Abstract
In the United States, investment income (e.g., capital gains, dividends, interest) is favored over earned income (e.g., salary, self-employment, tips). While Congress bears some responsibility for the favorable treatment that investment income gets, it has not acted alone. The judiciary, for its part, has contributed a rule that shields any taxation of investments until they have become realized. In Eisner v. Macomber (1920), the Supreme Court determined that investments must be separated from their capital and that there must be some form of receipt before the gain is considered taxable. In other words, the Macomber Court read a rule that favors investors over laborers into the Constitution itself.
The Macomber Court’s realization rule was nowhere to be found at the nation’s founding. In Hylton v. United States (1796), the Court prioritized judicial deference and legislative functionality in matters of taxation, concluding that the Constitution’s text allowed the elected branches to tax leisure carriages, even though there had been no sale (realization event). Less than a century later, the majority in Pollock v. United States (1895) examined the same taxation clauses and found the words had a “natural and obvious sense” that restricted taxation of capital. This ruling began a tug-of-war between the elected branches and the judiciary. The Sixteenth Amendment was enacted to repudiate the Pollock decision, but a majority of the Supreme Court in Macomber continued Pollock’s legacy and held there was a fundamental distinction between capital and income. The Macomber Court constitutionalized the realization rule.
But the tug-of-war between the judiciary and elected branches was far from over, and, for the next century, the judiciary would largely capitulate. An analysis of the “attribution” concept and the Court’s recent decision in Moore v. United States (2024), reveals that the realization rule has become a “zombie precedent”—conceptually unstable and maintained only by ignoring increasingly complex legislative workarounds.
Ultimately, judicial policy making does not withstand the test of time. The realization requirement is a judicial invention anchored in what the Justices considered “sound economics,” without regard for the original intent of the Sixteenth Amendment. To ensure the Constitution endures through “remote futurities,” the Court must formally abandon the realization requirement and return the authority to regulate macro-economic inequality to the democratic process.
Volume
110
Issue
5
Page
2483
Year
2026
Recommended Citation
Blaise Knueppel,
The Judiciary's Intrusion into the Power to Tax: The Constitutionality of Taxing Unrealized Gains Argument for Deference to the Elected Branches,
110
Minn. L. Rev.
2483
(2026).
Available at:
https://scholarship.law.umn.edu/minnlrev/vol110/iss5/7
Rights
http://rightsstatements.org/vocab/InC-EDU/1.0/
Publication Abbreviation
Minn. L. Rev.
