United states supreme court building by Jeff Kubina is licensed under public domain
Americans for Tax Reform filed an amicus brief in Moore v. United States urging the United States Supreme Court to reject the Ninth Circuit’s decision to depart from established limitations on the government’s taxing power. The Ninth Circuit’s backward view of the 16th Amendment opens the door to Congress enacting unconstitutional wealth taxes that upset the settled expectations of American taxpayers.
The case will address a lawsuit filed by the Moore family after they received a $14,729 tax bill under the mandatory repatriation tax (MRT) implemented in 2017. The MRT was implemented as a one-time tax on Americans who owned shares in foreign corporations, even if the corporation hadn’t distributed any earnings to the taxpayer. The plaintiffs claim that the tax is unconstitutional because it applies to “unrealized” income while simultaneously applying retroactively to past earnings that amount to property, violating the 16th Amendment and years of case law requiring that income be “clearly realized” before it is taxed.
The Sixteenth Amendment’s text and history as well as Supreme Court precedent have established that realization is part of the constitutional definition of income. Yet the Ninth Circuit’s decision brazenly ignores this requirement as a mere matter of administrative convenience, rather than a constitutional requirement. Americans for Tax Reform strongly urges the court to reject this unprecedented view.
The brief explores the legal history of realization as a core tenet of income and shows that the term “incomes” in the Sixteenth Amendment included a realization requirement “in the minds of the people when they adopted” it.
Below are some excerpts from ATR’s Amicus Curiae brief:
Congress May Not Levy an Unapportioned Direct Tax on Unrealized Gains.
The MRT passes constitutional muster only if it is a tax on “incomes” within the meaning of the Sixteenth Amendment. The Sixteenth Amendment’s text and history, as well as this Court’s precedents, all confirm that realization is part of the constitutional definition of income. But the Ninth Circuit viewed realization as merely a matter of administrative convenience, rather than a constitutional requirement. This Court should reject that unprecedented view. [page 4]
The Mandatory Repatriation Tax Is an Unapportioned Direct Tax.
The Framers thus struck a careful balance in defining Congress’s power to tax. They granted Congress the power to “lay and collect Taxes, Duties, Imposts and Excises.” But they qualified that power by providing that “[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census.” [page 5]
The reason for this limitation was straightforward. “[W]hat the Constitution intended to guard against was the exercise by the general government of the power of directly taxing persons and property within any State through a majority made up from the other States.” [page 5]
The Original Public Meaning of “Incomes” Does Not Include Unrealized Gains.
The term “incomes” in the Sixteenth Amendment included a realization requirement “in the minds of the people when they adopted” it. Consequently, the ratifying public understood that “income not realized is not income.” A plethora of sources makes this clear. [page 7]
A Realization Requirement Respects The Balance Struck By The Sixteenth Amendment’s Framers.
If any doubts remain as to the meaning of “income,” they are dispelled by the historical context surrounding the Sixteenth Amendment’s passage. [page 20]
This Court has long recognized that a constitutional amendment must be read “in connection with the known condition of affairs out of which the occasion for its adoption may have arisen.” And, with that historical context in mind, courts should construe the constitutional text “in a way, so far as is reasonably possible, to forward the known purpose or object for which the amendment was adopted.” [page 20]
Failing to honor the realization requirement would upset that choice. And it would open the door to a limitless new federal tax power. As Judge Bumatay put it: “Divorcing income from realization opens the door to new federal taxes on all sorts of wealth and property without the constitutional requirement of apportionment.” For “without a realization requirement to cabin the scope of ‘incomes,’” he explained, “it is hard to see how the apportionment requirement has any remaining relevance. [page 23]
The Ninth Circuit’s Decision Invites Future Efforts To Expand Congress’s Taxing Power Beyond Constitutional Constraints.
Recent years have seen a slurry of proposed wealth taxes. Some of these proposals try to seize the net unrealized gains of wealthy taxpayers. But history has shown that Congress will not stop there. The federal income tax itself began as a 1% to 7% assessment that applied to fewer than 400,000 Americans. Yet, in 2017, almost 150 million Americans filed tax returns, and tax revenues were nearly 200 times what they were in 1913, adjusted for inflation. [pages 27-28]
The federal income tax and the AMT teach a lesson: When it comes to taxation, Congress will test the waters with a small number of wealthy taxpayers. But, eventually, Congress’s appetite for new revenue ensnares far more Americans. Indeed, over 60% of Americans own securities, making them susceptible to congressional attempts to tax unrealized capital gains. [page 29]
Americans for Tax Reform strongly urges the Supreme Court to reject the Ninth Circuit’s backward view that ignores the meaning of “income” under the 16th Amendment and will open the door to Congress enacting unconstitutional wealth taxes that upset the settled expectations of American taxpayers.
You can read the full amicus brief here.