When conservative interest groups cheered on Charles and Kathleen Moore’s suit against the government over a tax bill,1 they sought to “permanently . . . put . . . to rest”2 calls by progressive American legislators for a wealth tax.3 Instead, after the Supreme Court unexpectedly “chang[ed] the subject,”4 the Justices tore open old wounds from “the most intense legal discourse” of an earlier era, resurrecting a dispute about corporate personality that had “abruptly subsided” a century ago, “leaving only traces for historians to follow.”5 Perhaps unaware of the old debates reanimated, five Justices joined the “sect of heretics . . . emancipating the legal world from the thraldom of a medieval superstition,” while four clung tight to the “teachings of the fathers . . . [i]n almost Athanasian terms.”6 Last Term, in Moore v. United States,7 the Supreme Court upheld the constitutionality of a tax that attributed income realized by foreign corporations to the corporations’ American shareholders. In affirming the judgment of the Ninth Circuit, the Court held that the federal government’s tax treatment of foreign-created legal entities was a “legislative choice.”8
Beyond blessing a Trump-era tax on shareholders of American-controlled foreign corporations, Moore reveals a Supreme Court at odds over how the Sixteenth Amendment treats legal entities, such as corporations, that are “creatures of state law.”9 Where some members of the Court viewed the federal government as having a choice in how to tax such entities, other members of the Court considered Congress restricted by the “essential truth” that corporations are real entities separate from their shareholders.10 Although early twentieth-century commentators on the theory of the corporation might not have predicted the practical importance of their debates to the twenty-first century,11 the ratification of the Sixteenth Amendment in 1913 caused the unsettledness of their century-old debates to have new relevance for an originalist Court.
Before 1962, American taxpayers could defer or avoid United States tax on certain “passive income,” such as dividends, by receiving that income through closely held “American-controlled foreign corporations” (CFCs) in low-tax foreign jurisdictions.12 Congress found this practice “inappropriate”13 and enacted subpart F of the Internal Revenue Code in 1962.14 But subpart F still did not tax United States shareholders on the “active business income attributable to the CFC’s own business held offshore.”15
In 2005, Charles and Kathleen Moore invested $40,000 into KisanKraft, a CFC created by a friend that supplies tools to small farmers in India.16 Each year, KisanKraft kept its profits in India, and the Moores never received any distributions.17 Neither KisanKraft nor the Moores paid United States tax on the company’s earnings.18
By 2015, CFCs like KisanKraft had accumulated an estimated $2.6 trillion in offshore earnings that had gone untaxed by the United States.19 To remedy this problem, Congress passed the Tax Cuts and Jobs Act of 2017,20 which, among many other changes to the tax code, imposed a “one-time, backward-looking tax” on the undistributed income of CFCs attributable to their American shareholders,21 called the Mandatory Repatriation Tax (MRT).22 The Moores’ share of KisanKraft’s earnings totaled about $508,000, which caused them to declare and pay $14,729 in MRT.23
The Moores then brought an action in the United States District Court for the Western District of Washington to recover the MRT that they paid.24 They argued that the MRT violated the Apportionment Clause of the United States Constitution25 because it imposed an “unapportioned direct tax.”26 While the Sixteenth Amendment allows for the taxation of income without apportionment, the Apportionment Clause requires direct taxes, such as property taxes, to be apportioned among the states by population.27 In the alternative, the Moores argued that the MRT was “a retroactive application of a new tax” that “violat[ed] the Fifth Amendment’s Due Process Clause.”28
The United States moved to dismiss for failure to state a claim, and the Moores moved for summary judgment.29 The district court granted the government’s motion and denied the Moores’ motion.30 It held that although the Moores had not received a distribution, the MRT taxed income realized by the corporation, and that Congress is allowed to “bypass[] the corporate entity” when “determining the incidence of Federal income taxation.”31 The district court further held that the MRT was retroactive but, nonetheless, did not violate the Due Process Clause.32
The Ninth Circuit affirmed.33 Writing for the panel, Judge Gould34 held that “[d]espite the difficulty in defining income”35 under the Sixteenth Amendment, a taxpayer need not realize income for a tax to be constitutional.36 Furthermore, the court reasoned, even if there were a realization requirement, Congress could still attribute a corporation’s income to its shareholders.37 Next, assuming that the tax was retroactive, the court held that such retroactivity did not violate the Due Process Clause because it served a “legitimate purpose by rational means.”38
The Ninth Circuit then denied the Moores’ petition for a rehearing en banc.39 Judge Bumatay dissented,40 arguing that the court erred in dispensing with the realization requirement for income.41 The Moores sought review in the Supreme Court on only the question of “[w]hether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”42
The Supreme Court affirmed.43 Writing for the Court, Justice Kavanaugh44 held that the MRT violated neither the Apportionment Clause nor the Sixteenth Amendment.45 The majority sidestepped the issue of whether Congress can constitutionally tax unrealized income.46 Instead, it reasoned that the MRT taxes income realized by the corporation, so questions regarding whether income must be realized before it is taxed were not relevant to the case at hand.47 For the majority, the actual question requiring resolution was “whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.”48
The Court held that Congress may attribute entities’ realized income to those entities’ shareholders or partners, and marshaled a long history of Congress doing just that. Before the Supreme Court had declared unapportioned income taxes unconstitutional in 1895,49 the Court upheld an “income-tax law that taxed individuals on ‘the gains and profits of all companies, whether incorporated or partnership,’ in which they were shareholders or partners.”50 After the Sixteenth Amendment once again made unapportioned income taxes constitutional, the Court upheld taxes on partners for undistributed income realized by the partnership,51 shareholders for undistributed income realized by “S corporations,”52 and shareholders for undistributed income of CFCs taxed under subpart F.53 Therefore, the Court considered pass-through taxation of legal entities to be a “legislative choice,” and held that the MRT was a permissible exercise of the legislature’s freedom to choose.54 Finally, indicating the narrowness of its holding, the Court noted that the Due Process Clause55 “proscribes arbitrary attribution” of income to taxpayers, such as when there is a lack of relationship between the taxpayer and the income.56
Justice Jackson concurred.57 Perhaps foreshadowing a future fight over a wealth tax, she suggested that taxes on unrealized gains might not violate the Sixteenth Amendment58 and taxes on unrealized gains might not be direct taxes.59
Justice Barrett concurred in the judgment.60 The Moores conceded that subpart F was constitutional, and Justice Barrett thought that subpart F was not meaningfully different from the MRT.61 But she suggested that, if not for the Moores’ concession, she would have held that Congress cannot tax unrealized gains without apportionment among the states62 and that the Moores did not realize income from the KisanKraft shares.63 Justice Barrett disagreed with the majority’s language of “legislative choice” — in her view, only some legal entities can be taxed as pass-throughs.64
Justice Thomas dissented.65 In his view, the Sixteenth Amendment defines income as “only income realized by the taxpayer.”66 Because the Moores never received any income from KisanKraft, “those unrealized gains could not be taxed as ‘income.’”67 He saw the Sixteenth Amendment as creating a “constitutional distinction between income and its source,”68 such that only income realized and separated from its source is taxable by Congress without apportionment.69 In his view, the cases the majority cited for the constitutionality of pass-through taxation instead merely demonstrated that Congress may attribute income to the “individual who actually controlled it when necessary to defeat attempts to evade tax liability.”70
Moore blessed taxation of shareholders of closely held foreign corporations based on the corporation’s undistributed profits. But Moore also revealed divisions between the Justices on whether Congress has “room . . . to disregard the corporate form” when it pleases,71 or whether it is duty-bound to treat corporations in certain ways. To the Justices led by Justice Barrett, Congress’s taxation decisions are constrained by the “essential truth” of corporations — that they are separate entities from their shareholders.72 To the majority led by Justice Kavanaugh, Congress has a “legislative choice” when deciding how to tax various legal entities.73 Because there was no settled understanding at the passage of the Sixteenth Amendment that corporations must be treated as entities separate from their shareholders, the Moore majority correctly held that the Sixteenth Amendment does not place limits on attributing corporate income to the individual taxpayer.74
The disagreement between the Moore Court’s Justices has old roots: Just over a century ago, soon after the proliferation of general incorporation statutes, arguments over the nature of the corporation raged in the legal scholarship.75 At the time of Congress’s passage of the Sixteenth Amendment in 1909 and its ratification in 1913, scholars debated whether corporations were best thought of in their traditional sense — as concessions granted by the state76 — or instead as “real” or natural entities possessing “legal personalities deserving of recognition.”77 Those who believed in the “concession theory” saw corporate privileges as retractable and believed the corporation and its shareholders may be regulated as the government chose.78 Those who believed in the “real entity theory” believed the government was mandated to provide the corporation rights and privileges because corporations were a “natural[]” and “inevitable[]” part of society.79 The two sides engaged in “controversy” so “heated” that it resembled “guerilla warfare,” and it was “difficult indeed for any American lawyer writing upon the subject of corporations to avoid declaring himself.”80 Although the philosopher John Dewey “put [the debate] to rest” in 1926 by smearing the theories as indeterminate and “manipulable” by judges,81 modern scholars consider the competing theories to have been more determinate and to have greatly affected the development of organizational law.82
All opinions in this case expressed a belief that the original understanding of the Sixteenth Amendment should answer the question of whether income of the corporation may be attributed to its shareholders.83 The unsettledness of these debates at the time of ratification suggests that the Constitution neither limits Congress’s choices regarding taxation of members of different business associations nor even provides clear distinctions between partnerships and corporations. As Professor Stephen Sachs has written, “The Constitution has no corporate law: it imposes no particular theory of the corporation one way or another.”84
In Supreme Court jurisprudence, the fluctuation of theories of the corporation hit its peak during the drafting and ratification of the Sixteenth Amendment.85 The landmark 1906 Supreme Court case of Hale v. Henkel86 partially embraced the real entity theory by granting corporations Fourth Amendment protections.87 But by refusing to also grant the corporation Fifth Amendment protections,88 the Hale Court showed “continuing reluctance” to treat the corporation as something more than a state-created entity.89 Meanwhile, the concession theory persisted in another important doctrine — the power of states to prevent “foreign” corporations chartered in other states from doing business in their states.90 An early influential decision held that corporations had no constitutional privileges in foreign jurisdictions because the corporation “exists only in contemplation of law, and by force of the law” as “a mere artificial being.”91 It was not until 1910, a year after Congress passed the Sixteenth Amendment, that a series of decisions employing the real entity theory recognized corporations as protected by the Fourteenth Amendment in foreign jurisdictions.92 Finally, questions remained even over whether shareholders or directors had ultimate control of a corporation.93 The many ways in which the law had still not separated corporations from their shareholders make it less likely that the original meaning of the Sixteenth Amendment prohibited the attribution of income from the corporation to its shareholders.
Court opinions following the Sixteenth Amendment’s passage continued to fluctuate between different theories of the corporation. Justice Kavanaugh and Justice Barrett each searched for cases after the amendment’s ratification for a “[l]ong settled and established practice” that “[could] carry ‘great weight in’ resolving constitutional questions.”94 Each claimed to find such a practice, yet their conclusions differed. In fact, the Court had waffled back and forth between different theories of the corporation, which led to inconsistent precedent.
Justice Kavanaugh and Justice Barrett advanced different interpretations of the 1920 case Eisner v. Macomber.95 Macomber adopted the real entity theory of the corporation: “[W]e cannot disregard the essential truth disclosed; ignore the substantial difference between corporation and stockholder; [and] treat the entire organization as unreal . . . . We must treat the corporation as a substantial entity separate from the stockholder . . . .”96 Where Justice Kavanaugh dismissed this language as dicta,97 Justice Barrett took from it a duty not to “‘indulge the fiction [that shareholders] have received and realized a share of the profits of the company’ when they have not.”98
Yet other cases after Macomber employed a theory of the corporation that provided Congress with flexibility. For example, in Burk-Waggoner Oil Ass’n v. Hopkins,99 the Court forthrightly stated: “Neither the conception of unincorporated associations prevailing under the local law, nor the relation under that law of the association to its shareholders . . . bear[s] upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.”100 In other words, the states’ concessions to legal entities did not require Congress to concede its tax powers. Justice Barrett dismissed this language as relating to only the ability to tax partnerships like corporations but not vice versa,101 but Justice Kavanaugh identified in it the beginning of a line of cases holding that “Congress could tax the income” of legal entities “as it chose.”102 Although Justices Barrett and Kavanaugh each tried to explain away contrary prior holdings and reasoning, genuine doctrinal inconsistencies resulted from the different theories of the corporation adopted by competing lines of precedent.
Still, if doctrinal consistency must be achieved, fewer originalist problems result when proceeding with Burk-Waggoner and its progeny. Justice Barrett dismissed the relevance of these cases by consigning them to “the unique partnership context, . . . shed[ding] no light on Congress’s power to tax shareholders on a corporation’s income.”103 But instead of considering early twentieth-century historical evidence, she cited a present-day corporate law treatise for the proposition that partnerships “do not have a legal identity distinct from the partners” and “are instead ‘an aggregation of individuals operating the business as co-owners with individual rights and duties.’”104
Yet the distinction between partnerships and corporations was not nearly so neat at the time of ratification. As Justice Kavanaugh demonstrated, the law at times saw partnerships and their partners as separate entities.105 In addition to the precedent and treatises from near ratification that he cited, evidence from the debates over the Uniform Partnership Act of 1914 reveals partnership law in flux, nearly collapsing into corporation law.
During the drafting of the Uniform Partnership Act between 1902 and 1914, theoretical debates percolated about partnerships similar to those about corporations. Some considered partnerships to be “an association of . . . persons carrying on business as co-principals,” but many considered partnerships to have a separate legal personality from the partners.106 When the drafters of the Act did not give partnerships fully separate legal personality, a critic decried the drafters as antediluvian compared to “modern jurists” who “accept[ed] the view that any group of human beings united for a common purpose forms a real or natural entity distinct from its members.”107 Despite the critic’s vitriol, the Act still considered the partnership a separate legal entity “in a score of specific, substantive provisions.”108 In fact, drafters of the Act did not further “person[ify]” the partnership in part because the partnership was already too close to becoming indistinguishable from the corporation.109 Given the similar conceptions of partnerships and corporations prevailing at the time of the Sixteenth Amendment’s passage, it is difficult to justify Congress’s power to tax partners but not shareholders.
Having “abruptly subsided” a century ago,110 debates over the natures of corporations and partnerships reerupted in the Moore Court’s competing understandings of the Sixteenth Amendment. While other areas of the Court’s constitutional jurisprudence take uncertain approaches to constitutionalizing a theory of the corporation,111 the majority held strong against constitutionalizing real entity theory for taxation purposes. Instead, the Court “emancipate[d]” Congress from the “thraldom”112 of real entity theory and allowed Congress to make its own “legislative choice[s].”113