The fruit or the tree? Being the lone sentry against unapportioned federal taxation, the very definition of income is central to tax jurisprudence. Taxable “income” has cautiously been likened to the fruit-bearing tree: fruit’s economic value should be attributed (taxed) to the tree on which it grows.[i]  Likewise, attempts to re-assign fruits to another tree for tax purposes are invalid.  The debate of what constitutes income is so fiercely consequential because the federal government’s authority to impose unapportioned direct taxes is plainly limited to “income” by the Sixteenth Amendment:

The Congress shall have power to lay and collect taxes on incomes (emphasis added), from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.[ii]

Since the Sixteenth Amendment’s ratification in 1913, the Supreme Court has cautiously defined income on only a handful of occasions. The first definition came shortly after ratification in Stratton’s Independence, where the Court defined income as “the gain derived from capital, from labor, or from both combined.”[iii]  The Stratton definition was affirmed just seven years later in the landmark Eisner v. Macomber case. That Eisner era ‘capital, labor, or a combination of both’ definition of “income” held for thirty-five years until the Court broadened its definition in the Glenshaw Glass Co opinion.[iv] Decided in 1955, “income” has since been defined as an “undeniable accession to wealth, clearly realized, and over which the taxpayers have complete dominion.”[v] Since Glenshaw, income has been understood to encompass only those economic gains that are clearly realized—i.e., more than mere appreciation—and over which taxpayers have complete control.[vi]

But just as fruit is not enjoyed until harvested, so too is income not taxed until assigned. For the next vital inquiry is identifying who the income belongs to—from which tree the fruit fell. To prevent taxpayers from avoiding income taxes by assigning their income—and tax burden—to somebody else, the judicially-developed assignment of income doctrine requires that income must be taxed to the person who earns it.[vii]  In other words, taxpayers will be liable for income taxes even if they attempt to anticipatorily transfer payment of their income to another individual.

The only way to validly assign income to another taxpayer is by transferring the underlying property ownership rights of an income-producing property. For example, if a father owns common stock and directs corporate dividend distributions to his son, the father will still be liable for income taxes on the dividends paid because the father still controls who enjoys its benefit. Conversely, if the father transfers the common stock outright to his son, then the son is liable for any income taxes on future dividends paid because income tax liability follows property ownership.[viii]

The decisive question of income has reared its arcane head before the Supreme Court yet again in the to-be-decided Moore v. United States case.[ix] Moore concerns a provision of the 2017 Tax Cuts and Jobs act that taxes certain shareholders of foreign corporations on the dividends they would be entitled to despite having not yet been paid by the corporation.[x] The provision in question, the Mandatory Repatriation Tax (“MRT”), operates to create a constructive dividend of all the corporation’s accumulated earnings and profit since December 31, 1986, and deem certain shareholders to have actually received those dividends in an amount proportional to their stock ownership. In other words, the MRT proportionally attributes all of certain corporation’s retained earnings (i.e., net income not distributed to shareholders) dating back to 1986 as “income” received by its shareholders equal to their ownership interest.

The taxpayers assert that the MRT does not tax “income” because their economic investment, although pregnant with appreciated gain, has yet to be realized in the manner required by existing definitions of income; the tree has fruit, but nobody can nor has eaten it. The “realization” requirement offered in support of the taxpayers’ argument against the tax has been judicially recognized since the Glenshaw Glass Co. holding in 1955.

In opposition, the IRS contends that income has no realization requirement, so a tax on constructive dividends proportional to shareholder interest is permissible even prior to any distributive dividend or other disposition. To support their argument, the IRS asserts that the Glenshaw Glass Co. and Macomber definitions have been effectively repealed because the Supreme Court has issued a number of opinions contrary to their alleged holdings.[xi]

It is incumbent upon the Supreme Court to use the Moore case as an opportunity to provide a bright-line rule defining taxable income. If the Supreme Court accepts or even fails to explicitly reject the government’s contention that there is no realization requirement for “income,” then Congress will have a green light to tax anything they might choose to define as income. Allowing such a broad interpretation of congressional taxing authority would mean that nearly any asset could be taxed on its yearly (or even daily) appreciation. The effects will include an oppressively increased tax burden coupled with economic collapse as Americans face speculative uncertainty as to the tax treatment of their assets.

There is no question that income was recognized by some party in the Moore case: the corporation in question had accumulated earnings and profits dating back to 2005. Those earnings and profits can only exist by virtue of income—but that income belongs to the corporation, not its shareholders. Just as income is only taxable to he who earns it, so too are corporate earnings only taxable under the Sixteenth Amendment to those who receive them. The Supreme Court must provide taxpayers and Congress with a concrete definition of income consistent with the Macomber and Glenshaw Glass Co. holdings. Otherwise, the Sixteenth Amendment will effectively become moot, and our entire economic system will be at risk as the fruits of economic labor will assuredly be prematurely assigned to the incorrect trees under expanded Congressional authority to tax “incomes.”

[i] See Lucas v. Earl, 281 U.S. 111, 115 (1930). See also Charles S. Lyon & James S. Eustice, Assignment of Income: Fruit and Tree as Irrigated by the P.G. Lake Case, 17 Tax L. Rev. 295 (1962) (discussing a thorough discussion on the assignment of income doctrine shortly after a series of landmark Supreme Court rulings). Lucas v. Earl is perhaps the seminal case on the judicially-developed assignment of income doctrine. Assignment of income answers the question to which taxpayer income tax liability shall be imposed with a common law: income shall be taxed to the person that earns it. But what is income? See Lucas 281 U.S. at 115.

[ii] U.S. Const. amend. XVI.

[iii] Stratton’s Independence, Ltd., v. Howbert, 231 U.S. 399, 415 (1913).

[iv] See Comm’r v. Glenshaw Glass Co., 348 U.S. 426 (1955).

[v] Id. at 431.

[vi] See Mark J. Wolff, Sex, Race, and Age: Double Discrimination in Torts and Taxes, 78 Wash. U. L.Q. 1341, 1364-66 (2000) (providing a more detailed history of the common law definitions of income and Congressional codification of “income” statutes from ratification in 1913 through the Glenshaw Glass Co. opinion in 1955).

[vii] See Lucas v. Earl, 281 US 111 (1930) (holding that taxpayer cannot avoid income tax by anticipatory assignment of future salary earnings to spouse); see also Helvering v. Horst, 311 U.S. 112 (1940).

[viii] See Blair v. Comm’r, 300 U.S. 5 (1937) (allowing avoidance of avoid tax liability on inherited income interest where taxpayer transferred his entire income interest to children).

[ix] Moore v. United States, 143 S. Ct 2656 (2023); see also Moore v. United States, 36 F.4th 930 (9th Cir. 2023) (holding for Commissioner); see also Moore v. United States, 2020 WL 6799022 (W.D. Wash 2020) (holding for Commissioner).

[x] See I.R.C. § 965; see also Treas. Reg. § 1.965-1(a). Section 965, also known as the Mandatory Repatriation Tax (“MRT”), was a new tax passed in the 2017 Tax Cuts and Jobs Act which taxed shareholders of Controlled Foreign Corporations (“CFCs”) on their attributable portion of the CFC’s retained earnings and profit accumulated since December 31, 1986. See I.R.C. § 965 (2023). The MRT treated any shareholder who held at least 10% of the CFC stock as receiving a constructive dividend to the extent of their proportional share of retained earnings and profits. Id. The Moore case challenges the MRT on the grounds that it is an impermissible tax on property—not income—because the Moores never received a distribution. The Moores’ argument is that MRT tax is unconstitutional because it is an unapportioned direct tax, but not on “income” as required by the Sixteenth Amendment. See Moore v. United States, 36 F.4^th 930 (9th Cir. 2023).

[xi] See e.g. U.S. v. Phellis, 257 U.S. 156 (1921) (holding that stock dividends were taxable income contrary to Macomber holding); see also Tariff Act of 1913, ch. 16, § 2.A.2, 38 Stat. 166 (taxing shareholders on “the share to which [they] would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations, joint-stock companies, or associations,” when those corporations had been “formed . . . for the purpose of preventing the imposition of [a] tax through the medium of permitting such gains and profits to accumulate instead of being divided or distributed.”).