The Supreme Court heard oral arguments Tuesday in a little case with potentially huge implications. The high court’s eventual decision in Moore v. USA could give a green light to Democrats in Congress and in state legislatures to enact taxes on unrealized gains, what liberals call “wealth taxes.”

The Moore case doesn’t involve one of these wealth taxes itself, but the tax that Charles and Kathleen Moore are challenging operates along the same lines. That is, it taxes monetary gains that are “unrealized” and thus exist only on a balance sheet.


Years ago, the Moores invested in a company that wanted to help India’s rural farmers—and turn a profit while doing so—by importing American-made tools into India.

The couple contributed $40,000 to help Ravi Agrawal found a company called KisanKraft and, in exchange, received about 13% of the company’s common shares.     

Demand for American farm tools in rural India was large, larger than KisanKraft could satisfy as a small startup. So, the company reinvested all its profits to grow bigger.

The Moores, as minority shareholders, couldn’t force KisanKraft to pay them a dividend, but neither did they want to do that. They were content to keep their money in a company that was doing a lot of good for Indian farmers.

The Moores didn’t receive any payments from KisanKraft. But because the company was growing, their initial investment increased in value. That value, however, existed only on paper.

The Moores never received a dollar. And if the company suddenly went under, their investment would have disappeared.

For 12 years, all went well. And then the Internal Revenue Service knocked on the Moores’ door. The IRS insisted that under the “Mandatory Repatriation Tax” part of the Tax Cuts and Jobs Act of 2017, the Moores had to pay taxes on their share of KisanKraft’s reinvested earnings going back to the company’s founding 12 years earlier.

All those reinvested earnings were “income,” as far as the IRS was concerned, and the Moores owed the IRS its cut.

But where was the money? The Moores didn’t realize any income. They didn’t receive any distributions, stock dividends, or other payments whatsoever from KisanKraft. The “income” existed only on a balance sheet in a company half a world away.

How could the IRS demand a portion of money, the Moores wondered, that they hadn’t realized or received? 

Under the Mandatory Repatriation Tax, the couple had to declare an additional $132,512 as “taxable 2017 income” and pay an additional $14,729 in tax. 

The Constitution and Taxes

The Constitution limits the federal government’s taxing power. Under the 16th Amendment, the only direct tax (that is, a tax “upon property holders in respect to their estates”) that the government can take is an income tax.

And the historical definition of “income” includes the requirement that the money be “realized.” That is, the money is in the hands—or, at least, distributional control—of the person taxed.

The IRS disagreed. It claimed that realization isn’t necessary because that word doesn’t appear in the 16th Amendment.  

This is essentially the same argument made by Democrats who support wealth taxes, such as Sen. Elizabeth Warren of Massachusetts and state legislators in seven blue states. These politicians argue that they can tax any unrealized gains, not just those from foreign investments.

Did the stock you purchased in June go up in value by Dec. 31? Then under their theory of government taxation, you must pay taxes on those unrealized gains.

The market crashed on Jan. 1 and wiped out your investments, you say? Too bad, you still owe taxes on the gains from Dec. 31. Where will you get the money from? That’s your problem. Pay up.

Charles and Kathleen Moore have a good argument. And their lawyers, expertly led by Andrew Grossman with the support of the Competitive Enterprise Institute, delivered it Tuesday to the nine Supreme Court justices.

They point to many historical sources from the time of the 16th Amendment’s ratification that tend to show that “income” does, indeed, require realization. They also point, chiefly, to two Supreme Court cases that say so.

In the first case, Eisner v. Macomber (1920), the Supreme Court held that a stock dividend wasn’t income because the dividend didn’t put any money in the investor’s hands. The investor received only an unrealized gain because “every dollar of his investment together with whatever accretions and accumulations have resulted … still remains the property of the company, and subject to the business risks which may result in wiping out the entire investment.”

The same goes for the Moores’ investment in KisanKraft, but even more so because they haven’t received even a stock dividend. They’ve received nothing.

The second case, Commissioner v. Glenshaw Glass (1955), held that for purposes of the Income Tax Code, “income” means “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”

Clear as crystal, but the tax code isn’t the same as the 16th Amendment. Still, it sure would be absurd for the code that operationalizes the power granted in that constitutional amendment to use a different meaning than the one used in the amendment.

In response to all of this, the IRS argues that Macomber applies only to stock dividends or, if the Supreme Court doesn’t buy that, that Macomber is such an old case that it can be ignored. And Glenshaw Glass doesn’t apply because it’s only relevant to the tax code.

And as for the Moores’ comprehensive historical analysis, the IRS points to several Civil War-era taxes that appear to have taxed unrealized gains. To which the Moores respond: Even if those taxes did reach unrealized gains, they’re irrelevant because the 16th Amendment was ratified in 1913.

Thus, what matters is whether, in 1913, “income” required realization, and the historical sources show that it did.

Oral Argument

At oral argument Tuesday before the Supreme Court, Grossman argued that “appreciation in the value of a home, a stock investment, or other property is not and never has been taxed as income.” He reasoned that a gain is “not income unless and until it has been realized by the taxpayer.” 

Displaying an impressive recall of Supreme Court precedent, Grossman said that the court has “held that line for a century.”  This is a tax on “ownership of property, and therefore must be apportioned,” he noted. 

In the first of many comments about first principles, Grossman noted that “dispensing with the need for realization sweeps away what the Framers regarded as the essential check on Congress’ power to tax property.” 

Grossman noted that the government could not identify “a single thing the government could not tax as income under its position that realization is unnecessary.” He did concede that KrisanKraft realized gains, but argued that the Moores, his clients, did not.  

Solicitor General Elizabeth Prelogar argued the case for the United States. She defended the Mandatory Repatriation Tax, stating that it was “firmly grounded in the 16th Amendment’s text and history.” 

Prelogar argued that the Supreme Court’s tax jurisprudence supported the government’s position. She warned that if the court ruled for the Moores, it would “cause a sea change in the operation of the tax code and cost several trillions of dollars in lost tax revenue.” 

Prelogar suggested that the court didn’t need to resolve any “fundamental questions in this case about whether the 16th Amendment requires realization.” The Mandatory Repatriation Tax “taxes income that was actually realized by the foreign corporations,” she said, and Congress was within its rights to attribute that tax to U.S. shareholders. 

The solicitor general argued that the Mandatory Repatriation Tax was no different, from a taxation standpoint, than a Subchapter S or partnership agreement. 

Under questioning by justices, Prelogar conceded that if Congress passed a tax on appreciation of real estate or stock portfolios, she would argue that those taxes are constitutional under the 16th Amendment.  She noted that “there is no bright line realization rule or requirement under the 16th Amendment and that Congress is permitted to tax certain forms of unrealized gains.”

Several justices indicated through their questions that they were looking for a way to decide the case in a narrow fashion.  Whatever the high court eventually decides, the ruling could have much bigger implications than the Moores’ tax bill.

If the Moores win broadly, Democrats can kiss goodbye their dreams of wealth taxes on unrealized gains. But if the Moores lose, residents of blue states probably can expect a very unpleasant April 15.

And the next time Democrats control the presidency and Congress, the rest of us Americans can, too.

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