Supreme Court To Consider ‘Quadrillion-Dollar Question’ in Major Tax Case

In early December, the Supreme Court will hear oral arguments on a case that has the potential to broadly reshape the U.S. tax code and could cost the government hundreds of billions of dollars in revenue.

The focus of the case centers around a section of Moore v. United States, questioning whether the federal government has the authority to tax certain types of “unrealized” gains, which include property such as stocks or bonds that people own but from which they haven’t directly recouped the value, so they don’t have direct access to the money that the property is worth.

Much of the U.S. tax code requires that income be “realized” before it can be taxed, but critics claim it’s an inherently uncertain concept that courts have been ignoring for years, due to administrative impracticalities. 

If the court limits the scope of its decision to the specific tax referenced in the case, known as the mandatory repatriation tax, a victory for the plaintiffs could cost $340 billion over the next decade. However, the cost could be even higher should the court broaden its definition of what counts as realization, which could remove significant swaths of taxable income out of the government’s reach.

The decision could have implications for everything from potential wealth taxes, like the one the Biden administration proposed for billionaires in 2022, to large swaths of the international tax regime.

“It’s the million-dollar question, just with a few more zeros: the quadrillion-dollar question,” Harvard University tax law professor Thomas Brennan told The Hill. “On one extreme, if the Supreme Court decides that a realization requirement is present in the 16th Amendment … then there are a number of code sections that arguably would be invalid or have to be reworked,” he said.

“On the other extreme, even if the Supreme Court finds in favor of the taxpayers, they could do so in a narrow way that’s limited to the particular situation at hand, or in a way that … forecloses the possibility of Congress enacting wealth taxes but that doesn’t disturb much of existing tax law,” Brennan said.

The scope of the ruling could impact significant aspects of the economy and tax code. 

“If [the court makes] a specific realization requirement, then it could have an impact on many other provisions of the Internal Revenue Code, because there are provisions currently … that arguably diverge from the realization rule,” Lawrence Hill, a partner at the Steptoe & Johnson law firm, told The Hill.

Kyle Pomerleau, a senior fellow at the American Enterprise Institute, filed an amicus brief supporting the government, arguing that a broad ruling in favor of the Moores could lead to lawsuits challenging other portions of the tax code. 

“A cloud is going to be cast over the U.S. economy, as there’s all this uncertainty about what the tax code is going to look like in five, 10, 15 years from now,” he argued. 

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