Paul L. Caron

Friday, January 17, 2014

Miller: Bartlett, Realization, and the Constitution

TaxProf Blog op-ed:   Bartlett, Realization, and the Constitution, by David S. Miller (Cadwalader, New York):

In his Economix column in the NY Times (January 14, 2014), Bruce Barlett discusses Eisner v. MacComber, 252 U.S. 189 (1920), where the Supreme Court held that stock dividends are not “income” within the meaning of the Sixteenth Amendment because they have not been realized, and therefore they may not be taxed by Congress without apportionment to the states. Bartlett woes the fact that Eisner v. MacComber remains good law today and that “one lasting judicial constraint on congressional latitude is the principle that only realized capital gains may be taxed, a legacy of the Eisner decision.” He concludes that “the constitutional requirement that capital gains must be realized to be taxable is one of the biggest problems in the tax code.”

But there is no constitutional requirement that capital gains be realized to be taxed.

The Supreme Court discredited the reasoning of Macomber in Helvering v. Horst, 311 U.S. 112 (1940) (realization requirement is ‘‘founded on administrative convenience’’). Since then several courts have permitted taxation without realization. See Garlock Inc. v. Commissioner, 489 F.2d 197, 200-201 (2d Cir. 1973) (upholding tax on shareholder’s share of current but undistributed earnings of controlled foreign corporation; ‘‘the argument that Section 951 . . . is unconstitutional we think borders on the frivolous in light of this court’s decision in Eder v. Commissioner. . . . ‘‘(citation omitted)); Eder v. Commissioner, 138 F.2d 27, 28-29 (2d Cir. 1943) (upholding tax on undistributed earnings of foreign personal holding companies); Murphy v. United States, 992 F.2d 929, 931-32 (9th Cir. 1993) (upholding constitutionality of mark-to-market taxation under section 1250 for commodity futures contracts).

Today commentators overwhelmingly conclude that the realization requirement is merely an administrative — and not a constitutional — rule. See Marvin A. Chirelstein, Federal Income Taxation 71 (7th ed. 1994) (‘‘[R]ealization is strictly an administrative rule and not a constitutional, much less an economic, requirement of ‘income.’’’); Joseph T. Sneed, The Configurations of Gross Income 65-72 (1967) (discussing ‘‘the Court’s erosion of the constitutional requirement of realization’’); Boris I. Bittker, Charitable Gifts of Income and the Internal Revenue Code: Another View, 65 Harv. L. Rev. 1375, 1380 (1952) (expressing ‘‘no doubt’’ that realization is not constitutionally required); Richard B. Stone, Back to Fundamentals: Another Version of the Stock Dividend Saga, 79 Colum. L. Rev. 898, 916-18 (1979) (realization is issue of policy, not constitutional law); Stanley S. Surrey, The Supreme Court and the Federal Income Tax: Some Implications of the Recent Decisions, 35 Ill. L. Rev. 779, 791 (1941) (most commentators agree that realization is not constitutionally mandated); see also David M. Schizer, Realization as Subsidy, 73 N.Y.U. L. Rev. 1549, 1576 (1998) (“Commentators almost universally agree that realization is not constitutionally required”); Noel B. Cunningham & Deborah H. Schenk, Taxation Without Realization: A ‘Revolutionary’ Approach to Ownership, 47 Tax L. Rev. 725, 741 and n.69 (1992) (citing both judicial and academic authority for the proposition that realization requirement is not constitutionally mandated).

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In Glenshaw Glass, 348 U.S. 426; 75 S. Ct. 473 (1955), the Supreme Court seemed to loosen up the definition of gross income. It noted that Macomber "was not meant to provide a touchstone to all future gross income questions." It defined gross income as "undeniable accessions to wealth, clearly real-ized, and over which the taxpayers have com-plete dominion."

Posted by: Elmer Stoup | Jan 21, 2014 7:34:59 AM

Well, Chief Justice Roberts did cite Macomber on a constitutional law question in NFIB v. Sebelius. The point wasn't specifically about realization, to be sure, but it was about the meaning of direct taxation. (That is, a tax on personal property is, like one on real property, direct.) That does suggest that Macomber's reasoning has not been totally repudiated. And, when it comes to understanding what the law is, what the Court says is perhaps more important than what "commentators" say.

Posted by: Erik Jensen | Jan 17, 2014 11:35:06 AM