“Mere growth or increment of value in a
capital investment is not income.”
HOWEVER, Democrats desperately want to institute a wealth tax.

The Scariest SCOTUS Case This Term

Moore v. United States will determine if the IRS can tax income you have never received.

On a recent Tuesday morning the U.S. Supreme Court heard oral arguments pursuant to a case in which Charles and Kathleen Moore argue that an obscure provision of the 2017 Tax Cuts and Jobs Act is unconstitutional. This is not an “inside baseball” case that only compulsive Court watchers will care about. If the justices rule against the Moores, it would supercharge the government’s confiscatory powers by enabling its inclination to tax unrealized income. This will affect everyone reading this column, not just investors with large stock portfolios. It would, in theory, permit the IRS to tax an increase in the value of your home as a capital gain — whether you have sold it or not.

At issue is the “mandatory repatriation tax” (MRT) and a 13 percent stake owned by the Moores in a company that supplies low-cost equipment to small farmers in India. The couple has never received income from this stock because the company reinvests all its profits in the business. Historically, the IRS hasn’t taxed shareholder “earnings” until they receive dividends or sell their stock for capital gain. Yet, pursuant to the MRT, the Moores received a $14,729 tax bill on their share of company profits. They sued the government on the grounds that the IRS violated the Sixteenth Amendment. They lost in federal district court and in the Ninth Circuit Court of Appeals, as legal scholar Steven Calabresi explains at the Volokh Conspiracy:

The court of appeals concluded that realization is not a precondition for income, and so the Moores could be taxed on unrealized gains in wealth. That rationale is not limited to the Moores, or to the particular tax, which the court applied in their case. Rather, under the Ninth Circuit’s analysis, investors might be taxed on their unrealized capital gains in their Vanguard funds or their stock portfolios. Moreover, homeowners might be taxed on their unrealized capital gains in their houses and land … The Supreme Court should reverse the Ninth Circuit and restore the original, commonsense meaning of the Sixteenth Amendment.

To grasp the significance of Moore v. United States, it’s necessary to remember that the original Constitution didn’t permit income tax. Article I, Section 9 prohibited direct taxes on individuals unless apportioned on the basis of the population of each state. The huge cost of the Civil War prompted Congress to pass the first income tax in 1862, but it was phased out after the war. Congress passed another income tax law in 1894, but the Supreme Court struck it down in 1895. The Sixteenth Amendment was passed by Congress in 1909 and ratified in 1913, and it does indeed bestow on Congress “the power to lay and collect taxes on income,” but it was not as clear as it could have been on the precise definition of “income.”

That issue was resolved in 1920, in Eisner v. Macomber, when the Supreme Court ruled that an increase in the value of a stock holding, in the absence of a monetary dividend, isn’t income: “Mere growth or increment of value in a capital investment is not income; income is essentially a gain or profit in itself of exchangeable value, proceeding from capital, severed from it, and derived or received by the taxpayer.” The Moores have received no such benefit from the investment in question and therefore never incurred a legitimate tax liability. A ruling in favor of the government in Moore v. United States will eliminate any restrictions on Congress’ taxing power. As the Cato Institute’s Thomas A. Berry writes:

[T]he Supreme Court has consistently held that a tax only qualifies as an “income” tax if it is imposed on money that a taxpayer has actually “realized,” in tax law parlance … If the bright‐​line rule requiring realization for an income tax to be imposed were jettisoned, then there would be no limit to the types of taxes the federal government could enact. Indeed, such a rule would open the door for the federal government to impose a future wealth tax entirely divorced from any connection to actual income. To ensure we do not start down that path, the Supreme Court should take this case and reject the Ninth Circuit’s approach.

It’s abundantly clear, however, that the Biden administration and congressional Democrats yearn for unfettered taxing authority. Indeed, they are so worried about the outcome of Moore v. United States that they have demanded the recusal of Justice Alito from the case. These demands are utterly frivolous, of course. Nonetheless, he responded with a 4-page statement explaining why recusal was inappropriate. He devoted particular attention to the absurd claim by Sen. Dick Durbin (D-Ill). that he should recuse himself pursuant to a couple of Wall Street Journal interviews and summed up thus: “For these reasons, there is no sound reason for my recusal in this case, and in accordance with the duty to sit, I decline to recuse.”

All the sound and fury surrounding Moore v. United States, is by no means an indication that it “signifies nothing.” The Biden administration, congressional Democrats, and the corporate media are not satisfied with the hidden tax they have imposed via high inflation, they badly want to foist a wealth tax on every American. The irony here is that former President Trump and the Republicans unwittingly handed them a powerful weapon when they included the MRT in the 2017 Tax Cuts and Jobs Act. Consequently, we find ourselves once again depending on the wisdom of the Supreme Court to save us, a thin reed to lean on under the “leadership” of Chief Justice John Roberts. If this makes you uneasy, it is not an irrational fear. (read more)