This summer, the Supreme Court will decide if ‘income’ under the law can include an unrealized gain. Guess what. 
Coming Up, Moore v. United States
The issue, as Wikipedia details is whether the 16th Amendment authorizes Congress to tax unrealized gains as income.
Background
Charles and Kathleen Moore invested $40,000 in an Indian business named KisanKraft in 2005, in exchange for 11% of the company’s equity. KisanKraft is a controlled foreign corporation. The company has made a profit every year of its existence, and rather than distributing its earnings to shareholders, it has reinvested profits in the business. Prior to the passage of the Tax Cuts and Jobs Act in 2017, income tax on such earnings generally did not have to be paid until they were distributed to shareholders. The 2017 law changed the corporate and Subpart F tax regime to focus on domestic profits, and imposed a one-time mandatory repatriation tax on profits held overseas. The Moores paid the $14,729 in tax owed and challenged the law in the United States District Court for the Western District of Washington as violating the Sixteenth Amendment’s requirement that income be realized before it can be taxed, as set forth in Eisner v. Macomber (1920). The district court ruled for the government, and the United States Court of Appeals for the Ninth Circuit affirmed. joined by three other judges, dissented.
The Moores filed a petition for a writ of certiorari on February 21, 2023. The Supreme Court granted certiorari on June 26, 2023, meaning that it would head the case.
Wealth-Tax Watershed for the Supreme Court
The Wall Street Journal comments on a Wealth-Tax Watershed for the Supreme Court
The Moores sued for a refund, but a three-judge panel of the Ninth Circuit ruled that “realization of income is not a constitutional requirement.” This defies the traditional understanding in U.S. tax law, and in Supreme Court doctrine, that income must be realized before it can be taxed. That is, the income must be real income, not merely an increase in the value of an asset in market value or on some company’s books.
A 1920 case, Eisner v. Macomber, held that a gain in asset value qualifies as income only if it is “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” The fight will be whether that precedent still holds under the Constitution’s Sixteenth Amendment that allowed the income tax.
Bernie Sanders, Elizabeth Warren, and Senate Finance Chairman Ron Wyden are all on board for a wealth tax.
State Exit Taxes
California, New York, Massachusetts, Hawaii, and Washington have all proposed exits taxes on unrealized gains when someone moves out of state.
A proper Supreme Court ruling would kill these ideas before they take hold.
Slam Dunk
This case is a slam dunk for the Supreme Court. In short, the constitution authorizes a tax on “income.” Fluctuations in value of an asset have been ruled not to be income and for good reason, given the meaning of the word income.
People with illiquid assets would be punished. Family farms would be crushed when the principle owner moved.
The case is simple. Expect a huge majority decision. Then expect Elizabeth Warren, President Biden, and Bernie Sanders to piss and moan when their Marxist wealth grab ideas bites the dust.
The Supreme Court is on a roll this year, all of it good.
Supreme Court Strikes Down Student Debt Cancellation, Cites Nancy Pelosi
Also consider my June 30 post Supreme Court Strikes Down Student Debt Cancellation, Cites Nancy Pelosi
My follow-up post was Flouting the Supreme Court Ruling, Biden Sets Student Debt Repayment to Zero for Many
Expect a legal challenge to Biden’s actions.
It’s funny how everyone rushes to “Bezos” or some other super rich dude, and talking about these obscure hedges for getting around realizing gains.
Right there in the article it states:
– Charles and Kathleen Moore invested $40,000 in an Indian business
– The Moores paid the $14,729 in tax owed and challenged the law
That is not the investment of a billionaire. Working plumbers have $40K to invest.
The purpose of this proposal is to go after people like the Moores as there are millions and millions of those people. The handful of Bezos is not what this case is about, and anyone arguing for taxing unrealized gains is stupid to think otherwise.
Any tax law you can propose I can find a counter-example of a rich person getting around it – that’s how tax lawyers make a living. And every time the government tries to “close loopholes for the rich” they ALWAYS get the middle class like the Alternative Minimum Tax, not indexing to inflation any cut-off, and so on.
So stop carping about the rich and tell me why the little people who can’t hedge, borrow,etc. on small gains should pull money out of savings to give to the government when they are taxed on unrealized gains.
Of course, this also raises the question of whether tax on income is justifiable. Historically various pol and head taxes have been viewed as an excess, but so has tax on subsistence income. Tax should only be exacted on transactions which any individual is free to either engage in or withdraw … and historically the burden of taxation has fallen on tolls, excises, customs, and sales.
Instead of taxing unrealized income, I wonder if the US gov’t may attempt to tax intangible assets. The State of Florida had an intangible tax for a few years starting in the early 2000s. It has since been repealed for the most part.
link to cga.ct.gov
If they can tax unrealized gains can I deduct unrealized losses? I have a couple pieces of land and some stocks that are dropping
It goes without saying, right? If the IRS was busy before, imagine having to audit millions of returns with competing land appraisals, private equity deal appraisals and so on. For every two tax returns with these things you’d need a full time IRS agent.
We know the Democrats love this idea, but we also know they never look at unintended consequences. It’s just about control and wealth envy for those lovely folks.
Dream on. And there are limits on deductions for realized losses.
32 trillion and counting, with congress adding another 4 trillion to the debt ceiling. The empire is in decline, with Klaus Schwab talking of a global Great Reset. We are coming back around to 1932.
Since when was the supreme court required to set policy over law? Politicians worm away with all sorts of laws which slowly erode the original intent of the specific piece of the constitution until someone challenges the change. I thought it was the court’s job to put the genie back in the bottle and let the politicians figure out a new law which complies with or alters the constitution. When the court goes rogue, there is no longer rule of law.
“ When the court goes rogue, there is no longer rule of law.”
See also: wickard v filburn
Maybe we should create a position along the lines of the Parliamentarians in Congress. Let’s call them Constitutionalists. Let’s head off problems before the majority can create them for the SC to remedy.
Yup. The SCs primary job is to hold the other 2 branches in check. Not to try to steer the country towards their dogmatic beliefs.
A case could be made that the beneficiaries of faux debt and Fed-induced low interest rates should be those who should bear the major portion cost of repaying said debt, since much of their wealth accumulated because of it. Of course, Much of that wealth would disappear with a real market crash… Will the wealthy get a bail out? They SHOULDN’T!
A (the) fundamental principle behind the US tax code has long been the ‘taxation of income from all sources derived’; that is, objectively measurable. That wealth can produce income through investment, then taxing that income should be enough to compensate for wealth. Imputing ‘income’ is inherently problematic.
Turning to direct taxation of wealth itself… Not all wealth is objectively measurable. Stocks and bonds have a market, as does most real estate. Markets also exist for fine art. What about intellectual property?
A far better cause for Congress is to reduce costs–beginning with waste and fraud, and moving to general incompetence and inefficiency in government service. Let’s start with a 20% across the board cut in budgets.
I agree, focus on reducing federal spending
Congress has tried, and many, many times since the 1900s succeeded in, arguing for the need to fund any number of projects claimed to be for the public’s benefit. We the people have let them vote for their pet projects and emergencies, all the while driving a proverbial truck through the US Constitution in the imposition of taxes. The fact that it took until 1936 (149 years after ratification) to argue successfully that the spending clause provides limits on Congressional expenditures as opposed to the enumerated powers illustrates the error that has produced the tax burden, debt burden and labyrinth-like tax laws lobbied for by “constituents” that allow for legal tax avoidance (as opposed to tax evasion). Instead of recognizing a limited government that seeks to preserve the unalienable rights of its citizens, many Americans seek a government that will help them get their way (dissenters be damned).
“The Supreme Court is on a roll this year, all of it good.”
Would it be too much to thank Donald Trump for this?
Asking for a friend.
Trump should be thanking McConnell, for squeezing him 2 extra picks and making sure all 3 Trump picks made it through the Senate
Any time a Trumpsters rails on McConnell, just remind him that before Trump was on the scene, McConnell snatched that seat from Obama (and make no doubt about it, that has complete theft… beautiful, nation-saving theft). Merrick Garland would be warming Gorsuch’s seat today, and we see his true colors now.
McConnell impressed the hell outta me by keeping Obama from a 3rd term, all that filibustering really paid off, even if it meant prolonging the recession and reducing the U.S. credit rating.
(Please, don’t bite on the 3rd term crack, professor)
“The Supreme Court is on a roll this year, all of it good.”
On a roll? yes
All of it good? not quite
Allen v. Milligan was a 5-4 mistake
Essentially because some southern states used to discriminate 50 – 150 years ago, no states can set race-blind districts, they all need to try to create them in ways that guarantees the major races (white, black and Hispanic) have successes that match their proportion of the population (ignoring recent historical evidence that indicates this isn’t necessary, such as a majority-white country electing a black President). Meanwhile they’ll have to start edging out Asian and Indigenous candidates with the gerrymanders to keep the other numbers in proportion.
This means crazy-shaped districts that connect distant urban populations across rural constituents that have entirely different voting interests.
It was time for required racial gerrymandering to go, even if the original intent was good.
Justice Clarence Thomas nailed it… the court is “dividing the nation into racially segregated districts.”
Hispanic isn’t a race. No DNA check for what an hispanic is.
You’re being disingenuous if you’re pretending not to get the point… Look at any census breakdowns and then remind yourself of the 2 “protected classes” of US Govt’s racial politics.
You can ignore “successful” races and any under 5% of the population because the govt isn’t going to gerrymander for them. Asian, indigenous, not relevant in the reapportionment discussions.
You’re left with white, black and Hispanic — the point being that those are the categories the govt is going to use to carve out districts that meet up with what amounts to Voting Rights Act quotas for elected officials.
Yes, I know Hispanic isn’t considered a race because there’s no form in the USA you can fill out that doesn’t require you to fill out demographic information and they’ll ask if you’re black or white or Asian or indigenous, then ask whether you’re Hispanic separately. Then you can read census results and they’re even more confusing and inconsistent, sometimes having race completely separate from Hispanic and sometimes grouping in the Hispanic numbers — and sometimes giving 2 counts, such as “White (Hispanics included)” and “White (non-Hispanic)” on the same data set.
Could have black hispanics
Yes (I didn’t say anything that contradicts that).
When you’re done with the pedantry could you make (or argue against) a point?
“This case is a slam dunk for the Supreme Court. In short, the constitution authorizes a tax on “income.” ”
Well, no –
“Section 8: Powers of Congress
The Congress shall have Power To lay and collect Taxes…”
Review the powers of Congress, there is no mention of income, Congress can tax whatever it wants.
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Not true. Congress could not tax income until the 16th Amendment passed.
No, actually true, until the 16th amendment income taxes had to be flat, not progressive, but Congress has always had the power to tax income.
To add, if SCOTUS rules against taxing unrealized gains, I could request my customer’s pay me in stocks or other fungible non-cash assets and only pay taxes on what I cash out, or, I could just leave the country, then cash out.
This would be a dream come true for H1-B workers, ask H.R. to invest 100% of their pay into company stock, once out of the U.S. cash out….it wasn’t “income” inside the U.S..
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Not true. Taxation of stock options and stock are clear. The IRS has rules regarding taxation of both. Unrealized are different because nothing has been earned that can be used by a tax payer.
conservative professor
Unrealized gains aren’t taxed in stocks.
“Milton”, below you has a strong argument against my scenario though.
Frilton Miedman
Your point is incorrect. Any payments by customers would immediately be income at the time of receipt of property, valued at the fair market price of the property.
The question at hand, is whether a taxpayer should be taxed on increases in value of property that they already own.
Any payments by customers is taxable income, regardless of the form of the payment. For example, if they paid you in stock, you would have to pay taxes on the FMV of the stock at the time of payment. If you did not sell the stock, you would defer any additional gains until the time of sale.
Milton, you’re correct, though my point was hypothetical, it was a poorly conceived example, gifted stocks aren’t taxable up to about 10K per gift, but stocks received as payment are.
Milton, to add –
“The question at hand, is whether a taxpayer should be taxed on increases in value of property that they already own.”
Property taxes already do that, as value appreciates, taxes go up proportionally.
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“Review the powers of Congress, there is no mention of income,”
You need to head back to law school.
First, you conveniently ignored the end of your Section 8 quotation: “The Congress shall have Power To lay and collect Taxes… but all Duties, Imposts and Excises shall be uniform throughout the United States;”
So at the time, they could levy a tax of $100 per state, or per person, but they could not tax people differently based on income. They Federal government had to tax Bill Gates and me the exam same amount.
16th Amendment to the Constitution gave Federal government the ability to tax based on income. A review of Congressional powers should turn that up.
“Congress can tax whatever it wants.”
Not quite. A follow-up SCOTUS ruling to the 16th Amendment declared that the income must be realized. The current Court make-up is conservative… it’s a slam dunk that they’re not overruling the status quo.
^They Federal^The Federal
^the exam^the exact
Very interesting, professor.
The 16th amendment ratifies Congress’ power to tax income – it does not limit Congress to taxing income only,
Now, read section 9, and go back through section 8 for that matter, show me what limits Congress’ powers in regard to taxing aside income – “The Congress shall have Power To lay and collect Taxes…”
Sales taxes, gross receipts taxes, value-added taxes, excise taxes, property taxes, tangible personal property taxes, estate and inheritance taxes, these aren’t “income” either.
Thanks for the lecture, professor.
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I agree. The 16th Amendment added income to the items that Congress can tax. I am not sure about the point you are making. Are you saying that Congress had the right to tax unrealized capital gains without the 16th Amendment? I do not think that the USSC will see the case in this way. I think that the USSC will decide if unrealized capital gains are income. You could be right that the USSC will see that unrealized capital gains are not income (as defined by the 16th Amendment) but Congress has the ability to tax unrealized capital gains anyway. I doubt that the court will consider unrealized capital gains as not income but taxable because the tax on unrealized capital gains (as applied to this case) because the tax is part of the 2017 tax bill. I see a better chance that the USSC will allow this part of the 2017 tax bill without answering the broader question about taxability of unrealized capital gains. The 2017 tax bill is not a general tax on unrealized capital gains so the USSC could rule that this part of the law is valid because it relates to offshore profits. This case will be a difficult read. The USSC often does not make sweeping rules. Rather narrow rulings that do not answer broader questions.
I was responding to the generalized statement “Wealth tax … headed for sudden death” and it appears you agree with my rationale. This case seems to rely on the definition of “income”, in my opinion, the only real argument might be “unapportioned”.
I don’t imagine SCOTUS would find that Congress can’t create an apportioned wealth tax, not even this SCOTUS would deny the powers of Congress.
The thread title leaves the impression that the court will decide what tax powers Congress has, I highly doubt that.
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“So at the time, they could levy a tax of $100 per state, or per person, but they could not tax people differently based on income.”
Wow, I missed this on the first pass, this is NOT a reference to equally taxing individuals regardless of income, it refers to imposing the same taxes to all states.
“… but all Duties, Imposts and Excises shall be uniform throughout the United States;”
I’m going to pee myself laughing, professor.
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Amendment 16 effectively repealed Section 8. Maybe the legality of ObamaCare should have been challenged on this theory.
“Amendment 16 effectively repealed Section 8.”
No, it added the power to tax income progressively.
It added to Section 8 powers.
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I am not sanguine about the prospect of the woman who does not know the definition of “woman” to know the definition of “income,” either.
She should recuse herself from any case that involves terms she does not understand.
Or, is it just an excuse to fill the void with new definitions that correlate exactly to Leftist doctrinaire?
16th amendment gives Congress the power to collect “income taxes”, yet they also impose sales taxes, property taxes, capital gains taxes, estate taxes.
The Powers of Congress basically gives Congress the power to tax utterly anything, if the defense is arguing that unrealized gains aren’t income, sobeit – they relabel it an “unrealized gains tax”.
The 16th Amendment did not give Congress the authority to tax sales, estates, and other items. Congress already had this power. The 16th Amendment extended Congress’s taxing authority to income. The question before the court involves the definition of income under the 16th Amendment, not other taxing authority.
OK, I see the confusion here…
Congress has always had the power to tax income, the 16th amendment merely allows income/direct taxes to be unapportioned/progressive.
The first attempt at a progressive income tax in 1862 was overturned in 1872, Congress later had to amend (16th) the Constitution.
Prior to that, all taxes were flat or consumption based.
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Where are these people coming from that spout this level of ignorance with such authority? Look up the term “direct tax”. There is a reason the 16th amendment was created. It would not have been necessary if Congress could tax whatever they want.
What they could do before the 16th was a pure head tax. They could for example say I want $200 from every American. Since this isn’t a direct tax it has to be an income tax which does in fact require, you know, income.
Fat drunk and stupid is no way to go through life, but it’s important to note that getting your information from MSNBC and common dreams is basically the same thing.
Ok Dean Wormer,
Rather than Googling “direct tax”, go to the source, Article I, Section 9.
In section 9, tell us where it says no taxing of income.
The 16th amendment was added to allow progressive taxation of income, that aside, Congress can tax anything it wants.
I think you missed my point, perhaps to eager to impose the “fat, drunk, stupid” sentiment.
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Generally when someone who knows what they are talking about corrects you it is better to acknowledge your ignorance or at least shut up, but doubling down is certainly another way to go.
Congress has always had the power to tax income, which is where “professor” is incorrect, but until the 16th it could not be progressively taxed – “unapportioned”.
Again, seems like you a wee bit eager to insult.
Maybe you ought take your own advice and shut up.
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In the list you cite, all but property falls under the category of income. The federal government can’t tax property because the Constitution does not give it the power to do so. Local governments may tax property since the powers not listed in the US Constitution are reserved for the States.
“The federal government can’t tax property because the Constitution does not give it the power to do so.”
Not true, the Federal government can, but said taxes have to be flat, not proportional to the value of property. This is why only states tax property.
I only insulted you because you are manifestly stupid, ignorant, and unwilling to change, a rare combination!
Ryan, you make very strong arguments, about what – I don’t know.
The reason I don’t know what you’re talking about is that you don’t know what you’re talking about.
Again, Congress can tax anything, the difference being that they can only tax income “unapportioned”…but yeah, respond with an insult, show your mettle!
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She should have recused herself from the affirmative action vote since the only reason she holds her position is because of affirmative action by Biden.
I think you are wrong on this one. Not that the Supreme Court will not agree with you, but that unrealized gains can not be taxed.
I do not want all unrealized gains taxed. Not even close. But unrealized gains is being used as a tax avoidance scheme by the ultra wealthy. Borrow against stocks by the multi-millions but never sell game. And 70% of estate wealth was never taxed and needs to be on death otherwise we end up with destinies.
Tax only holdings after 5 years that have gained 40% in value… or something similar.
Bozos has only paid 2% in taxes on his wealth gain. Needs to change.
Loans using a portfolio as collateral are risky. A decline in the portfolio can trigger a margin call. In addition, the loan accrues interest, a cost to the loan recipient. Portfolio loans are not a tax dodge. They are risky loans that may trigger taxation of realized portfolio gains if the market declines.
Not if you hedge, and, a loan with interest below tax rate makes it very worthwhile for the higher tax brackets.
You are essentially asserting the existence of magical loans. Interest and hedging are costs. If a taxpayer has no earned or unearned income to pay these costs, assets must be sold to pay. Capital gains taxes must be paid on asset selling or the taxpayer must live with less income. Hedging is no silver bullet. The more hedge, the higher the costs. At best, some wealthy individuals are using loans to defer capital gains taxes. The combination of interest and hedging costs indirectly increases capital gains taxes. There is also the danger that future tax rates on capital gains and inheritance will increase substantially, a very real threat from Democrats.
conservative professor –
“If a taxpayer has no earned or unearned income to pay these costs, assets must be sold to pay.” – Yes, so a billionaire investor with $50mil invested makes a 10% gain can withdraw, say, $100K, his “income” is only $100K, uses the interest as a writeoff for his business. The interest on any loan/margin is still less than cap gains tax, nevermind income tax.
“Interest and hedging are costs.” – Yes, and a tax write-off.
“Capital gains taxes must be paid on asset selling or the taxpayer must live with less income.” – Correct, cap gains tax is 20% for top bracket vs 37% for income, that 20% is bypassed until sale of stock vs income taxed yearly.
“At best, some wealthy individuals are using loans to defer capital gains taxes.” – Absolutely.
Is this what passes as an argument? It’s income not because it matches the definition of income, but because you don’t like the fact that unrealized gains can’t be taxed?
I don’t like the IRS getting all of the details of my personal financial life therefore the income tax is illegal. Besides they have a history of using the tax code as a political weapon. I mean I don’t want no taxes not even close. Let them have 0.5% a year or something similar.
That is functionally the same thing as the comment you just
I’ve read about the strategy of borrowing against assets to avoid triggering income tax. Placing limits on how much one may borrow, might be an indirect way to force asset sales and collect income tax. I imagine the intelligent response to such a rule change would be to less speculative / more frugal.
You’re giving government more and more control over the “free” market. Historically, that has never worked well.
Yes, yes, yes.
We must tax everyone that has more than I do.
Who is “we”?
Why do YOU assume entitlement to the property of others?
What percentage of others time/talent/treasure are YOU entitled to confiscate for YOUR desires?
Are you quoting King George III?
You are a Marxist. Lets eliminate the income tax and institute a federal flat rate sales tax.
You cite one example in your favor while ignoring the thousands who will be forced to sell assets to pay the taxes.
I strongly dislike the Marxist turn in the USA and the woke turn in the UK, we need to fight tooth and nail against it. On this article you used the word “principle” incorrectly, in this case it should be “principal”. Let us not allow these parasitical liberals to pick on our spelling or call us “less educated”. They are losers whose intent is to stop the winners. The Anglo-German viking original culture of the majority of the white settlers to the USA was viking, the rule that the viking can keep his loot. These new socialist ideas pushed by open borders to try and turn the USA into a corrupt ineffective Latin American country are worrying. Already Biden got us deliberately into this mess with Ukraine and has set the clock back 50 years to the cold war days. He is like Fidel Castro in charge of the Anglo American war machinery that entrepreneurial work has funded for so many decades. These are evil and dangerous times for all of us. The fraudulent election that saw Biden beat Trump – the voting lists are now corrupted because Democrats believe anybody in the country can vote regardless of citizenship… has had enormous consequences to the world: cost of living crisis, inflation, weaker borders, effeminates in charge of everything. We are in an existential fight.