Supreme Court Will Hear Case Targeting Tax On Unrealized Gains

[NewYorkExpress]

https://www.forbes.com/sites/kellyphillipserb/2023/06/26/supreme-court-will-decided-whether-taxing-unrealized-gains-is-unconstitutional/?sh=396493e214fe

The Supreme Court has added a new tax case to its docket for the 2023-24 term: Moore v. United States. As a result, the Court will consider whether a relatively new tax—the "mandatory repatriation tax"—created under a provision of the 2017 Tax Cuts and Jobs Act is unconstitutional under the Sixteenth Amendment. The case could have significance for future taxes, including the much-discussed tax on unrealized gains aimed at the uber-wealthy.

This smells like a 6-3 party-line case to me. There's not really a reason for any of the conservatives to cross sides on this one, let alone two of them, and there's not really a reason for any of the three liberals to do so either here.

[Mr.Phips]

This was a Republican passed law.

[NewYorkExpress]

This was a Republican passed law.

The implication that it can be used to allow for wealth taxes would be enough to see the conservatives on the court strike it down.

[Ferguson97]

You can argue the merits of the policy until you're blue in the face, but I do not understand the argument that a wealth tax would be unconstitutional.

[Vosem]

You can argue the merits of the policy until you're blue in the face, but I do not understand the argument that a wealth tax would be unconstitutional.

Here is 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.

Is wealth income? The seminal case on what this exactly means is Eisner v. Macomber (1920), which said, incredibly famously:

Here, we have the essential matter: not a gain accruing to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being "derived" -- that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal -- that is income derived from property. Nothing else answers the description.

This has been interpreted to mean that 'realization' is necessary for something to be considered income; there needs to be a moment at which it is gained. Most of the very famous 'income' cases have to do with whether particularly illogical sources of gains are actually income (Glenshaw Glass, punitive damages; James, embezzled funds), and the answer has invariably been 'yes.

...but, that said, is realization actually necessary? The Supreme Court has upheld Congress's ability to impose taxes retroactively even in the pretty recent past (Carlton -- this case is from 1994, so not that long ago, but it's pretty obscure and I learned about it only from reading the Ninth Circuit's opinion in Moore), and in another classic tax case, Helvering v. Horst (1940), seemed to suggest that the realization requirement is statutory rather than constitutional (much of the language of Eisner was copied by a 1924 tax law, still in force today, at the bedrock of the income tax system), and so could be ignored by Congress:

But the rule that income is not taxable until realized has never been taken to mean that the taxpayer, even on the cash receipts basis, who has fully enjoyed the benefit of the economic gain represented by his right to receive income can escape taxation because he has not himself received payment of it from his obligor. The rule, founded on administrative convenience, is only one of postponement of the tax to the final event of enjoyment of the income, usually the receipt of it by the taxpayer, and not one of exemption from taxation where the enjoyment is consummated by some event other than the taxpayer's personal receipt of money or property...

...so, which is it? A strict originalist like Gorsuch might read the Eisner opinion -- never overturned and still good caselaw -- and say that realization is mandatory, and without realization there is no income. A pragmatist (like every liberal who weighed in on the matter on the Ninth Circuit, or Mark Bennett, a very moderate conservative) might note that many existing tax laws might not withstand scrutiny like this. Most of the conservatives who weighed in on the Ninth Circuit, covering a pretty broad range of right-wing legal thought (Bumatay, VanDyke, Ikuta, and Callahan cover a number of bases) seemed to think that realization is mandatory.

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

[Ferguson97]

Is wealth income?

[...]

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

But we tax a lot of things that aren't income: we have a sales tax, a property tax, etc.

[Vosem]

Is wealth income?

[...]

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

But we tax a lot of things that aren't income: we have a sales tax, a property tax, etc.

We do not have a federal sales tax or a federal property tax. States and municipalities may (and do) impose such taxes, to be sure.

The argument here is that the Constitution does not give Congress (...or, by extension, the federal government) the authority to tax wealth (or, more specifically, 'unrealized income', where both of those words have very specific meanings). It is not that there is an incorporated right to be free from wealth taxes, such that no state or municipality could ever enact one. (There is an argument to this effect using the Due Process Clause but it is much more of a stretch, adopting it would imply consequences that legal conservatives really don't want, and it's not what the case in this thread is all about).

[Mr.Phips]

Is wealth income?

[...]

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

But we tax a lot of things that aren't income: we have a sales tax, a property tax, etc.

We do not have a federal sales tax or a federal property tax. States and municipalities may (and do) impose such taxes, to be sure.

The argument here is that the Constitution does not give Congress (...or, by extension, the federal government) the authority to tax wealth (or, more specifically, 'unrealized income', where both of those words have very specific meanings). It is not that there is an incorporated right to be free from wealth taxes, such that no state or municipality could ever enact one. (There is an argument to this effect using the Due Process Clause but it is much more of a stretch, adopting it would imply consequences that legal conservatives really don't want, and it's not what the case in this thread is all about).

Well then how is the US able to tax Subpart F income, which is basically just “deemed” income based on activities of controlled foreign corporations, whether actually distributed to US shareholders or not? 

[Vosem]

Is wealth income?

[...]

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

But we tax a lot of things that aren't income: we have a sales tax, a property tax, etc.

We do not have a federal sales tax or a federal property tax. States and municipalities may (and do) impose such taxes, to be sure.

The argument here is that the Constitution does not give Congress (...or, by extension, the federal government) the authority to tax wealth (or, more specifically, 'unrealized income', where both of those words have very specific meanings). It is not that there is an incorporated right to be free from wealth taxes, such that no state or municipality could ever enact one. (There is an argument to this effect using the Due Process Clause but it is much more of a stretch, adopting it would imply consequences that legal conservatives really don't want, and it's not what the case in this thread is all about).

Well then how is the US able to tax Subpart F income, which is basically just “deemed” income based on activities of controlled foreign corporations, whether actually distributed to US shareholders or not? 

Fantastic question, discussed in Part III of this law review article from 2019. The answer appears to be that if you take a strict originalist reading of the Sixteenth Amendment, like the one the Court took in Macomber, that taxing Subpart F income is unconstitutional because no realization event took place. (The law review article seems to see this as proof that realization is not necessarily required in practice, but of course if it is then Subpart F would have to go).

[Torie]

Is wealth income?

[...]

Anyway, it seems like a perfectly reasonable opinion to hold (...and my guess is that the Supreme Court is going to endorse it, though probably in some half-ass way that makes future tax increases much harder while not touching much existing stuff on account of realpolitik) that the Constitution does not permit Congress to enact a tax on wealth.

But we tax a lot of things that aren't income: we have a sales tax, a property tax, etc.

We do not have a federal sales tax or a federal property tax. States and municipalities may (and do) impose such taxes, to be sure.

The argument here is that the Constitution does not give Congress (...or, by extension, the federal government) the authority to tax wealth (or, more specifically, 'unrealized income', where both of those words have very specific meanings). It is not that there is an incorporated right to be free from wealth taxes, such that no state or municipality could ever enact one. (There is an argument to this effect using the Due Process Clause but it is much more of a stretch, adopting it would imply consequences that legal conservatives really don't want, and it's not what the case in this thread is all about).

Well then how is the US able to tax Subpart F income, which is basically just “deemed” income based on activities of controlled foreign corporations, whether actually distributed to US shareholders or not? 

Fantastic question, discussed in Part III of this law review article from 2019. The answer appears to be that if you take a strict originalist reading of the Sixteenth Amendment, like the one the Court took in Macomber, that taxing Subpart F income is unconstitutional because no realization event took place. (The law review article seems to see this as proof that realization is not necessarily required in practice, but of course if it is then Subpart F would have to go).

Subpart income is realized abroad. The most common example is interest income.

[Vosem]

Subpart income is realized abroad. The most common example is interest income.

I don't believe Subpart F income experiences a realization in the meaning of Macomber, so if taxation in the absence of a realization in the meaning of Macomber is unconstitutional, then the tax on subpart F income is likely also unconstitutional (absent some form of splitting hairs that I can't possibly anticipate).

Further the Court observed that the earnings of a corporation are not the property of the shareholder. The corporation may distribute its earnings among the shareholders as cash dividends or liquidating distributions but until distributed the earnings remain corporate property and not shareholder property. Stock dividends do not separate property from the corporation and place it in the hands of the shareholders, since the shareholder owns only the same interest in the corporation as before the dividend and no greater interest in the corporation’s underlying assets. The separateness of the corporation from its shareholders is fundamental. The Court stated:

We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital, at the same time shows he has not realized or received any income in the transaction.

Further: “enrichment through increase in value of capital investment is not income in any proper meaning of the term.” And “what is called the stockholder’s share in the accumulated profits of the company is capital, not income.”

The transition tax includes in U.S. shareholders’ incomes the shareholders’ proportional share of a foreign corporation’s retained profits without any distribution or separation from the corporation’s assets. It is difficult to imagine facts more closely resembling the issues addressed and resolved in Macomber. In defining accumulated foreign earnings as subpart F income, the transition tax includes the accumulation as income to the corporation’s shareholders even though, under Macomber, it clearly is not.