Sitting at the table of the highest court in the land is the monumental case, Moore v. United States.[i] A case that concerns a potential seismic shift in the legal interpretation of what constitutes taxable income in the United States. At the crux of the debate is the Mandatory Repatriation Tax (“MRT”), a policy that challenges the established norm by seeking to tax unrealized gains.[ii]
The Established Norm
Income for tax purposes has historically been defined by “realization events.” A realization event is a specific occurrence that triggers the recognition of income or gain for tax purposes. Income or gain is generally considered realized when an asset is sold or disposed of, and the earnings from that sale are ascertainable. For instance, if you own stock and it increases in value, you do not realize the gain, and thus you would not owe taxes on it, until you sell the stock and secure the profit. In other words, unrealized gains are hypothetical gains that could disappear tomorrow. This principle ensures that taxation aligns with an individual’s liquidity and the actual acquisition of income, adhering to an ability-to-pay standard.
Since the 1920s, the United States Supreme Court has recognized the requirement of realization in defining taxable income. Specifically, the Supreme Court characterized income as “a gain derived from capital, not a gain accruing to capital, nor a growth or increment of value in the investment, but a gain, a profit, . . . coming in, that is, received or drawn by the claimant for his separate use, benefit, and disposal.”[iii] This definition emphasizes the established norm that income for tax purposes is not merely an increase in the value of an investment but rather a profit that is under the taxpayer’s complete dominion.
Policy at Issue: The Mandatory Repatriation Tax
Departing from the long-standing precedent requiring realization, the MRT taxes shareholders on the retained earnings and profits of all controlled foreign corporations. Before this tax was introduced, corporations could keep that money overseas and not be subject to the full extent of taxes until they brought it back to the U.S. However, under the Tax Cuts and Jobs Act, a tax reform that took place in 2017, these corporations and individuals who invested in these corporations were required to pay taxes on these profits whether they brought the money back or not.[iv] The tax is called “mandatory” because corporations must pay tax on their foreign-earned profits even if there was no realization event.[v] This was done in hopes of ensuring everyone pays their fair share of taxes on profits earned globally. However, by considering unrealized gains as taxable income, the government is stepping into relatively uncharted territory, which raises several fundamental questions about the nature of income taxation.[vi]
Unpacking the Implications
Taxing unrealized gains is like opening Pandora’s box. As there would be a significant expansion as to what would be considered taxable income, Congress could impose taxes on the appreciation of any property. Moreover, “a broad ruling in the U.S. government’s favor could provide Congress with too much leeway to impose new tax regimes targeting unrealized gains, such as a mark-to-market wealth tax or taxes on stock held in individual retirement accounts.”[vii]
The Voices from Amicus Briefs
An amicus brief is a document submitted to the Supreme Court by concerned experts who are not directly involved but have a stake in the outcome. In the case of Moore, the amicus briefs filed in support of the Petitioners serve as a diverse voice that collectively underscores the potential ramifications of a ruling in favor of the United States.[viii]
A brief filed by the Buckeye Institute argues that the Ninth Circuit’s decision is inconsistent with the text of the Constitution as it would allow Congress to impose an unapportioned tax on farmers or other landowners for the unrealized appreciation of their property. Noting how this would have a disastrous impact because “the Buckeye Institute’s home state of Ohio, for example, has more than 75,000 farms, and 90 percent of those are run by families.” [ix] Further, explaining how it is foreseeable that a family-run farm would not be able to afford a tax on the unrealized appreciation of their property, forcing them to sell or otherwise lose their property. [x]
In addition, the Atlantic Legal Foundation asserts that unapportioned taxes on the appreciated value of investments disincentive investment, entrepreneurship, and innovation, which would have nationwide economic repercussions.[xi] Similarly, The Chamber of Commerce argues that businesses and shareholders rely on the predictability of tax laws to plan their financial affairs, and the Ninth Circuit’s reasoning destroys that because they could be taxed on gains that disappear as the market fluctuates.[xii]
Further, Americans for Tax Reform warns that the Ninth Circuit’s reasoning opens the floodgates for a wealth tax. Drawing parallels to historical precedents showing Congress has a tendency to expand its tax schemes, they highlight the inherent risk of unchecked expansions of Congress’s taxing power beyond the 16th Amendment’s constitutional restraint. Specifically, the brief says:
The president and certain members of Congress have recently proposed several unapportioned wealth taxes aimed at the unrealized gains of those they claim have too much. But the income tax, too, was originally billed as a tax only on the wealthy. As history shows, new taxing powers inevitably sweep in more and more taxpayers. It thus falls to this Court to recognize and enforce the 16th Amendment’s realization requirement and the constitutional limit upon direct taxation.[xiii]
Therefore, asserting that contemporary proposals for wealth taxes on unrealized gains risk expanding taxation beyond the wealthy, similar to the historical creep of the income tax.[xiv]
Finally, the Independent Women’s Law Center addresses the gendered impact of the MRT, shedding light on how taxes on unrealized gains disproportionately impact women. They note that the Ninth Circuit ruling “permits Congress to impose a particularly onerous burden on women, who tend to invest for a longer duration than men and, when working as entrepreneurs, often have no choice but to rely on their own capital rather than external investment.”[xv]
Conclusion
Therefore, the Supreme Court should reverse the Ninth Circuit and restore Congress’s constitutional restraints. The decision reached by the Supreme Court will undeniably shape the trajectory of the nation’s fiscal policy and its foundational principles of taxation for years to come. A decision by the Supreme Court is expected as late as June 2024.
[i] See Moore v. United States, 143 S. Ct. 2656 (2023).
[ii] See Tim Shaw, Supreme Court Takes Up Constitutional Challenge to TCJA Transition Tax, Thomson Reuters (June 27, 2023), https://tax.thomsonreuters.com/news/supreme-court-takes-up-constitutional-challenge-to-tcja-transition-tax/.
[iii] United States v. Phellis, 257 U.S. 156, 169 (1921) (emphasis added) (citing Eisner v. Macomber, 252 U.S. 189, 207 (1920).
[iv] See Kelley Taylor, Will SCOTUS Uphold Wealth Taxes?, Kiplinger (Dec. 5, 2023), https://www.kiplinger.com/taxes/will-scotus-strike-down-wealth-taxes.
[v] See I.R.C. § 956.
[vi] Hank Adler and Lacy Williams, The Supreme Court Will Finally Decide What ‘Income’ Means, The Wall St. J. (Dec. 4, 2023, 5:37 PM), https://www.wsj.com/articles/the-supreme-court-will-finally-decide-what-income-means-tax-investment-mandatory-repatriation-e647a03f.
[vii] Russel Sullivan et al., A Look Ahead Into Tax Policy in 2024, Brownstein (Jan. 4, 2024), https://www.bhfs.com/insights/alerts-articles/2024/a-look-ahead-into-tax-policy-in-2024.
[viii] Jack Salmon, Wide-Ranging Amicus Briefs in Moore v. U.S. Show Dangers of Taxing Unrealized Income, Philanthropy Roundtable (Sept. 26, 2023), https://www.philanthropyroundtable.org/wide-ranging-amicus-briefs-in-moore-v-u-s-show-dangers-of-taxing-unrealized-income/.
[ix] Brief of The Buckeye Institute as Amici Curiae Supporting Petitioners at 14, Moore v. United States, 143 S. Ct. 2656 (2023) (No. 22-800).
[x] See id.
[xi] See Brief of Atlantic Legal Foundation as Amici Curiae Supporting Petitioners at 3, Moore v. United States, 143 S. Ct. 2656 (2023) (No. 22-800).
[xii] See Brief of The Chamber of Commerce as Amici Curiae Supporting Petitioners at 2, Moore v. United States, 143 S. Ct. 2656 (2023) (No. 22-800).
[xiii] Brief of Americans for Tax Reform as Amici Curiae Supporting Petitioners at 3, Moore v. United States, 143 S. Ct. 2656 (2023) (No. 22-800).
[xiv] See id.
[xv] Brief of Independent Women’s Law Center as Amici Curiae Supporting Petitioners at 3, Moore v. United States, 143 S. Ct. 2656 (2023) (No. 22-800).
