Moore v. The United States: Will The Supreme Court Join The Whack-A-Tax Shelter Game?

Eugene Steuerle (Tax Policy Center; Google Scholar), Moore v. The United States: Will The Supreme Court Join The Whack-A-Tax Shelter Game?:

In  Moore v. the United States, the Supreme Court dodged the issue of whether the Constitution allows for the taxation of unrealized income, concluding that the “disagreement over realization” was among “potential issues for another day.” However, Justices Amy Coney Barrett and Samuel Alito, in a concurring opinion, and Justices Clarence Thomas and Neil Gorsuch, in the dissent, declared that realization was a Constitutional requirement.

This is not a minor issue. As my colleague Steven Rosenthal explains, their declarations open the Court to new challenges to the taxation of unrealized income. If the Court determines that “realization” is a Constitutional requirement, the decision would, at worst, threaten to gut the taxation of capital income. At best, it would require the Court to join Congress and the US Treasury Department in the endless game of whack-a-mole on tax shelters. ...

Will this whack-a-tax-shelter game be improved if the Supreme Court steps in as umpire?

Congress has written many tax rules designed to limit tax arbitrage and the amount of income that can remain unrealized. Rules that apply to commodity and other straddles, annuities, undistributed partnership income, zero coupon bonds, contingent debt, futures contracts, swaps, and constructive sales prevent some unrealized income from avoiding tax. Arguably, Congress still has been losing this battle.

In a future ruling, the Supreme Court could decide it wants to officiate Congress’ game of whack-a-tax shelter. But if it does, the Court needs to understand how open-ended this game can be, the tax arbitrage and shelter opportunities their decisions could easily create, and the consequences for tax equity and the economy itself. 

Editor's Note:  If you would like to receive a daily email with links to tax posts on TaxProf Blog, email me here.