Sam Alito’s Lonely Fight to Defend His Friend’s Harebrained Anti-Tax Scheme

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On Tuesday, the Supreme Court was presented with an opportunity to blow a $340 billion hole in the federal budget, jeopardize major chunks of the tax code, and preemptively kill a “wealth tax.” It will almost certainly decline the invitation. The court’s conservative justices remain deeply and disproportionately solicitous of rich people’s rights. But they appear unwilling to embrace a crank theory that could rewind Congress’ taxing power to the pre–Civil War era. Only Justice Samuel Alito was in the tank for this absurd idea, which was devised by one of his close friends, and his efforts fell painfully short of persuasion.

Tuesday’s case, Moore v. U.S., involves a tax enacted as part of President Donald Trump’s Tax Cuts and Jobs Act, which passed—with exclusively Republican support—in 2017. The act largely exempted corporations’ foreign profits from taxation, but it also imposed a one-time tax on Americans who own shares in foreign corporations. Over a decade, it is projected to collect about $340 billion, a considerable sum intended to offset the act’s addition to the budget deficit.

This one-time tax only became controversial when conservative activists, led by lawyers Andrew Grossman and David Rivkin, identified it as a vehicle to preemptively kill more ambitious taxations of wealth. Specifically, they sought to preempt the kind of proposal from Sen. Elizabeth Warren that would tax a person’s net worth, including high-dollar assets that haven’t been sold. You may remember Rivkin from his sympathetic interviews with Alito in the Wall Street Journal opinion section, a relationship that Alito swears poses no bar to his participation in this case.

Grossman and Rivkin claim the 16^th Amendment permits taxation only on “realized income,” or assets that have been converted into cash at a gain for the investor. They asserted that the 2017 law taxes “unrealized income,” or assets that haven’t yet been cashed out, and that this feature made it an unconstitutional “direct” tax. Technically, these lawyers represent two plaintiffs, Charles and Kathleen Moore, who own shares in a foreign company that they want to shield from the taxman. But the lawyers’ ultimate goal, as they’ve admitted, is to secure a decision against this tax to prevent a future Congress from enacting a true Warren-style “wealth tax.”

Crucially, the Grossman/Rivkin theory would recklessly imperil countless other taxes that raise trillions of dollars for the government. Congress, for instance, currently collects taxes on undistributed income from partnerships and corporations; these laws could be rendered unconstitutional if SCOTUS rules for the plaintiffs, starving the United States of the money it needs to operate. Luckily, the Grossman/Rivkin theory is demonstrably false, a revisionist fantasy with no basis in history or text. Starting in 1861, Congress enacted an income tax system, which grew to cover both realized and unrealized gains. This system flourished until 1895, when an ultraconservative Supreme Court struck down the federal income tax as “direct” in violation of the Constitution. Its 5–4 decision in Pollock v. Farmers’ Loan & Trust was part of the Lochner era, when the court beat back progressive reforms in aid of the wealthy. Pollock rested on a bogus rewrite of history, and it set off a bipartisan campaign to overrule the Supreme Court. This battle culminated in the ratification of the 16^th Amendment in 1913, which expressly authorized a federal income tax.

Grossman and Rivkin’s effort to shrink the 16^th Amendment by limiting it to realized income finds no support in the historical record. As Justice Sonia Sotomayor noted during arguments, “the concept of realization was very well established at the time that the 16^th Amendment was adopted, but the amendment does not reference realization.” In fact, “as far back as 1864,” and again in 1913, Congress taxed unrealized gains. As Solicitor General Elizabeth Prelogar conclusively demonstrated, the word “income” was defined in 1913 to mean any “gain,” “profit,” or “revenue,” whether realized or not. Tax scholars have further shown that “economists, accountants, lawyers and legislators in the early 20^th century all defined income” to include “unrealized gain.”

Arguing the case on Tuesday, Grossman was unable to effectively counter this evidence. “There is quite the history in this country of Congress taxing American shareholders on their gains from foreign corporations,” Justice Elena Kagan told him. “Why is this any different and why shouldn’t we understand that to be quite well settled?” During a colloquy with Grossman, Justice Ketanji Brown Jackson displayed her superior grasp on a 1796 precedent narrowing the definition of unconstitutional “direct” taxes. (She also noted that any constitutional limitations on such taxes arose as part of a shameful compromise over slavery.) Justice Amy Coney Barrett seized upon the very real risk that the Grossman/Rivkin theory poses to other parts of the tax code that collect money from unrealized income. “What is the distinction?” she pressed, and sounded profoundly skeptical that Grossman could draw a bright line that would spare trillions in tax revenue from judicial revocation.

Justice Brett Kavanaugh saw a different path forward: Why not just say the 2017 law does tax realized gains and be done with it? “The entity realized income,” he pointed out—meaning the corporation itself made money. “The question then is attribution, and we’ve long held that Congress may attribute the income of the company to the shareholders.” In other words, the court has consistently let Congress attribute a corporation’s profits to shareholders when collecting taxes. Why is this law “different analytically”?

Kavanaugh raised this point with Prelogar, who embraced it as a way of avoiding more difficult “foundational questions about the meaning of the 16^th Amendment.” You could hear the compromise taking shape: The court says this tax is constitutional because it targets realized income, without answering the bigger question of whether a true wealth tax complies with the 16^th Amendment. Justice Neil Gorsuch tried to resist this middle ground in a lengthy exchange with Prelogar, but as usual, she wrestled him into a truce. Several justices love scrapping with Prelogar, but Gorsuch takes the practice to new heights; the often cranky justice sounds delighted, even charmed, when rebutted by the solicitor general. It was a positive sign that, by the end of their tangle, he still couldn’t find an excuse to side with the plaintiffs.

Really, the only justice who stuck his neck out for the Rivkin/Grossman claim was Alito, Rivkin’s pal on the bench. Oozing irascibility, Alito tried to corner Prelogar in two unusually long exchanges, only to fall flat on his face. Rather than try to defend an indefensible theory on the merits, Alito attempted to undermine the solicitor general’s own position by implying that it could lead to catastrophic confiscation of fat cats’ wealth. “One of your arguments that you press most strongly—and, certainly, it has resonated a lot in the coverage of this case—is that the adoption of the petitioners’ arguments would have far-reaching consequences,” the justice huffed. “Do you think it is fair then to explore what the consequences of your argument would be?” When Prelogar explained that there would be no consequences, except a continuation of the status quo, Alito was unsatisfied.

“What I’m trying to do is to understand the breadth of your argument,” he said again. “I understand you want to talk about this case, and ultimately we have to talk about this case, but I just want to understand how far your argument goes, how far does it logically go.” Alito then inquired whether Congress could tax a billionaire’s lifetime worth of profits, going back to when he started up “a little business in his garage.” It fell to Kavanaugh, of all people, to save Prelogar: “On the proverbial open door for Congress,” the justice said, “members of Congress want to get reelected.” So Alito’s “farfetched” hypotheticals probably won’t come to pass. Translation: Sam, stop using the remote prospect of scary future taxes as an excuse to invalidate this plain-vanilla law.

At this point, Alito’s questions didn’t much matter; you could already count five votes, maybe more, to uphold the statute at issue—which, it bears repeating, was passed with exclusively Republican votes, and signed by a Republican president. A cynic might think that Alito was thumbing his nose at his critics by running interference for his BFF’s flaccid theory, flaunting his defiance of judicial ethics. He couldn’t even resist a jab at the media’s ostensibly one-sided “coverage of this case,” as though he had an obligation to defend Rivkin’s honor from the rabidly partisan press.

Yet all of this was, in the end, a sideshow. The U.S. tax code will survive. The 16^th Amendment will not be overturned by judicial fiat. The wealth tax will not be killed off before it is enacted. And that is the most we can possibly expect from this Supreme Court.