss of control on it. I think that would incentivize taxpayers to try to argue an individual case they dont have control. Im suggesting it might be sufficie. I wouldgr that might be sufficient to establish congress made a fair atibion decision. I would cautn e court away from constitutionalize and that or sayinits necessary in every case. Wt other factors would you have us look at . The other factors are the atement in made in burnett versus wells was whether congress h me an attribution decision unrelated to any privilege or benef. Using that standard it works for us awe because there are obvious benefits aociated with doing business through a controlled Foreign Corporation closely held and could keep the moy offshore for all of those years subject to tax deferral. Let me pause you there. The foreign aspect of it and the difficulty of otherwise obtain some kd tax on it should factor in our analysis . Hose are conditions that could be sufficient. Wouldnt with the court to say theyre absolutely necessy every case. We have things like partnerships weathers not necessarily any abuse. Any other factors you would ha me consider . Think you have covered the waterfront of the things that ha erged in the case law. If i step back to a 30,000 foot level, thenehing i would say is i would urge the court not to try to setow and explicit set of princips govern all cases for the reasons i was describing that we have seen xpers latch onto that and seek to avoidaxion. Roger that too. That would te re if we wrote that that way it would take care of all of your conrns about S Corporation, schedule f or the mark to market and potentially e t . Yes. I think the mrt in addition to all of those taxes satisfy the type of criteria the court has looked at relevant to the attribution question. Whether we attribution or constructive realization. Pota pato. I would shy away from constructive reazaon because it introduces an additional layer of ambiguity in e de. It means not actual realization so i think the way i read our precedent, i will stop but the way i read our precedent, it is fairly saying this individual realized, gained control of or coulde judged to have done that by congressthis person has control over these assets. You have given me a helpful list of factors from this courts history and practice consistent with our precede rher than calling it all misguided that might wo. Fairnoh . I dont think it is right to say this list of factors gives the taxpayer sufficient control over the assets because the concept of control can be cousing if its just a majority stake. The S Corporation shareholders might have a 1 stake in the company. That is where i have a little bit of disagreement on how to describe what were discussing. Hat is helpful to me. Justice kavanaugh . You dont win us to use the phseonstructive realization . I think that phse is inherently amorphous. It does not appear in the code. It appea tbe a phrase petitioners have invtefor the purposes of trying to save thesotr taxes. Itou open up immediate sputes about what it encompasses. On the proverbial open door of congress, members of Congress Want to get reelected. That iwhthey are farfetched. O ows how things would change. Some of justice alits hypotheticals, if things came to pass, i think yo acknowledged i just want t confirm that unlike this case where you say historical practice supports congresss historical practice, th courts cases, if there were something novel, that lack of historical support would be a strike against it. Not dispositive necessarily. Is that aure . The point i was trying to make athere are huge practical an policy reasons these taxes would not be enacted and if it came to pass, the court could assess that tax on its own terms and it might look to history and think this is something new. I want to be clear we dont think the novelty alone would be dispositive. Certainly congress has the power to enact texas it has not enactedefore but it would provid a reason to scrutinize that tax a littl carefully. The court does not have to go down that adecause the history is all on our side. One hypo of my o. If there were a federal tax on e value of someones property you agree that is a direct tax or on the value of someos holdings, you agree that is a direct tax that would have to be apportioned, correct . That is a qntsential tax on property because it is looking at the total value of thact set and doing it at a particular point in time maybe you could levy yet again and again on the same value. That is totay fferent from an income tax where you are taxing the income an ogain over time and only doing it one time with any future tax looking a new increment of gain over a new time. Your position on the mrt and you cite heiner and subpart f and corp. s and y say this is all similar in kind. The one wrinkle and i want to make se are on the same page as this goes back a lot of years and rules in income from many pasyes. What should we say aboutha d let me just add, he says ultimately if you can just roll in income at any point in time, at really becomes not mucof a limit at all. Et me react to that in uple different ways. I thk e length of the look back period cannot change the underlined character or classification of what is being taxed as income. This was actuaeaings brought in by the company, kept inhe coffers. If it was income in year one, i dont think there is an Expiration Date on classifying it as income in future year. I think the look back period instead of relating to the 16th amenen or any questions about what income constitutess a retroactivity concern. It arises under the due process clause and return on whether congress had a legitimate purpose for having this kind of look period and use rational means. We think that is clely satisfied. Petitionerraed a retroactivity due process argumentelow. The court rejected in the nth circuit. It fails under precedent like ited states versus carlton. I would urge the court to recognize that is not about the proper characterization of the underlying tax base. I want to followup on your factors to justi gsuch. You talked about h it could be fair, Justice Kavanaugh just said s corpse, oerip, mrt, to say this is attributable to the shareholders or to the partners or the seller of the ust. How do we know that . Is it because it is closely held i assume what your friend on the other site is going to say is they had 10 . They were not majority holder so they cannot force a distribution. How would you articulate that when it can be fairly attributed . If for not talking due process. Ifer talking about it from a 16th amendment point the court could rel on the lessons to be drawn from history and tradition. Dysfunctions like the early come taxes i pointed to from the 1860s and 1870s that text shareholders on Corporate Income. At that pnt, corporations were nerally closely held. There were fewer americans who own stock. They functioned analouy to the mrt. They reached a distinctive category of shareholders generally in those closy Held Corporations. I guess what i would say is we think it is a ctor in our favor this reaeselatively large u. S. Shareholders. It is true it is 10 s ey dont have to have a majority stake. The premise of congress is these kinds ofar shared large shareholders canortogether with other shareholders in this closely Held Corporation. Ere are going to be many of them to direct the companys policy or to force a distribution. That kind have threshold, 10 , appears throughout the law. Not just in the tax ce. In the security context, there are additional obligations imposed on 10 shareholders. Wherever the line made be drawn may be drawn on a think about it from this relationship to the funds and level of influence, 10 falls within the line of what should be recognized as permissible. Justice jackson . O are there drawbacks to setting this up in the way that Justice Gorsuch has articulated . I guess im a little concerned because i heard you respond to Justice Sotomayor by saying one of your primary concerns is we not suggest that realization is requir. Would taking the approach that Justice Gorsuch has articulated require us to do that or could we assume or how do we get around the other caution you put rwd . If i understood jusce gorsuchs approach, the idea ul be to recognize we have realized iome so the court does not nee need to resolve the status of that. The Pressure Point is whether congress could enact passthrough tax on the 10 u. S. Shareholders. Is that fairly eomssed by this question . Is sort of goes to discussions with Justice Alito. Thght the question presented was about the extent to which the th amendment requires realization. If we are going now beyond that, early out of the territy fairly encompassed . I think the answer to the question presented would be we donha to decide in all contexts. Here there was a realization. As we said in our brief we dont think theas resents the question presented because there are actual there was actual realization by. The corporation e al dispute was whether congress made a fair attribution decision. Why did the government make anrgument about eise taxes at the end . We think the mris constitutional on an excise tax theory as well. There has been suggestion that we did not prenthat argument below and thats correct. In the ninth circuit we said even if the m inot properly charactezeas an income tax, it is not a directax we said congress had Article One Authority to enact it. We did preserve e argument. The ninth circuit did not ha occasion to reach it because it ruled in our favor on the primary income tax argument. If this court had any doubt on whhe this was a proper income tax, the court put a firm on t eise tax argument. As id mentioned, one of the important things for the court to keep in mind is 99 of the tax owed under the m iowed by Domestic Corporation sharehde. Larg u. S. Companies that have these foreignubdiaries where theyve been holding mone overseas for a number ofea and this would be a tax on the ivege of doingusiness with those rpate relationships and in that corporate form. We would urge the court not to invalidatehert and all of its circumstances without proper consideration of that matter. And that is bause the constitutional question is a direct tax. This relates to your earer questions about the meaning of helton and whether this can be in a sense to conser direct tax. At the very least ts is not a tax on land. This is not a tax on personal prer we think it is either anxcise or income tax. Why shouldnt take this opportunity to put an end to it . If we were to apply the stare decisis factors that the core goes through when it decides whheor not to formally overrule a precedent doesnt macomber fail anyway . I agree macbe would fill those factors aappropriate case. The reone havent asked the cot overruled overrule macomber is because we just think its inapplicable by the terms of subsequent precedent. You would say the government would still win on its view that macomber is not good law or corolling in this case . If this court thought it were necessary to walk through the starry decisive factors, i think in each instance macomber was egregiously wrong. It did not grapple with the text of the 16th amendment or look at all of the history relevant to that question. It has been subsequently eroded a number of additional president s. Congress has relied on the subsequent precedents by and i can he numr of taxes that would not tiy the realization framework. Titioners acknowledge macombers realization framework could not carry the day because the taxes they have said or constitutional would not survive. Thank you, counsel. A rebuttal, mr. Groma thank you. Thgovernments recalibrated position as explained by my frie inot narrow and the court should not mistake it as such. The governments view that a corporations earnings can be attributed to any corporate shareholr staggeringly broa. Corporations like miost a exxon mobil have hundreds of billions of dollars of retained earnings on their books theyve invested in corporate assets, research a development and other activities. In some cases, those retained eain exceed the current value of shares. Under the gernments view and i think asemstrated by the mrt, apparently congre cld simply text backwards reachin back as far as it would care to so to attribute those retained earnings going bac many years to current shareholders. In some instances in excess of the value of the current holdings. I think the court should keep in mind there is an impact to tt position that purportedly narrower addition under the existi ce which is there is no carveout against ting shareholders in the current code on corporate earnings. If those are 16th amendment eaings 16th amendment income to shareholders, they are already subject the income tax through the gateway definition of gross income that reaches everything under the 16th amendme. There is no carveout. Those woulalady be subject to it. I thk is demonstrates the way the governments position would make a hh of existing low and cause confusion wi respect to however sit our tax system functions. By contrast, i dont think there are any serious consequences of the realatn principal we have put forrdn this case because it is the thread that nshrough the courts jurisprudence going over a century and is the glue that holds together the tax code. Every tax that my friend has mentioned falls into one of two categories. Some of those regardi t abuse of the corporate form turn on theories of constructive realization or you might s assignment of income. I dont think there isucof a distinction. The remainder are straightforward excise taxes supported by the long history of congressional practice. These include the original issue discount. It is simply anxce tax on the transaction regarding the transfer oa nd. Congress has been levying taxes like that for over 130 years others like the mark to market tas are excis taxes on conducting business in specified faio those sort of taxes predate the 16th amendment and theres also case law. If it was simply enough for th for the if it was simply enough to attribute income t anybody with a close relationship to it, l the courts corporate reorganization cases and cases voing shareholder rights and really pretty much all the sixteenth amendment cases involving trusts and Everything Else would have been about a sentence long because it wouldnt really take ch more than that for the court simply to say, well, theres a close enough relationship and so who cares whheor not the person realized income or not. Of course, thats not the inirthe court has undertaken. And so f as macombers rule is concerned and the court has applied the dividing line regned by macomber as recently as 1975 in ivan allen d its carried forward the same principle in cases like indianapolis power lig in 1990, as well as restating it in cottage savings in 1991. I dont inreal real this concept of realization is ything unfamiliar to our law, and, indd,ts the only way to understand the current tax code. Every congress has the the antiincome, income avoidance provisions of the tax code are long, lengthy, reticulated. I dont envy anybody whos had to spend their time reading subpart f and practices in that field. But e ason those are so complicated and reticulated is because congress has tried to st whin the realization line. Its done everything c to fit that framework, where it would have been the easiest thing in the world, if if congress thought it had the por to do it, simply to say, well, if you own shares in a Foreign Corporation, whatever the ownership threshd, simply pay taxes on those earnings. Thatnothe way the tax that these sorts of taxing provisions have ever worked. Instead, they get at the idea o is really earning the income and receiving the benet by it, and that person should be the one to pay taxes on it we think they all fit that mold. Id like to briefly address the 1864 tax. The court in hubbard recognized that it was a tax on property. Subsequently, in brushaber, the court recognized that at the time, that wasnt really considered or thought about as being much of a defect with respect to the direct tax clauses under sort of the reasoning of springer. And, of course, macomber rejected the exact same argument. We would ask the court to reverse. We are in a place that commemorates the university, and the role she has played, and continues to play identifying as a literary destination. The street, used kennedy boulevard, originally was part of the road system called the old apopka highway. She was born in 1891, died in 1960, her parents brought her to eatonville when she was a toddler. So in the early 1900s, this roadway now called east kennedy boulevard, was the old apopka highway. It was the link between northeast orange county, maitland, and northwest orange county, apopka. So, the road itself is historic. Were in a space that looks a lot different from modern eatonville, in fact, this is a space that harkens back what we call old florida. We are standing in a place where Zora Neale Hurston is known to have done some of her writing. At a certain point, she came back and forth to eatonville, and at times, when she didnt stay here we called this ticks ito junction. It is located on the shores of the lake. It is a place that she is known to have done some of her writing. Now were at the Matilda House museum. We are here because matilda mosley, known as tillie, was already a hurstons best friend at the time. Matilda mosley was a direct descendant of the town founder, joe clark. Especially in florida in the south, the porch is the social Gathering Place for family and friends. Here we are positioned in the porch. What you see really represents the essence of Zora Neale Hurston as a folklorist. She was the writer of this new very classic, their eyes were watching god. But she was a folklorist and anthropologist, and in this photograph, she is collecting folklore material. This home represents that time. You have a founding family. You have the connection between the childhood friendships of Zora Neale Hurston that tillie maintained throughout adulthood. You had that social interaction combined with the establishment of the town as an incorporated be nyssa polity. Municipality. You have the genius of tori Neale Hurston that establishes eatonville as a literary destination for readers around the globe. Weeknights at 9 00 eastern, cspans encore presentation of our 10part series books that shaped america. Cspan partnered with the library of congress to explore key pieces of literature that have impacted our country. Wednesday night, Zora Neale Hurstons 1937 novel their eyes were watching god. Our guest is tiffany ruby patterson, professor of history at vanderbilt university, and author of a history of southern life. Watch cspans encore presentation of books that shaped america. Four go to cspan. Org to view the series and learn more about each book featured. Cspan is your unfiltered view of government. Were funded by these Television Companies and more, including sparklight. The greatest town on earth is the place you call home. Its our home, too. We are facing our greatest challenge. That is why sparklight is working around the clock to keep you connected. Doing our part, so it is easier to do yours. Sparklight supports cspan as a public service, along with these other television providers. Giving you a front row seato democracy. 2tony for republican president ial candidate Vivek Ramaswamy spoke to voters during a wn hall in fenton, iowa. He answered questions on th economy and how to deter cna from invading taiwan. This event took ace weeks before the 2024 Iowa Republican president ial caucuses on january 15. [applause] good to see you guys. Ive been to this restaurant. I love this place. Its our second time back here. Ad