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Wealth tax questions punted for another day

Updated: Jul 2

There are at least four U.S. Supreme Court justices willing to forcefully slam the door shut on efforts to impose wealth taxes. Unfortunately, you need five. Last October we wrote, “U.S. Supreme Court considers tax case of the century.” When the ruling in Moore v. United States came out on June 20, however, it brought to mind the scene from Peanuts of Lucy moving the ball before Charlie Brown could kick it. Rather than affirmatively answering whether income must be realized before it can be taxed, the majority opinion left that major legal question for another day.

The SCOTUS blog described the ruling this way:

“In its 24-page ruling, the majority did not resolve the question whether – as the Moores contended and the government disputed – the Constitution requires income to be realized before it can be taxed. Instead, Kavanaugh explained, the real ‘precise and narrow question’ before the justices was whether Congress can attribute income that an entity has realized but not distributed to its shareholders or partners and then tax that income. For Kavanaugh and the four justices who joined his opinion – Chief Justice John Roberts and Justices Sonia Sotomayor, Elena Kagan, and Ketanji Brown Jackson – the answer was clear from the Supreme Court’s ‘longstanding precedents’: yes, although they stressed that their ruling was a narrow one that ‘applies when Congress treats the entity as a pass-through.’”

The majority opinion in Moore notes:

“The Court’s holding is narrow and limited to entities treated as pass-throughs. Nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.”

Reading through the concurrent and dissenting opinions, there are at least four justices who are willing to rule that income must be realized before it can be taxed.

As noted by the Tax Foundation:

"It would take just one justice from the opinion of the court (which demurs on the question, for now) to create a majority against taxes on unrealized income, which could in turn invalidate certain tax ideas."

One of the amicus in the case was filed by the National Taxpayers Union Foundation (NTUF). NTUF said this about the Moore ruling:


“This is a narrow decision focused on the one-time international tax that was challenged. But the Court makes clear it is not opening the door to a wealth tax, which would still face constitutional problems as a tax on property.”

The failure to resolve this debate now left Justice Thomas particularly frustrated in his dissent:

“Even as the majority admits to reasoning from fiscal consequences, it apparently believes that a generous application of dicta will guard against unconstitutional taxes in the future. The majority’s analysis begins with a list of nonexistent taxes that the Court does not today bless, including a wealth tax. And, it concludes by offering a narrow interpretation of its own holding, hinting at limiting doctrines, prejudging future taxes, cataloguing the Government’s concessions, and reserving other questions ‘for another day.’ Sensing that upholding the MRT cedes additional ground to Congress, the majority arms itself with dicta to tell Congress ‘no’ in the future. But, if the Court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.

The Court today upholds the MRT, but not because it endorses the Ninth Circuit’s erroneous view that ‘realization of income is not a constitutional requirement.’ The majority acknowledges that the Sixteenth Amendment draws a distinction between income and its source. And, it does not dispute that realization is what distinguishes income from property. Those premises are sufficient to establish that realization is a constitutional requirement. Sixteenth Amendment ‘income’ is only realized income. We should not have hesitated to say so in this case.”

Advocates for taxing unrealized income may look at the ruling in Moore and think, “So you're telling me there's a chance?” With four justices already a firm no, that’s a chance not worth taking.

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