This is the Kind of Precedent that the Court's Conservatives Exalt?

"[I]n Gorsuch's words, he would be required to undermine the very notion of income taxation 'if I'm not willing to overturn a hundred years' worth of precedent.' Right. Fifty-year-old precedents are fair game, I guess, when they are wrongly described as "egregiously wrong."  That quotation is from a column that I wrote this past December commenting on Neil Gorsuch's performance during oral argument in Moore v. US, one of the most consequential -- and potentially devastating -- tax cases that the Court has heard in decades.

I could certainly have gone beyond a subtle jab about Gorsuch's enthusiastic flouting of precedent in overruling Roe via the Dobbs decision.  After all, he and his crowd have had no problem throwing away decades of precedent not only on abortion rights but also on affirmative action, gun regulation, labor unions, and more.  For Gorsuch to say with a straight face that he hesitates to overturn precedent is evidence only of his contempt for our intelligence, not of any fealty to apolitical principles.

Here, however, I want to focus on the specific case that Gorsuch (and surely at least four of the other hyper-aggressive movement conservatives on the Court) will use opportunistically to gut the ability of future Congresses to tax wealthy people at all.  That is the 1920 case called Eisner v. Macomber, which I have had reason to mention at length in numerous previous columns on Verdict and here on Dorf on Law.  (Links to many of those previous columns are available in my December column.)

Interested readers can find the details of Moore in that December column and in a very good SCOTUSblog piece by John Elwood, but in any event the case arises because Congress in 2017 imposed a tax on some firms' "undistributed retained earnings."  (Surprisingly, that tax increase was included in what was otherwise a shamelessly regressive tax giveaway bill that Republicans rammed through as their only legislative "accomplishment" during the two years that they controlled all three branches of government.)  Undistributed retained earnings are an example of "unrealized" income, and Gorsuch et al. want to say that they are required by Macomber to hold that unrealized income is not income, taking it out of the ambit of the Sixteenth Amendment, which paved the way for the modern income tax.

Income can be realized or unrealized.  If I receive $100,000 in salary, I am $100,000 richer and thus have $100,000 in income in the relevant year.  If instead my investments go up in value by $100,000 in the same year, I am also $100,000 richer and have $100,000 in income in that year.  Substance matters, not form, when defining income.  Income is "realized" when the investments are sold (or in some other circumstances) and are unrealized before then, but it is nonetheless income in either form.  Surely a person who, say, wanted to qualify for a loan would point to the increase in value in their assets over the years to show that they have a steady source of income.  Like Donald Trump, however, they want to tell a completely different story when it comes to taxes than when they are talking to lenders.

So what is this vaunted Macomber decision that Gorsuch treats with such awe?  The case there involved a taxpayer (Myrtle Macomber) who owned and held stock in Standard Oil of California.  The Congress that passed the Sixteenth Amendment in 1913 also passed the first revenue act authorized by that amendment, and in the statute it listed "stock dividends" as income.  Macomber had received stock dividends, which are (for current purposes) equivalent to a stock split, such that a person who (if the split is two-for-one) owned 1000 shares now owns 2000 shares.  Even so, the issuance of the stock dividend itself did not make Macomber richer, which will become relevant shortly. 

The high comedy, however, is in the Macomber majority's attempt to talk its way around the language of the Sixteenth Amendment: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."  The majority does not focus on "income" but instead desperately grabs onto the phrase "from whatever source derived," taking readers on a wild ride.

Their confused argument starts with the idea that in order to be derived from a source, income must be available for the owner's “separate use, benefit and disposal" (emphasis added). Why? Why not?  They don't need no stinkin' reasons.  The Court then takes the additional step of saying that the gain must be "severed" from the source in order to be "separate" from the source, meaning that nothing is income until it is severed from its source.  Having made those (il)logical leaps, the majority then says that unrealized gains have not been severed from their source, hence that they have not been separated from their source, meaning that the gains had not been derived from that source, and therefore that they are not income at all. The majority says this even as it acknowledges that "the shareholder is the richer."

This is, to say the least, a lot.  How did we go from "derived" to "separate" to "severed"?  The phrase "from whatever source derived" is obviously in the amendment to expand its coverage, not contract it.  Income clearly is not limited to, say, only labor income or some other narrower definition, yet the Macomber majority says that those words somehow turn accrued-but-unrealized income into "not income in any proper sense of the term." Wow. As I ask my students when I teach the case: "If I derive my citizenship from the Constitution, does that mean I am not a citizen unless something is severed from the Constitution?"  The three-step dance from derive to separate to sever is frankly an embarrassment.

And indeed, everyone pretty immediately understood as much.  After the Lochner Court passed into history, the Supreme Court was forced to deal with their predecessors' silliness in Helvering v. Bruun (1940).  There, the new lineup of justices decided that they did not need to overrule Macomber because it could so easily be limited to its facts.  The Bruun court focused on the fact that the stock dividend itself was not an income-producing event, which is true (as noted above).  The later Court can almost be heard laughing when it summarizes how to understand "sever" in Macomber: "[The] stockholder’s interests … after receipt … was the same as and inseverable from that which he owned before the dividend was declared."  (Note that the Court referred to Myrtle Macomber as "he."  But concern about pronouns is so Twenty-First Century.)

Get it?  The unanimous Bruun court basically said: "Where in he world did that Lochner Court get 'sever' from?  Well, we'll just say that you can't sever your after-dividend income from your before-dividend income because they are exactly the same thing."  The justices then noted that there are plenty of other examples of un-severed gains that have been held to be income, including the exchange of entire properties (that is, not severed from other properties).  And it all but mocked the idea that it should remand the case at hand, involving the construction of a commercial building, to determine whether that building was on wheels or could otherwise be "severed" from the land on which it stood.

And that, ladies and gentleman, is the exalted precedent that Gorsuch respects so deeply.  In this past December's oral argument, he insisted that "it seems to me at least as I read [Bruun and other cases] that they're all trying to work within Macomber's framework."  No, they are rejecting Macomber's framework entirely, saying that the derive/separate/sever dance is baseless and illogical.  Even read generously, Bruun says at most that the Macomber framework is dicta of the rankest kind, because if the stock dividend that is being taxed is not income at all -- which, again, it was not -- then there is no need to reach the question of whether unrealized income is income for Sixteenth Amendment purposes.

As I pointed out in my December column, however, even if the Court in Bruun or elsewhere had explicitly overruled Macomber, that would hardly stop this Court's conservatives today.  The would simply say that Bruun was super-duper-egregiously wrong and that Macomber should be restored to its rightful place of honor.  They are nothing if not focused on results.  Even so, it is useful to remember that even in technical cases with low political salience, these conservatives are defending some of the most indefensible legal reasoning out there.  And I do mean "out there."