The United State Supreme Court fielded arguments in a monumental case that has the potential to open the door for further unconstitutional and unjust federal tax practices. The case, Moore vs. United States, debates the definition of what income is. More specifically, the case is focused on the taxability of unreleased asset gains. The Moores, a married couple out of Washington, own a portion of a foreign farm tooling and equipment company. The Tax Cuts and Jobs Act passed in 2017 introduced a one time tax that retroactively taxed a very specific investment position that involved foreign companies whose ownership is majority held by U.S. persons. What does this mean exactly? This means that the Moores, U.S. citizens, own a portion of a foreign corporation, in which the majority of the corporation's ownership through stocks is also held by U.S. citizens and they were going to be retroactively taxed on their gains resulting from their ownership position. The most important part of the act is that it taxed earnings regardless of repatriation, meaning it taxed foreign gains regardless if the gains were brought back to the United States, something that was not and is not common regarding tax liability.
At face value, it may seem as though the Moore’s don’t really have much of a compelling argument. This case in particular is so important because of one major detail, the Moore’s never realized any kind of gain from their ownership position. They did not sell their shares, they did not receive any kind of dividend payment, they received no income of any kind regarding their stock ownership in the foreign farm tooling and equipment company. Their argument is because they did not realize any gains, they received no payment or income of any kind whatsoever, they owe no additional taxes. Now suddenly their argument has much more behind it. The Moore’s make a very valid point. The reason being is if the government can tax based on unrealized gains, it opens the door for the government to unconstitutionally change the definition of income to include whatever they want. The 16th amendment is really what is in question here as it states that the government has the power to tax incomes. The Moore’s are arguing they received zero income of any kind regarding their position and ownership in the mentioned corporation, while the government is arguing that the nominal gains, though not realized, are considered income and should have been taxed according to the act previously mentioned.
From a high level view, this is extremely problematic for a few reasons. To begin, it would open the door for the government to unconstitutionally define what income is. A ruling in favor of considering unrealized gains as income and the ability to retroactively tax said unrealized gains, would be devastating to any American that owns an asset of any kind. What is more concerning is timeline considerations, or lack thereof. If the government can choose arbitrary timelines, say retroactive for the past 5 years, 10 years, whatever, then you are at the mercy of the asset fluctuations that occurred during those time frames. In which consideration for potentially having to pay unrealized gains was not taken regarding the positioning you were putting yourself in at the time. Breaking this down, this means it is very possible that you favor the strategy of “buying the dip”. You see a stock that is making downward moves, so you decide to buy it. You hold onto it for a while and it fluctuates, continuing to go down before eventually coming back up. The stock shows resistance at the price you bought it for years ago, ultimately being a wash for you, with you making zero wealth or financial gain of any kind. If the government steps in and enacts policy that states they can retroactively tax stock gains for the last year, if that is the only time your stock moved up, even though you literally may have bought and sold the stock for the same exact price over the life of you owning the stock, you now owe a tax bill based solely off the gains the stock made in the previous year.
There are more granular reasons why a ruling in favor of the U.S. Government would be so problematic and detrimental to U.S. taxpayers. Legal rulings, especially those that include ambiguous vocabulary and positions, often lean on similar ruling in the past. If the Supreme Court rules that the unrealized gains in this case can be taxed, it is almost certain that legislation will be pushed to allow for unrealised asset gains in the future can be taxed, completely disregarding the specifics of the case like the fact that the mentioned Act was passed or that this particular scenario dealt with foreign holdings. Since the beginning of the Covid-19 pandemic home prices have increased on average of 49% across the country. Imagine if the government enacted a retroactive tax that implemented say even a 10% tax in asset gains since covid. If you had a house valued at $200,000 in 2019 and it “increased in value” at the average rate since then, that could amount to a $10,000 tax bill simply because you own a home. This is even more problematic in the high inflation economic environment we are in. Regardless if your assets are truly appreciating in value, the devaluation of the dollar will increase the nominal price of your house. That means there is potential for someone's real overall wealth to decrease as their home depreciates. But, if inflation caused greater nominal increases, you would owe a tax bill even though your overall wealth and net worth went down.
This ruling is wildly important to just about everyone. You may be thinking by now, there's no way the government would tax citizens on their house appreciation. That's just taking it too far. You may even be right about that. But, there is one place that this directly impacts, that it directly addresses, and it is something that a lot of people do have. As mentioned at the very beginning of this article, this Supreme Court hearing addresses unrealized nominal gains associated with stock portfolios. If you have a 401k, this matters to you. Even if the ruling opened the door for further retroactive taxation on foreign stock gains, how many people truly know the composition of their 401k portfolios? Effectively every major investment firm operates on the principle of diversification. This means it's effectively guaranteed you own some bonds, some domestic stocks, and some foreign stocks. Whether it comes through as a per portfolio basis, or if the government tried to say that the investment managers had to pay it, it would in one way or another come out of your retirement savings. Any way you look at it, left or right, dem, republican, or libertarian, this issue is massive. It is being pushed through the media with headlines such as “government to miss out on potentially trillions of dollars of tax revenue” and other similar verbiage. The government was not deserving of this claimed missing money, the people who are paying it would have never received it themselves. it is unconstitutional, it should be a legitimate cause for anger amongst the American people, and the fact that it is even up for discussion should be wildly concerning for any and everyone whose life goals include anything such as owning a house or retiring.
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