Taxing Unrealized Gains Could Hurt the Charitable Sector

This week Philanthropy Roundtable published a new policy brief on the Moore v. United States case and potential consequences for the charitable sector if taxes on unrealized gains are deemed constitutional. The ultimate ruling by the Supreme Court on this matter could lead to dire outcomes for the philanthropic community, with the potential to undermine the transformative work nonprofits do across the nation. Our policy brief highlights how tax laws can impact investors and why taxing unrealized gains could discourage donors from giving as generously as they would otherwise.  

The Moore v. United States Case 

The case of Charles and Kathleen Moore, a married couple from Washington state, sheds light on the tangible consequences of implementing taxes on unrealized gains. The Moores made an investment in KisanKraft, an Indian company dedicated to empowering small-scale farmers by providing affordable power tools. Despite not receiving any financial profits from their investment, they found great satisfaction in knowing their capital was actively making a positive impact on the lives of rural farmers. However, when the Tax Cuts and Jobs Act (TCJA) was passed in 2017, the Moores unexpectedly found themselves burdened with a large tax bill that totaled almost $15,000. 

This tax, referred to as the Mandatory Repatriation Tax (MRT), obligated them to declare additional taxable income based on gains that had not yet materialized. The Moores subsequently petitioned the U.S. Supreme Court to review a lower court decision on the matter, challenging the constitutionality of the tax. 

Constitutional Questions 

The founders created the Constitution in part to prevent the government from having too much power to tax, especially in favor of certain regions. They made sure direct taxes were distributed equally based on the population. The MRT, a tax on personal property, arguably goes against this rule unless it can be considered a tax on “incomes” according to the 16th Amendment. Despite this, the Ninth Circuit court ruled in favor of the government, noting that realization of income is not a constitutional requirement for an income tax.  

However, the Buckeye Institute argues that removing the requirement to actually receive income weakens the protection against direct taxation. Court rulings over the past century have consistently said income must be realized and determined, contradicting the Ninth Circuit’s claim that realization is not necessary. 

Implications for Charitable Giving 

Beyond the constitutional concerns, the Ninth Circuit’s ruling introduces uncertainty that could adversely impact the economy. Tax complexity and economic uncertainty tend to discourage charitable giving and could hamper the ability of charities to fulfill their missions. Additionally, businesses facing uncertainty often adopt more conservative spending practices, which could lead to decreased corporate giving. 

The Threat to Philanthropy of Expanding Federal Taxes 

The MRT is merely the tip of the iceberg. Proposals for additional federal taxes on property and wealth have already surfaced. The Ultra-Millionaire Tax Act, the Billionaire Minimum Income Tax Act and President Biden’s proposal for a 25% tax on wealth for individuals with net assets above $100 million further illustrates the potential expansion of federal taxes on wealth. 

If the ruling of the Ninth Circuit in Moore v. United States stands, it could mark the beginning of a new era where federal taxes are levied on appreciating properties, stocks, farmland and other assets. The implications for the charitable sector would be profound with some notable wealth tax proposals including plans to tax charitable assets. Those who contribute generously to charitable foundations could see their assets diminish, potentially affecting the communities that currently benefit from their donations. 

The case of Charles and Kathleen Moore’s investment in KisanKraft serves as a poignant example of how tax laws can directly impact investors and charitable organizations. Although the Moores did not receive any financial gains from their investment, they found satisfaction in knowing their funds were making a positive difference in the lives of small-scale farmers. However, the Ninth Circuit’s ruling that an “income tax” does not require realized income could open the door to federal taxes on wealth, including the assets of charitable foundations. This would undoubtedly have far-reaching implications for the charitable sector and the communities it serves. 

As the Supreme Court reviews the case of Moore v. United States, it remains to be seen what the long-term consequences of their ruling will be for charitable funds, wealth creators and the charitable organizations they support. The outcome of this case will not only shape the landscape of tax policy but also determine the extent to which philanthropy can thrive and make a positive impact in society. 

For more information on this issue, read our policy brief entitled “Taxing Unrealized Gains is Unconstitutional: Moore v. United States” here.  

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