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Tax History: Moores Lean on 1916 Tax Expert to Argue No Realization Means No Income 

Posted on Nov. 20, 2023

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist,” John Maynard Keynes famously observed.

Apparently, Charles G. Moore and Kathleen F. Moore are in thrall to a certain Columbia University economist from the early 20th century. Edwin R.A. Seligman is a big player in Moore v. United States, No. 22-800 — no small feat for a scholar who’s been moldering in a Brooklyn cemetery these past 84 years.

Still, Seligman’s prominence in the Moore case is worthy of note, even if Keynes would have found it predictable. The petitioners have cited Seligman repeatedly, using him to support their claim that unrealized income is not really income at all — at least not as far as the 16th Amendment is concerned.

As well they should: The Moores could hardly have asked for a better historical champion. If you’re trying to argue that the original meaning of the 16th Amendment hinges on the concept of realization, then Seligman is your man.

“If it is not realized, there is no income,” Seligman declared in a seminal article on the taxation of stock dividends.

That statement seems pretty definitive, especially coming from America’s leading tax expert of the early 20th century. Indeed, it’s hard to imagine a better statement to buttress the Moores’ principal historical assertion: “Then, as now, income was understood to refer to gains realized by a taxpayer through payment, exchange, or the like, not mere increase in the value of property.”

But here’s the thing: Seligman was not the only tax expert of the early 20th century. He wasn’t even the only tax expert at Columbia. Or the only one trying to sort out the meaning of income in the mid-1910s. There were countless others, including Seligman’s star pupil, Robert Murray Haig.

Haig — who would eventually succeed Seligman as the Columbia University McVickar Professor of Political Economy — was a rising star in the economics profession. And while Seligman was insisting on the centrality of realization to the concept of income, Haig was developing a different, less restrictive definition.

Broadly speaking, the meaning of income was up for grabs at the time the 16th Amendment was drafted and ratified, at least among tax experts. Seligman played an important role in the expert debate over income and its essential qualities. But so did others, including Haig. Over the course of two articles, I will explore the ideas of both these economists on this crucial point.

Speaking for the Moores

In their petition for certiorari, the Moores argued that when the 16th Amendment exempted from apportionment “taxes on incomes, from whatever source derived,” it applied only to taxes on realized income. “A gain is not income unless and until it has been ‘derived’ by the taxpayer from some ‘source,’” they wrote.

The petition insisted that this understanding of income was dominant at the time of the amendment’s drafting and ratification. In support of that assertion, they cited contemporaneous court decisions, some dictionary entries, and a collection of legal treatises and economic studies. Seligman’s work appears in this last group.

“Edwin Seligman, a leading proponent of the Sixteenth Amendment and federal income tax, likewise recognized the necessity of realization in his influential The Income Tax (1911),” the Moores wrote. “‘Income,’ he explained, ‘is that which comes in to an individual above all necessary expenses of acquisition, and which is available for his own consumption.’” (Emphasis in original.)

The italics were added by the Moores to emphasize availability, which presumably implied realization (and possibly monetary realization in particular). Seligman’s definition of income, including its focus on realization, also proved durable, the Moores argued: “That same understanding prevailed after the Amendment and federal income tax took effect.”

In their subsequent brief on the merits, the Moores returned to Seligman to buttress their claims about realization. Citing him as the “dominant academic voice” in support of income taxation (a description borrowed from a Tax Notes article by legal historian Ajay Mehrotra), they quoted the same passage from Seligman’s 1911 book as they had in their earlier petition. (Prior analysis: Tax Notes, Nov. 14, 2005, p. 933.) They also took note of Seligman’s other work on income taxes, including a historical study, “The Income Tax in the American Colonies and States,” and a 1919 article on the taxation of stock dividends.

This last article, on stock dividends, deserves special mention, since it bolsters the Moores’ case in the most straightforward terms possible.

Seligman and Realization

Seligman argued that stock dividends were not, in fact, taxable under the federal income tax. By all accounts, his reasoning helped shape the Supreme Court’s decision in Eisner v. Macomber, 252 U.S. 189 (1920), which came to the same conclusion.

Seligman began by defining income as a flow of “satisfactions” that could be “parted with for money.” Those satisfactions did not have to be in the form of money; they could take the shape of other goods or services. But satisfactions had to be capable of being “transmuted” into money. The flow of income, moreover, must necessarily be measurable over a period of time: a day, a month, a year. But it was always distinguishable from a one-time gain, as well as from a store of wealth.

And then came Seligman’s most salient point, at least as far as the Moores are concerned.

“Since the real wealth of an individual or a community consists of this inflow of satisfactions that we call income, it is clear that the satisfaction must be realized before we can predicate of it the quality of income,” he wrote. When a person sells a service, that person receives money. The purchaser, in return, receives the service. “The first party’s money income is correlative to the second party’s pleasure income, which if not money, is money’s worth.”

But what if the item being sold turns out to be defective? Then the purchaser does not receive a satisfaction; they do not realize their anticipated gain. And since that gain is the foundation of income, there is no actual income.

The same is true of strictly monetary exchanges.

“The net result is that an unrealized gain or imaginary income is not an income at all,” Seligman wrote. “Just as true satisfaction is realized satisfaction, so true income is realized income. In order to constitute income, the anticipated or putative gain must be not only realizable, but realized. If it is not realized, there is no income. Realization is a necessary attribute of income.”

Seligman also insisted that income must be distinct and separable from the things providing the income. In the case of concrete objects offered for sale — Seligman used a mare and her foals as his example — that separation was straightforward. For services, the separation was somewhat less obvious but still straightforward: A plumber could “transmute” his skill when choosing to sell his services. “Separation, like realization, is a necessary attribute of income,” Seligman concluded.

Using this multipart definition, Seligman ultimately concluded that stock dividends did not qualify as taxable income. “The real distinction to be kept continually in mind in threading one’s way through the mazes of the income tax is between the actual receipt of income on the one hand and the unrealized appreciation of capital on the other,” he wrote. “A cash dividend is income; a stock dividend is not income.”

Room for Debate

Seligman was quite certain of his answer in the case of stock dividends, and of his conception of income more generally. But he was not quite so categorical when assessing the broader state of economic and legal thinking. He was clear about his own opinion, but he understood that others disagreed with him.

More to the point, perhaps, Seligman also believed that many lawmakers disagreed with him. And lawmakers were typically uncertain about crucial tax issues.

In the introduction to a 1921 essay collection, The Federal Income Tax, edited by Haig, Seligman described the legislative process surrounding any new revenue measure. “In every new fiscal project there are three stages which must be traversed,” he wrote. “The first is for the legislator to decide as to the fundamental principles on which the bill is to be constructed. These principles are primarily economic in character.”

Unfortunately, lawmakers couldn’t rely on economists for help. “Inasmuch as fiscal science is still a youthful discipline in America and in view of the comparative insignificance of the income tax in the public finance of foreign countries, the economists have not yet addressed themselves, with complete success in achieving unanimity of results, to many of the problems which must guide the legislator,” he wrote.

The definition of income was one of the most important questions that economists were still struggling to answer — even in 1921, some eight years after state legislatures had ratified the income tax amendment and Congress had put one on the books. Indeed, the United States had financed a world war and recast the fundamental structure of its fiscal system without ever settling on the precise meaning of income.

Seligman provided a non-exhaustive list of five questions still awaiting resolution by Congress, the courts, and the economics profession:

  • “Is income to be conceived of in terms of money, of money’s worth, or of mere psychic benefit?”

  • “If income is a flow and capital a fund of wealth, between what periods of time is the flow realized, and when does the flow congeal into a fund?”

  • “Are both realization and separation necessary to the concept of income?”

  • “Does income include the appreciation of capital?”

  • “Are gifts to be considered income?”

To be sure, lawmakers and the courts had provided some answers to these (and other) questions by 1921. But Seligman considered many of them to be provisional or flat-out wrong, especially since many were uninformed by economic reasoning. “Until fiscal science reaches a definite conclusion on these problems the way of the legislator will be a thorny one,” he warned.

Seligman also counseled against the rush to premature, and artificial, certainty. “It is questionable whether the legitimate desire to give a fixed constitutional interpretation of a complicated statute like the income tax law is not resulting in a regrettable tying of the hands of the legislator and an undue curtailment of legislative discretion,” he wrote, “with the result of raising many new problems in the place of the single problem which the courts endeavor to settle.”

The real lesson to take from Seligman’s warning — especially in light of the Moore litigation — is to be wary of false certainty. As we will discover next week, the meaning of income was anything but certain in the 1910s.

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