I’m no expert in tax law, and I encourage those of you who are steeped in tax law to read today’s Supreme Court ruling in Moore v. United States for yourselves.
The big-picture takeaway for the general reader is that the five-justice majority—opinion by Kavanaugh, joined by the Chief, Sotomayor, Kagan, and Jackson—avoided deciding whether the Sixteenth Amendment requires that income be realized in order to be taxable. The four other justices—Thomas, Alito, Gorsuch, and Barrett—found it clear that the Sixteenth Amendment does impose a realization requirement.
While the majority opinion thus leaves open the theoretical possibility that the Sixteenth Amendment would allow a tax on wealth, it certainly does not greenlight such a tax. On the contrary, Justice Kavanaugh cites the government’s double acknowledgments at oral argument that a tax on wealth “might be considered a tax on property, not income” (and thus be subject to the Constitution’s onerous requirement that “direct” taxes be apportioned among the states according to population) and that the Sixteenth Amendment might require that income be realized.
But Justice Jackson writes separately to make clear that she thinks that the Sixteenth Amendment does allow Congress to tax unrealized gains (e.g., the appreciation in value of property)—in short, to tax increases in wealth as income.
Some additional observations:
1. At issue in the case is the constitutionality of the Mandatory Repatriation Tax, enacted as part of a 2017 law. The MRT, as Kavanaugh summarizes it, “imposed a new, one-time pass-through tax on some American shareholders of American-controlled foreign corporations.” Specifically, “the MRT attributed the long-accumulated and undistributed income of American-controlled foreign corporations to American shareholders, and then taxed those American shareholders on their pro rata shares of that long-accumulated income at a rate from 8 to 15.5 percent.”
Kavanaugh’s majority opinion finds it unnecessary to address the realization question because “the MRT does tax realized income—namely, income realized by the [foreign] corporation.” (Emphasis in original.) Thus, “the precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.” Kavanaugh concludes that the answer to that question, under the “clear rule” that the Court’s precedents had established by 1938, is yes.
Kavanaugh emphasizes that the Court’s holding is “narrow”:
It is limited to: (i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income. In other words, our holding applies when Congress treats the entity as a pass-through.
2. Justice Barrett, joined by Justice Alito, concurred in the judgment, and Justice Thomas, joined by Justice Gorsuch dissented. Despite her agreement with the majority’s bottom line, Barrett’s opinion has much more in common with Thomas’s.
Addressing the question on which the Court granted certiorari (but that the majority does not decide), Barrett concludes that it is “straightforward” that the Sixteenth Amendment does not authorize Congress to tax unrealized sums. She disagrees with the majority’s reasons for saying that the income realized by a foreign corporation can be attributed to its taxpayers, but she finds that the plaintiff taxpayers in this case, having “barely addressed” the attribution question, “have not met their burden” of showing that the income at issue here cannot be attributed to them.
Justice Thomas, in his dissent, opines that realization is a constitutional requirement for income taxes, and he calls the majority’s “clear rule” on attribution an “invention” and a “mirage.” He concludes that the MRT does not operate as a tax on income.
3. Justice Jackson wrote a solo concurring opinion. She rejects the notion that the Sixteenth Amendment allows taxation only of realized gains, and she thus would open the door wide to a federal tax on wealth. So if you have a house that has increased in value since you bought it, Congress could tax you on the increase. Ditto for shares of stock.
Don’t infer from their failure to join Jackson’s opinion that Kagan and Sotomayor disagree with her.