If the Supreme Court upholds the MRT, it could empower the IRS to tax unrealized income, affecting everyone.
via spectator.org:
Tuesday morning the U.S. Supreme Court will hear oral arguments pursuant to a case in which Charles and Kathleen Moore argue that an obscure provision of the 2017 Tax Cuts and Jobs Act is unconstitutional. This is not an “inside baseball” case that only compulsive Court watchers will care about. If the justices rule against the Moores, it will supercharge the government’s confiscatory powers by enabling its inclination to tax unrealized income. This will affect everyone reading this column, not just investors with large stock portfolios. It would, in theory, permit the IRS to tax an increase in the value of your home as a capital gain — whether you have sold it or not.
At issue is the “mandatory repatriation tax” (MRT) and a 13 percent stake owned by the Moores in a company that supplies low-cost equipment to small farmers in India. The couple has never received income from this stock because the company reinvests all its profits in the business. Historically, the IRS hasn’t taxed shareholder “earnings” until they receive dividends or sell their stock for capital gain. Yet, pursuant to the MRT, the Moores received a $14,729 tax bill on their share of company profits. They sued the government on the grounds that the IRS violated the Sixteenth Amendment. They lost in federal district court and in the Ninth Circuit Court of Appeals, as legal scholar Steven Calabresi explains at the Volokh Conspiracy:
The court of appeals concluded that realization is not a precondition for income, and so the Moores could be taxed on unrealized gains in wealth. That rationale is not limited to the Moores, or to the particular tax, which the court applied in their case. Rather, under the Ninth Circuit’s analysis, investors might be taxed on their unrealized capital gains in their Vanguard funds or their stock portfolios. Moreover, homeowners might be taxed on their unrealized capital gains in their houses and land … The Supreme Court should reverse the Ninth Circuit and restore the original, commonsense meaning of the Sixteenth Amendment.
To grasp the significance of Moore v. United States, it’s necessary to remember that the original Constitution didn’t permit income tax. Article I, Section 9 prohibited direct taxes on individuals unless apportioned on the basis of the population of each state. The huge cost of the Civil War prompted Congress to pass the first income tax in 1862, but it was phased out after the war. Congress passed another income tax law in 1894, but the Supreme Court struck it down in 1895. The Sixteenth Amendment was passed by Congress in 1909 and ratified in 1913, and it does indeed bestow on Congress “the power to lay and collect taxes on income,” but it was not as clear as it could have been on the precise definition of “income.”
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