Finance Docket: Supreme Court Case Could Torpedo A Future Wealth Tax – Above the Law

Ed. note: This article first appeared in the Finance Docket newsletter. Enter your email below to view the full newsletter and subscribe. 

The details of any individual court case can be fascinating. At times, though, cases explode beyond the boundaries of the particular facts at issue to affect entire industries.

The Supreme Court just heard oral arguments in Moore v. United States, a dispute over $15,000 in income tax liability. This sum may seem insignificant in the grand scheme of things (and even to average litigants considering that you can barely get in the door of the courthouse for $15,000 worth of legal fees). Even so, the results might have very broad implications.

The basic question in Moore v. United States is whether income must be “realized” by a taxpayer before the federal government can tax it. For example, to realize gains as income when a stock you purchased has gone up in value, you must sell the stock. In the alternative, you can just hold onto the stock indefinitely, generally without being taxed on market gains as long as you hold it. The concept of realization of income has always been squishy at best and has led to various kinds of corporate gamification to keep gains of one form or another unrealized.

If it turns out that Congress may only tax realized gains, this will prove costly to taxpayers. Nullification of the exact one-time transition tax provision at issue for overseas investments in this case would cost the federal government about $340 billion in lost revenues over a decade.

More broadly, however, the case is seen by some as a legal referendum on the concept of a wealth tax. There is no existing federal wealth tax, of course. But if the Moores successfully dodge their $15,000 tax bill, the resulting Supreme Court precedent could prevent any sort of wealth tax from ever being imposed, at least absent the virtual impossibility of a new constitutional amendment.

Isn’t it ironic that a fight over $15,000 will determine the disposition of hundreds of billions, and perhaps even trillions, of dollars?

Most of the justices seemed swayed at oral arguments by the government’s position, which would leave the future possibility of a wealth tax intact and the Moores with $15,000 to pay. Trying to read the tea leaves at oral arguments is always a dangerous proposition though, and a real ruling isn’t expected before June.