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u.s. supreme cou hears oral argument in a case involving the taxation of earnings made by americans from a foreign country. the ce focuses on india based company with more than half o its ownership held by americans it was brought by a plaintiff objects to a clause in 2017 change in tax law that would have required a one-time repatriation tax. this is about two hours. >> will hear argument this ing case 22800 more versus united state counse >> met please the court the word income is understood at theime of the 16th amendment adoption appreciation of the value of a home, stock investmentr other property is not a never has been taxed as income. unless and until it has been

realized by the taxpayer. the courtquely held as much just a few years following the adoption of the amendment. the court's decisn of held that line first century. that precedent makes easy wor of this case. it is undisputed the position it relates nothing from thetock investment their attacks not because theyad any income but because i 2017 they happen to own shares in a corporation carrng retained earnings on its books. iss a tax on the ownership of property and thereforeust be apportioned. dispsi with the realization sweeps wit t framers rard the essentialhe on congress' power to tax property. the government cannot identify a ng thing that congress could taxes income under its position it's unnecessary but without alization there is no principle. except in the government position o iome would make a hash of the current law. tax codes gateway definition of gross income inserts full measure of congressaxing power to the 16th amendment by

reaching all income fro whatever source derived. if theovernment's position in this case is right crent law already requires taxpayers to report pay tax on all of their assets, on corporate earning for any stocks they own and on any paper gains from their contracts and loans. going back to 1913. again the reason the law does not wk that was the obvious one. unrealized gains are not income. the only way to make sense of the income taxes that has existed for a century i to stick with the original meaning of the 16th amendment. the court shouldto reaffirm there's no income without reization i welcome the courts question. >> music realization do you have a definition for that or an explanation of exactly what it is and how is it differentro attributes? >> thank you justice thomas. realization is going to be receipts but that in other

instances it will be other types of enjoyment of economi gn such the taxpayer could but that gain to hisair her own uses and benefits that might be forgiveness ofr alone or it mit be assignment o iome to a third party. >> there certainly is realization here by the corporation if not taxpayers, right? it is not a case like appriaon of property work happened. you buy a property you are holding for 20 years. here is something that has happened. income is gone to the corporation, isnhat right? >> yeshe corporation as income d not dispute the corporation relates income over the decade plus years been taxed by the mrt. i think it really is like the instance of appciion of property. shareholders interest in the rpation capitol interest,

property interest he not real as any income. their partnership agreement does not realize new to them. in many states doesn't gethe value of the partnership yet we permit a death tax. >> thank you jtice for the partnership is fundamentally different formf the organization then a corporation ere the law has always recognized that a corporation of sera from the shareholders and the corporation. there simply isot the separate personhood that applies to partnership our partnerships are group of people who come together to undertake a business activity. when the d so the end come that comes ins there income

dictly. >> what you do is subpart f o s or all of the otheray which we have attributed corporate co to individuals? >> you don't challenge the. >> is not an issuen this case. on your brief y don't appear to be challenging it. quick to think subpart f follows the commonly accepted cgrs has used two dress situations enhe taxpayer has interposed a corporate structure roxette is ehole purpose of the corporate structure. people do that all of the te. particularly for tha purpose. we don't incorporate unless y with the corporate shiel you don't incpote 20 benefits of the protection. so under your theory subpart s

subpart s leads are long-standing taxing recognitions by the gerent. your theory would undermine those as wellld wouldn't it? >> i don't think that is right. subpart f worn categories of income on a current basis. those categories of income are prer viewed as being ened by the shareholders due to the nature of t categories of income addressed it. >> exactly him so i go ahead. >> we concede subpart f is constitutional as i just want t be sure i understand that. >> we think theeft with the mrt does not really apply to subpart f. the court's never consider the nstitutional subpart f but as we take ite don't think there's a constitutionnd what is the distiti? other parts of spa f to the extent they tax income to it on an annual basis in mrt was a one-shot that went backwards? >> i think that's part of it. but what it really is, i'morry

subpart f addresses a fundamental shift in concepts of oras the mrt does not. so in two respects. first of all subpart f operates on a crent basis will the corporation is subject to the control of the controllingro shareholders. where is the mrt tak no account to pay. >> i amak sorry. ere is no question that you meet theno definition of subpart f.yo at least 10% of the company share in the company has to be owowned more than 50% by u.s. owner so it is identical in terms of the percentage of ownership or the percentag o shares. >> that is rig b subpart unlike the mrt aligns the control and the ability to redire iome with the year it is appcae too. >> it sounds to me what you are attacking is only a due process

issue of how long taxes for not the ability to tax it. >> i don't think that is right for the reason whether you own a particular piece of property at a given date which is the questionhertsk for his issubpart f looks at income as t comes in while the controlling shehder has the ability to redirect that stream of income. >> whether it is fair to attributes, fair from a due process to fair tottbute the income generated which is a distinct question whether there is income within the 16th amendment, right? it's it ultimately ces onto 16th and emma question for the same reason thet court thoughto which is a shareholder's interest in a corporation including its income as a pitol interest and therefore a property interest. and so if there isome reason to look beyond that in attribute income to the shareholder that

would necessarily raise a question of income and why it is the shareholderer something taxi what would otherwise be a property interest. i thi t court is always address the sort of question as a question of income and that includes for example all the assignment of income cases the court haseced over the years. >> can i go back t the first principle? e concept of realizations very well established at the time the 16th amendment was adopted. nott andment does referenceealization all they had to do is add the word reiz after ince to weigh and collect taxes on income but eyever used the word realize. then i lked at the history both before and after the ratification as far back as 1864. not so far backk congress taxed from the ratification congress tax gains and profits of oil companies whether incorporated

or partnerships and estimated the annual gains of profits or inme of any person entitled to the same whether divided or undivided. in 1913 just eight months after theatification of the6t amendment congress include o distributed corporate earnings to certain shareholders. tried to distinguish all these things but i come back to t main point. both sides can point to coressional actions that tax some realize income. some didn' tax on relates unread inco b we have examples of congress taxing unrealized income. why don't i take the plain text of theai amendment does not make reree to realization? >> are two central features of the text ofhe amendments that

reflect it does apply only to realize gains. the first is simply the use of the word income outpu equally the ma caprice filed by t professors of law and linguistics which analyzes the use ofncomen it. tax for. >> as io back, all this goes back-and-forth the government has other definitions. we are back at square one if what we aree doing is weighing storical definitions. >> the weighing in this case your honor is quite lopsided thhe government relies principally on two definitions that were put forward by ecomists in the years of following the amendment's adoption. neither of whieflect the common understanding at the te but one of the economists recognized he was simply esusg his own economic viewsfr divorced from any question of la o common undstding. the second economists recognize th cmon understanding of income is what we say that it was a realized gain.

f as the common understanding of the term was ncned the onlyndication aside from dictionaries which again lopsided favor our position is late linguistics analysis o t professors ofor law. which looks at how the word was used in everyday language at time. it concludes unanimously it's possible to distinguish gains there'sls thed andnts the language from whatever src deve here it is sweet pointed t to ride was generally meant to refer to concesike receipts and indeed the amicus brief recognize income was i guess i'm not sure. >> thought that was just a response and other forms o income that distinction w don't

approve of that distinction. >> what they did was remove the necessity to decide with income cait from one source versus soues. of but in so doing it required as a precedent but was being taxed in fact be incom a not something else. >> why should we takehe common meaning of income rather than the legal meaning given the context pointed out? if the 16th amendment was specifically rep responding to the legal pcents related to the meaning ofl income i curious as to why you tnk the common meaning of income is what we should be focused on what we try toou understand the 16th amenenmeant but we useha term? >> that's certainly the approach would addressing original meanghat aside as wh the court cases have said from

merchants and bank andgain and again i t 16th amendment is to be conru according to its ordinary meaning. if the court were to depart from th and say for example personal property was not subject to apportionment which i ta i to be the thrust of the questions in this direction, taxes on persona pperty that is. that would upend pretty much the enutline of the 16th amendment jurisprudence over the prpast 16th century. >> i am sorry. go ahead. but why? if what we do is tohi about a particular tax which seems to be what we have beenoi for over 100 years. to see whether that tax is come as underoo by attribution or excise tax or other pnciples.

we would consider each tax on its own form. you are asking us to just nounceut of context. for the last 100 years we he been avoiding doing tt because we recognize that it is dangerous to do that. to say a word like realization we have to come up with a working definition that applies to every piece of propeyn every way in which people gain a wealth. it does not seem logical to me. why don't you just concentrate on why congress can't say tt in certain situations is going to ignore the corporate form and attributeohe individual shareholders certain income. that is what it has been doing l along. and here it doesn't need a realizn because congress has attributed this to the individual owners of

corporations. >> respectfully the court has already said a multiple occasions the rlization is in fact required forhere to be incomeme under the 16th amendment. it is also versus alliance insurance. is the safety card. >> yes. on certain types of property but noal paid. >> pay. >> it's ivan allen. >> we have also said that partnerships can be taxed individually but even wnhe partners are not receiving. we have sub factor f and we have all sorts of different forms of wealth weavttbuted to individuals rather than to t legal forms of ownership. >> and all of those taxes rely principle the court expressed in cases which is that income should be taxed to he w

earns it and enjoys its benefits for. >> pting aside whether there is any realizaon requireme, there is quite the history in this country of congress taxing american shareholders on their gains from foreign corporations. and you can see why. the u.s. government does taxed directly and they wanted to make sure americans -- the money and the corporations watch their money grow and never pay taxes on them. there is a long century-old history of these kinds of tes from your holdings in a foreign corporation why is this anyny different and why shouldn't we understand that to be qui well-settled that congress can

implement those taxes and enforce those taxes for those purposes? >> the taxis in that area have followed the pattern i have described of a taxpayer interposing aor corporation between themselves and ince that would otherwise be theirs. those om the "east of the same shareholders as in subrt f. >> the differences those provisions heypically address things like passive income andeled party transactions thatre properly attributable to a parent corporation. whether it is apparent corporation can own a income generate asset itself or simply shift that into corporation, orinto a foreign corporation and thereby avoid the income. but the law a recognized is just in cases that is effectively an assignment of h income and it can be attributed to the parent corporation for that reason.

because the paren cporation is the one that ctrs the flow of the income as it is miin in. the mrt by contrast operates as a tax on property i does not take into account any power the shareholder had over the income as it was coming in to the corporation only takes account of oerip request seems to be an argument about timing. in other words we have a realization in this case the entity realized income. the questio then is attribution we have long held congress may attribute the income of the company to the shareholders or pthe partnership to the partnes the onlyea wrinkle i think here is that it goes back and captures prior year's income. >> thererewo wrinks. one is thatn respect to the prior years the statute doesn't require the shareholders being xed said in the ability to control the disposition of the income of those years that is a fundamental distinction. the second. >> us not true for the facts of

this case though, correct? was isot true for the facts of this case because you are saying generally. >> it jus demonstrates this is a tax on property do you own something on a particular date opposed to what to do in the passage of t power in the past? bu sond the provisions for. >> if taxear by year would that be permissible? >> know that's sond wrinkle so to speak. the mrt is the inverse of its precessors in the statute. all the preceors like the foreign personal holdingomny coy provisions as well as subpart f focus on categories of income they are susceptible to being reassigned into the corporate. congress is never reached the forester tax shareholders. whyin is it different analytically? this is all part of a big change worldwide tax system to a territorial tax system and this is one piece of that.

i guess i am not sure which kind ofnce matters for the ultimate analysis whether the attribution isermissible. >> going back to the very beginning we've always done that isircled byocing on particular categories of income that are susceptible to that type of abuse. wh i interesting as subpart s as you capture the field now is get everything else. the activee business income is attributableoly to the corporations own legitimate business activities overseas. th shareholder and afford in a d corporation stand in a different position than microsoft or any other corraon. this is not the type of income that sreholder in an ordinary cose offfrs to shift

around into a corporate form and receive themselves. i also want to address the difficulties the interpretation wodaise with respect to the current taxax code. as i noted the tax code already reaches the full extent of congresses authority under t 16thmement. if the government i right there certain novel categories of what in here to haveeen regarded as unalized income or unrealized appreciation we are subject to taxation of t 16th amendment. those but always be subject to taxation under existing law. >> can i ask you a question about your argument for you go on with the government? wegree to the 16th amendment use of income ruis realization and the mrt does not

meet the realization requirement ose are two differentli sps. we demonstrate t 16th amendment does not justify the mrt. don't you still have to demotre the mrt is a direct tax in oer to establish the constitution been violated? >> of thert is not a tax on income it stands to reason it would be a tax on the ownership of shares. >> and make another argumtn their brief for example they offer it could b an excise tax. my point is jt, any indirect tax i wouhink it just has to be uniform under the constitution it seems it's your burden regale of this issue about trealizatio to establish this tax is a direct taxith a constitutional argument are m wrong about that?

looks to b alleged as a direct ch they filed to dismiss the one a tax on income. it did not dispute big bucks i preach at people have an art in this book them and we send that back ninthircuit to determine the iuef whether or not it's a direct tax? your argument we custain the constitutionality just becse we haven't had briefgn this particular aspect of it. >> with the court could do is sw the question psented as to whether o not there be anything left to remand is up to theou's discretion whether which is to reach the excise tax argument. so far the arguments concerned again that taxed statues on ownership of particula ce of property on aarcular day and takes no a account of any type f siness operation of the people whom it is taxing. that is the sort of tax which is a high water of a tax on a

property cannot beusined as an excise tax. the court could very easily make short work that argument. going to the govnmt's position requests that argued within the question presented? >> no your honor >> wasn't preserved? >> was it preserved? >> no your honor. it was raised for the firstim before this court. so far as the governor's position is ccerned think about for example if someone has a contract to sell which is to a third party i auture year for the price of widge gsow so they are less expenveo manufacture then this is so that reperson has received an economc gain the governor's position now bele thank you. but thank you counsel jtice thomas? anything further? what's with your case be any different or your argument be anyy stronger ife were talking about real estate rather than owning stocks in a corporation or an interest

in a corporation? >>oour honor. et much allf the cases over the course of the last centuryave concern personal property in the form of investments is well-established at this time thaaxes on personal property. >> actually what i am more intereed in is n necessarily necessarydistinction between red person pperty. but rather having investment in a corporate form or a partnership where there is an argument that the income hadd been realized byhe corporationn or income had not been realized as you heard thisbe morning by e partnership. whether or n tt should then be attributed to invest in those companies. whereas in real estate unles there is a transaction, a sale, a lease or something there i no text of the transaction would

there be a difference i the state or theorporation or the partnership as opposed to real estate or other personal opties? >> i don't think so the court has applied the se principles across the sweep of the 16th to mimases. pretty much all the early ones applying therinciple did involve corporate investments in different type o corporate reorganizations the government gu resulted in income to theeh shareholders. but the coupplied the same principles in cases like inlv real property recognized in thatnsnce they had to be realization. likewi i blatz the court reached the opposite result with respect to improvement mad t report property. we do not thihe constitutional principles are any different and the only difference perhaps to respect to corporat shares is that the governmentig have an argument that there is some type of conste realization der this that imposes a tax.

>> isn't -- based on the ququestions it seems to be a vulnerability that you would not have with rl property. for instance. >> i don't think it's vulnerability given the general principle that is required and the natef this tax. i think it would be a more difficult case if this was structured entirel different fashion and not operate the way it does but that's honestly hypothetical. >> justice? >>do your theory put at risk limited liabity companies? limited partnership corporations i mean thererell sorts of corporate forms that are there. your definition would affect the vernment's ability to taxes

dividual partners as individual sharelds. >> no your honor per. >> why not? was we d'think those ovions present inhe constitutional difficulty whatsoever but again the different for cot cases have recognized that by. >> i don't know why. whether it's limited liability? or personally held it sti corporation. >> first of>> all distinguishg court corporation from a partnership you he the doctrine of corporate personhood th court has long understood does make dference in the circumstances. but so far other types of corporations o concerns there is an election that's made by allhe shareholders to those corporations to allow pastors taxation but iffw someone was o come to the governmt and say i am earning income that's how i'verganized my business and operating i think the government can accept tt >> going backother attributions thank you progsse don't think it's a question of attribution your honor it's a concession by the shareholders. >> th'sxactly the pointhy

should they get to choose not the government we are to attribute the income? >> justice kagan question parts of the risk of low but repeating some o theisssion it seems to me there are four principles there may be others that therefore principle kinds of taxation. that congress has repeatedly countenancedhis court certainly has done nothing to get in the way of it. i just want to make sure i understand youristinctions. and whether there is a single distinction that covers all of these or whether each one has a different elation. here are my four subpart f it's s corporation its parerips, and it is taxing on i an accrual basis. so, give me why itgi is you thik we can decide f you without putting any of those kinds of

various established schemes at risk question requested a 10,000 foot level your honor they're all to the realization linus has been developed in the court cases and by historil precedents. i would've thought none of them use the realization. i mean that's why this my question i guess. [laughte again subpart f uses that familiar mechanism of simpl attribute income to the person inwho earned it even if they dicted it somewhere else taxes that nature bit long been justified on that basis. as corporaon again or by election of the shareholders if they can see ts is in fact their income t tether operate their business i don't think the government would have any basis not to take them at their word shld the government choose to do so. so far as partnerships are concerned aga tre is no separate perso that sits above the shareholders i'm sry the partners of a partnership. those have aays been treated

differently gngack to gosh, goingack to the dartmouth college case and it wn't even with that point but wit respect to income going back to givens which is's brecon is a well-established principle at that point corporations are different in that respect from partnerships. thatashe basis on which macomber rejected the se arguments.is and finally withespect to accrual the court already address that issue. and that safety car heating and liti case it held the standard 16th amendment realization principles it cited among others macomber. applied theethod of accounting. whatever question there might be about the methodology a its constitutional status at this point it h been a long established and is water under the bridge. >> could i come back to justice thomas question wch is your own definition of a realization? am going to give it tell me if you agree that or disagree with it or think it needs to be

mofied? that which pceeds from the property is severed from t capitol is received or drawn by the recipients that is the taxpayer for his a separate use. is that your definition to? >> tnk subsequent case lawas recognized the separation coepts may be does not necessarily apply to every circumstance of the does apply to the circutae of it distinguishing shareholders versus corporations. >> yes so for example we basically ignored the separation requirement, correct? >> the courts it is applicable in the corporate but not in otrontexts. in that example and improvement was made was not separle from the land. >> that said -- m the definition would not be very good toxpin subpart f is that correct too? what's whhe court has recognized and subsequent cases se up through the concept of

realization as opposed to actuae receipts. it's important. >> what you' sing is basically what we have left behind. >> note.e. think the courts>> cases up through -- as recently as indianapolis power and light recognize there is something more tt is needed than amiri economic gain. >> is not suggesting we have a left entirely behind any concept of realization. i mean that it is a different question. but we have left the macomber definition behind. >> i think it's holding in that respect remains good law i don't think it has been left bin it goes on to recognize for example regarding corporations there may be appropriate circumstances to work behind the corporate form to ascertain the true rights a action of the shareholder in respect income. i think taken as a whole does recognize this principle and use the best lgue of the coach of the judges in the ctext of

the case to express that in most cases is going to beat receipts but in other cases something else may well qualify. >> i think t aument we have kind of heard other cases mething else may well qualify. >> i think the argument we have kind of heard from the other side involves there is realization requirement is met here because the corporation unrealized income. and then it just becomes a question of attriti of that relates income. congress has a free hand there the 16th amement says nothing. your response? >> the court has always looked at questions from income fro the point of view of the shareholder ifouook at the 16th and mimic case or case inlving gross income under the ta code the core has always looked at the individual circumstances of the shareholder to ascertain whether or not that shareholder h aually relates agn. and so for example indianapolis power light in the 1990 case the court look specifically at the cts regardinglo certain types of

cuom security depit look at it as an abstract inquiry or were things might be assigned and so forth.. that sought toddress the question whether or not that shareholder had incom macomber did the exact same thing with respect to shareholde a corporations. i think the court would certainly have t rerse macomber which the government has not asked to do. to get bon the idea to some free-floating notion of income is sufficient for the government to pointt something and taxes ar particular a individual as parent company. >> you are saying i can put a fineoi on if i understand e estion is whether it is inco t the taxpayers being taxed? >> yes, your honor. >> i would like for you to go back to the discussion you had with justice jackson. i understandsi your point the excise argument has been forfeited or perpsven or waived in thisps case. i just want your thoughts on it generally as an original matter? we hav t hilton case.

it's from quite a long time ago. carriageser thought to be rhaps not a direct tax. could the government and the regional matter called an excise tax? what's the answer would be resoundingly no. th whole point of the direct tax clause is to make it difficult foroness to levy these types of taxes while leaving t ahority available in timesth of emergency. so far as taxes on personal property and things like investments are o concerned tt was addressed extensively during the ratification debates of t constituon it was really one of the primary arguments of the ai- federalist against the ratification of the constitution. permitting congress to levy direct taxes will be sp too far allow congress to destroy the states and reach all the property that was known to all homes across the country.

that was one of the four most concerns the way the framers address that was to render these types of taxes specifically subjt apportionnt thisasas addressed and discussed at thend connecticut, the pennsylvania and the virginia ratifying convention by james mattis, by chiefusce marshall it was a central concern at the time it's a maerf original meaning thi sort of an investment, this property is something that necessarily taxis were subject to apportionment piglets one last question returned to my first one, apologies. we are shiftingbo. if the court were to hd the only realization requirement is somewhat realization somewhere along the chain by a corporation what would be the conseens of the whole thing likeha >> the consequences be to on the door to taxation to practically everything. all property that a person owns is the fruits of income at some point in time.

whether it might be income they have received in the past. ultimately all property that we have is made up ofnce that is been invested.at anal that was necessary was some level of income congress ul simply point out anything and say at seoint this was income. and to some person at some lev and therefore can be subject to taxation without apportionment. >> i suppose weou and maybe have to draw a line as t how far back in time one can go in assessing the chain of realization r. >> that is right and i do not derstand of the court would do that base of the constitutional text for the government's definition of income is increasing a person's wealth between two points in time. well, the time was s a a person's birth arean decades in the past that could reach some or potentially all their property. do not reallyy understand what the limiting principle would be. >> thank you. >> in your brief to distinguish

subpart f and s corraon some partnerships you use the phrase constructive realization. i would ask if you canefine what you mean by constctive realization? >> sure we use constructive as e realization is a blanket term drunk coas such comps that an assignment of income. it refers to t general principle espoused in cases like banks that income should be taxed to the person who earns it and enjoys i benefits. and congress when it has an actedcases relying on that docte has approache it in that nature assessing whether the issue is something and the ordinary course could be attributed to theof person to the particular taxpayer at issue regarding gories of income and so forth. >> okay, thank you. >> except there are situations there cases in which state law

that partners could not have control over t property or pull it out unilaterall which we said it's okay for that income to be contributed to the partner. i understand partnerships are different kind of form because as an ownership matter the partners wou o equally. but i guess i d't think our cases have establisheded control as the linchpin can you point me in the right direction if you disagree? with respect to partnerships ifoi you set theiew partnership income is directly thencome of its parer the restrictions on t ud to which partnerships can put their income such as distribution company stripping in certa circumstances is no different than a state law preventing an individualro using their own income and at some particular fashion, spending on a particular item they might wish pchase very. >> i just mean that control -- we are thinking about how into to fight income i a questioning whether controlan really be words use as opposed to som

distinction between capolnd income. this seed and itsts fruit. it seems to me control might go a littl t far. >> control haslws been an essential element of income attribution statutes. the general idea has to be the taxpayer at issue has the ability to redirect that stream of income somhe else and therefore avoid taxes on it >> wi a that a duerocess issue? this goes back to the point about whatrehe consequences be and we have to dw out lines but you said that mean something that was earned income awhe along the line ultimatel lds in my bank account and can be considered income to me. is that a 16th amendment obm or a due process where we have to dw lines about what search arite one person's income to someoneit else? mexican race issues under both but that crt has considered a 16th amendment issue of binterest cases.

work on the court considered it a question of did the taxpayer income he had in that caseam of redirected into a trust for the benefit of his close famil members. that is the way the court has ways analyze it from the point of view of the taxpayer whether that taxpayer has actually received income or not to request the last question subpart f i just want to be sure i understdour pos you say income is about whether the person has the ability to direct the income stream,nd my accurately repeating what you said when it's about attribution? >> that is a necessary of it y. >> and cygnus are part of it you have also said subpart f corpns in genal of which f corporations subpart f do not pose the same 16th and mama mamaprobably see here, right? >> you meet with respect to the application of subpart f aside from the mrt?

>> yes. >> is that because going back your point aboutth control is te distinction between mrt and the rest of subpart f this idea the other conte t sharehoer have sil ability to direct the stream? >> it is two things is not that they have more ability they hav any ability because under the terms of the statute mrt does not take to account as t whether n a shareholder exercise control while the ream of income was coming in the door. it only focuses on ownership in 2017. but also that degree of control is also been combined historically with the question whether or not the tes of incomeed being taxedre susceptible such that it's appropriate for. >> or some sort of fraud overlaid to this? is ts functioning as a tax shelter? >> that is how cgrs addressed in the very first question requires is a

constitial requirement? >> cgress viewed it that way in the first. that provision regarng fraudulent availability corporations to was specifically limited byany of the chief proponents of t 16th amendment to avoid the precise question we are -- the dects we are dressing today. their view is you cannot ordery tribute corporate income to shareholders but could do so only in the instance where there isome sort of fragile abusive ft abusive corporation to avoid income. ask justice jackson? >> yes. i am interested in your conversaonbout the original meaningco of the direct t clause. i am trying tonderstand whether it is your position that as an original matter the direct clause was interpreted to include income and all sorts of things.

i had thought originally as w said in the hilton case was pretty and narrowly focused. i'm i wrong about that? >> the hilton casead opinions to viewed as a consumption tax regarding conveyance of persons. the, third adopted the view its difficult to apportion somhi that should not beubct to apportionment piglets what about justice patterson explanation that this is a pretty narrow sclause and designed to protect southern states in slavery from federal interference that was really what was going on here d therefore when you're looking at direct taxesaxes as opposed to indirect you are talking about certain kinds of things and it's not necessarily otrs. others income and that sort of thing. >> is a matter ofriginal meaning that's incorrect. that certainly did nottand for the position of the court

requesteth court, until that hold the income was direct? >> notit respect so much to encumber grace i'm sorry. ask the case tt address this issue was springer which did adopt a narwnterpretation of the direct tax clauses. >> it up until plick was addressed by the 16th amenen we had a very narrow direction for. >> for 20 year there was. saide to that as i pretty much all of that 16th amendmt er the past century have concern taxes on personal property in the fm of investments. i think the crt would have to up and jurisprudence if it would to decide the late date the dire t laws ought to be given some other interetion. >> on the askbo realizations. going back to justice thomas first queio and what the.

definition i i guess i am trying to understand whether you think congressas the autri to define what constitutes realization orti not? is it something you're giving to the court there cstitutional interpretation? who gets to decide with the realization line is? >> is an inialatter yes congress does get different on them.re but it actually is to try to do th wch is not what he did in this case. again turns o t ownership of property on a particula date does noter take into account. >> i guess i don't understand your answer. could we find there is alization in this case? like who makes the definio of realization? could the court determine there is realization here under a definitionhat we are apeciating? >> the government is never argued there is realization in this case theovnment has presented the other argument

that it's n required i think it would be unusual for the cot to reach out a decide a question without the government. >> are you asking us to lit put it this way are you asking us to ado a particular definition of realization under which your clitins inn this case question if we disre about what realization it means to you lose? >> we are simply askinghe court to rffm theefition that it has applied since two of the dawn of the 16th amendment. >> in the 16th amendment does not havealization in it? you are saying the implied alization requirement has a definition you're asking the court to adopt? >>ecently asking the court to say realization is necessary as the concept has been espoused in the courts decisions the course of a century.nt >> tha for. >> thank you counsel. general?

>> mr. chief justice admit plsehe court, mrt is firmly grounded in the6t amendment tax andistory. the amendment allows congress to impose taxes oncome. that has well-established meeting drawn from numerous pre-ratification income taxes congress enacted before ts court's dision. several of those taxes were lik the mrt they tax shareholders on undistributed corporate earnings including the income taxes in 1864, 1865, 1867 and 1870. this court upheld congress' power to impose those taxes and hubbard. sixteenth amendment drafters therefore would've understood taxes on income t include taxes like the mrt. thats confirmed by the very first incomeax congress enacted the 16th amendment. that 1913 will tax shareholders. the trend tt passed through taxation continued throughout the next century from taxes on

partners, to s corporation shareholders, to foreign corporation sharehoers under subpart f. against all of that history petitioner's sake of their case. the cou has limited toax on particular stock dividends that are not at issue here. if the court now extended the discussion to invalidate a taxes on undistributed business and earnings it would cause seachange in the operations of e tax code and cost several trillions of dollarsnost tax revenue. n petitioners say every other provision ofhe tax code could be saved under a theory of constructive realization they do not provide a comprehensive definition of tt term or explain why it would rescue every profession excthe mrt for my friend today said it's a blanket term that's din by theircumstances or you can say construcve realization occurred. that simply is circular. and by concedi constructive realization they have acknowledged congress' power to draw reasonabl lines about what

counts as income and who can be taxed on it which is exactly what congress did in the mrt. finally the court i not actually need to resolve any fundamental questions in this casebout whether the 16th amou requires rlization. e mrt taxes income that was actually realized by the foreign corporations and congress permissibly truted the tax on that realized income to u.s. shareholders just as it is said inny number of pass-through taxes to other nations history the court can say only that and affirm. i welcome the courts questions. >> when you say realized, it has nbeen realized what do you mean by that? >> i think this is a case of realization justice thomas insofar as the thing being taxed taxe underlying tax base for the mrt are the earnings came into the corporation the foreign corporations coffers of the tax base he was substantial ordinary businesse income the foreign corporation generated through its operations in the

foreign country and that has to date been subject to tax deferral that income is government tax the corporate entity level. instead what congress did in the mrt is an active pass-through that she routed that lbity on the actual income that was yrealized do you think the increase in vuef real property could be aaxle event? >> that raises a more difficult question. this proce o the idea whether we can characterize gains in the form o appreciation as income that'sha taxable. i thkhere's a strong gument that falls within the definition of income that looks tohether his economic gains overha time. it's important to note congress has at various te impose taxes on that kind o appciion. some of the civil war era t laws that i poiedo at the beginning of my introduction had appreciation based tatn for

certain property like lesck and still today the really important provisions of the tax cohat effectively tax individuals on appreciio foxample the market to market xe are constitutional treat a taxpayer is a real life event at the end of the t yror lifeng sunce holdings, security dealers holdings, that marks the amntf value to the market price even in the absen o any kind of sale. i tnkhere is strong support for the idea it you can passively certain forms of apeciation. >> hertrg support and that takes awa a lot of the strong supportwa for a pretty basic composition the government can't xed as income to theroperty owner. the appreciation andal of property. so what is left to defend the

proposition? >> mr. chief justice i disagree with the suggestion that involve the tax o appreciio the court said her. >> i know your argument that it's limited to stock dividends. but it also h been recognized, at lstn the binng before itro narrowe or time as standing for the proposition that the government cannot tax the appreciation and property. you have taken that off the board in your pseation today. i wonder if you can give us a little more view or assurance of what isef toefend the proposition once you have is stabbe >> was her chief justice i want to say we are invoking this court's own precedents about the scope and reach the court itself that said macomber is limited to the particular type of stock dividend at iue thereha type of stock dividend did not

present any kind of economic gains to the taxpayer r in other wos the taxpayer received additional shares in the company it was a stock split and her shares were diluted in a commencement amounts of the court said the taxpayer's perspective there is no difference in your ownership stake in the company both before and afte >> if you wanted to defend the prosion the gernment cannot tax the appreciation of property without any other of the event of a realization but would you cite given the fact that some of the table? >> the thing i would cite the court were looking for limiting principle that takes appreciation of the table at least in certain circumstaes would be his truth is a different historical foundation for that type of tax compado what we have here whi is a pass-through tax on rels corporatence. the court could reserve judgment on whether there might be principle lines are bedn the history of the tax scheme to address it would not put the

framers of the 16th amendment had in mind. i do and t emphasize the distinction between tax base focus onealized income makes many provisions. >> one ofou arguments that you press most strongly and ceaiy it has a resignation a rea t in coverage of this case is the adoption ofhe petitioner's gunts would have far-reaching consequences, isn't that correct?. tt is correct >> is it fai tn toxplore what the conseens of your argument would be? >> i'm happy to talk about the coeqnces of our argument i wanted to athe outset the court could have resolved this case quite narrowly. >> the ninth circuit held the supreme court has made clear that realization of income is not a constitutional requirement but is instead founded on

administrativeonnience. is that correct? >> the ninth circuit was referred to this court's desi and cottages savings the court did say that realiziorequirements are unded. >> top the question whether that's the correct interpretation of our prior precedent is that your position as i understd you to argue in your brief that realization is no required? the 16th amendment permits income whether realized or not progressively think there is no bright leealization or requirement under the 16th amendment congress is permitted to tax certain forms of unrealized gains. i don't to suggest thert set out to define income for all purposes or to announce any bright line rules about realization i think it is sufficie he for the court to sayie you had before he a particular type of tax and undistributed corporate earnings that were actually realized and to look at the history and tradition that demonstrates that fitsel within congresses goals. demonstrates itits

within congresses authority. >> so i take it what you said, realization is not a requirement. did you say that explicitly in your brief? >> we believe realization is >> we don't have to agree for you to prevail and even assuming and tre was and come here to the entitynd is attributed to the shareholders in a manner consistent with how congress has done that in this court allowed. >> we thank you the constitutional section is quite easy andtoesn't require the court to consider the foundational questionsf the meaning of the 16th amendment and other context becauseere we heart agenda have charismatic income at the entityev and dysfunctions just like partnerships read the taxes on

partnerships andt other corpore shareholders as corporaon shareholders and particularly in the context of foreign cooperation, the tax which the mrps just a part. >> the answer there need not be realization by the taxpayer is sufficient if there is realization by some other entity, correct. >> into the 16th memo thats correct but there's a due process on the limits of ngress ability to attribute income was realized by one taxpayer to another taxpayer. >> the due process question and that's a question of substantive due process. >>has how they analyzed it like burnett versus wells lookingtongress ability to make the attribution decision >> anything under subsidy due process involving a enomic regulation exists the only thing that would need toehown it was rational for congress to do what it did.

>> the court has looked at whether congress made an bitrary choice or acted unasably but i think the court's president revealed the court has looked at whether the taxpayer that owes the tax liability has a relatnsp. >> is a rational basis to review them that is not much. we could sayhe thirty-year requirement is a substantive due proces iue so we don't have to grapple with this. but to be honte would be saying unless you can show it was irrational that wlde sufficient. >> i want to be precise about theoctrine you mentioned the thirty-year look back. i thi tt has to do with retroactivity principles under th due process clause and that is somewhat different than atibion question that we've been discussing whether congress nttribute tax liability to one person per income earned at th entity level. i recognize there are complicated questionsha could exist in the space but the important point we haven enormous amount of history and tradition on our side to spo the idea that this particular attribution decisionri follows.

>> to talk about this case and timately we have to talk about this case but i want to detand how far does your argument logically go. under your aumt there does the 16th amendment allow the taxation of income and any defined incom a a an increase in economic gain between two points in time, let's say somebody graduates from school and start up a businsn his garage and 20ears later or 30 years later the psos ability can the congress under your argument can congressaxhat on the ground as income. >> if that'see taxed as i imagine their annual income taxes and it sounds like the hypothetical is functioning as a property tax tn the total value of the asset. >> the appreciio of stock value over 20 or 30 years, could

congress say we're going to reach back and tax all of that d get between two periods of time into points of time. >> think that's a harder question andt here's why i thik that would f whin an ordinary conception of income of covering economic gain between two points of time and focus on the increment of gain but we don't have the same tradition to support congress love ian income taxes in the manner. >> sorry to interrupt but on this point in your brief and i understand your argument was a little bit different here today but in your brief you confronted ether congress could tax millions of americans that hold al amount of stock in a retirement investment account and you say yes and you point to the 1864 civil war laws and you say that would be ministratively unworkable. at least in your brief as i understood the justice to alito's question i think is yes

that could happen. >> i think this is an important poin justice gorges, let me clarify theyere verifying tax to all corporate shareholders. that would function like the mrt and t basis for the tax would be the corporation earnings and the shareholders would be responsible for the share of tht corporation earnings. >> i'm not sure that is clear it seemed that the argument was you reealing with the change in value over time in stock prices increased, could you tax that that we would consider unalized gain entry to as a realized gain and the answer is yes because t 1864 andf there is any limitation has to do with administrativ corporation ability. >> in 1864 they were doing a

pass-through on the corra learning so the calculation was not based on the appreciatnn the shares that was based on what the corporation had ene of the income and i don't want touggest attacks on appreciation would be invalid as i mentiedo justice thomas there provisions that my friends mightees constitutional but this question and just distill the ali i pressing on the idea that they should be beyond the rea of congress back i'm just testing the limits of your arme and it seems there are none. >> i certainly think that congress h bught taxing power and what i was about to say, the relevant question is t whether congress has the power to tax inn the first plac, the congress has plenty of power and conta pple for existing. the question if it's airt tax that have to be apportioned for uniformity as an indirect tax. >> if i might address a backup argument, the first brief argument no realization requirement, today i hear even

if there is realization and there was somewhere inhehain realization in congress can attribute freely as it wishes. i understand the argument b i'm not sure how we fit with our president. i understand your argument but let's assume it isn't completely misguided, i think those were yo wds, misguided. i look at fellas i look at room iook at hearst it seems as i read them there tryingo work

in a congress framework in talkingbo is it fair to say there was realization to the taxpayer, not realization somewhere back in the chain of sty and income realized by the corporation were a parent or bsidiary or whomever. as a matter of precedent as i'm talkg,hat is mistaken about that. >> in the subsequent cas i would not say the court was mistaken it did happen to find realization on the facts of the particular cases. for the taxpayer right. >> they involve different types t and of those involve the pass-through tax. think were loongt the closest president of the situation that we have he point to the court's decision in hiner versus mellon t propriety of the tax on partners even in a circumstance whe they could not access the partnership income because the state law prohibited a distribution in the court said thataserfectly fine. >> you have not made an argument realatn to the taxpayer have you. >> the whole premise. >> before you launch off, you'll not be the argumentad. >> we don't think the tax constitutionality depends on whether they did a distribution this is a pass-through tax and havethe other contacts i mentioned. >> i will take that as aue. >> there are two ways to think aboutt it.

one is to say there was realized incomethe entity level and congress can attribute that to th tpayer in another way with the say the taxpayer had alo enough relationship to the underlying income for congrs to permissibly treat it as income to the taxpayer. >> we don't have the argument before us, the argument has not been made. >> w ctainly intend to make the argument and i understand everhi to focus on both aspects but we joined issues on whetrhe j defendant met h realization. >> to the taxpayer or anyone and you said it doesn't requirere realization and now you're saying it ruis realization but not to the taxpayer one argument that i'm missing is that there waseazation to the taxpayer, that is not in the ie for the argument today, what way do about that if you

think the i realization to this taxpayer why did you make the argunt >> we are not suggesting there is anything like stric realization in the taxpayer having received something in hand but i don't understand petitioners to say that is what is required because vacancy. >> in our cases they say there could be realization of partnership situation or a fraud siation or an s corporation situation we've been clear about that that there is some enjoyment that the taxpayer has over the money and some control he may assign elsewhere whatever but he controlled it and there's some realization that it is enough but that argument that this taxpayer had that enjoyment is not in the briefs before us and i'm wondering what way do about that. >> i think we made the argument because we made theoi that to the extent they go down the ro o recognizing constructive realization that the mrt would fi i the same framework because petitioners have not identifiednyistinction between howot the tax context

operate and how the mrt operates. >> let's say i don't see that argument, then what do you want me to do my supposed to vacate for consideraonf the question? is it waived, what would you ha m do. >> i think in our brief we argued that the taxpaye improperly held accountable for the f corporation income. i got the argument that there is no realization or as a backu there is a realization of faire attribution butf'm working within the court precedents i don't consider holy mguided if i'm not willing to overturn 100 years which areskg us to do in the question is is it fair to say this taxpayer constructively

were actually realizes income should i vacate and remand? >> you should affirm because here we made the argument the exact same relationship so we made this argument justice worship we made the pnt that their focus on control or influence that the i no relevant distinction because this is taxing in preciselyhe same way that they operate. >> what do you think i t significance of the confession that is constitutional to you point. >> i think it's significant because it donstrates that the court were to apply a lens of control oinfluence the right word would be relationship of the incom and petitioners have acknowledged that 10% of shareholders havthe requisite level of relationship to have income attributeto them. my friend suggest there is a fundamental difference bween subpart f because it taxes different parts o income income where you can interpose the rporate form, i don't understand the distinction because the6tamendment says congress can tax all income from whatever source dived so the 16 tax by its own terms makes clear the different forms

don't make ielevant constitutional difference. if you look at it as aacal matter my friends argument does not withstand scrutiny he suggested for example all of the inme could've been earned by the taxpayer himself but that doesn't explain many important features like insuring risks outside of the country of rporation for the cfc or doing business in countries that are subject to u.s. sanctions tse are subpa iome and there's not a relevant distinction with respect to pperly attributed to theaxpayer. >> justice gorsuch said you were asking us to overrule 100 years of our president, that sounds bad, are y? >> i am not askinghehe court to overrule any precedent. i'm asking the court to follow its precedent that postdates comber and makes clear that i was limited to the particular soft dividend issue there. i recognize there is language that seemed to have broader suites but this has already coized that is not the right

way to rebuilding. >> genalf i might in the mb realization you said that is misguided. in fellas you said the tt laid out a makeover. brewer it was following macomber's understanding of income and in horst it sd much of the same thing i won't bother with the quote, each of those cases have reported torp be sol. you justisagree with that? i guess. >> i disagree with theseas if you look at each of the cases in the court designed realization on the particular facts but usingifferent standards that macomber hadic articulated, take for example you said the court was applying the interpretation of income but th court in bruhn disavowed the

aspect o make a trip macombe that you have tort separate the economic gain from the underlying property. >>sertainly talked about contl did you think it was deluding himself that's howhe court perceived what it was doing shouldn't that account f something. >> look at the court statement in griffith he said macomber's theoretical bases had been undermined and it had in effect been limited to the stock dividend and issue there andt did not have control with respect to other sto dividends and other economic gain. >> what you understand to behe current state of our president at a certain point you said mamb was confronting something that had stock dividend and no econoc consequent whatsoever. that was true and that could have been. makeover could've been decided in thearraph saying that but that's not what the court did. then as you sayany cases following macomber which leave

his own theory of realization in the desk. what y take to be the current state of our president that we need t pay attention to. >> i think if this court hadca anothe sck dividend case that involved in economically substance split then that's what good for said macomber is limited to the stock dividend but the court in any follow-on cases had said makeover doessot have controlling ways outside of the context the court sd the statements and makeover were not intended to provi a touchwn for resolving all gross income questions thatng could arise. i think to the extent that tha leaves macomber and island into itself that the natural effect of this court subsequent president and were asking the court to follow the precedent. >> most on point for you i tnk you said is heiner, the

partnership case. >> it involved the most in allergist. >> explain w tt dictates the results were strongly supports the results from your perspective since that'shene you're relying on the most. >> it strongly sports because the court confronted the situation wherert partners claim they cannot lawfullyeaxed on partnership income on a pass-through basis bau state law operated to preclude any distribution of the ptnship income to them. by definition under state law th partners would not personally realize income they limited the distribution in the court from the partners sdt didn't make a difference with respect to the permissibit of the pass-through tax from the partnership entity lev t the partners himself, petitioners have suggested that partnsh can be distinguished on the line cae they say the partnership has a different legal statusff incorporation. it's not like partnerships have innate legal stashe creatures of state law and there's any numbers of states that define a ptnship as the underlying partners themselves. we also hav gd caseload but

hasnhe lower courts this is been applied in context voing pass-through taxation incorporation in particular and it not just the modern laws that justice kavanaugh it is all ofhe history virtually the entirety of the nation's experienceit the income tax there's laws on the books other than the brief. where congress has taxed corporate income at the shareholder level that is a classic path enter pass-through an how the mrt operate. >> i agree withhe history in your description i was just isolating the case that is closest is heiner. what about the fact. go ahead. >> i was goingosk you, heiner is closest on the pass-through what is youres federal case upholding a federal tax on appreciation or doou havene. >> i do not have a case from this cou that upholds the tax

on appreciation. i think there areower court cases that are considered things like accrual accounting or other situations. there are fewer taxes that reach appreciationndhe pass-through is the morer commn one we think about gains that are not realized to the taxpayer himself but there are aa variey of taxes out there. >> exactly it's really important to recognize the importance t tax in the context. the situation that congress nfnted to enact the market taxes is the fact that the taxper can manipulate realization events. for example they can enter into offsettingutes contracts and they don't have any economic substance tha aow the taxper to hold onto the one that has again to difre taxation and favorable capital gains rates and to sell thene that is aoss and immediately have a taxable eventnongress recognized that was a loophole in the tax codeha could enable this abuse. >> there are taxes attacks and appreciation but it is fair to

say we would do something new if we accepted your argument that income is a kind of economic gain appreciation included. >>ippreciate the opportunity to clarify, were not asking the cour to define income that way. i think if there is a lesson to be drawn is that there's a real danger i trying as an abstract matter to defy income for all purposes or as glenn shot glass said a touchstone for auture cases in part because our experience with the taxode that taxpayers often latch onto the statements and uses as a basis for avoiding taxation going forward. i d'think the court needs to approach it by adopting a global uversal definition income that the revenue doesn't define incomenstead it says income is all income from whateveray sours realize and give an example. i don't think my friends are offering the court of the finition of income because they say income is realize gains or category of unrealized gains

that areco constructely realized. i don't think it's necessary for the court to comprehensively define it here. >> thank you,, counsel. i understood your answer to just the spirit toe the same that you gave me with respect to un-realized increase in value from one time to another time i real property and you did not have any authority to support that. a >> that's right i'm not referring to a case from this court that would find that is taxable and there's nothing from this court other than macomber that wouldecsarily rule that out. >> when you said that is the lesson of macomber that is the lesson of macomber's demise. >> ultimately i think the court recognized those statements which were rendered as an abstract matter and opined that wa'tirectly presented had untenable consequences and profoundlyisrical. i think there's a lot of wisdom in followingt the approach andt

the court said we don't rule on the constitutionality of the tax until we find that congress h laid the tax the court should take each tax that comes for purposes of resolving the questions. >> justice thomas, justice alito. >> gentlemen in t midst of your aumt i am quite concerned why the potential implications of petitioner's argument and you stressed that in your brief youti say if we re in the petitioner'sav then large important pieces of the tax code will ao logically fall and i tnk that's a fair argument but i think it's also a fair argument to do thean same thing with their positionnd i want to understand the limits of your position, coming in i understood your positio t be that realization isir not requid in the 16th amendment

realization to the taxpayer is not requiredndherefore the 16 amendment allows the taxation of income and you seem to define income in your bef as economic gain between two points in time and you says those well-established principles that distinguish income taxes for property taxes. if that is correct then what about the appreciation o holdings insecurities by millions and millions and holding ins mutual funds over a riod of time without selling the shares in the mutual funds. can those be taxed under the 16th amendment. >> i think i congress enacted attacks like that it'dd ever has we would likyo send as an income tax but you don't haveo agree that the tax would be valid in order to uold the mrt

as corporations, your answer is anthat would be permissible under the 16th amendme a the court could draw lines and that would it look like you to think august is gone before in the court is ud history to draw princal lines and where coress has enacted attacks that looksik pastor taxes through history i think in respect to the proprietyf this x. >>sustices question about the appreciation in value o real property. >> i think it would be subject to the same analysis that would fit in a conception of economic gain between two points p in tie and congrsasn't tax that and if it were confronted with the

situationit the historical mind and limiting principle he. >> unless history rule set out i'm not quiteure how congress failure to enacted tax in the past brings that outside t 16th amendment if the tax wodtherwise fall within the 16th amendment but you say that pottily is also taxable as income under your theory? >> yes i think it's clearly xae under thele cstution this is not about cgress power is the motive taxation whether topption that taxth orot. >> if a construction realization or test f aribution is required, what is your test? how far c cgress go and attribute i income to someone who is not realized that incom

in the standard understated that term. >> i wou aly the test to the court using burnett versus wellr at present a situation where the taxpayer argued because he was a granto o the trustee cannot be held liable for the gains of the trust and not properly intuitive because he had norl continuing control would not personally enjoyho gains that went to the beneficiary h this srt under court said congress had not acted arbitrarily in making the decision and looked at the taxpayer's relationship withhe underlying income and could include a gdeason to tax the grantor in the circumstance to avd shifting income to lower income taxpayers but if the cotere applying the attribution analysis here i think the mrt like many pastor taxes i eally constitutional, the income has never been taxed at thenty level and newsreel complications were trying to tax foreigcorporations. in many respects the large u.s. shareholdersy definition together collectively to have a majority stake in a corporation

ehe most suitable entity to tax. >> have we ever said, maybe we should in this case say the 16th of member apply 7 income or propert oained a broad than it does to income or property within the united states. >> the court hasn't previously stated ttut my friend suggest thinkinbout the issue the court should focus on the potential for t aidance and abe and that concession underscores the point when you're using a foreign cooration that provides a ready vehicle to shelter funds offsre and keep them out of the reach of the taxing authority and copycat efforts to access the funds even when i ve a significant connection because the majority by u.s. taxpayers is importa to recoiz this is not the paradigmatic how mrt applieshe

overwhelming majority of taxpayers subject to this a domestic corporations often parent companies of subsidiaries however, arrange the aairs to get this money oshe to a period of long t deferral but isaac would be anomalous to suggest the money is out of the reach for u.s. taxing authority. >> the petitioners were on the ground floor with his corporation but what if they out into the country the day before the mrt made taxesue wanted that look like a tax on capital rather than a tax on income. >> i've three reactions to tt enderlying nature of what's been taxed which are the realize rnings of the corporation wouldco not change i think tt raises a harder attribution becausth taxpayer would have a less of a direct ratnship to what's been taxed may be somewhat of theittion would have a better due process claim

that as you mentioned they are not in oppositn. the court is interested in exploring as a due process iss is important to note the mrtes s not unique there are oer taxes in context the court has regnized and that was abolished whhe court considered the issue with respect to the gift tax and how it can opete and buy shares in the controlled foreign coorion and be taxed under before you by your state, the third point as a factual matter, the situation is unlel to arise last because congress acted provisions of the code that largely tied the gains to the perso who owned the shares of the relevant time ts is 26 usc section 1248 and it taxes gains of t time of sale so when you hypothetical in 2017 with the person is buying the best share in the company it taxes gains to the seller as though they retained corporate earnings.

there is a paralle pvision for the buyer under the mrt, 26 usc 965 b2b that ensures the buyer does not have t include the and his income were cross reference to 959. i think congress is trying to attribute the income to the person on the shares at t relevantim >> one last subject i'm sorry to go on like this. your brief makes an awful lot out of collectors versus hubbard decided i18. what degree does your argument depend on that. >> our argument does not depend on hubbard, ultimately we think what cri the day is overwhelming history that demonstrates tt congress has long taxed income at the corporate level to shareholders, bbd upheld the exercise of authority and if you look at the attacks of the 1hbutment and what does the drafted had in mind they wou b well aware of the taxhrough taxation. >> to think hubbard deced that the tax that was an issue in

hubbard satisfied artle one section two in article one section nine? this draws a distinction between direct and indec taxes. do you think the court decided that question hubbard. >> hubbard's discussion of the issue is brief, i don't think it parcels it that way although it d say this was within congress' power to enact so i understand that to bese constuonal holding but i acknowledge it did not get into the spefi provision of the constitution. >> to think it was overruled and pollic. >> i don't think itou be right to say that pollick was the last wor on it. if it was overruled and pollick, the 16th of men came along. >> you think the pollick court understo i to be overruling inin publi >> i think it's possible that the pollick courtos understood o be overruling. it was obviously adopting an undersndg of what constitutes a direct tax that

was a sharp deptu from what income before, ide wld say it seems to me impossible that thee drters of the 16th of member in seeking to overturn pollick an fully revive the pre-existing income tax authority would've mnt to do so with respecto the ways congress had exercise the authorityxct for the pass-through tax that hubbard specificallygreed to. >> if t crt in hubbard thought it was overruling hubbard, ifhe court in hubbard thought it was overruling what you make that it doesn't mention hubbard and as far asmei can tell hubbard wasas never cid by the attorney in the case and i lookac at professor volum in the homes dic of the supreme court on what he haso say about pollick and he said it was a special ceremonial occasion the egregious lawyers appeared for both sides, the greatest lawyers for the day did

not uerstand that there was huard that haduprted the attorney arguing f the government did not realize when they had hubbard on the bk that supported theirosion. >> the court entirely mse it. [crowd boos] maybe they missed an opportuni to make a good argument in the case but ultimately. an important poi t lien on pollick versus hubbard ignores the efftfba the 16th amendment, this was an amendment t constitution that was ecifically designed to restore the pre-existing power and the right way of wha the power means to look at how it had been exercised. >> justice soto sotomayor were. >> ion fault the parties under parties for shooting for the stars. i guess the question is nobody is happy with abo's h definition. of anything. you started by suggesting in our

ruling, i think they were to ways to narwl rule. tell me if one is bte than the other if at all. first we can say there is a realization requirement and he it was realized because therp corporation realized it that you have to deal with justice gorsuch that youai the argume. i may disagree but that w a workout and ourselves. but the bottom line could rule that way or w could do it the way justice kavanaugh target his question that we assume that there i aealization requirement and was met here. which of the two ways should we do it and why not >> it would be criticay important for the court to do it through justice kavanaugh's apoa.

i don't think the court needs to resolve whetherhe6th amendment requires realization, here we happen to het in this tax corresponds to pass-through taxes we had through history and that suffices to result inhi thi cas. >> the history is that congress can attribute the realization. >> congress can attribute the realization by the corporation tohehe shareholds and taxes th lk like that that point straight nations history. the rso why i would caution the court away from adopting a realizio requirement is not s in think is incurate, profoundly historical and consistent with the 15tmendment but it would also wreak havoc on the prer operation of the tax code. i think there are pass-throh taxes that would stand scrutiny of the attribution holding, as i mentiodo justice. there are a number of provisions of the codeha don't have that kind of pastor mechanism in don't turnnealization at all that includes a marketo market taxes, original issue discount on bonds and drives crisis and

bond markets and could avoid sheltering of income that should be taxable. it includes the tax when people announce tohenited states citizenship. i think there are vio ways in which adopting any form of a realizationeqrement which had profound practical consequences and unnecessary for the court to go down that road in light of the serious legal arguments against the reang >> thank you. >> justice kagan. >> just to take you back tohe implication ofma mr. grossman's argument, he made a number of statements in his brief in today as well about how he would distinguish this tax from many others from s corporations, from partnerships, from accrual, from you name it there might be more. what do you worry about and why? >> i worry that none of thep proposals hold up and provide a basis for the mrt.

fitou suggest has to do with control but as i explained to stice. before, the level of control is 10% shareholders, the u.s. shareholders that held foreign operation and control cannot be the relevant difference, it's also not the difference with respect to partnership and s rporationfe shareholders that might have lower than 10% stake in nevertheless income attributed to them, then he says maybe the answer is consent any points to s corporation and says that is on a theory of consent but i don't think that works either to the extent that there is a realization requirement in the 16th amendment consent cannot insure the difficult or give taxpayers a basis to allow congress to tax outdef authority and it does not work as a descriptive matter because the s corporation shareholders might buy their interest in the company and never personally consent to pass-through taxation or they might change tir mind and say i don't want to be taxed on anymore but ifhey have a

minority stake there stuck with it and ctinue to have pass-through taxation. i don't think consent works. thenouaid maybe has something to do with the type of inco under subpart fut as i explained we don't like the typ of income matters under the 16 amendment and here this is dramatic income, ordinary business income substantial earnings realized by t company in a take would be a really onous result to say this type of income is exempt from tax under pass-throughaxation. he suggests returns on the potential for abuse anday be that expensive other taxes but there again the mrt itself sponds to the concerns that the domestic corporations and so individual shareholders have been able to keep the money offshoreit foreign corporations and thereby differ taxation on them. with respect to every possible point of difference we jt don't think it holds up as a descriptiveanner so there's a real ccern that if the court goes down one of the roa i nevertheless and validate the mrt as on a principal

distinction. >> with respect to the implications of the regions of your argument that justice alito was asking about you said with respect to a number of taxes that will never see in our lifetime, you said if w did see them you wou pbably defend them. >> when you say that that iss your job. >> we generally defend the stut >> how should we think aboutta that set of possibilities. >> i thinkhemportant starting point is to recognize those are hypothetical as you mentioned that are unlel to ever come to pass. the is a really good reason that congress cos to tax i based on realization in the administration of t suation or its complicated the value er time or engage in the analysis for assets that might be hard to value. in the main a congress does choe toely on realization and some of the hypotheticals about taxing all people who have

shares or economic appreciation are likely to never to com t pass. i think it's important for the court tootely one concerns about those types of far-fetched hypoetals to announce bright line rules about what the 16th amdmt requires that could take down critically important provio of the tax code and that respond to real life coer and very legitimate exercises of the power. in particula my of the taxes on congress have chose to tax in the abscef realization because taxpayers can abusee te rules, they can manipulate realization events or make use of certain structure o financial instruments to shield assets from taxation. any coherent or proper administration of the tax code so be able to respond to the taxpayer abuse. >> thank yo >> justice gorsuch. >> would you agree general that when the court openson the door, congress tends to walk the red. >> i don't want to overgeneralize on the back and forth between the court and congress. butn ustice gorsuch if i'm

antipang where you are go going. >> baby you are and may b marked, probably are youou usuay are but i the only barred congress from enacting attacks onillions of americans retirement accounts and mutual fundsnhe administrative ability, theyreretty clever over there, aren't the >> justi gorsuch. >> they know how to get around administration concerns. >> i think it would be good reason for them to avoid administratives complexity. >> are you sure it's a polic matter. isn't the case thatou open the door. >> the door is already open, congress can enact that. >> i understand it's been open forever. >> the constitution gives power to tax that. >> in terms of your argument as well that there is no differenc between income i that unrealed capital gain, you are

familiar with the 1918 tax cases obviousl the government's brief in that case for my indtrus law court pulled it and the government draws a distincti and says that the capital gain is not income because the individual received theaxyer received nothing that is not income it's a mere gain or loss of capital value, are you familiar with that. >> i'm not sure what brief you're talking about. >> is theolitor general's brief in the 1918 tax income cases. it's pages 32 and 53. >> i would haveoook at the particular issue that is being considered, there are statutory alation requirement that ul explain the statements. theres lot of evolution in the thinking abo tse issues following macomber. i recognized the government has

sometimes taken a broader vw of macomber. that was an era when the court se had been unclear about the breach of macomber before the court sharply limited it. >> i think there is room for narrow ground as justice sotomayorr suggested. ifne thanks the questions attribution thatou call it, i think your friend on the other side would call it is it realized by the taxpaye i it attributed to the taxpayer, pota, potato i sometimes wonder. >> i'm from idaho s i like that. >> you totally get what'm saying. >> over talking about t same thing, you make a persuasive argument that under the mrt the rulers do have constructive control, it is fairly attributable to them becse they are 10% stakeholder and other10 facts. again i may be missing and i don't seehergument in the brief. assu t argument has not yet i do.ade, what do

>> i agree justice gorsuch we haven't made the argument in term of control because we don't think that's thedo right standad but weidlearly make the argument that the mrt is constitutional for the very same reason the petitioners say. >> i understand thatutust answer my question. if we think that there is constructive realization were attribution requirement required but that is not beendjicated yet and at argued, what should i do. >> if you think it haseen argued i disagreen the tax and the court can affirm on an alternative ground tthe party didn't raise, the court said that the united stasor example. i think it would be open for the coto affirm because we think it's a strong argument and i wodncourage the court to do so. >> you argued the attribuon >> you argued the attribution >> you argued the attriti >> you argued the attribution of due pce rather than co. if all of our cases if were p

talking aut partnership or as corpse or schedule f hav treated as wther it is a form of income to the taxpayer. under the6t amendme,hat is how we grounded our analysis soar, we have seen a change to move it ove t due pcess. can you react to that. >> i think auay the court central case on attribution was a due processhi is burnett versus wells in the trustnd the court put it exclusively. >> you mention partnerip earlier and i went back and looked at the and due proce you said that's the best casebe those wordso not appear anywhere in the opinion at all it's all whether you call it attributable or realized by the partner. >> i think it is perfectly fe for the court to look through the lens ofth the 16th amendment because you get to the same ultimate result which is a question that would bean

congress attribute the income to you, the taxpayer ander we have overwhelming history and tradition going back to the 1860s and 70s that yes, congressan >> are some of the factors that youook at whether they control the entity, whether there is evidence of fraud and its use of the entity, whatls could you add to t list. >> i will look at the taxpayer's erl relationship to the income and the eity. i hesitate tory to put the glossf control for couple of different reasons. i thinkhat would incentivize taxpaysnd argue individual cases they don't have control. >> i'm not suggesting that is necessary but it might be fficient. >> i would aee that might be sufficient to establish that congress made a decision in the case i would caution the court away saying is necessary in every case. >> roger that, what other factors would you have us look at.

>> the other factors of the statement that it made h burnett versus wells whether congress hadn't made an attribution decisio uelated to privilege or benef a in that sndd it works for us as well because there are obvious benefits between business through controlled foreign corporation which is closely held and can keep t money ofho in all subject to tax deferral. >> let me pauseou there. in the aspectndhe difficulty of otherwise obtaining some kind of tax on it should factor analysis. i think those are conditions that could be sufficient. i wldot want the court to say that they are absolutely necessyn every case. we have things lik ptnerships that is not an abuse is a convenntay to structure taxation with tax identity. >> any other factors for me. >> i thank youoved a lot of the things that already emerged in the case law. if i step back to a 30000-foot level, the one thing i would say i urge the court not to try to

step down principles t gern all cases for the very reasons i was desibg earlier that we se taxpayers and we seek to avoid that. >> ge that too. and that wou take care if we go that way it would take care of all of your concerns about s corporations and schul and mark to market and potentially the mrt. >> certainly i think the mrt in addition to the other taxes satisfy the criteria that t court has looked at that are relevant to the attribution question. >> whether we call it attribution or conruiveeuc realization. >> on that one i would shy away fromonructive realization is i think introduces additional layer of aigty. by definition means not actual realization so ihink the term that doesn't appear in the code itself. i will just stoput the way

i read i it is fairly saying this indidl realized gain control o or adjudged to do that byoness, this person has control over these assets and you have given me a helpful list of factors fmhe court history and practice consistent with our preside rher than calling it misguided, it might work, fair enough. >> i don'think it's right to yhe factors gives sufficient control over the assets because the concept of control can be inherently confusing if it suggests a majority stake. the s corporation shareholder we might have a 1% stake not have any control. i think that's where i have a little bit of disagreement on how to describe what were discussing. >> that is helpful, thank you general. >> justicece kavanau y don't want to use the phrase constructive>> realization. >> yes i think the phrase is>> inherently amorphous and does not appear i a the codt appears to be a phrase that petitions have inventedor

puoses to save the other taxes and i think it would open up immediate diste of what it encompasses. >> on the a proverbia open door members of congress want to get reelected. me of the high post. that is why they're far-fch although who knows how things would change on some o justice alito's if things cameo pass i thank you acknowledge and i want to confirm, unlike this case where you say the historical practice supports this congress historical practice thehe courts case if there was something novel and the lack of historical support would be a strike against it not nessarily is accurate of what you said about that. >> i think the point ias trying to make the first yes practical and policy reasons why they would not be enacted and if it came t ps then the court

could assess the tax on its own terms and it might look to history and say this is something new. i want to bele we don't think the novelty alone, certainly congress has empowered enact taxes and has enacted before. it would certainly provide a reason tocrinize the tax little morearefully and here the court does not have to get on the road because the history is all on our side. >> one on my owno ke sure it's covered, i think it is an easy one. wod make sure if there is a federal tax on the value of somebo'sroperty that he would agr,hat is a direct tax on the value of someone's holdings you agree that is a direct tax that would have to be apportioned correct. >> exactly that the qutessential non- property looking at the total value of the asset ands doing at a particular pointf time and y could love yet again and again, on the same vueike any homeowner experiences with property tax bil t the home that is totally differentro an income tax where your tax increment of being overtim and

gerally only doing it one time with any future tax loo io a new increment over a new period te. >> last question, your position on mrt in subrt and s corporation's and this is all similar in kind,he one wrinkle i jus wt to make sure were on the same page, this goes back a lot of years and rolls in income froman past years. what should we say about that, he says ultimately if he can rule in any pointat in time the not really becomes not much of a windowt l. >> let me reacted on a couple of different ways. i think the link of the back. nnot change the underlying chacr or classification of what is being taxwh income.

this was actual earnings brought in by the company and if it was come in year one i don't think there is an eirion date on classifying the income in a future year, i think it would be anomalousorongress to lose its ability to tax iome because a tax deferral, instead i think theoo back. instead of ratg to the 16th amendment or fundamental questions of what income constitutes instead of retroactivity concerning under the due pce clause in return on whether congress had a legitima ppose for having this kind of look back. and use the ratiol means. here we think that is satisfying, petiors raised retroactivity due process and the court projectednhe ninth circuit they have not renewed it here and it clelyails under president and the united states versus carlton. ultimately i would urge the court to recognize that is not about the proper arterization of the underlying tax base.

>> thank you. >> justice. >> i will follow up on your factors tousce gorsuch, you talked about how it could be fair, justice kavanaugh said as court partnerships and m to the mrt tax could say this is attributable to the shareholders or to the ptns or to the settlor of the trust. how do we know that is it becauset' closely held. i assume what you find on the other side that they had 10% and they were not majority holders and they cannot force a 1 distribution. how wou y articulate that when i fairly be attributed ever notalking due process of or talking about the 15th amendmen >> i think at the outset the court could rely on the lessons b drawn from history and tradition in functions like the early income taxes that appointed to the 1860s and 1870s attack shareholders o corporate income. at that point in ourt nations history, corporations are generally closely held and fewer americans who owned stock so i think thatow they funion quite

analogously to the mrt and so far they reached a distinctive shareholder generally in the closely hdll corpoti. at the end of the day, i guess i would say certainly we tnk it's a factor in her favor that is reaches relatively large u.s. shareholders is true 10% they don't have to have a majority stake. but the promise of congress these large shareholders can uay work together with other shareholders in closely held corporations that are going to be that man of them to direct the company's policy or the distribution is the case may be, that threshold, 10% appears throughout the lawot just in the tax code but in the security context for example there are adtional obligation on 10% shareholders of companies. whatever the line might be drawn and taken about it fmhis relationship to the fund and lel of influence of the corporation policy 10% falls well within the line of recognize permissible. >> justice jackson.

>> there are fallbacks t setting this up into t way justiceorsuch has articulated. i guess i'm a ltle concerned because i heard you respondo justice sotomay by sayingne of your primary conrn is that we not suggest that realization is required. would taking the approach that justice gorsuch has articulated require us to do that or could we assume, how do we get around th other caution that you put forward. >> if i uerood justice gorsuch approach and i hope i'm not getting it wrong. the idea behind the approach is to recognize that we actually have realized incom so the court doesn't need to resolve the status of that under the 16th amendment in a stand pressure point whether congress ca ect a pastor tax on the 10% u.s. shareholder >> is that encompassed by this congress into your discussion of justice alito.

i thought the questionrented was about the extent to which the 16th amendment requires realizatn. if we are going beyond that are we out of the territory that is encompassed he. >> i don't think so the answer to theueion preseede don't have to decide in all context there was a realiti and as we set a briefing opposition to this case we don't thk that the case preventss a question prevented because here there wasctl realization by the corporation in the real dispute betenhe parties of whether congress made a fair attribution disn. >> let me ask you another question about the f governments brief. why did the government men argument about excess taxes at the end. >> we think the mrt is clearly constitutialn a tax theory as well. there has been some suggestion and aumt that maybe we did not present thergument below and it is incorrect. inheinth circuit we said even if the mrt is not properly

arterized as an income tax it is not a direct tax and we sa trefore congress had article one authority to enact itit and pointed to the case whh is in excess tax case. i thi w preserve the argument the circuit becau i ruled in our favor on the primary income tax argunt ifif this court had any doubt about whether this is a proper income tax greed we think the court can affirm inarcular and as i mentiedn earlier response one of themptant things for the court to keep in mind, 99% of theax owed under the mrt is oed by domestic corporation shareholders. large companies that have subsidiaries were there holding money oversea f a number of years and this would be a tax on erivilege of doing business with those corporate relationship a in the corporate wan form. we would urge the court not to inlidate the mrt and all of its circumstances without proper consideratioofhat matter. >> and that is because the

constitutional question is a direct tax. >> this relateso ur earlier questions about the meangf helton and whether this can be in any sseo consider a direct tax. at the veryeast this is not a x land. this is not a tax on psol property we think it is eith an excise or income tax. >> one final question why should we take this opportunity to put an end to i i mean, if we were to apply the factors the court goes through when it decides whether to formally overrule a precedent, doesn't macomber fail anyway? >> i agree it would fail. those factors in the appropriate case the resume if not ask the court as we think is in applicable my precedents hav already said only has control with respect to the very specific tef soft dividend.

e court has already done the work here effectively. >> we applied the start decisie fact sheets if the government ul still win on the view macomber is it not good at law controlling the case? >> this court that it is necessary to walk through the factors then yes i think it each itasgregiously wng to grapple with the 1h amendment legitimate layer of the history is relevant to that question. it has been eroded by any number of pcedents. in the end with reliance h relied on those precedents. would not satisfy the realization framework and petitioners themselves acknowledge realization framework could not actually carry the day because the taxes they have set our constitutio wouldot survive under macomber. >> thank you. thank you counsel put a rebuttal? >> thk u.

the government recalibrate a position as explained by my friend is not in the court should n be taken as such. the view a corporation's earnings can be attributed i anycorporate shareholder staggeringly broad has hundreds of billions ofds dollars but thy have invested in corporate assets reseahnd developme. and in other activitie and in some cases the retained earnings is the current value of shares paid under the view i thinkt' demonstrated by the mrt apparently congress could silyext backwards. ast would care to do so and cess of the value of the current holdings. the court should also keep in mind there's an impact to tt

position. under the existing code which is that tre no carveut for taxing shareholders in the currentt code on corporate earnings. sixteenth amendment income to shareholders there already subject to the incom tax to the gateway definition thateaches everything that's iom under the 16th amendment. there's nout carve out they would are to be subject to it. this just demonstrateshe way the government's position makes the hash of existing law and causingnoous confusion with respect to how our tax syste futions. by contrast, i do not think there are any serious consequences of the realizati principle we have put forward in this case. it's the thread that runs the court's t jurispruden gng back over a century it ishe glue that holds together the tax code ast exists today. every tax my friend has meion falls into one of two

categories. some of those, for tickly regarding the abuse of the coorate form turn on theories of constctive realization where y might say a sign of income i don't think there's much of an extension. major are straightforward excise taxes that are supported by the ng history of congressional practice. these include i for example the original issue discount it'n excise tax on theransaction regarding the transfer of a e bond. congress has bee levying taxes like thatss forever wder to 30 0 years at this point. others like a market to marke taxes are excise taxes on conducting business in the specified fashion. again those taxes predate the amendmentso one's ever called into question the constitutionality as such. there is also case law. it was simply enough to attribute incom to anybody with the close relationship to it, all the corporate reorganization se case involving shareholder

rights i'm pretty much on the 16th amendments including trust and everything else would bebo a sentence along it would not take much more than that for the court simply to say there is close enough relationship andhoares whether or not the person realize income or not. of course that's not the inquiry the courtas undertaken so far as macomber's rule is concerned theou has ali recently and ida and alan it's the same principle like indianapolis power and light i in 1990 is restating 1991. this concept of realizati i anything unfamiliar to our law and indeed it's the only way to understand the current tax code. the anti- ince,ncomeov avoidance provisions of the tax code along lengthy particular i do notho envy and who said this d spend their tim reading subpat

f and practices in that field. the reason those are so complicated and reticulated is becae congress has tried to stay within the reazaon line. it has done everythingt can t fit the framework the easiest thing in the world have the power toot simply tore say if you own shares in a forgn corporation whatever the ownership threshold simply pay xes on those earnings. these are not the way these sorts of taxing provisions ever worked they get at the idea of who is earning the income and receiving the benefit by it that person should be the one to pay taxes ont. recognize the tax on properties at the time w not considered or thought about as being a defect with respect to the directx causesnd thehe reasoning of springer. and of course macomber rejected the same argument.

we asked the court to reverse thank you. >> than counsel general the case submitted. >> last december colorado supremrt ruled former president donald trump eligible to appear in the state presidential ballot for violation of the u.s. constitution instruction clause under4th amendment. there is that u.s.me court hears oral argument and donald trump's appeal of that decision. we will have live at 10:00 a.m. on c-span, see spend our free mobile video app and online at c-span.org. ♪ c-span is your unfiltered view of government that we are funded by these television companies and more including comcast. >> are you thinking this is just a committee center? it is way more than that. comcast is part of 1000 committee centers to create wi-fi enabled the students get their low income families can get their tools they need to be ready for anything. comcast support c-span as a public service.

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