CBA Record January-February 2024

YOUNG LAWYERS SECTION

Moore Money, Moore Problems: How the Supreme Court Could Set the Stage for a Wealth Tax By Robert J. Hovey

I n June 2023, the U.S. Supreme Court granted a writ of certiorari in Moore v. United States, No. 22-800. This case has the potential to upend signifi cant portions of the U.S. tax code and, most notably, pave the way for a wealth tax. This article describes some potential outcomes of such a decision, particularly with respect to the impact on a potential future wealth tax. Wealth tax proposals have become increasingly popular on both federal and state levels. This type of tax would be based on a taxpayer’s “net worth” as opposed to their income. Net worth is usually defined as a taxpayer’s total assets minus their total liabilities. These assets could consist of bank accounts and investments in stocks, bonds, and real estate, along with owner ship in privately held companies. Liabili ties could encompass loans or other debt obligations, such as mortgages, car loans, credit card or other consumer debt, or student loans. Generally, federal and state tax law do not tax a taxpayer’s assets unless they are sold, and the taxpayer realizes income from the sale. For example, taxpayers do not pay tax on appreciation of their invest ment portfolio (unrealized gains) unless and until they sell an asset and realize a gain, a transaction which is then subjected to capital gains tax. However, federal and state governments have begun to outline wealth tax proposals to levy a tax on assets even if they have not been sold and the taxpayer has not realized a gain. In Illinois, legislators have introduced H.B. 3039, which provides that any tax

payer with net assets worth $1 billion or more would pay tax on any assets increase in value of their assets, whether or not the assets have been sold. Similar measures have been proposed on the federal level, such as President Biden’s Billionaire Minimum Income Tax. This tax would require households with net assets worth $100 million or more to pay at least 20% tax on their income and unrealized appreciation in assets. Although federal and state efforts to enact a wealth tax have stalled, the Supreme Court’s decision in Moore could bear significantly on the constitutionality of a wealth tax. Constitutional limitations and court decisions have stifled the prospects of a wealth tax. The Constitution’s Apportion ment Clause specifies that “No Capita tion, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” U.S. Const. Art. 1, § 9, cl. 4. This means that, previously, a direct tax—that is, taxes on property or income—must have been apportioned among the states in proportion to their population. Pollock v. Farmers’ Loan & Trust Co., 157 U.S. 429, 573-74 (1895). Congress overruled the Supreme Court’s holding in Pollack by enacting the Sixteenth Amendment, which provides that “[t]he Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without appor Constitutional and Legal Limitations

tionment among the several states, and without regard to any census or enumera tion.” U.S. Const. Amend. XVI. This means that Congress can impose taxes on income without being constrained by the Apportionment Clause. However, historically, courts have had difficulty defining “income” for constitu tional purposes. The most helpful defini tion of “income” was described as when a taxpayer “realize[d] a profit or gain.” Eisner v. Macomber, 252 U.S. 189, 209 (1920). This definition was later relied upon to describe income as an “undeni able accessions to wealth, clearly realized, and over which the taxpayers have com plete dominion.” Commissioner v. Glen shaw Glass Co., 348 U.S. 426, 431 (1955). This definition is often referred to as the “realization requirement,” which sug gests that income can only be taxed once it is realized—that is, once the money is received. Thus, the constitutionality of a wealth tax based upon the value of a taxpayer’s assets, whether sold or not, has yet to be addressed by the courts. In 2005, Charles and Kathleen Moore became U.S. shareholders of a controlled foreign corporation (CFC) when they invested $40,000 for an 11% ownership interest in KisanKraft, Ltd., a manufac turing company based in India. From 2006 through 2017, the company kept all its earnings and profits without dis tributing any amount to their sharehold Facts and Procedural History of Moore

28 JanuaryFebruary 2024