SCOTUS reviews Washington couples’ income tax suit some say could nullify tax code

While the U.S. Supreme Court has yet to announce whether it will take up a case regarding whether or not a Washington state capital gains tax is an income tax, it is currently reviewing the legality of a federal tax that poses its own legal challenge.

The lawsuit filed by a Washington couple disputes whether they owe $15,000 under a one-time tax enacted in 2017 that applies to the earnings of U.S. residents who generated income from shares in foreign companies.

The lawsuit has prompted dozens of amicus briefs, many of them centered around the issue of whether income has to be “gained” or “realized” in order to be taxed. According to the couples’ lawsuit, they reinvested the capital gains generated from their shares into the company but never realized a profit.

The reason for the high interest is due to how the SCOTUS ruling could interpret the 16th Amendment, which allows Congress to “collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. The plaintiffs argue that for it to be taxable, that income needs to be “realized.”

As proof, they cite the 1920 case Eisner v. Macomber, in which SCOTUS ruled that pro rata stock dividends could not be taxed as income if the stock owner received no cash or property and their amount of ownership remained the same.

During a Dec. 5 oral argument in front of SCOTUS, the plaintiffs’ legal counsel told the high court that “it is undisputed that the petitioners realized nothing from their stock investment.” Because of that, he added, it constitutes a tax on property ownership, which would require it be apportioned.

Many of the justices levied numerous questions to both sides over how they define income for tax purposes. The federal government’s legal counsel argued that Congress has the authority to tax unrealized income and has done so in the past.

One justice noted that the main issue appeared to be that the tax applied to income earned in prior years.

While those in favor of the tax’s legality claim a decision against it could render much of the Internal Revenue Code unconstitutional, others like the U.S. Chamber of Commerce warned in an amicus brief that a prior 9th Circuit Court of Appeals ruling on the lawsuit in favor of the tax means that “businesses and their shareholders could be subject to taxes on anything that the government later deems “income”—even increases in value that could later disappear as valuations or markets fluctuate. Companies no longer control their own realization decisions; Congress does.”