Just one week after a group of 15 senators introduced wealth tax legislation aimed at taxing the unrealized gains of Americans, the U.S. Supreme Court heard oral argument in the case of Moore v. United States. The question at hand: Does the 16th Amendment authorize Congress to tax unrealized gains without requiring them to be first realized by the taxpayer.
Should the Supreme Court side with the government and find that “income tax” does not require realized income, the decision could pave the way for a federal wealth tax. Such taxes wouldn’t just impact millionaires and billionaires, the assets of charitable foundations could be targeted as well. All of this could have profound effects on the charitable sector, particularly for individual donors to charitable foundations and the individuals and communities they serve.
Ultimately, the ruling by the Supreme Court could lead to dire outcomes for the philanthropic community, with the potential to undermine the transformative work nonprofits do across the nation. The outcome of Moore v. United States will not only shape the landscape of future tax policy but it will determine the extent to which philanthropy can thrive and positively impact society.
Attorney Andrew Grossman, representing the Moores argued, “’Income’ was understood at the time of the 16th Amendment’s adoption to refer to gains coming into the taxpayer, like wages, rents and dividends. Appreciation in the value of a home, a stock investment or other property is not and never has been taxed as income.”
“That’s not how the income tax has ever worked going back to 1913. Again, the reason the law doesn’t work that way is the obvious one. Unrealized gains are not income. The only way to make sense of the income tax as it’s existed for a century is to stick with the original meaning of the 16th Amendment. The Court should reaffirm that there is no income without realization.”
Solicitor General Elizabeth B. Prelogar argued for the government that the 16th Amendment does not require realization before income can be taxed. She said the amendment does not explicitly mention the concept of realization, and the word “income” has a broader meaning than only something that has been realized. The government also argued Congress has the authority to tax unrealized gains under its authority to regulate commerce.
Skepticism of the Justices
Justice Thomas asked the government to define realization.
Reiterating the argument that the 16th Amendment allows for a broad definition of income that includes unrealized gains, the government cited historical precedents like livestock taxation and the concept of “mark-to-market” value as evidence.
Using a federal tax on Americans’ retirement accounts as an example, Justice Gorsuch asked Prelogar “Would you agree, General, that when the Court opens a door, Congress tends to walk through it?”
Prelogar responded saying this door is already open and in the example of retirement accounts under her definition of income, the Constitution already grants Congress the authority to enact a tax on the unrealized gains.
Other justices expressed concern over potentially disrupting established legal frameworks for investors, tax advisors and businesses.
Justices Gorsuch and Alito found aspects of the government’s argument concerning, saying taxation of unrealized assets would impact millions and millions of Americans who participate in the stock market.
Conclusion: SCOTUS Should Slam the Door on Wealth Taxes
As a reminder, Philanthropy Roundtable submitted an amicus brief in support of the petitioners because the effectiveness of philanthropy is dependent on the nature of the tax code. If the Mandatory Repatriation Tax is upheld it could open the door to a variety of taxes that could decimate effective philanthropy.
To avoid upending a century of jurisprudence, the court should reapply the realization definition it has applied since Eisner v. Macomber (1920).
Philanthropy Roundtable continues to monitor this case closely. The Supreme Court will issue a decision in Moore before July 2024.