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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.
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