University of Houston Law Center Professor Bret Wells, the Law Foundation Professor of Law
Oct. 19, 2023 — University of Houston Law Center Professor Bret Wells joined Reuven Avi-Yonah (Michigan) and Clinton Wallace (South Carolina) in filing an amicus curiae brief in Moore v. United States, Docket No. 22-800 today.
In Moore, the U.S. Supreme Court will decide whether the 16th Amendment authorizes Congress to tax unrealized income without apportionment among the states. Unrealized income is economic income that is taxed without regard to an actual sale or exchange event. Congress will often wait until an actual transaction to assert taxation, but not always. The taxpayer in Moore claims that Congress does not have authority to assert income taxation before an actual realization event notwithstanding that the Internal Revenue Code is littered with numerous instances where taxpayers are subject to income taxation without regard to actual or constructive receipt. Congress, by necessity, has imposed taxation on unrealized income so that tax planning by sophisticated taxpayers cannot be used to divert income away from themselves and underrepresent their true economic income on their tax returns.
“Imposing a constitutional realization requirement will allow taxpayers, for the first time in many decades, to shield significant categories of income from U.S. tax through complex tax planning structures that deflect income away from themselves. Creating a new constitutional requirement to only assert income taxation when the taxpayer decides to engage in a specific transaction would break with history and would have severe practical consequences to the administration of the income tax that Congress has authority to implement under the 16th Amendment,” said Wells, the Law Foundation Professor of Law at UHLC.
The brief argues that if the Supreme Court rules that Congress does not have the authority to determine when to impose its income tax in the context of sophisticated business structures, then Congress simply does not have the power to lay and collect taxes on all incomes.
According to the brief, taxation of a person’s economic income in advance of a particular transaction is an essential design feature of the nation’s income tax laws that seek to prevent tax sheltering and in turn serves to create a level playing field for all taxpayers. The usage of such rules can be traced back to the earliest iterations of the income tax enacted shortly after the 16th Amendment was ratified. Moreover, the brief argues that usage of nonrealization taxation principles is not at odds with a later inclusion of income at the time of later realization event. Rather, whenever Congress has chosen to tax income prior to a realization event, Congress has then carefully calibrated basis adjustments so that income subjected to tax on a pre-realization basis is not taxed again when a later realization event occurs. Thus, at the end of the day, the taxpayer’s income is taxed only once, but even so Congress must have the ability to ensure that the nation’s income tax laws are robust enough to ensure that the tax obligations of sophisticated taxpayers are based on a clear reflection of their true income.
The brief authors assert that a victory for the Moores creates the specter that only some income derived from property owners will be subject to tax while those who derive their income from wages will invariably continue to pay.
The Supreme Court has scheduled an oral argument for the case for Dec. 5.
