US Wealth Tax Could Gain Footing With Supreme Court Moore Ruling

Most of us thought Moore v. United States was a dispute about income taxes. It now appears the case could decide whether Congress has the power to impose a federal wealth tax.

The question before the justices is straightforward—can the IRS tax the shareholders of a foreign corporation on the company’s income without a cash dividend or other distribution? Partners are taxed even if no cash is distributed, so could the same rule apply to corporate shareholders?

Without an actual cash distribution, the petitioners say, the shareholders haven’t “realized” any income that can be properly taxed under the 16th Amendment. The government disagrees, arguing there’s no realization requirement in the Constitution—only the requirement for economic gain or profit. The shareholder’s economic gain is a share of the company’s income, even if not yet distributed, the government says.

The petitioners argue that much more is at stake than taxing shareholders. They say the case could open the door to federal wealth taxes that could fundamentally transform the nature of our economic system.

The government has provided a reassuring response, explaining that the high court typically only decides the constitutionality of provisions directly involved in the case. Because Moore involves income tax provisions, it argues, the issue of wealth taxation shouldn’t arise. This sounds reasonable but doesn’t appear to be correct.

According to the latest briefs, filed by some of the country’s top law professors, the issue of wealth taxes is clearly on the table. So the big issue may be how the government wins—if it does win. Based on our review of the roughly 45 briefs filed so far, there are three options.

The narrowest possible government win would be that advocated in the brief filed by L.E. Simmons, a private investor. The court would uphold the constitutionality of the Mandatory Repatriation Tax (and Subpart F), but not for any of the reasons argued by the government or the lower courts in Moore.

Those taxes are constitutional only because they tax the foreign source income of a foreign company, which otherwise isn’t subject to any US corporate income tax. Simmons’ brief also argues that the court should correct or vacate the erroneous reasoning of the lower courts and clarify that there are important constitutional limits on income taxation.

Those limitations might be a problem for proposals to tax unrealized capital gains but they would have no application in this case.

A much broader win—the position advocated by the government and many of its allies—would hold that the mandatory repatriation tax is constitutional because there’s no constitutional requirement that income be realized. Congress can tax unrealized income as long as there is some economic gain.

Such an opinion could send a green light to those in Congress proposing a tax on unrealized capital gains such as the “billionaire income tax.” The high court could remain silent on wealth taxes—as the government suggested it might.

The most expansive win, quite concerning to some, is a suggestion by tax professors from Yale and other leading universities and law schools. The professors argued that Moore shouldn’t be decided under the 16th Amendment, which they believe was a historical mistake.

They explained that, in 1895, the Supreme Court invalidated an income tax because they found it was a direct tax that couldn’t be constitutionally imposed without apportionment among the states by population, an impractical requirement that made income taxation impossible.

That 1895 decision in Pollock v. Farmers’ Loan & Trust Co. led to the 16th Amendment, which exempted income taxes from the apportionment requirement and made the modern income tax possible—as long as the amount being taxed met the constitutional definition of income.

But the professors urged the high court to sidestep the 16th Amendment entirely and to reverse Pollock. They say that would mean that neither an income tax nor a wealth tax would be considered a direct tax, and neither would have to deal with the impractical apportionment requirement.

If Moore were resolved that way, the decision would be tantamount to holding that federal wealth taxes are entirely constitutional. It would be perceived as a green light for any wealth tax Congress might consider. The professors themselves make no specific legislative recommendations.

If the goal were to redistribute the nation’s wealth, Congress might consider an annual tax of 10% of individual net worth over $10 million, 20% of individual net worth over $100 million, and 50% of individual net worth over $1 billion. That could include IRAs and possibly wealth owned by corporations or institutional investors. And that likely would be in addition to normal income taxes.

The brief from professors Akhil and Vikram Amar suggests that direct taxes on real estate wouldn’t be allowed without apportionment. But that wouldn’t preclude a federal wealth tax imposed on stocks, bonds, commodities, or partnership interests.

The only possible counter would be to argue, as the Simmons brief does, that the Fifth Amendment also must be considered. In theory, it prevents Congress from seizing private property without compensation, even if the seizure is done in the form of a wealth tax.

We’re not making any predictions. We prefer the approach of the Simmons brief, on which we were consulted, but the important point is to recognize that Moore may be more important, more far-reaching, and more historic than some of us thought a few short weeks ago.

The case is Moore v. United States, U.S., No. 22-800, briefs filed 10/24/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Donald B. Susswein is a principal at RSM US, leading the pass-through tax consulting practice and its practice advising on tax treatment of legal controversies, costs, and settlements.

Ramon Camacho is a principal at RSM US and leads the firm’s international tax practice.

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