Does Moore Have Bite?

• In Event: Realization

Abstract

In Moore v. United States, the Supreme Court affirmed the constitutional validity of “pass-through” taxation. But pass-through taxation is not unbounded: the Moore majority emphasizes that “due process limits” prevent the “arbitrary” attribution of an entity’s income to owners. The Moore opinions, however, do little to illuminate the contours of this Fifth Amendment limitation, especially outside of the corporate context. This Article takes a first—and critical—look at Moore’s arbitrariness limitation as applied to noncorporate pass-through entities.
This Article traces the origins of a constitutional arbitrariness limitation on the federal taxing power across the first half of the twentieth century. Then, this Article speculates on the implications of a revived arbitrariness limitation for today’s partnership pass-through regime. Although the broad themes of partnership taxation appear consistent with rational basis review—tax consequences are intended to track economic results—the mechanics and practice of partnership tax frequently employ fictions to fill gaps and manage complexity.
Through three case studies, this Article develops the implications of a revived arbitrariness limitation for partnership taxation. First, book capital accounts do not (and are not intended to) reflect an entity’s economics over time. Second, tax does not (and cannot) always follow book, including for contributions of appreciated property and deductions that relate to nonrecourse debt. Finally, distributions of property and sales of partnership interests use realization and nonrecognition to shift income among partners. In these contexts, the re-Lochnerization of tax law threatens longstanding congressional and administrative compromises involving administrability, economic fidelity, and tax gaming.

Author

• Sloan Speck, sloan.speck@colorado.edu