The U.S. Supreme Court (SCOTUS) has received scores of briefs on whether it is constitutionally permissible for the United States to tax unrealized income. The briefs are in connection with a case now pending before SCOTUS, Moore v United States, which raises the issue of whether unrealized income can be subject to current tax liability. The case has significant implications for cash value life insurance, and for long-held investments.
Among the briefs is one from 17 Republican attorneys general that argues that Congress’ power to tax does not include the power to tax unrealized gains. Other amicus briefs have come from, among others, such groups as Americans for Tax Reform, the U.S. Chamber of Commerce, and FreedomWorks. Generally, the conservative groups have filed briefs arguing that unrealized income should not and cannot be taxed based on Constitutional principles involving the rules regarding direct taxation. On the other hand, many tax experts argue that while Congress typically does not impose tax on unrealized gains, there is no constitutional impediment to doing so, and in fact, it has been done (including in the Moore case, which involves a 2017 tax law provision that imposes a transition tax on gains not paid to the investors (the Moore’s) from an international (Indian) farming equipment company).
The scope of the issues at the heart of Moore could be narrow or very broad, depending on how SCOTUS decides the case. If SCOTUS takes a broad approach, it could wipe out many of the international tax rules enacted in the 2017 Tax Cuts and Jobs Act (TCJA). It could also be a death knell to progressive efforts to enact a “wealth tax,” i.e., a current tax on unrealized investment income held by very wealthy individuals).
On the other hand, a narrow decision could preserve both most of the TCJA (and previous) international tax rules. And perhaps of more importance to NAIFA interests, a narrow SCOTUS decision could preserve Congress’ ability (if it so chooses) to enact a “mark-to-market” tax rule that would subject annual gains—even if the asset underlying them is not sold and thus the gains are not realized—that underpins most of the progressives’ “tax-the-rich” proposals.
The implications for cash value life insurance could be profound. One of several key reasons why inside buildup is not subject to current tax liability is because the gains inside a life insurance policy are not realized until the policyholder dies, takes a withdrawal, or surrenders the policy.
Prospects: It is likely to take until next year before SCOTUS announces its decision on Moore. But the stakes of the decision are very high. And some kind of profound ruling seems likely given that SCOTUS took a case involving the principle of unrealized gains but on a relatively modest ($15,000) claim. NAIFA will keep you informed.
NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.