Reuven Avi-Yonah (Michigan) has a new column in Tax Notes, “Are Wealth Taxes and Mark-to-Market Income Taxes Constitutional?” Here is the introduction:

In Moore v. United States, the Supreme Court avoided the question of whether a wealth tax or a tax on unrealized income is constitutional. The majority held that as long as income is realized by an entity such as a corporation, partnership, or LLC, it may be attributed to the entity’s shareholders, partners, or members without violating the constitutional prohibition on unapportioned “direct” taxes. However, four justices held in their concurrence or dissent that income under the 16th Amendment means “realized income.”

The issue is likely to come up again. The majority wrote that “our analysis today does not address the distinct issues that would be raised by . . . (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation” and that “those are potential issues for another day, and we do not address or resolve any of those issues here.” Thus, it is worth revisiting the issue of what the constitutional text means and what the implications are for wealth taxes and taxes on unrealized appreciation (mark-to-market taxes). While the code does not impose a wealth tax, there have been many proposals to adopt one. And the code does sometimes impose mark-to-market taxes on particular assets (e.g., section 1256, which imposes mark-to-market taxation on certain futures contracts), types of taxpayers (e.g., section 475, mark-to-market taxation on securities dealers), and transactions (e.g., section 877A, mark-to-market taxation on expatriation). There have also been many proposals for a general mark-to-market income tax. In my opinion, wealth taxes are unconstitutional because they are unapportioned direct taxes, but mark-to-market taxes are constitutional because “incomes” in the 16th Amendment do not require realization, and the direct/indirect distinction does not apply to income taxes.