Thursday, September 28, 2023
John Brooks (Fordham; Google Scholar) presents The Sixteenth Amendment and the Meaning of "Income" (with David Gamage (Indiana-Maurer; Google Scholar)) at Columbia today as part of its Davis Polk & Wardwell Tax Policy Colloquium hosted by Michael Love:
The upcoming Supreme Court case of Moore v. United States raises questions that the Court has rarely had to address in the last 100 years—what is the meaning of income under the Sixteenth Amendment, and of the Sixteenth Amendment generally? And furthermore, is realization required before the gain from property ownership can be treated as income? And what does realization mean? The taxpayers in Moore (and the Ninth Circuit judges who dissented from the denial of rehearing en banc) argue that realization is necessarily a part of the meaning of “income” in the Sixteenth Amendment—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.” They are, in essence, aiming to revive a disputed reading of the discredited 1920 case of Eisner v. Macomber.
In this Article we show that contemporaneous definitions of “income” did not incorporate—and could not have incorporated—the contemporaneous understanding 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 of assets as gross income for tax purposes.
Furthermore, we show that the explicit and well-understood purpose of the Sixteenth Amendment was to overrule the Pollock case and re-establish the practice of income taxation as it was understood at the time—including, in particular, income taxes on undistributed corporate earnings and unrealized gain. Given this evidence, it is clear that realization could not have been a necessary and required element of the original meaning of “income” in the Sixteenth Amendment.
Finally, we explain how income should be understood under the Sixteenth Amendment. We endorse the standard view of an economic-gain conception of income, consistent with the Haig-Simons income concept. That conception is also consistent with the existing law, aligns with the historical distinction between income and capital, and is workable for courts. But we also explain why an economic-gain conception is better suited to protect against backdoor wealth taxation than alternative conceptions.