The Sixteenth Amendment, ratified in 1913, allows the federal government to collect “taxes on incomes, from whatever source derived.” The Amendment overruled a notorious Supreme Court decision that limited the government’s ability to tax income derived from investments or property, as opposed to wages or salaries. Moore v. United States involved a new effort to limit the government’s income-taxing power, this time by giving a narrow meaning to the word “income” under the Sixteenth Amendment.

The petitioners were shareholders who own part of a foreign corporation. Instead of distributing its profits to shareholders, the corporation reinvested those profits in the business. But a 2017 law imposes a one-time tax on this type of undistributed corporate profit. Seeking a refund of their tax payment, the petitioners asserted that the law is not authorized by the Sixteenth Amendment because it taxes “unrealized” income—essentially, income that has not yet been distributed to taxpayers or placed under their direct control.

A federal district court dismissed the case, and a court of appeals affirmed the dismissal, rejecting the petitioners’ argument that “unrealized” income cannot be taxed under the Sixteenth Amendment. After the Supreme Court granted review, CAC filed an amicus brief supporting the government on behalf of professors John R. Brooks and David Gamage, two leading scholars of tax law and policy. Our brief demonstrated that the text and history of the Sixteenth Amendment support the government’s position that unrealized gains can be taxed as income.

When the Sixteenth Amendment was ratified, federal law had long treated unrealized gains as a taxable income. Indeed, under the first federal income taxes established during the Civil War, taxable income included a shareholder’s portion of undistributed corporate earnings, as well as other forms of unrealized income such as gains from interest (whether paid or not) and increases in the value of certain property (whether sold or not). When a taxpayer refused to report his share of undistributed corporate earnings, the Supreme Court rejected his argument that such unrealized gains are not “income.” And when Congress revived income taxation in the 1890s, it once again taxed unrealized income. Likewise, under a 1909 corporate income tax—enforced while the Sixteenth Amendment was being ratified—unrealized income was taxed yet again. And as soon as the Sixteenth Amendment was ratified in 1913, Congress taxed unrealized income once more, specifically, undistributed corporate earnings. Thus, by the time the Amendment reaffirmed Congress’s power to tax “incomes,” Congress for half a century had repeatedly taxed unrealized gains as income.

The history of the Sixteenth Amendment confirms that its drafters and ratifiers had no intention of narrowing Congress’s power to tax income—or departing from how that power had been exercised in the past—by exempting unrealized gains from taxation. Instead, the Amendment was adopted to reverse an infamous Supreme Court decision holding that income derived from property could not be taxed in the same way as other income. That decision prompted an enormous public backlash, and the Sixteenth Amendment was adopted to restore the status quo, including the broad scope of Congress’s income-taxing power. That power had long included the ability to tax undistributed corporate earnings and other unrealized gains.

Finally, the word “income” had an expansive meaning in the ratification era that encompassed virtually any kind of financial gain, realized or unrealized. This broad definition was reflected in both specialized treatises and general-use dictionaries from the period. And while some academics argued that realization should be considered a necessary element of income, these same authors acknowledged that actual usage, including in statutes, did not match their recommendations.

In sum, text and history clearly indicate that the original meaning of the Sixteenth Amendment permits Congress to tax unrealized financial gains as income.

In June 2024, the Supreme Court upheld the challenged tax in a 7-2 decision. The majority opinion did not resolve whether Congress may tax unrealized financial gains, because the financial gains being taxed in this case were realized by the corporation, even if not by its individual shareholders. As the Court explained, longstanding precedent establishes that Congress may attribute a corporation’s income to its shareholders for tax purposes, as Congress has done since the Civil War. In her concurrence, Justice Jackson cited CAC’s amicus brief on behalf of professors John R. Brooks and David Gamage while discussing the history behind the Sixteenth Amendment’s language, noting that the artificial limit on Congress’s taxing power urged by the challengers in this case “appears nowhere in the text” of the Amendment.