David Schizer (Columbia) presents Income Without Realization Under the Sixteenth Amendment: An Originalist Analysis of Contemporary Tax and Accounting Regimes at Georgia today as part of its Tax Policy Colloquium Series hosted by Assaf Harpaz:

For decades, the taxing power was a sleepy constitutional backwater, but this has changed. In Moore v. United States, four justices opined that the realization rule, which delays tax on gains until an appreciated asset is sold, is constitutionally required. These justices claimed that when the Sixteenth Amendment authorized “taxes on incomes,” this phrase was conventionally understood to require realization. If so, vast swaths of the tax code could be unconstitutional. Although the majority decided Moore on other grounds, the Court is sure to revisit this issue.

This Article responds to the four justices in Moore, showing that the original understanding of the Sixteenth Amendment actually did not require realization. In seeking the Amendment’s original meaning, judges and commentators have overrelied on dictionary definitions and treatises, which can be read either way. Instead, this Article focuses on two other sources that have not received adequate attention: early income taxes and accounting practices.

In authorizing income taxes, the Sixteenth Amendment was not painting on a blank canvass. Rather, Congress enacted the first income tax to fund the Civil War, and another in 1894 during the Progressive era, which was invalidated in Pollock v. Farmers Loan & Trust Co. When the Sixteenth Amendment overturned Pollock, authorizing “taxes on incomes,” this phrase was no abstraction; it referred to a type of tax that Congress had already enacted. Therefore, the key to understanding the original meaning of this phrase is to examine those early statutes. Did they strictly adhere to realization? In fact, they did not. Each contained exceptions to realization, and some of these exceptions are new to the literature. 

To uncover the original meaning of “Incomes,” this Article also explores ratification-era accounting practices. “Income” was a central concept in regulatory and financial accounting and, like in early tax statutes, realization was not always required. 

In analyzing early tax and accounting, this Article seeks the original understanding among experts, not average voters. This focus is necessary in this context. After all, the Sixteenth Amendment responded to a Supreme Court case–and a fairly technical one, at that. Although the stakes in Pollock presumably were clear to the general public–the fate of the income tax–the actual issues were quite esoteric. To resolve them, the Amendment needed the precision of legal language. In addition, terms of art in the Amendment put citizens on notice that legal language was being used. As a result, the legal meaning is the relevant one and it was clear: “taxes on incomes” could reach unrealized gains and losses.

For more information on the Tax Policy Colloquium, please contact Assaf Harpaz.