A constitutional overreach with dire consequences for philanthropy

As recently as President Joe Biden’s latest tax proposal, the idea of taxing unrealized capital gains has gained traction among policymakers. Advocates argue such a tax could address wealth inequality and provide much-needed revenue for societal needs. Biden suggested a 25 percent tax on unrealized gains. However, the potential ramifications of this proposal extend well beyond its perceived benefits.

One critical aspect often overlooked is the detrimental impact it would have on philanthropy and charitable organizations. A newly released policy brief published by Philanthropy Roundtable notes how taxing unrealized gains poses a significant threat to the fabric of charitable organizations and the philanthropists who support them. By subjecting investors to taxes on gains they have not yet realized, the funds available for charitable giving would be drastically reduced. This reduction in resources would hamper the ability of charitable organizations to fulfill their crucial missions and provide much-needed support to vulnerable populations.

The case of Moore v. United States serves as a stark reminder of the constitutional concerns associated with taxing unrealized gains and highlights the grave implications it could have for the charitable sector. The U.S. Supreme Court will determine by the end of this month if it will be granted cert. If taxes on unrealized gains are deemed constitutional, it opens the door to further encroachments on property rights, wealth accumulation and even the assets of charitable foundations. The fallout for the charitable sector would be severe, with the potential to undermine the transformative work it does in communities across the nation.

The case of Charles and Kathleen Moore brings to light the real-world consequences of taxing unrealized gains. The Moores made a prudent investment in KisanKraft, an Indian company dedicated to empowering small-scale farmers through affordable power tools. Despite never receiving any financial gains from their investment, they derived immense satisfaction from knowing their capital was actively improving the lives of rural farmers. However, following the enactment of the Tax Cuts and Jobs Act in 2017, the Moores were unexpectedly burdened with an exorbitant tax bill.

This tax, known as the Mandatory Repatriation Tax (MRT), required them to report additional taxable income based on unrealized gains. In response, the Moores filed a complaint for a refund, taking their case to the Ninth Circuit Court of Appeals.

At the heart of the Moore case lies the constitutional challenge posed by the MRT. The Founding Fathers of the United States were keen to prevent the concentration of taxing powers and mandated that any direct tax on personal property be apportioned fairly according to population. The MRT, as an unapportioned tax on shares in foreign corporations, flagrantly disregards these constitutional principles.

Proponents attempt to get around this by saying the MRT is a form of “income” tax, which means it doesn’t have to follow the same rules for fair distribution outlined in the 16th Amendment. Yet, previous legal cases clearly show income must meet certain conditions to be considered taxable. The Ninth Circuit’s audacious claim that “Realization of income is not a constitutional requirement” flies in the face of long-standing legal precedent and raises serious concerns about the erosion of constitutional protections.

If individuals or organizations are required to pay taxes on the increased value of an asset without having sold it, this could have a chilling effect on charitable giving as there will be less funds available to make charitable contributions. 

This reduction in giving would directly impact the ability of charitable organizations to raise funds and fulfill their missions, ultimately leaving vulnerable populations without necessary support. Additionally, businesses facing economic uncertainty may adopt a more cautious approach, reducing their corporate giving to charities.

The Ninth Circuit decision also opens the door to additional federal taxes on wealth. Notably, some wealth tax proposals in recent years have included plans to tax the wealth of private foundations and endowment funds. 

The Ninth Circuit’s decision thus threatens to undermine the important work carried out by charitable organizations across the nation.   

The Moore case exemplifies the tangible impact of tax laws on investors and the potential consequences for the charitable sector. This looming threat could significantly impact the charitable sector, particularly for those individuals who regularly donate generous gifts to private foundations and other charitable causes. An ultimate ruling by the Supreme Court could carry profound implications for charitable organizations, wealth creators and the communities they support. 

Jack Salmon is the director of Policy Research at Philanthropy Roundtable.