Brooks & Gamage: The Sixteenth Amendment And Congress’s Income Tax Power

John R. Brooks (Fordham; Google Scholar) & David Gamage (Indiana-Maurer; Google Scholar), “From Whatever Source Derived”: The Sixteenth Amendment and Congress’s Income Tax Power:

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 the Sixteenth Amendment and Congress’s income tax power? Does that power only extend to realized 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 explicit and well-understood purpose of the Sixteenth Amendment was to overrule the Supreme Court case of Pollock v. Farmers’ Loan & Trust Co. and restore the “complete and plenary power of income taxation” as it was understood at the time. The Amendment did not create Congress’s power to tax income, which it had been doing since the Civil War; it merely removed the impediment Pollock had introduced. This public meaning of the Amendment was communicated clearly both in Congress and in the press.

Thus, to understand the power the Amendment authorized, it is necessary to look at the practice and experience of income taxation at that time. Federal (and state) income taxes prior to the time of ratification explicitly included items of “unrealized” income. In particular, federal tax law 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. 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.

This Article also explains how income should be affirmatively 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 courts 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.

Prior TaxProf Blog coverage:

• Christopher Cox (Former Rep. (1989-2005) & SEC Chair (2005-2009)) & Hank Adler (Chapman), The Ninth Circuit Upholds A Wealth Tax (Jan. 30, 2023)
• Reuven Avi-Yonah (Michigan), If Moore Is Reversed, 179 Tax Notes Fed. 2215 (June 26, 2023)
• John Brooks (Fordham) & David Gamage (Indiana), Moore v. United States and the Original Meaning of Income (June 27, 2023) (reviewed by Michelle Layser (San Diego) here)
• Daniel Hemel (NYU), The Low And High Stakes Of Moore, 180 Tax Notes Fed. 563 (July 24, 2023) (reviewed by Young Ran (Christine) Kim (Cardozo) here)
• Alex Zhang (Emory), Moore, Eisner v. Macomber, and the Future of Structural Tax Reform, 92 Geo. Wash. L. Rev. __ (2024) (Aug. 29, 2023)
• Thomas Lee (BYU), Lawrence Solum (Virginia), James Cleith Phillips (Chapman) & Jesse Egbert (Northern Arizona), Moore, Corpus Linguistics, And The Original Public Meaning Of The Sixteenth Amendment (Sept. 14, 2023)
• Christopher Hanna (SMU), Moore, The 16th Amendment, And The Underpinnings Of The TCJA’s Deemed Repatriation Provision (Sept. 28, 2023)
• Joint Committee on Taxation, Tax Code Provisions Implicated In Moore (Oct. 5, 2023)
• Natasha Sarin (Yale), The Supreme Court Tax Case That Could Blow A Hole In The Federal Budget (Oct. 7, 2023)