From the Wall Street Journal by its Editorial Board — June 27, 2023 —
The Justices will hear Moore v. U.S., which asks if ‘income’ under the law can be an unrealized gain.
The Supreme Court is set to finish another consequential term this week, and on Monday the Justices teed up for next term what could be a landmark tax case. In agreeing to hear Moore v. U.S., the Court will consider the legality of a form of wealth tax that is the long-time dream of the political left.
We recently urged the Justices to take this appeal from a bad ruling by the Ninth Circuit Court of Appeals. The case concerns a provision in the 2017 tax reform that levied a one-time mandatory repatriation tax on foreign companies, as Congress scrambled to find revenue to pay for tax-rate cuts.
But the tax applied to American shareholders, even passive investors like Charles and Kathleen Moore of Washington state. They were hit by a surprise $14,729 tax bill, though they had never seen a dime of income from their investment in a friend’s company in rural India. They were taxed instead on the unrealized income of the foreign company.
And there’s the rub. The Moores sued for a refund, but a three-judge panel of the Ninth Circuit ruled that “realization of income is not a constitutional requirement.” This defies the traditional understanding in U.S. tax law, and in Supreme Court doctrine, that income must be realized before it can be taxed. That is, the income must be real income, not merely an increase in the value of an asset in market value or on some company’s books.
The Moores were denied an en banc hearing by the full Ninth Circuit, but four judges dissented from that denial. Judge Patrick Bumatay’s powerful dissent for the four judges will be a constitutional guide for the Supreme Court when it hears the case.
A 1920 case, Eisner v. Macomber, held that a gain in asset value qualifies as income only if it is “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” The fight will be whether that precedent still holds under the Constitution’s Sixteenth Amendment that allowed the income tax.
The legal and economic stakes are high. A ruling that upholds the Ninth Circuit would open the door for Congress to tax wealth and property of all kinds, including art and collectibles. Sens. Bernie Sanders and Elizabeth Warren are wealth-tax evangelists, and Senate Finance Chairman Ron Wyden has floated a proposal. The press is already pitching the case in class-warfare terms as an opening for corporate refunds. The horror.
If the courts give a green light, prepare for a raid on much of the private wealth and savings of Americans. The Supreme Court can forestall this outcome by reinforcing its tax precedents and foreclosing the kind of levy that sideswiped the Moores. If progressives want a wealth tax, they should be obliged to amend the Sixteenth Amendment to redefine income.
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