Thread by @jbhenchman

Of the 6,000 to 8,000 cases appealed to the U.S. Supreme Court each year, fewer than a hundred are accepted. In nearly all the denials, the Court simply states the appeal has been denied with no further comment.

That didn't happen on June 28 with one obscure case.

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That day the Court denied 129 appeals that had been submitted to it. It is rare but not unusual for a justice to write a long statement taking their colleagues to task for declining to hear a case.

That's what Justice Thomas did that day in Standing Akimbo v. United States.

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The case had escaped the notice of most observers: no briefs were filed urging the Court to hear it, and the Court evidently wrestled with it since it appeared on the agenda of 13 successive private conferences of the justices before the denial was announced.

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Standing Akimbo involved a Colorado medical marijuana dispensary challenging section 280E of the tax code, a provision dating from 1982 that denies ordinary deductions (such as rent, employee pay, etc.) to any business selling Schedule I drugs (which includes marijuana).

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The IRS demanded sales information, and the business moved to quash the IRS summons, arguing their business is legal under Colorado law. The judge and the Tenth Circuit Court of Appeals sided with the IRS, after which the business tried an appeal to the Supreme Court.

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Only at that stage (i.e., too late), did the business try arguing that denying their deduction for business expenses means they're getting taxed on more than their income, making the tax beyond Congress’s Sixteenth Amendment power to tax “incomes.”

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You may know that the Sixteenth Amendment authorized the federal government to impose an income tax. *How* it does so is a bit strange.

The pre-16th Amendment Constitution authorizes direct taxes and indirect taxes. But direct taxes must be apportioned by state population.

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If California has 10% of U.S. population, Californians collectively would owe 10% of an apportioned direct tax. For an income tax, rates would vary state to state, and would be lower in richer states and higher in poorer states. Not what pro income tax people in 1913 wanted.

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The 16th Amendment doesn't change the direct/indirect distinction or the requirement for direct taxes to be apportioned. It just specifies that a federal income tax can be levied without needing to be apportioned.

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You may be asking some questions:

1. What is a direct tax? What is an indirect tax?

2. What is the difference between an income tax allowed by the Sixteenth Amendment and other, unallowable taxes? Where is that line drawn?

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Those are good questions. And you may be surprised to learn that the Supreme Court has never really answered them satisfactorily.

That's what Justice Thomas noted in his Standing Akimbo statement last week:

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Justice Thomas gently noted that Standing Akimbo's questions about the scope of federal taxing power are difficult but technically still open. He did accept that this case wasn't developed enough to resolve them now.

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But that he mentions it at all is a hint that he sees something worth litigating in the future.

Thomas cites two cases in his footnote: a 1929 cases that held capital gains to be a type of income (and not merely non-taxable growth in asset value) and...

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...the 2012 ACA case that upheld the individual mandate as under the federal taxing power. There, the Court listed direct taxes as including capitation taxes, income taxes, real estate taxes, and taxes on personal property.

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Thomas might have also included Murphy v. IRS, where an appeals court in 2006-07 first held that emotional distress compensation was not taxable because it's not income, instead making someone whole, then reversed themselves and held that income covers “all economic gains.”

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If ever a President Elizabeth Warren tries to pass a wealth tax, this issue will come up. Is a wealth tax a direct tax? If so, it needs to be apportioned unless it's an income tax. So is it an income tax?

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A related issue is happening in Washington state, where they have no income tax but the Legislature just passed an "excise tax on capital gains." Is it an excise tax or an income tax? Two lawsuits have been filed on that issue.

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(My view, and I think the precedents bear me out on this, is that direct taxes are those in which the taxpayer bears the economic incidence of the tax; indirect taxes are those in which someone other than the taxpayer bears the economic burden of the tax.)

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One case that may confront this issue is Moore v. United States, currently pending before the Ninth Circuit. The case challenges the “deemed repatriation” tax passed in the 2017 tax bill, which imposed a one-time unapportioned tax on accumulated overseas business earnings.

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Prior to 2017, such earnings were taxed at the full corporate tax rate (35% plus state rates) when such income was brought back, or repatriated, to the United States.

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Post-2017, such earnings are generally exempt from tax, with the “deemed repatriation” tax of 8% (15.5% for cash assets) a one-time transition measure.

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The plaintiffs in Moore argue in part that it is legal fiction to call these amounts “income,” as shareholders never received it, so it is an unconstitutional unapportioned direct tax. The trial court held that it's a tax on undistributed corporate earnings, which is income.

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For their part, Standing Akimbo cited a 2019 opinion by three Tax Court judges, where they wrote that section 280E’s denial of ordinary business deductions to marijuana businesses operated more akin to a fine than a tax, violating the 8th Amendment's excess fines clause.

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I don't know whether Thomas knows all of this stuff, but he certainly understood there are some unresolved issues that need addressing. And they aren't going away.

And that's not all...

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Thomas also observed that in Gonzales v. Raich (2005), the Court upheld federal regulation of the intrastate sale or possession of marijuana, the justification given by the majority was that no exception could be allowed to a “watertight nationwide prohibition” of marijuana.

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Now, Thomas dissented in that case. He thought the majority was wrong. (Some media coverage of Thomas's statement fixated on how he is now against the drug war, but his position on Raich didn't change.)

But he is now pointing out something that observers should take notice.

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Now, Thomas says, federal marijuana policy is a “half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana,” undermining the rationale supporting the federal ban. The DOJ isn't enforcing. The IRS is. DEA sometimes. Customs is. States aren't.

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In short, the constitutional justification the feds gave - for the DEA destroying Angel Raich's six marijuana plants that she used for her chronic pain - is no longer valid.

Even if the other justices disagree, they'd have to find a new justification if a case came up.

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In summary, while Standing Akimbo’s contention that section 280E violates both the Eighth and Sixteenth Amendments was not raised in time to allow it to be adjudicated, it does not mean that these arguments are without merit.

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Indeed, the potential veracity of these constitutional claims coupled with the current uncertainty as to the federal government's approach to state-level marijuana legalization makes it apparent that this is an issue that will come again before the Supreme Court.

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I hope you found Thomas's statement as fascinating as I did. And I want to thank Grant Gourley, a legal intern at @NTUF this summer, for analyzing it with me and co-authoring this short piece on it:

ntu.org/foundation/det…

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And here's the link to Justice Thomas's statement:

supremecourt.gov/orders/courtor…

(It starts on page 28 of the order list.)

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