Income

I told you a few days ago that the Petitioners and their dark money supporters were gonna make a chicken little argument against Congress’ right to tax unrealized appreciation.  That’s just what they are doing in their opening brief filed yesterday, arguing that Congress will tax us all out of existence if it is allowed to tax unrealized appreciation.  Haig-Simons, by the way, is thought the purest legal-economic definition of income.  It doesn’t mention realization.  The Brief cites Erik Jensen and Edwin Seligman among other scholars (Ordower and Kwall) but no mention of Henry Simons, one of Seligman’s contemporaries.  Not even a nod — whistling past the most consequential theory of tax law as if doesn’t exist.  I wonder why.  From Petitioners’ brief in Moore v. United States of America:

 SUMMARY OF THE ARGUMENT

The Sixteenth Amendment carves out a narrow exception to Article I’s apportionment clauses for “taxes on incomes.” This Court’s precedents correctly under stand that exception to be limited to taxes on gains realized by the taxpayer. The Ninth Circuit’s contrary holding not only defies those precedents, it sweeps away the essential restraint on Congress’s taxing power, opening the door to unapportioned taxes on property (as in this case) and anything else Congress might deem to be a given taxpayer’s “income.”

    I.  This Court has consistently held that “income” within the meaning of the Sixteenth Amendment turns on realization. Just a few years after the Amendment’s adoption, the Court held in Macomber that the “characteristic and distinguishing attribute of income” is that “a gain, a profit, something of ex- changeable value” is “received or drawn by the recipi- ent (the taxpayer) for his separate use, benefit and disposal.” Macomber, 252 U.S. at 207 (emphases in original). Mere “enrichment through increase in value of capital investment is not income in any proper meaning of the term.” at 214–15. Since that time and through to the modern era, the Court has reiter- ated and applied that principle in numerous cases.

Macomber’s holding on realization was correct, and there is no conceivable justification to depart from stare decisis at this late date. The principle that income requires realization is compelled by the original meaning of the Sixteenth Amendment, as evidenced by  an  enormous  body  of  ratification-era sources addressing the nature of income. That under- standing is also the only one to comport with constitutional structure: without a realization requirement, Article I’s apportionment requirement, which the Amendment’s framers generally preserved, would be a dead letter. It is also supported by consistent congressional practice since the Amendment’s ratification—at least prior to the tax at issue here.

    II.  The Ninth Circuit’s reasoning does not with stand scrutiny. This Court has never overruled Macomber’s holding that income requires realization. And the MRT plainly is not a tax on income under Macomber: it taxes ownership of specified property on a specific date in 2017, not realized gains. The Ninth Circuit’s failure to follow directly applicable control- ling precedent is inexcusable.

The Ninth Circuit’s fear that following Macomber would “call into question the constitutionality of many other tax provisions” is unfounded. Pet.App.16. The income tax provisions cited by the Ninth Circuit all involve actual or constructive realization of income. Unlike those provisions, the MRT is an outright tax on property because of ownership. And unlike with taxpayers subject to those provisions, it is undisputed that petitioners realized nothing from their owner- ship of shares in KisanKraft.

darryll k. jones