Galle: What's Next For Wealth And Mark-To-Market Taxes After Moore?

TaxProf Blog Op-Ed:  What's Next For Wealth And Mark-To-Market Taxes After Moore?, by Brian D. Galle (Georgetown; Google Scholar):

The Moore case was always about wealth taxes. Now that the Supreme Court has handed down its decision, and seems to have studiously avoided making any (technically) definitive statements about whether wealth taxes fit into the constitutional scheme, what’s next for proponents of wealth and mark-to-market taxes?

First, let’s review. Moore holds that the government can define an individual’s income to include the untaxed profits of a business entity in which the individual holds an equity stake. Thus, whether or not the Constitution in effect demands realization, taxing the equity owner would meet that demand, assuming the business entity itself has realized income. That holding allowed the Court to take a pass on determining whether there is any constitutional realization requirement. And the Court repeated several times, in several different ways, that a realization requirement could be a constitutional obstacle to wealth or mark-to-market taxes, and it was not deciding those questions.

Tea-leaf readers might still find some passages to sip on. In holding that pass-through taxation of active business income would meet any constitutional realization requirement, the Court emphasized the historical pedigree of that approach, calling it “long-settled and established practice.” Oral argument listeners might recall that when Justice Kavanaugh probed the Solicitor General on how the Court might side with the Government without blessing any future wealth tax, General Prelogar replied by noting that the Court sometimes relied on history and tradition to uphold otherwise dubious provisions.

As several amicus briefs noted (including one co-drafted by yours truly, and joined by some noted legal historians), realization was a common but not inevitable feature of U.S. tax schemes beginning at least with the Civil War income tax statutes. Before 1913, farmers, insurance companies, businesses holding investment assets, and even homeowners in Wisconsin paid income tax based on unrealized gains or losses.

But authors of a future wealth or mark-to-market bill would not have to rely just on historical precedent. They might, for example, build on the Billionaire Minimum Income Tax bill from Rep. Cohen, which implemented the Administration’s Green Book proposal. In the BMIT, many taxpayers got a choice: they could pay tax immediately based on an estimated value of their assets, or instead wait until an actual sale or other realization event, and then pay tax plus an interest charge. (For an extended discussion of how that method works, see here.) That mirrors the long-standing approach of subpart F, under which taxpayers can elect out of mark-to-market treatment of their foreign investments by agreeing to undesirable charges at the time of a future distribution.

A brief aside late in the Moore majority opinion shouldn’t cast much doubt on that approach. In rejecting the plaintiffs’ arguments about S Corporations, the Court noted that S-corp shareholders’ consent likely cannot “eliminate the apportionment requirement (which is a structural requirement of the Constitution).” The Court had already rejected the S-corp argument on another ground, making this language dicta, and it doesn’t come with any supporting citation. Many “structural” features of the Constitution, such as the Article III limitations on which officials can exercise the judicial power, indeed are waivable. In any event, statutory drafters could simply make the deferral-plus-interest approach mandatory, perhaps with some required withholding in advance to make sure that taxpayers will be liquid enough to cover their future liabilities.

Another approach might be to tax wealth in forms that the Court has long said are constitutional without respect to whether they are taxes on realized “income.” That might include a tax on wealth held by a trust or other business entity, which would cover the vast majority of all wealth transmitted from generation to generation. Reformers might also look to states, where there are few constitutional obstacles, and here taxing before realization might help solve otherwise enduring problems of tax avoidance.

TaxProf Blog Op-Eds on Moore v. United States, No. 22–800 (June 20, 2024):

• Lawrence Zelenak (Duke), Moore Thoughts (June 21, 2024)
• Conor Clarke (Washington University), Four More Takeaways From Moore (June 22, 2024)
• Reuven Avi-Yonah (Michigan), Is A Mark To Market Tax Constitutional After Moore? (June 23, 2024)
• John Brooks (Fordham) & David Gamage (Missouri-Columbia), Moore v. United States: Initial Reactions (June 24, 2024)
• Brian Galle (Georgetown), What's Next For Wealth And Mark-To-Market Taxes After Moore?
• Andy Grewal (Iowa), Moore Decides Less (June 26, 2024)
• Michael Graetz (Columbia), Moore v United States—Winning the Battle but the War Goes On (June 27, 2024)
• Alex Zhang (Emory), Moore And The Judicial Role In Tax Law (June 28, 2024)