this is about two hours.

>> the court squarely held us much just a few years following adoption of the amendment. the the president makes easy work of the case. it is undisputed the petitioners realize nothing from their stock investment. they were taxed not because they had income but because in 2017 they happened to own shares in a corporation. this is a tax on the ownership of property. dispensing with the need for realization, the framers regarded this as the essential check on the power of congress to tax property. the government cannot identify a single thing congress could not tax its income under its position realization is unnecessary. without realization there is no limiting principle. accepting the government

position on income would make a cap -- hash of the current law. gateway definition of gross income asserts congresses taxing power under the 16th amendment through reaching all income from whatever source derived. if the government possession -- position in this case is right the current law already requires taxpayers to pay on the valuation of bother assets, corporate earnings, any stocks they own, and any paper gains from contracts and loans. going back to 1913 that is how it has worked. the reason the law does not work that way is obvious. unrealized gains are not income. the only way to make sense of the income tax as it has existed for a century is to stick with the original meaning of the 16th amendment. the court should reaffirm there is no income without realization pre-i welcome the courts questions. >> when you say realization do you have a definition or explanation as to what it is?

how is it different from, say, attribution? like thank you justice thomas. realization in the main will be receipts. in other situations it will be other types of enjoyment of economic gain such as the taxpayer can put that game -- gain it to his or her uses and benefits. that might be forgiveness of a loan or assignment of income to a third party. >> there is certainly realization here by the corporation, if not the taxpayers. it's not a case like appreciation of property were nothing has happened. you buy property and you are holding it for 20 years and you have not sold it and nothing has happened. here, something has happened. income has gone to the corporation. >> guess the corporation has income. we don't dispute the corporation realized income over the decade plus years taxed by the mrt.

i think it is like the instance of property from the point of view of the shareholders. the shareholder interest in the corporation is only a capital interest, a property interest. the value of their capital has increased. but shareholders know they have not realized any income. >> tell me, why do we permit taxing of individual partners when either state law or partnership agreement does not realized the income to them? in many states, a partner does not have personal ownership. does not get the value of the partnership. that we permitted that tax. >> thank you justice sotomayor. a partnership is a fundamentally different form of ownership center corporation. the law has always recognized a corporation is a person separate from the shareholders in that corporation and there is not a

separate personhood that applies to partnerships. the partnerships are group of people that come together to undertake a business activity and when they do so the income is there income directly. >> what do you do with the ways in which we have attributed corporate income to individuals? you don't challenge the constitutionality. >> that is not an issue in this case. >> in your brief you don't appear to be challenging it. >> we think a of follows the commonly accepted method congress has used to address changes when a taxpayer has interposed a corporate structure between themselves and income. >> that is the entire purpose of a corporate structure. people do that all the time particularly for that purpose. you don't incorporate unless you want the corporate shield.

you don't incorporate unless you want the benefits of corporate protection. under your theory subpart f subpart s these are long-standing taxing mechanisms by the government and your theory would undermine those as well. >> i do not think that is right. subpart f works on categories of income on an occurrence basis where the categories are properly viewed as being earned by the shareholders due to the nature of the categories of income addressed. >> you can see subpart f is constitutional. i want to understand your answer. >> we think the defect of the mrt does not apply to subpart f. we do not think there is --. >> what is the distinction? just that other parts to the

extent they tax income do it on an annual basis and mrt was a one shot that went backwards? >> think that is part of it. subpart f addresses the fundamental income shift concept. the mrt does not. subpart f operates on a current basis while the corporation is subject to the control of the controlling shareholders. and the mrt takes no account. >> there is no question you meet the definition of subpart f. at least 10% of a company's share and the company has to be owned more than 50% by u.s. owners. so it is identical in terms of birth -- the percentage of ownership or the percentage of shares. >> right. but subpart f aligns the control and the ability to direct income

with the year it's applicable to. >> it seems what you are attacking is only a due process issue of how long the tax is for, not the ability to tax. >> i do not think that is right. i think whether you owned a particular piece of property on a given date, the question the mrt asks. i think that is the synod one non-attacks on property. this looks at income while it comes in while the controlling shareholder has the ability to redirect that stream of income. >> can we talk about whether it is fair to attribute from a due process point of view, the income generated by kaizen craft to the moors, a distinct question of whether there was income within the medium to 16th amendment, right? >> it comes down to a 16th amendment question. a shareholder's interest in a corporation including its income

is a capital interest and is therefore a property interest. if there is a reason to look beyond that and attribute income to the shareholder, that would raise a question of income and why it is the shareholder is not being taxed on what would otherwise be a property interest. the court has always addressed this sort of question as a question of income. this includes all of the assignment of income cases in the court has decided over the years. >> can i go back to first principle? the concept of realization was very well-established at the time the 16th amendment was adopted. but the amendment does not reference realization. all the drafters had to do was add the word realize after income to collect taxes on income realized. but they never used the word realize. then i look at the history both before and after the ratification. as far back as 1864. but so far back.

congress taxed games and profits of all companies whether incorporated or partnerships. it estimated the annual gains, profit, or income of any person entitled to the same, whether divided or undivided. in 1913, just eight months after the ratification of the 16th amendment, congress included undistributed corporate earnings to certain shareholders. the brief tries to distinguish all these things. but i come back to the main point. both sides can point to congressional action. some did not tax unrealized income. we have examples of congress taxing realized -- unrealized income. why don't i take it that the plain text of the amendment does

not make reference to realization? >> i think there are two central features of the text of the amendment that reflect that it does apply only to realized gains. the first is simply the use of the word income. i would particularly commend it to the courts attention the amicus brief filed by the professors of law and linguistics which analyzes the use of the word income in period texts. >> all of this goes back and forth. the government has other definitions. we are back at square one is what we are doing is weighing historical definitions. >> the weighing in this case, your honor, is quite lopsided. the governor relies principally on two definitions put forth by economists in the years following the amendments adoption and neither of which reflect common understanding of the time. one of the economists recognized he was simply espousing his own economic views divorced from

any question of law or common understanding and the second economists recognized the common understanding of income is what we say it was, realized gain. so far, as the common understanding of the term was concerned, the only indication that the court has before it aside from dictionaries which, again, lopsided lay favor our position, is the corpus linguistics analysis of the professors of law and linguistics which looks at how the word was used in everyday language at the time. this concludes unanimously where it is possible to distinguish income meant realized gains. there is also in the amendment the language from whatever source derived. as we pointed out derived was generally meant to refer to concepts like receipts. indeed, again, the amicus brief of the professors of law and linguistics read -- recognized that when income was described as derived it was always used in that fashion. >> i thought that was just a

response to pollock which distinguished between income on personal property and other forms of income and all of the 16th amendment authors were doing was to say the distinction that pollock drew, we do not approve of that. >> right. i think that what the 16th amendment did was remove the necessity to consider whether income came from one source, property, versus other types of sources. but in so doing it necessarily required as a president that the -- as a president that the amounts tax to be in and not something else. >> why should we take the common meaning of income rather than the legal meaning? if the 16th amendment was specifically responding to this court's legal president related to the meaning of income, i am curious why you think the common meaning of income is what we should be focused on when we try to understand what the 16th amendment meant.

>> that is certainly the approach the court typically takes in addressing questions of original meaning. that aside, that is what the court cases have said for merchant banks and macomber again and again. that the 16th amendment is to be construed according to its ordinary meaning. if the court were to depart from that and say, for example, that personal property was not subject to apportionment, which i take to be the thrust of the questions in this direction, taxes on personal property, that is. that would offend pretty much the whole ion of the courts 16th amendment jurisprudence over the last century. >> but why, if what we do is to think about a particular tax, which seems to be what we have been doing for years. to see whether that tax is to income as understood by attribution or as an excise tax

or by other principles. we would not have to consider each tax on its own form. you are asking us to just announce what realization is out of context. for the last 100 years we have been studiously avoiding doing that because we recognize it's dangerous to do that, to say a word like realization we then have to come up with a working definition that applies to every piece of property and every way people regain wealth. it does not seem logical to me. why do not -- why don't you just concentrate on white congress cannot say that in certain situations it will endure the corporate form and attribute to the individual shareholder certain income? that is what it has been doing all along.

here it does not need realization. because, congress has attributed this to the individual owners of the corporation. >> respectfully, the court has already said in multiple locations that realization is in fact required for there to be income under the 16th amendment. it's not just macomber. it is also maclachlan versus alliance insurance. it is the safety card heating. >> yes, on certain types of property. but, not all. >> it is ivan allen. >> we also said taxes, that partnerships can be taxed individually even when the partners are not receiving the property. we have sub set as and as and -- f and s and all different forms of wealth we have interpreted to individuals rather than to the legal forms of ownership. >> and all of those taxes rely

on the principle that the court expressed in cases like horst and banks which is income should be taxed to he who earns it and enjoys its benefits. >> i wonder whether there is any realization requirement at all. there is quite a history in this country of congress taxing american shareholders on their gains from foreign corporations and you can see why. the u.s. government cannot tax foreign corporations directly. they wanted to make sure americans that have stashed their money in foreign corporations watched their money grow and never pay taxes on them. so, there is a long centuries-old history of these kinds of taxes on gains from your holdings in a foreign corporation. why is this any different?

why shouldn't we understand that to be quite well-settled, that congress can implement those taxes and enforce those taxes for those purposes? >> the taxes in that area have typically followed the patterns i described. it simply, a taxpayer interposing a corporation using income that would otherwise be theirs. >> that would fit, isn't it? >> is not. >> these are the shame -- same shareholders as in subpart f. >> those provisions typically address things like passive income and related party transactions that are probably attributable to a parent corporation. a parent corporation could own an income generating assets itself or shift that into a corporation, into a foreign corporation, thereby avoiding the income. what the laws recognize is just as in cases like horst and banks

this is effectively an assignment of income that can be attributed to the parent corporation for that reason. because, the parent corporation is the one that controls the flow of income coming in. the mrt by contrast operates as a tax on property. it does not take account of any power that shareholder had over the income as it was coming into the corporation. it only takes account of ownership. >> that seems to be an argument about timing. we have realization in this case. thtity realized income. the question then is attribution. we have long held that congress may attribute the income of the company to the shareholders, or the partnership to the parer and the only real wrinkle icing here is that it goes back and captures prior year's income. >> i think there are two wrinkles. one, with respect to the prior years, the statute does not require the sharehoerbeing

taxed had any ability to control the disposition of those income -- the unfermentse years. e second is --. >> that's not true for the facts of this c >> it's not. >>ut you are saying generally. >> i think it demonstrates this is a tax on property. do you own something on a rtular date as opposed to what did you do in the past? did you ha t power in the past? >> prosis tax year by year, would that have been permissible? >> know, and that is the son wrinkle. the mrt is the vee of its predecessors in the statutes. all the edessors like the foreign personal hdi company provisions as well as subpart s focus -- subpart f focus on cagories of income and are susceptible to being reassigned into the corporate board. congress has never reached so far to tax the shareholderof foreign corporations on the acve business income of those corporations. >> why is that diert

analytically? this was part of a big change from a wldde tax system to a territorial taxes ma this is one piece of that. i am not sure why this issue matters for the ultimate analysis of whhethe attribution is the purpose of the law. >> all the attributions go back to the very beginning that focused on the fraudulent or improper availme othe corporate forum to avoid income. th he always done that historically by focusing on particular categories of income sctible to that type of abuse. congress took that to the max amending subpart f over the years to capture me d more types of that sort of income avoidance. subpart f says u ve captured the deal and now let's get everything else really everything elsis the active business iomattributable solely f -- foreign corporations or legitimate business activitieovseas. a shareholder of a forgn corporations stands in a fferent position with respect to the position dan a

shehder in microsoft or any other corporation. this is not the type iome that shareholder would in an ordinary course of affairs, as a matter of reality, be ablto shift to a corporate forum and thereby avoid receiving it themselves. i also want to address the ffulties the government's interpretation would raise with respect to the current tax cod as i noted, the tax code already reaches the full extt of congressional autri under the 16th amendment. and if the government is right, therefore, that certain novel tegories of what had heretofore been regarded as unrealized income or unrealized appreciation, were subject to taxation under the 16th amendment, those wod already be subject to taxati uer existing law. >> let me ask a question about your argument before you gon with the government. so, if we agree with you that

the 16th amendment uses income that requires realizatio command, that the mrt does t meet the realization requirement, those are two i think different steps of urinalysis. it see tme all we have done is to mistreat the 16th amendment does not justify the t. don't you still have to demonstrate that the mrt is a direct tax in order to eablish that the constitution has been violated? >> if the mrt is not a tax on income i think it stands to reason it would be a tax on the ownership of shares, because otherwise --. >> the government makes another argument in theibrf. they offer it could be an excise tax. five pnt is dressed, any indirect tax, i would think, st has to be uniform und the constitution. it seems if it isorburdened regardless of this issue about realization to eabsh that

this tax is airect tax in order to sustain your constitutional argument. am i wrong? >> we allege it was a direct x. the government filed a motion to dismiss and argued it w aax on income. it did not dispute. >> i appreciate people have argued this. would we then send it back to the ninthircuit to determine whether or not it is a direct tax? your argument that we can sustain its constitutionality just because we have notad a briefing on this particular aspect of it >> i think the court could enter the question presented. as to whether or not there would be anything about the remand it is at the court's discretion whether it wishes to reach the governmentexse tax argument. so far as the argument is coerned, the bear attacks of the statute operates solely se on the ownership of a particular piece of property on a particular date and it takes no count of any type of business operations on the people who it is tin

that is the sort of tax that is at t hh watermark of t courts jurisprudence. it's a tax on property that cannot be sustained as an excise tax. the court could easily make short work of that argument. going to the government's position --. >> was that gunt in the question presented? >> no, your honor. >> was preserved. -- was it preserved? no, your honor it was raised for the first time before this court. as far as the government physician is concerned, think about if a person has contract to sell widgets to a third party in a future ar if the price of widgets goes down so ty are less expensive to manufacture or wreck - received an economic gain under the government decision that would be taxable. >> thank you council. justice thomas? >> would your ca bin a different, or your argumt any stronger if we were talking

about real eatrather than owning stocks in a corporation or an interest in a corporatn? >> no, your honor. pretty much all the courts 16th amendment cases over the course of the last ceur have concerned personal property in the form of investment. i think it is llstablished at this time that taxes on personal propert-- >>ha i am more interested in is not necessarily aistinction between real property an personal property, but rather, being -- having an investment in a corpore forum or partnership where you can actually -- where there is an argument that the ince d been realized by cooration or income had not been rlid, as you heardhis morning, by the partnership and whether or not that should then be attributed to those that invest in those organizations, in those companies. whereas, in real estate, unless there is a transaction, a sale,

lease or something, there is no taxable transaction. so, would tre be a difference between a stake in a corporation or partnership as opposed to real estate or other personal operty? >> i don't think so. the court has applied the same principles across the sweet events 16th amendment cases. pretty much all thearly ones applying the principle we put forwardiinvolve corporate investments and a different types of corporate reorganizations that the government aueresulted in income to shareholders. the court applied the same inciples in cases le ground, for example, involving real property and recogningn that instance had to be rlition. likewise in plat the government that released the opposite result with improvement made to real property. we don't think the constitutional principles are ffent. the only difference is with -

difference witreect to corporate shares is the government might have an argument there is some type of constructive realization under the statute that impos t tax. >> isn't that, just based on the questions, it seems to be a vulnerability you don't have with real property for instance? >> i do not thinkt a vulnerability given the general inple ruired and given the nature of the tax. i think it would be a more difficult case if the tax was structured in a different fashion that does not operate the way it does. >> does your theory put at risk limited liability companies? publicly held corporations? limited partnership corporations? there are all sorts of corporate forums that are there.

your defitn, i think, would affect the government'abity to tax those individual partners , thesinvidual shareholders? >> no, your honor. >> >> why not? >> we don't think those provisions present any constitutional difficult whatsoever. >> i don't know why. whetr is limited liability orubcly held, is still a corporation. >> first of all you have stinguishing a corporation from partnership, again, you have the doctorate of corporate personhood that the courtas long understood does make a dierce in these circumstances. where other tes of corporations are concerned there is an ection made by all the shareholde tthose corporations to allow taxation. if someone wants to comeo the government and say i am earning income and that is how i organized my business anam operating in it, i think the government cancct that. >> you are going back to whether

attribution is legal. the question of attribution is a questionf shareholders. >> why should they get to choose and not the government? where to attribute the income? >> justice kagan? >> at the risk of repeating some discussioniteems to me there are four principles and m b others. but there are four principal kinds of taxation. that congress has reatedly countenanced. this court has done nothing to get in the way of that. you have the distinguishing here. i want to make se i understand your distinctions. and whether there is a single distinction that covers all these or whether each one has a different explanation. here are my four. suar f, s corporations, it' partnerships, and its taxing on an accal basis.

so, give me y is you think wean decide for you was outputting any of those kinds of ve established taxation schemes at risk? >> at a 10,000 foot level they all you to the realization line as it has been developed in the court case and send by historical precedent. >> i would have thought none of th we. >> -- wld that is why this is my question. >> subpart f uses that familiar mechanism of simply attributing income to the person that earned it even if they directed it somewhere else. taxes of that nature have lon been justified on that basis. corporatio a by election of shareholders. they can see this is their income and this is h ty are operating your business. i doot think the government ou have any basis to not take them at their word should the government not choose to do so.

as far as partnerships come in a separate person sits abovehe shareholders -- i am sorry, the partners of a partnership. those have always been treated differently going back to the dartmouth college day and it was not even y wh that point. -- new at that point. going back to income, recognizing it as a we-eablished principle that corporations are different from partrsps. that was the basis on which macomber rejected the same argument. with respect to accrual, the court drsed that issue in the case -- safety car heating and lighting caswhe it held standard 16th amendment realization principles apply to e crual method. so whatever question there might be aut that methodology and its constitution status, at that point it has been long established and it is water under the bridge. >> can gback to justice thomas' question, your own

definition of realization? will give you my cumbers. tell me if you disagree or disagree wheremccumber said, thh proceedsro the property, severed from the capital, is ceived or drawn by the recipient, theaxyer, for his separate use. is that your definition too? >> subseencase law has recognized that thseration nct doesn't necessarily apply to every circumstance, although it does apply in the circumstance of distinguishing shareholders versus corpatns. >> yeah, so fo example, in brunn, we basically ignored the separation ruiment, correct? >>n that example, it was proved that it wasot separable from the land. >> and that definition wouldot be very good to explain subpart

f, is that true? with the court has recogze in subsequent cases, it is the concept of realization as opposed to actua receipt. >> so basically, you are saying we he ft mccumber behin >> no. i think the court's case through glenn shaw glass, up to dianapolis power and light or banks, there is something needed for more than mere economic in. >> anot saying we have left entirely behind any concept of realization,, thats different conversation. but we have left the mccumber definition of realization behind? >> mccumber goes on to recognize regardingorporations, there may be aroiate circumstances for the court to work to --

ascertain the ue rights of the shareholder. macomber use the best langge that occurred to the judges in the context of the case to express that look, in this case it will be receipts, but in other cases, something else may well qualify. >> justice gorsuch? >> i think t aument we have heard from theth side is, there is a realization reirement that is met here because the corporation realized the income. then it becomes a question of the realized income. the congress has a free hand there, the 16th amendment says thg. your response? >> the court has always looked at questions of income from the point of view of the arolder. cases involving gross income under the tax code, the court has looked at the individual rcstances of the shareholder ascertain as whether the shareholder has realized a

gain. the court looked specifically at th fact of different types of customerecity deposits. it was not an abstract inquiry were things might be assigned and so forth, it was assigned to decide shareholder income. i think the court would rtnly have to reverse mccumber, which the gerent has not asked it to do, to get beyo t idea that some free-floating notion of income is sficient for the government tooi at something and tax it to a particular individual as eir income. >> if i understand it, the question is whether i's income to the taxpayer that is being taxed? >> correct. >> i would like to go back to the discussion you had with justice jackson. i understand your point that the excise argument has been forfeited or perhaps en it in this case --waivedn

this case. we have the hilton case from a long time ago. terr -- carriag we not thought to be a direct tax. to the government call this an excise tax? >> the answer resoundingly would be no. the whole point of the direct tax clauses to make it diffulfor congress to levy these types of taxes and still leaving authority available times of emergency. taxes on personal property and things le ere investmts are concerned, that was addressed extensively during the ratificaonebates for the constitution. it was one of the primary arguments of the antifederalists against the ratificatioofhe constitution. permitting congress to levy direct taxes would be a step too far and allow congress to derothe states and

reach mi property across the country. so the way the framers addressed that was to render these types of tes specifically subject to aprtionment. this was addressed and discussed at theoncticut, pin -- pennsylvania, ratifying conventions by james madiso chief justice marshall. this sort of invesen is something where taxes on it were subject to apportionment. >> one more question on policy. if the crtere to hold that the realization requirement sowhere along the chain, wh would be the consequencesf holding like that? >> open the door of taxation to

practically everything. all property persons own, whether it be income the have received they have in the past, but all propertye have is made up of forms of income that have been invested. if this is all necessaryit some level of income, we can say at some point, this was income to some person at some level and can be subject to taxation tht apportionment. >> i supposee would have to draw lines as to h far back in time one can go in assessing the chain of realization. >> that's right. i don't understand how that is done on the constitutional text. if the times set at a person's birth or many decades in the past, that could reach all of

their property. i don't understand what the limiting principle would be. >> thank you. >> justice kavanaugh? >> in your brief, y used the phrase constructive realization. am asking if you could define what you mean by constructive realization. >> we use this as a blanket term to encpa such concepts as assignment of income and refe t the general principle esused in cases likeanks, that income should be taxed to a rson that enjoys its benefits. congress, when it has enacted cases reinon that doctrine, has approached it in that nature. asssing whether the income at issue is something in the ordinary course of affairs that could be attributed to th person, the singular taxpayer at issue, regarding categories of income or use of the corporate

form and so forth. >> ok, thank you. >> there are cases inhich state law said that partners could not have control over th property or pull it out unilaterally, wch we said is ok for the income to be attributedo the partner. i understa partnerships are a different kind of form. as an ownershipatr, the partners would own it equally, but i don't think our cases have established control as the linchpin. could you point me in the right direction if you disagree. >> if you ce of the view that partnership income is e income of its partners, restrictionsuch as distributing it in certain circumstances is used in state law to prevent an individual from using their own income, enng it on a particular item they might >> wish to

purcse but when we think about how to define income, i think about how control could be the word to use, despite distinction between capital and income, the seed and its fruit, right? it smsike control might go a little bit too far. >> control has always been an essential element income attribution statutes, because the general id h to be, the taxpayer at issue has the ability to direct that stream of income somewhere else and thereb aid taxes on it. >> why it isn't that a due process issue? you said it mean something tha was earned income anywhere along the lineltately lands in my bank account and can be considered income to me. is that a 16th amendntroblem or a due process problem, where we have to draw lines about when its fair to attribute one rson's income to someone else?

>> the court hasrationally considered it to be a 16th amendment issue. the court considered it a question of, did the taxpayer have control over the stream of income that he had in that case redirected into a trust for the nefit of his close family members? that's the way the court has always analyzed it, from the point of view of the taxpayer and whether thataayer has received income or not. >> in the last queion about subpart f -- you say income is about wth a person has an ability to direct the income stream. mi accurately repeating what you saidhen it is about attribution? >> it is a necessary part of it, ye >> and you said subpt corporations in general, of which this corporati mts the definition, these corporations in subpart f do not

oppose the 16th amendment as you see he, correct? >> aside frothmrt, yes. >> ands at because, going backo your point about control, is the distinction between mrt and the rest of subpart f, the shareholderha more ability to direct the stream? >> it's two things. it's not that they ve more ability, but any ability. under the tms of the statute, they don't take into account whether or not a shareholder exercised control with that stream of income coming in the door. it only focuses on nehip in 2017, but that degree of ctr has also been combined historically with the questio of whether or not the types of inco bng tax a those that are susceptible to that sortf use, such that attribiois appropriate? >> so there is a fraud overlay to this? is this functioning as a tax

shelter, as justice gawas pointing out? that's a nstutional requirement? >> congress certainly viewed it that way. thprovision was limited specifically by many of the chief proponents of the 16th endment to avoid the precise question, the precise defect we are addressing here today. their view was, you cannot ordinarily attribute corporate income to shareholders, but when there was fraudulent abuse of a corporation to provide income. >> i am interested in your conversation with justus gorsuch about the origil aning of the direct tax clause. i am tin to understand whether iyour positionha as an original matter, the direct tax clause was interpreted to include income

and all sorts of things, or was it narrow? i thought originally, as weai in the hilton case, that it was pretty narrowly [inaudible] >> hilton case had three opions, two of them viewed them as a consumption tax. the last view said it was not subject to apportionment -- >> what abt stice patterson's explanation, that it wa desne to protect southern states and slavery from federal interference? at that was what was going on here? when you look at direct taxes, as opposed to indirect, u are talking about certain kinds of things, tt it is not necessarily otrs income in that sen.

ihink that is a matter of didual meaning that is incorrect. >> did the court until mccumber hold that income was direct? >> not so much with respect income -- >> sorry, sorry, pollock.that >> addresses the interpretation of the normal tax clauses. >> so pollock was adesd by the 16th amendment, anunl then we had a very narrow conception of direct tax. >> tubbs went to that, as i said, all of t 16th amendment cases over the past century have given certain taxes on personal property in the form of investments. i think the court would hav to upend its jurisprudence if it were to decide the direct tax clauses ought to be given some

other interpretation. >> let me askoubout realization, going back to justice thomas's first question and athe definition is. i'm trying to undeta whether you think congress has th authority to define what constitus realization or not. is that something you're givin to theou through constitutional interpretation, w decides what the realization line is? >> yes, congress gets deferen on that, but it definitely has to try to do that, which is not what it did in this case. this tnswnership and property out on a particular date and does not take into count -- i don't understand your answer. could we find there is realization in this case, that there is realiti? who makes the definition of alation? could the court determine there iseazation here under a definition that we are preciating?

>> the government has never argued that there is realization in this case. the government has presented the argument that realization ino required, so i think it would be unuafor the court to reach outndecide a question of that import -- >> are you asking us to adopt a particular definition of realization that your client nes this case? if we opaarticular position, do you lose? >> this is applied since the dawn of the 16th amendnt >> even though the 16th amendment does not have realization in it. you are saying the implied realization requirement have a definition that you areskg the court to adopt? >> we are asking the court to say realization is necessary, as e contact has been espoused in the court's decisi over the course of the century.

>> thank you. >> thank you, counsel. >> mr. chief justice, and may it please the court, the mrt is firmly grounded in the 16th amendment text and history. vindman help -- t amendment allows congress to impose taxes on incomes. several of those taxes within mrt taxed shareholrs on undistributed corpora earnings, including the income taxesn 1864, 1865, 1867 and 18. this court upheld congress's power to collect those taxes in hubbard. they would have detood drafting of taxes on income - the 1913aw taxed shareholders

on their pro rata shares of undistributed corporate earnings, and the trend that passed through taxation has continued througuthe next century, from xes on partners to s corporation shahoers, the foreign corporations areholders under subpart f. against all that history petitioners take their case on macomber. the court has limited macomber to taxes that are not on issue here. if the court extended momr discussions ttaxes on all undistbud business earnings, it would cause a seachange i the tax code and lead to several billion dollars lost tax revenue. they don't provi a comprehensive definition of constructive realization or explain why it would rescue every ovision except the mrt. my friend today said i is a blanket term defined by the circumstances, but that is

simply circular. by conceding constructive realization, they have knowledged congress's power to draw aeasonable lines about what counts as income and wh can be taxed on it, which is what congress did in the mrt. finally, the court does not need to resolve any funmental questions about whether the 16th amendment requires realization. -- a number of pass-through taxes without our nations histor i wco the court's questions. >>he you say realized, it has been realized, what do you mean by that? >> i think this is a paradigm attic case of realization, the underlying tax base for the mrt are the earnings that actually came into the corpoti, the

foreign corporations cfers. the tax be here was a substantial ordinary business owned income that the foren corporation generated through its operations in a foreign country and had to date been subject to tax deferral. that income s ver been taxed at the corporate or entity level. what congress did in the mrt contributed tthe liability realized to the u.s. shareholders. >> outside of the coex of the mrt, do you think that the increase of value in real property cou ba taxable event? tt raises a more difficult question. th psses on the idea of whether you can characterize gains in the term of appreciation and income that is taxable. there is a strg argument, that falls into a defitn of income w that looks at denions of income over time, some of the civil war era income

tax laws i pointed to at the beginning of our introduction had appreciation based taxation for certain propertli livestock, and there are important provisions of the tax code that feively tax individuals on appreciation, r example, the market to market taxes, treating a taxpayer as though there was a realizae event at the end of the tax year for certain futures contracts, life insurance holdings, security dealers holdings that markg amounts of the valueo the market price, even in the absence of any kind of sale. there is strong support for the idea that you coac certain forms of appreciatio-- >> newberry macomber, and that takes ay a lot of the strong suor for a pretty strong proposition that the government can't taxed as income to the property owner deed appreciation

in value of the property. so what is left to defend that opition without macomber? >> i disagree wh e suggestion that macomber involved the tax on apprecti. >> i know your argument, it is limited to stock dividends, but it has also been recnid, at least in the beginning, before it narrowed over time, a standing for the proposition that the government caot tax the appreciation and property. you have taken that off the board in your presentation today. i wondeifou could give us a little more view,r assurance, and what is left to defend at proposition once you have stabbed macomber. [laughter] >> we are invoking this own courts precedent about macomber's scope and reach.

they sai it was limited to the stock didd issue there, and it did notepresent any economic gain to the taxpayer. in other words, the taxpayer received additional shares from the company, but itas a stock slip and her shares we diluted . the quartet from the taxpayers perspeiv there was no difference in her ownership stake in the cmpan before or aftery. what would you cite, given the fact that macomber is not on the table? >> if the court were lki for a limiting principle that takes apeciation off the table in certain circumstances, i would look at history. i think there is a different historical foundation for that type of tax compared to what we have here, which is a pass-throu tax on realized corporate income.

was not with the framers of the 16th amendment had in mind, but i do want to focus on a tax base that focuses on realized income and attributes it to different taxpayer, which is a prevalent feature othtax code and involves many of the provio -- >> one of the arguments that has resonated a lot in the coverage of this case, the adoption of petitioner's arguments would have far-reachincoequences. isn't that correct? >> that is correct. >> do you think it is fair to explore what the csequences of your argument would be? >> i want to say at the outset, i think the court could resolve th ce quite narrowly. >> realizaonf income is not

a constitutional requirement, but instead isoued on administrative convenience. is tt rrect? >> the nth circuit did say realization requirements were founded -- >> that's not whether it is a correct inrptation of our prior precedents, is iyo position that realization inot required? the 16th amendment permits the taxati o income, whether realized or not? >> we think the is no rule or requirement under the 16th amendment, and congress is permitted to tax certain forms of unrealized gns the court does not need to set out here to define iome for all purpes or announce any bright line rules. it is sufficient here r e court to say, you have before you a particular type of tax on particular corporate earnings that were aled, and to look at the history and tradition

that demonstrates it fits within congresses authority. >> so i take it what you said, realization is not a requirement. did you say that explicitly in your brief? >> weelve realization is always a requirement. >> we don't have to agree with you on that for you to prevail, i think you said in your opening as well. even leaving open whether realization is a constitutional requiremt,here was realized income here to thenty, and it is attributed to the shareholders in a manner consistent with how congress has done that and the court has allowed. >> that's correct. we think here, the constitution qstion is quite easy and does not require t court to consider some of the foundational queions about the meaning of the 16th amendment in

other contexts. we have realized income at the entity level, and itunctions like the pass-through taxes on partnerships, other types of corporate sharehoer as corporation shareholders and in the ntt of foreign corporatnsthe tax under subpart. >> sthe answer, there need not be realization by the taxpayer. the is realization by some other entity. correct? >> under the 16th amendment, that is correct, but there is also a due pce question about congress's ability to limit realization on income. >>hat's a question of substantive due process. >> that is how the court has framed it in cases like burnett versus wells. >> anything under substantive dupress involvi an economic regulation like this, thon thing that would need to be shown is that it w rational for congress to do what

did? >>he court has looked at whether congress has made an arbitrary choice or acted unreasonably, but they have looked at whether the taxpayer who owes the tax liily has a relationship. >> if it is a rational basis, that is not ch we could say the thirty-year requirement here is a substantive due process issue, so we don't have tgrapple with that here. to be honest, we would be saying, unless you can show it was a rational, that would be sufficient. >> i want to be precise about the doctrine here. you mentioned the 30 yr ok back period. that haso with retroactivity principles under thdue process clause. mething that has been different is the attribution process we have been discsi, about whether congress can apply that at the enti lel. we have in norma's amount of history andradition on our

side to support the idea that this particular attribution decision -- ultimately, he to talk about this case, but i want to understand how far the argument goes? unr your argument, does the 16 amendment allow the taxation of income? you define income as an increase in an econicain between two points in time. l's say somebody graduates from schoolnd startsand 20 yrs s later the person is a billionaire. can congress tax all of that on the ground as income? if that has already been taxed as i imagine it would through annualnce taxes, it sounds to me the hypothetical is functioning as a property tax.

>> the areation in stock value over 20 or 30 years. wod ngress say we want to reach back and tax all ofhat? between two points in time. >> that is a harder question and heres why. i think that would fit within an ordiryonception of income as covering enomic gain through two points of time. we d't have the same tradition to support congress levying income tax in that manner. >> on this point in your brief and i understand your argument is different today but in ur brief, you confronted the quti whether cgrs could tax millions of americans. you say yes. you point to the 1864 civil war laws. you say thawod be administratively unworkable.

as i understood in your brief, the answer tjuice alito's question is yes. that could hpen. >> this is an important point and let melafy that statemt was referring to the idea of pass through taxation of large corporate arolders. that would function like the mrt. the shareholders would be responsible f a pro rata share of t enings. >> i'm not sure that is clear. it seemed to me the argument was the change in value over time. stock prices increase. could you tax that otheis considered unreazegain and the answer is yes becsehey did that in 14. if there any limitation, it has to do with administrative workability. >> in 1854, they werdog a

pass-through tax on corporate earnings. the calculation was not based on the appreciaonn shares. i don't nt to suggest a tax on appciion would be invalid. erareppciations on the books that are constitutional. let me say to the question and justice alito's question is pressing on the idea maybe this nd of appreciation should be beyond the reach. >> i am asking what the limits of your argument are. itee to me there are none. >> i certainly think congress habrought taxing power. what i was about to say was here, the relevant question is t ether congress has the power to tax in the first place. the board has said -- the court has saidoness has plenary power. the question iwhher that is a direct tax that has to be a portion. >>f i might address what i perceived to be a backup argume -the first argument

is no realization requirement. today i am hearing even if there is realization, there s somewhere in the chain realization and congress can attributitreely as it wishes . i understand that argument but i'not sure how we fit it with our president. if we ditch my cumber, i understand your argument. let's assume macomber is not completely misguided. i look at brun. i look at hearst. it seems to me as iead them they are all trying to work within macomber's framework. talking about is it fair to say there was realization to the tax payer, not realization somewhere back in the chain of history and income realized by the corporatn or a re or subsidiary. just as a matter ofrecedent, what is mistaken about tha

>> in those subsequent cases, i would nosathe court was mistaken. it did happen to find realization for those cases. >> for the taxpayer. >> for t tpayer. none ofho cases involved a pass-through t. looking at what may be the closest precedent, i point to e court's decision in ne versus mellon which considered a tax on partners even when they cannot access the partnership income. the court said that s perfectly fine. >> you have not made an argument there was realization t taxpayer. just answer that before you un off. you have not made that argument, right? > we don't think the tax's constitutionality depes on whether the taxpayers g a distribution because this is a pass-through tax. i think -- >> wl take that as a yes. >> there are two ways to think

aboutt. there was related income at the entity level. congress can attribute that to the taxpayer. the taxpayer haa ose enough relationship to the undeyi income f cgress to treat it as income to t tpayer. >> we n't have that argument before us. that argument has not been me. >> we intended to make that argument. i understand our briefing to focus on both aspects of this issue. we join issue with petitioners on whether the 16th amendment requeselies asian. -- requires realization. >> now you are saying it requir rlization but not to the tpar. when aument i am missing is there was realization to the taxpayer. at is not in the brief. what do i do about that? if you think there is realization to this taxpayer, why didn't you makeha argument?

we are not suggesting there is anything like strict realizatn the sense of the taxpayer having received something in hand. i don't understand petitioners to be saying that is what is required. >> our cases in brun and horst say there could be constructive realization of partnership situation or a fra situation. we have been clear about that. there is somenyment the taxpayer has over that money. some control. heayssign it elsewhere but he controls it. there is some relies asian under macomber -- some realization under macomber's framework. the taxpayer having the interim and is not in the briefs. what do i do about that? >> i tnk we did make the arguntecause we made the pointecause to the court goes down recognizing some realization, the mrt would fit within that framework

the petitioners have not identified any distinction beeehow the other contacts operate and how the mrt operates. >> let's just say i don't see that argument. then what u nt me to do? if i am supposed to vacate and remand f csideration of the question? atould you have me do? >> i certainly think in our brief we argued the taxpayer can prer be held accountable for the corporio income. iot the argument either there is no realization or as a backuphe is realization and fair attribution. if i am working whithe precedence, if i don't consider them wholly misguided, if i'm nowilling to overturn 100 years worth of precedent, and the question is is it fair to say this taxpayer construivy or actually realized this income, should i vacate and remand? >> you shouldffirm because here, we made the argument there is the same level of control and

exactly the same relationship in subpart f. we did make this argument. we made the point if the court is focused on things like control or influence, there is no relevant dtition because this is taxing in the same way as subpart f operates. >> what do you think is the significance of petitioner's concession subpart f is constitutional? >> i think that is an incredibly gnificant concession because even if the cou we to apply a lens of control or influence come i tnkhe right word to use would be relationship to the income. titioners have acknowledged 10% of shareholders have the requisite level of relationsh to have income which riveted to them. my friend suggested there is some fundament dference with subpart f because it taxes different types of income. he said it is co where you can impose the form. the 16th amendment says congress contacts all income from whatever source derived. the text by its own terms makes

clear the different formsf income do not make a relevant constitutional difference. if you look at it as affectional matter, my friends argument does notithstand scrutiny. he suggested all of this income could have been burned by the taxpayer himself. ats not explain many important features like insuring risk outside the country of incorporation for th cfc were doing business in country subjt to u.s. sanctions. those are part of subpart f income and i don't think there is a relevant distinction. >> justice gorsuch said you were asking us to overrule what hundred years of our precedent. soundsad are you? [laughr] >> im not asking the court overrule any precedent. i am asking thcot toollow its precedt at postdates macomber and makes clear the discussion in that case is relevant to the thought issue there. i recogne ere is language

that seems to have broader sweep. thisou has recognized that isothe right way to read -- >> ii might, momber, it said realization. you said that is mguided. in fallis, we said we were following the test laid down in macomber. in brun, we said it was following macoe's understanding of income. in horst, it said much the same thing. i'm not going to bother with the quote. in each of those cases, it purported to be faithfully following macomber. yodisagree with that iuess. i disagree >> with the readin of the cases. if you look at each of the se the court did find realization on the facts there but using different standards th momber had articulated. take brun pure that was a ce where you said the court was

ithfully applying its interpretation of income but the court disavowed the aspect of macoerhat said you have to be able to separate the economic in from the underlying property. >> talked about control. but it spoke of applying macomber. the vi tnk it was diluting itself but that is how t court perceived what it was doing. she th cnt for something? >> look at the statementin griffith. the court said the theoretica bases had been undermined. that it had been lit to the particular type of thought dividend at issue and it did not have controlling weight even with respect t other types of stock dividend. >> what do you understand to be the rrt state of our precedent? you said macomr s confronting something that stuck dividendad no economic consequence. that was te. macomber could have been decided in a paragraph saying that but that is not what the court did.

as you say, there are many case following macomber which leaves macomber's ownhey of realization in the dust. what doou take to be the current state of our precedent we need to pay attention to. >> i think of th ce had before it another stuck dividend case tt volved another split, macombewould control. that iwh griffith said. the court itself in any number ofolw one casesacber does not have controlling weight outside of the context. the court said the statements were not intended to pvi a touchtone for resolving all future growth questions that could arise. to the extent that leaves macomber as an island unto itself, that is the natural effect of the precedent and we are asking the crto follow that. >> the president most on point r you you said is high in her. the partnership case.

>> that involve theost analogous task. >> explain why that dictates the result here from your perspective since that is the onyou are relying on most. >> it supports t rults because the court confrond situation where partners claimed they could not lawfully btad on partnership income on the pass-tou basis because state law orated to preclude any distributions to them. the partners were not going to personally realize the income. state law prohibited the distribution. court rejected the claim from the partners and said it did not make a difference with respect to the permissibility of the pass-through tax to the partners emlves. petitioners have suggested partners can be established on the line because they say partnerships have a ffent legal status. it is not like partnerships have an iatlegal status. they are creatures of stateaw and there any number of states

that define a partnership as stinct from the partners themselves. we have good case law that governs subpart f funny the lower courts. this has bn applied in numerous additna contacts -- additional contexts. it is notusthe modern law. it is all of the history here. viually the entirety of this patient's experience with an income tax there have been balls on the book other than the brief time when pollock governed where congress has taxed corporate income at the shareholder level. it is a classic tax and how the mrt operates. >> i agree with your scription. i was i slitting the case that is the closest i think i just wanted you to spell that t. >> i was just going to ask you -- heiner is closest on the pass-through point, what is your best federal case upholding a federal tax on appreciation or do you have one?

>> i don't have the case from this court that upholds a tax on appreciation. there e fewer taxes that have reached appreciation. there are a variety of taxesut there a -- >> the market one dark and it is important to recognize the importance of being able to tax in that context. the situation that prompted this is the fact taxpayers can manipulate realization events. they can enter intfures contracts and allow the taxpayer hold onto the one that has a in. and to sell the one that is loss and immediately have a taxablevt. congress recognized that was a loophole in the tax code that could enablehikind of abuse.

>> there areaxes like the mark to market one that is tax based on appreciation but it is fair to say would be doing something new if we accepted your argument that income is any kd economic gain appreciation include. >> i appreciate th opportunity to clarify becau ware not asking the court to clari income that way. ifhe is a lesson, it is there is a realanger to define income for all purposes or to provide a touchtone for all ture cases in part because our experience with the tax code is taxpayers latch onto those statements and use it as basis to avoid taxation going forward. i don't think the court needs to approach this issue by adting some universal definition of income. the inrn revenue code does nodene income. it says income is all income and gives some illustrative examples. don't think my friends are ofring the court a definition

because they say income is realized gains or some category of unrealized gains you can say are constructively realized to it is not necessary for the court to comprehensively define here. >> i understood your answer to justice barrett to be the same as the answer you gave me th respect to unrealized increase in value from on time to another time in real property that you did notavany authority to support that. >> i am not pointing to a case in this court i would find taxable. >> you mean that is e sson of macomber's demise? >> exactly. i think the court recogze those statements rendered as an abstract matter and opined on taxes n presented had teble consequences and were a historical there is a lot of

wind -- a lot of wisdom in following the court. the court said weo t will of the constitutionality ofheax until we find congress has laid that tax. >> i still want to understand the limits of your argen i am quite concerned by the potential implications of petitioner's argument and you stress that iyo brief. you say if we will in petitioners favor, large important pieces of the tax code will also logically fall. and i think that is a fr argument but i think it is also a fair argument to do the same thing with your position and i want to understand the litof your position. coming in, i understood your position to be realization is

not required and the 16th amendment, realization to the taxpay is not required and the 16th amendment allows the taxation of income d u seem to define income in yo brief as economic gain between two points in time. you say it is those well-established principles that distinguish income taxes from property taxes. if that is correct, then what about the appreciation of holdings in insecurities by millions and millions of americans, holdings in mutual funds over a time without selling the shares in those mutual funds? can those be taxed under the 16th amendment? >> i think if congress enacted a tax like that and never has, we would likely defend it as an income tax. don't have to agree the tax

would be valid to uphold the mrt. >> i understand that, in order to rule first -- to rule for petitioners, we'll have to same thing about subpart f or s corporations, but your answer is that would probably be permissible under your interpretation of the 16th amendment? >> the court could draw lines based on history and if there truly were a widespread tax on all amount of appreciation for every taxpayer, that would not look like anything congress has done before. the court has sometimes used history that to draw principled lines. . we have exactly the opposite situation where congress has enacted a tax that looks look any number of pass-through taxes through history. history functions as a rule of inclusion with respect to the propriety of this tax. >> as to the chief justice's question, about the appreciation of value in real property? >> congress has not

traditionally text that. the court if it were confronted with that situation would conclude there is a historical line or limited principle here. >> and less history rules that out, i'm not sure how congress's failure to enact a tax in the past brings that outside the 16th amendment if the tax would otherwise fall within the 16th amendment. . you say that is potentially also taxable as income under your theory. >> yes and i think it is clearly taxable under the constitution. this is not a question about congress's power. it is about the motive taxation and with her to a portion of the tax or not. >> if some sort of constructive realization or subtest for attribution is required, what is your test? how far make congress go in treating income to someone who

has not realized that income in the standard understanding of that term? new >> i would apply the test the court used in burnett versus wells which prevents -- which presents the most analogous situation. a taxpayer argued because he had been the grantor of the trustee could not be held liable for the gains. it could not properly be attributive to him because he had no continuing control. the court rejected that claim and it said congress had not acted arbitrarily. it looked at the taxpayer's relationship to the underlying income and concluded there was good reason to tax the grantor in that circumstance including to avoid shifting income to lower income taxpayers. if the court were applying that kind of attribution analysis, the mrt like many pass-through taxes is equally constitutional. the income has never been taxed at the entity level and there are complications trying to tax foreign corporations directly.

these large u.s. shareholders who by devastation together -- by definition together have a majority stake in closely held corporation are the most suitable person or entity to tax. >> have we ever said and maybe we should say the 16th amendment applies differently to income or property that is obtained abroad than it does to income or property possessed within the united states? >> the court has not previously said that but my friend himself suggest in thinking about these issues the court should focus on the potential for tax avoidance or abuse. that concession underscores the point when you're using a foreign corporation it provides a ready vehicle to shelter funds offshore, keep them out of the reach of u.s. taxing authorities and couple get efforts to access those funds even when they have a significant connection because these companies are majority-owned by u.s.

taxpayers. it's important to recognize this case is not the paradigmatic case of how the mrt applies. the overwhelming majority of taxpayers subject to this are domestic corporations, often parent companies of wholly-owned foreign subsidiaries who have arrange their affairs to be able to keep this money offshore. it would be anomalous to suggest the money is forever out of the reach of the u.s. >> petitioners were in on the ground floor with this corporation but what if they had simply bought into the company the day before the mrt made taxes due? wouldn't that look an awful lot like a tax on capital rather than a tax on income? >> i think the underlying nature of what is being taxed which are the realized earnings of the corporation would not change. i think that raises a harder attribution question because the taxpayer would have less of a direct relationship to the thing being taxed. maybe someone in that situation

would have a better as applied to process claim. as you mentioned, the moors themselves are not in that situation. the second thing i would say is if the core is interested in exploring this as applies due process issue, the mrt is not unique in this regard. their other taxes in other contexts where the court has recognized someone can be taxed on gain in property that happen before the ownership was a and. in taft versus bowers the court considered this issue with respect to the gift tax. you can buy shares in the controlled foreign corporation and be taxed under subpart f. the third point i would make it is as a factual matter the situation is unlikely to arise and that is because congress has enacted other permissions of the code that largely tie the gains to the person who owned the shares at the relevant time. 26 usc section 1248 and it taxes gains at the times of sale. in 2017 with a person is buying share in the company, it taxes

gains to the seller as though they were paid out of the retained corporate earnings. there is a parallel provision for the buyer under the mrt. that ensures the buyer does not have to include that in his income through a cross reference to section 959. i think congress was trying to attribute the income to the person who owned the shares at the relevant time. >> your brief makes an awful lot out of collector versus hubbard decided in 1871. to what degree does your argument depend on that? and he went >> ultimately we think what carries the day is the overwhelming history congress has lung taxed income. cupboard upheld that exercise of authority. if you're looking at the text of the 16th amendment, they would have been aware of the pastor taxation. >> do you think hubbard decided

the tax was at issue satisfied article one, section two and article one, section nine which draws a distinction between direct and indirect taxes? you think the court decided that question? >> hubbard's discussion is brief. i don't think it part the constitutional text that way although it did say this was within congress's power. i understand that to be a constitutional holding. diagnose that the dead not get into the provisions of the constitution. >> you think it was overruled in pollock? >> i don't think it would be right to say pollock was the last word on it. even if it was overruled, the 16th amendment came along and itself reversed. >> do you think the pollock court understood itself to be overruling hubbard? >> i think it is possible the court understood itself to be overruling.

it was obviously adopting an understanding of what constitutes a direct tax that was a sharp departure from what had come before. i guess what i would say is it seems to be implausible the drafters of the 16th amendment in seeking to overturn pollock and fully revive congress's pre-existing income tax already would have meant to do so with respect to all the ways congress had exercise that authority except for the type of pass-through tax hubbard specifically approved. >> if the court in hubbard thought it was overruling -- the court in public but it was overruling hubbard, what you make of the fact it does not mention hubbard at as far as i can tell hubbard was never cited the attorneys? i look back at professor fists's volume in the oliver window homes devise of the supreme court on what he has to say about pollock and he says pollock was a special ceremonial occasion for the court.

the greatest lawyers of the day appeared for both sides. the greatest lawyers for the day didn't understand that there was hubbard that had supported the attorney arguing for the government just didn't realize they had hubbard on the book that supported their position? >> maybe they missed an opportunity to make a good argument in that case. [laughter] ultimately the important point is relying on pollock and trying to parse pollock versus hubbard ignores the effect of the 16th amendment. this was an amendment to the constitution that was designed to restore a pre-existing power and the right way to look at what that power means is to look at how it had actually been exercised. >> justice sotomayor. >> i don't fault the parties for shooting for the stars and but i guess the tenor of the questions is nobody is happy with

anybody's definition of anything, ok? you started by suggesting a narrow ruling. i think there are two ways to never really will. tell me if one is better than the other if at all. first, we can say there is a realization requirement. here, it was realized because the corporation realized it. you have to deal with justice gorsuch's concern that you waive that argument. i may disagree with him but that we can work out among ourselves. we could rule that way. or we could do it the way justice kavanaugh starred his question which is we assume there is a realization requirement. and it was met here. which of the two ways should we do it and how not and why not? >> it would be critically

important for the court to do it through justice kavanaugh's approach. i don't think the court needs to resolve about anything whether the 16th amendment requires realization. this kind of tax corresponds to pass-through taxes we have had through history. that suffices to resolve this case. >> the history is that congress can attribute that realization? >> that congress can attribute that realization by the corporation to the shareholders and/or taxes that look like that at virtually all points in our nations history. the reason i would caution the court away from adopting a realization requirement is not only we think it is inaccurate, profoundly ahistorical, inconsistent with the text of the 16th amendment but it would wreak havoc on the proper operation of the tax code. i think there are pass-through taxes that could withstand scrutiny if the court affirms the attribution holding but as i mentioned, there are a number of tickly important permissions of the code that don't have that kind of mechanism and don't turn

on realization at all. that includes mark to market taxes, original issued discount on bonds that drives prices in bond markets and avoids sheltering of income that should be taxable. it includes the expatriation tax when people renounce their citizenship. there are various ways in which adopting any form of realization requirement have profound practical consequences and it is unnecessary for the court to go down that road in light of the legal arguments against that reading. >> just to take you back to the implications of mr. grossman's argument, he has made a number of statements in his brief and today how he would distinguish from subpart f, from s corporations, from partnerships, from accrual, from there might be more. what do you worry about and why?

>> i worry none of those proposals hold up and provide a basis to distinguish the mrt. fit suggested has to do with control. as explained to justice barrett, the level of control is exactly the same as under subpart f. are 10% shareholders of closely held foreign corporations and so control cannot be the relevant differce. it is not the difree with respect to partnerships and as corporation shareholders who might hava lower than 10% stake and can have income much riveted to them. then he says maybe the answer is consent and he points to as corporat and says that turns on a theory of consent idle think that works either because to any extent there is any kind oreys asian reirent, consent could not cure that differeny ive taxpayers a basis to allow congress to tax things outside its authority. the s corporations shareholders might buy their intest in the company and nev psonally

consent to pass-through taxation or they might changthr minds and remove their consent. i don't think consent works. then he says maybe it has something to do with the type of income under subpart f. i've explained before, we don't think the type of income matters under the 16th amendment. this is paired pneumatic income. as ordinary biness income substantl rnings realized by the company. i think it would be an anomalous resulto y this type of income uniquely is exempt from pass-through taxatio he suggests may be a turns on the potential foabe and maybe that explains some of these othe taxes. . eragain i think the mrt self responds to the concern these domestic corporations, so some individual shareholders have been able to keep the money offshore out of the closely held foreign corporations and deferred taxation so with respect to every possleoint of difference we don't thk it holds up as a deriive matter and so there

is a concern we have if the court goes down one of these ros and invalidates the mrt it is not a principal distinction. >> with respect to the plications of the furthest reaches of your argument at justice alito was asking about, u said with rescto a number of taxes icwill probably neveree but you said if we did see them, you would probably defend them. that is your job, right? [laughter] >> we general dend the constitutionality of statutes. >> how should we think about that set of ssilities? >> the important startg int is to recognize those are hypotheticals th a unlikely to ever come to pass. it is the administrative practicalities of the situation. it is complicated to trac fluctuations in value or engage in a valuation analysis for

asse tt might be hard to value. some of the hypotheticals about taxing all people who have shares or l me appreciation are unlikely to come. . to pass. i also think it is important for the court to not rely on concerns about thoseyp of far-fetched hypotheticals to ance bright line rulesbo what the 16th amendment requir that could take down critically important provisions of the tax code and that respond to real-life concerns and legitimate exercises of the taxing power. many of the times we congress has chosetoax in the absence of reazaon it isecse taxpayers can abuse the rules. they cananipulate realization events. ey can make use of certain structures or financial instrumenttohield assets from taxation. any coherent or proper administration has to be able to respond to that kind of abuse. >>usce gorsuch? >> would yougree that when the court opens a door, congress tends to walk through it? [laughter] >> i don't want to

overgeneralize on the back and forth between the court and congress but if i am anticipating correctly where you'reoi -- >> maybe you are, maybe you aren't. usually e. [laughter] but if the only bar to congre from enacting a tax on millions of americans retirenaccounts and mutual funds is administrative ability, they are pretty clever over there, are toy? -- aren't ty? they know how to get around administration concerns et well. >> i think they would be good reasons for them to avoid the complexities. >> sure is a policy matter but isn't ithease that would open a big door? >> that door is already open. congress can enact that tax. >> it has been open forever in your view. >> in terms of your argument of

e's no difference between income and that unreiz capital gain, you are familiar with the 1918 taxas. the government's brief inhat case, one of my industrious low clerks pulled it and the government does draw that distinction and says that nd of capital gain is notnce because the individual received, the taxpayer received nothing. and that is not income. it is a mere gain or loss of capital value. are you familiar with that? i'm not sure exactly which brief you artaing about. >> the solicitor genera's brief in the 1918 income tax case. page32 and 53. >> i've have to look t paular issue being considered. there are a number of statutory realiziorequirements that could explain the statements. there has been a lot of evolution in thehiing about these issues following macomber.

i recogniz the government has taken a broader view of macombe itself but that was in an era when the crttself had been unclear about the reach of macomber before the court had lite it. >> do think there is room for some narrow ground as justice sotomayor suggested. if one thinks the question is attributn u call it, i think your friend on t others would call it, is it realized by the taxpayer? yosay is it fairly attribute it to the taxpayer. potato/potato. >> i'm from idaho so i love that. >> you totally get what i'm saying. if we are lkg about the same thing, you make a persuasive gunt under the mrt, the more ore you have constructive control it is attributable to them because they are 10 stakeholder and some other ct i may be missing it.

i don't see that argument in the brief. assume that argument has not been made. what do i d >> i agree that we have t de the argument expressly in terms of contr bause we don't think that is the right standard. we did clearly make the argument the mrt is constitutional for the same reasons. >> if we think there is some constructive realization or tribution requirement required but that has not been argued yet, what should i do? >> if you think it has not been argued yet, i veourse disagree on the facts but the court can affirmn a deterrent ofrod, even one the party did not raise -- the courtaid in dahda versus road states so i think it would be open for the court to affirm on background. >> you have argued the

attribution is a feature of due process rather than income under th16th amendment. l our cases whether we are talking about partnerships or you want to talk about s corpse or schedule f, have treated it as whether it is a form of income to the taxpayer under the 16th amendment. that is how we grounded our analysis so far. it would seem quite a change to move iover to due process. >> the court's ceracase on attribution was a due process case. this was burnett versus well. >> you mention partnership earlier. i looked at that and you said that is the best case. thoswos don't appear anywhere in justice brandeis's opion. it is all about whether you can call it fairly attributable or realiz bthe partner. >> i think it is perfectly fine for the court to look at this

through thle of the 16th amendment. you get to the se sult which is the question would be can congress fairly attribute this income to the taxpayer and here we have overwhelming history and tradition going back to the 1860's and 1870's demonstrating coress can. >> are some of those factors you look at whether they control the entity, whether there is evidence o fraud? what elswod you add to the list? >> i would look at the taxpayer's relationship to the income in the entity. i hesitate to try to put the gloss of control on it. i think that would incentivize taxpays to try to argue an individual case they don't have control. >> i'm suggesting it might be sufficient. >> i would agree that mighbe sufficient to establish congress made a fair attribution decision. i would caution the court away om constitutionalize and that

or saying it is necessarin every case. >> what other faorwould you have us look at? >> the other factors are the statement inadin burnett versus wells was whether congress has made an attriti decision unrelated to any privilege or benefit. inthat standard it works for us as well because there are obvious benefits associated wi doing business through a controlled foreign corporation osely held and could keep the money offshore for all of those years subject to t derral. >> let me pause you there. the foreign aspect of it and the difficulty of otherwise obtaining some kind of tax on it should factor in our analysis? >> those are conditions that could be sufficient. i wouldn't with the court to say they are absolutely necessary in evy case. weavthings like partnerships weathers not necessarilyny abuse. >> any other factors you would have me consider? >> i think youavcovered the

waterfront of the things that have emerged in thca l. if i step back to a 30,000 foot level, the one thing i wou s is i would urge the court not to try to set downnd explicit set of principles to govern al cases for the reasons i was describing that we have seen taxpayers latch to that and seek to avoid taxation. >> roger that too. that would take care if w wrote that thawa it would take care of all of your concerns about corporation, schedule f or the mark to market and potentially the mrt? >> yes. i think the mrt in addition to all of tse taxes satis t type of criteria the court has looked at relanto the attribution question. wther we: attribution or constructive realization. potato/potato. i would >> shy away from constructive realization because it introduces an additional layer of ambiguity in the code. it means not actual realization

so i think -- >> t w i read our precedent, i will stop b the way i read our precedent, its fairly saying this individual realized, gained control of or could be dged to have done that by congress, this persoha control over these assets. you ha gen me a helpful list ofacrs from this court's history and practice consistent with our precedent rather than calling it all misguided that might work. fair enough? >> i don't think it is right to say this list of factors gives the taxpay sficient control over the assets because the concept of contl can be confusing if 's just a majority stake. the s corporation shareholders might have a 1% stake in the company. that is where i have a little bit of disagreement on how to describe what were discussing. >> that is helulo me. >> justice kavanaugh? >> you don't win us to use the phrase constructivreization?

>> i think that phrase i inherently amorphous. it does not appear in the code. it appears to be a phras petitioners have invented for the purposes of trying to save these other taxes. it would open up immediate disputes abo what it encompasses. >>n e proverbial open door of congress, members of congress want tgereelected. that is why they are far-fetched. who knows how thgsould change. on some of justice alito's hypoetals, if things came to pass, i think you acknowledged -- i just want toonfirm that unlikehi case where you say historical practice supports congress's historical practice, the court's cases, if there were somethin novel, that lk historical support would be a strike against it. not dispositive necessarily. is that accurate?

the point i was trying to make as there are huge practical and policy reasons these taxes would not be enacted and if it came to pass, the courtou assess that tax on its own terms and it might look to history and thk is is something new. i want to be clear we don't think the novelty alone would be dispositive. certainly congress has the power to enact texas it has not enacted before but would provide a reason to scrutinize that tax a little cefly. the court does not have to go down that road because the history is all on our side. >> o hypo of my own. if there were a federal tax on the value of someone's property, yoage that is a direct x or on the value of someone's hoin, you agree that is a direct tax that would have to be portioned, correct? > that is a quintessential tax on property because it is looking at the total value of the act set andog it at a particular point in time. maybe u uld levy yet ain

and again on the same value. that is totally different fr an income tax where you are taxing the income and of gain over time and only doing it one time with any future tax looking to a new incme of gain over a new time. >> your position on the mrtnd you cite heiner and subpart f and s corp.'s and you say this is all similar in kind. the one wrkland i want to make sure we are on the same pages is goes back a lot of years and rulesn income from many past years. what should we say about that? and let me just add, he says ultimalyf you can just roll in iomat any point in time, that really becomes not much of lit at all. >> let me react to that in couple diffent ways. i think the length othlook

back periocaot change the underlined character or asfication of what is being taxed as income. this was actual earnings broug in by the company, kept in their coers. if it was income in year one, i don't think there is an expiration date on clsiing it as income in future year. i think the look back period instead of relating to the 16th amendment or any questions about what incomcotitutes is a retroactivity concern. it arises underhe due process clause and return on whether congress had aegimate purpose for having this kind of look piod and use rational means. we think that is clearly satisfied. petitioners raised a retroactivity due process argument below. the court rejected in the ninth circui it fails under precedent like united stateveus carlton. i would urge the court to recognize that is not about the proper characterization of the

underlying tax base. >> i want to follow-up on your factors to justice gorsuch. you talked about how it could be fair, stice kavanaugh just said s corpse, ownership, mrt, to say this is attributable to the arolders or to the partners or the seller of the trust. how do we know that? is it becae is closely held? i su what your friend on the other site is going to say is they h 10%. they wernomajority holder so they cannot force a distribution. how would you articulate that when it can be fairly attributed? if for not talking due process. if her talking about it from a 16th amendment point. >> the court could rely on the lessons to bdrn from history and tradition. dysfunctions like the early income taxes i pnted to from the 1860's and 1870's that text sharehde on corporate income. at that point, corporations were

generally closel held. . there were fewer americans who own stock. they functioned analogously to the mrt. they reached a distinctive cagory of shareholders generally in those closely held corporations. i guess what i would say is we think it is a factor in our favor this reaches relatively large u.s. shareholders. it is true it is 10%'s they n't have to have a majority ake. the premise of congress is these kinds of large shared -- lar shareholders can work together with other shareholders in this osy held corporation. there are gog be many of them to direct the company's policy oce a distribution. thatinhave threshold, 10%, appears throughout the law. not just in the tax code. the security context, there are additional obligations imposeon0% shareholders. wherever the line made be drawn -- may be drawn on a think about it from this relationship to the funds and level of influence, 10% falls within the line of

what should be recognized as rmissible. >> justice jackson? >> so are therdrbacks to setting this up in the way that justice gorsuch has articulated? i guesi'm a little concerned because i heard you respond to justiceotayor by saying one of your primary concerns is we not suggest that realization is required. would taking the approach that juste rsuch has articulat require us to do that or ul we assume or how do we get around the other caution you put forward? >> if i understood justice gorsuch's approach, the idea would be to recognize we have realized income so the court does not need need to resolve the status of that. the psse point is whether congress could enact a pa-tough tax on the 10% u.s. shareholders. >> is that fairly encompassed by

this question? this sort ofoeto discussions with justice alito. i thought the quti presented was about the extent to which the 16th ameme requires reizion. if we are going now beyondha early out of the territory ir encompassed? >> think the answer to the questionresented would be we don't have to deciden l contexts. here there was a realization. as we said in our brief we don't think the case resents the question presented because there are actual -- thereasctual realization by. . the corporation the real dispute was whether congress made a fair attributn cision. >> why did the government make an argument abt excise taxes at the end? >> we think the mrt is nstutional on an excise tax theory as well. . the has beenuggestion that we did not present that argument

below and that is incorrect. in the ninth circuit we said even if the mrt is not properly characterized as an inco t, it is not a direct tax. we said congress had artic o authority to enact it. we did preserve the argument. . the ninth circuit did not have ocsi to reach it because it ruled in our favor on the primary inmeax argument. if this court had any doubt on whether this was a proper income taxthcourt put a firm on the excise tax argumen as i'd mentioned, one oth important things for the court to keep inin is 99%f e tax owed under the mrt is owed by domestic corporation shareholders. large u.s. companies that have these foren subsidiaries whe they've been holding money ovse for a number of years anthis would be a tax on the privilege of doi business with those corporate relatishs and in that corporateorm. we would urge the court not to invalidate the mrt and allf its circumstances without proper

consideration of that matter. >> and that is because the constitutional question is a direct tax. >> this relates to your earlier esons authe meaning of helton and whether this can be in any sense to consider a re tax. the very least this is not a tax on land. this is not a tax on personal property we think it is either an excise or income tax. >> why shouldn't we take this oppouny to put an end to i if we wereo apply the stare decisis factors that the core goes through when it decides whether or not to formally overrule a precedent, ds't macomber fail anyway?

>> i agree macomber would fill those factors in an appropriat case. the reason we haven't asked the court overruled overrule macomber is because we just think it's inapplicable by the terms of subsequent precedent. >> you would say t gernment would still win on its view that macomber is not good law or controlling inhicase? >> if this court thought it were necessary to walk through the starry decisive factors, i think in each instance macomber was egregiousl wrong. it did not grapple with the text of t 1h amendment or look at all of the history relevant to that question. it has been subsequently eroded by any number ofddional presidents. congress has relied on the subsequent precedents by and i can he number of taxes that would not satisfy the realization framework. petitioners acknowledge macomber's realization framework could not carry the day because the they have said or constitutional would not survive. >> thank you, counsel.

a rebuttal, mr. grossman? >> thank you. the governmen's recalibrated position as explneby my friend is not narrowndhe court should not misket as such. the governments view that a rpation's earnings can be attributed to any corporate shareholder is staggeriny broad. corporations like microsoft and exn mobil have hundreds of billions of dollars of retained earnings othr books they've invested in corporate assets, research and development and othe activities. in some cases, those retained earnings exceed thcuent value of shares. under the governments vw and i think as demonstrated by the mrt, apparently congress could simply text backwards reaching back as far as it would care to do so to attribute tse retained earnings going back ma yrs to current shareholders. in some stces in excess of the value of the current holdings.

i think the court shod ep in mind there is an impact to that positionhapurportedly narrower addition under the existing code which ishe is no carveout against taxing shareholders in the current code on corporate earnings. if those are 16th amendment earnings -- 16th amendment income to shareholders, they are already subject to the ince tax through the gateway defiti of gross iomthat reaches everything under the 16th amendment. there is no carveout. those would already be subject to it. i think this demonsttethe way the government's position would make a hash of existg low and cause confusion with reecto however sit -- our tax system functions. by contrast, i don't think there are any serious consequences of the realization principal we have put forward in this case because it is the thread that runs through theous jurisprudence going over a century and is the glue that holds together the tax code.

every tax that my friend has mentioned falls io e of two categories. me of those regarding the abe of the corporate form turn on tors of constructive realization or you might say asgnment of income. i don't think there is much of a distinction. the remainder are straigfoard excise tax supported by the long historyf congressional practice. these include the original issue discount. it is simply an excise tax on the transaction regarding the transfer of a bond. congress has been levying taxes like that for over 130 years. others like the mark to market taxes are excise taxes on conducting business in specified fashion. those sort of taxes pda the 16th amendment and there's also case law. if it was simply enough for the -- for the -- if it was simply enough to attribute income to

anybody th close relationship to it, all of the cou's corporate reorganization cases and cases involving areholder rights and really pretty much all the sixteenth amendment cases involving trusts and everything else would have been about a sentence long because it wouldn't really take much more th tt for the court simply to say, well, there's close enough relationship and so who cares whether or not theern realized income or not. of course, that's not the inquiry the court s undertaken. and so far as macomb's rule is concerned -- and the court has applied the dividing line recognized by macoers recently as 1975 in ivan allen and it'caied forward the same priip in cases like indianapolis power & light in 1990, as well as restating it in cotte vings in 1991. i don't think real -- re - this concept of realization is anything unfilr to our law, and, indeed, it's thon way to understand the current tax code. every -- congress has -- the -- the anti-income, income avoidance provisions of the tax codereong, lengthy,

reticulated. d't envy anybody who's had to spend their time reading subpart f and practices in that field. but the reason thosereo complicated and reticulated is because congress has tried to stay within the realization line. it's done everything it can to fit that framework, where it would have been the easiest thininhe world, if -- if congress thought it had the power to do itsily to say, well, if you own shares in a foren rporation, whatever the ownership threshold, simply pataxes on those earnings. that's not the way thta-- that these sorts of taxing provisions have ever worked. instead, they get at the idea who is realleaing the income and receiving the benefit by it, and that person should be the one to pay taxes on it. wehi they all fit that mold. i'd like to briefly address the 64 tax. the court in hubbard recognized that it was a tax on property. subsequently, in brushaber, the court recognized that at the time, that wasn't really considered or thought about as being much of a defect with respect to the direct tax

clauses unr sort of the reasoning of springer. and, of course, macomber rejected the exact same argument. we would ask the court to reverse. watch all this week on c-span. water our website. >> american history tv, saturday

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