Philanthropy Roundtable

Wide-Ranging Amicus Briefs in Moore v. U.S. Show Dangers of Taxing Unrealized Income

September 26, 2023

(Philanthropy Roundtable)—As we’ve discussed here before, the Supreme Court is considering a case with implications for future wealth tax proposals. We know that taxing assets is a net negative for philanthropy and the vibrant charitable sector it supports, so the Roundtable is closely following Moore v. United States.

We’ve recently filed an amicus brief before the Supreme Court, arguing the court should overrule the decision by the Ninth Circuit Court of Appeals to allow a tax on unrealized income.

The crux of our brief is that the tax in question, the Mandatory Repatriation Tax (MRT), could lead to a chilling effect on charitable giving to the detriment of civil society. While our focus is squarely on the potential impact on philanthropy, two dozen other organizations also filed amicus briefs, representing a diverse set of concerns. For example, Americans for Tax Reform argues the Ninth Circuit decision invites future efforts to expand Congress’ taxing power beyond constitutional restraints. Specifically, the brief says:

The president and certain members of Congress have recently proposed several unapportioned wealth taxes aimed at the unrealized gains of those they claim have too much. But the income tax, too, was originally billed as a tax only on the wealthy. As history shows, new taxing powers inevitably sweep in more and more taxpayers. It thus falls to this Court to recognize and enforce the 16th Amendment’s realization requirement and the constitutional limit upon direct taxation.

The Southern Poverty Law Institute argues in their brief that the MRT upsets the Constitution’s intended balance of tax powers, opening the door to wealth taxes. Specifically, their brief notes that:

The existing balance and strictures imposed by the framers in the original Constitution, as regards the respective tax powers of both states and federal government, remain in full effect. It is in light of those considerations that the Court should now review and reverse the decision of the Ninth Circuit.

The Southern Poverty Law brief concludes by noting that not only is the MRT unconstitutional, but it also becomes an unlawful exercise of sovereignty against international law. They argue the MRT:

Would work in violation of settled and longstanding precepts of international law. No nation, without a universally accepted legal basis, can arbitrarily reach out to tax the property and assets sited within the other country’s sovereign territory. Absent realization, the purported gains which the MRT seeks to tax, fail to achieve the sufficient and necessary connection to American citizens who would provide a nationality principle basis for exercise of American tax jurisdiction.

A brief filed by the Liberty Justice Center uses a helpful analogy to illustrate how a tax on something that has not been realized is not by any measure the same thing as a tax on income. The brief explains how taxing unrealized gains on investments “is sort of like a bread tax based on the pounds of flour and packets of yeast in the cabinet.”

In another amicus brief filed in support of the petitioners, Chapman University accounting professor Hank Adler notes the MRT offends the principles of our tax code by treating identically situated taxpayers differently. If two taxpayers received equal amounts of taxable income in 2017, but one of them immediately reinvested the income into buying land, the identically situated taxpayers would face substantially different tax burdens. Adler argues that:

Differential treatment of identically situated taxpayers offends the long-rooted principle of horizontal equity. … The concept of horizontal equity plays an important role in the evaluation of tax policy. For example, treating taxpayers with equal incomes equally was one of the central organizing principles of the landmark reform of the federal income tax that took place in the Tax Reform Act of 1986.

Finally, the Independent Women’s Law Center argues in their brief that taxes on unrealized gains harm women because of the way women invest and operate as entrepreneurs. They note that the Ninth Circuit ruling “permits Congress to impose a particularly onerous burden on women, who tend to invest for a longer duration than men and, when working as entrepreneurs, often have no choice but to rely on their own capital rather than external investment.”

The amicus briefs filed in Moore v. United States raise important concerns about the constitutionality and fairness of taxing unrealized gains. The briefs contend the MRT upsets the balance of tax powers, violates international law, treats identically situated taxpayers differently, harms women and negatively affects charitable giving and civil society.

The briefs also say the MRT invites future efforts to expand Congress’ taxing power beyond constitutional restraints. As the Supreme Court considers these crucial questions, the Roundtable will follow the debate and continue to highlight the implications of their decision for philanthropy and the communities it supports.