Brooks & Gamage: Moore v. United States And The Original Meaning Of Income

Wall Street Journal Editorial, A Wealth-Tax Watershed for the Supreme Court:

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.

John R. Brooks (Fordham; Google Scholar) & David Gamage (Indiana-Maurer; Google Scholar), Moore v. United States and the Original Meaning of Income:

In the upcoming Supreme Court case of Moore v. United States the taxpayers are challenging whether unrepatriated earnings of a foreign corporation can be “income” of a shareholder under the Sixteenth Amendment. The case therefore raises a question that the Court has rarely had to address in the last 100 years—what is the meaning of "income" under the Sixteenth Amendment? And furthermore, is "realization" required before the gain from property ownership can be treated as income?

Central to answering those question is another question: What is the original meaning of "income" at the time of the Sixteenth Amendment’s ratification? The taxpayers in Moore (and the Ninth Circuit judges who dissented from the denial of rehearing en banc) argue that some concept of realization is necessarily a part of the original meaning of income—i.e., that there must be some act of separation or conversion of property into cash or other property in order for there to be “income.”

In this essay we highlight some of the major errors and omissions of the taxpayers, amici, and Ninth Circuit dissenters related to the question of original meaning. We show that contemporary definitions of income did not—and could not have—incorporated the contemporaneous definition of "realization," and that they in fact incorporated unrealized gain. Furthermore, we show that pre-ratification and contemporaneous federal tax law explicitly included undistributed corporate earnings in shareholders' income. We also show—we believe for the first time in the literature—that the federal corporate income tax law at the time of the Sixteenth Amendment's ratification explicitly included unrealized gain from the appreciation assets as gross income for tax purposes. Given this evidence, it is clear that realization could not have been a necessary and required element of the original meaning of income.

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