GOOGLE GEMINI: Does “profit” within the meaning of the Sixteenth Amendment include exchanges where there is no real inflation adjusted appreciation?

EDITORIAL: The following series of questions were asked of Google Gemini on 5/1/24

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QUESTION 1:

Does “Profit” within the context of the Sixteenth Amendment include numerical but not real gains in the value of a thing? By that I mean does it include something that has no gain after adjusting for inflation?

ANSWER 1:

You’re right, the Sixteenth Amendment to the U.S. Constitution refers to income tax, and profit is a factor in determining taxable income. In the context of taxes, profit is generally considered to be the difference between the selling price of an asset and its purchase price. This definition of profit for tax purposes typically does not take inflation into account.

So, to answer your question, yes, “profit” within the context of the sixteenth Amendment can include numerical but not real gains in the value of an asset, meaning it can include profits that haven’t kept pace with inflation. For instance, if you buy a stock for $100 and sell it for $120 several years later, you would have a capital gain of $20 for tax purposes, even though inflation might have eroded the actual purchasing power of that $120.

There are some areas where inflation adjustments are made for tax purposes, but generally not for capital gains taxes. It’s important to consult with a tax advisor for specific guidance on how inflation might affect your tax situation.

QUESTION 2:

What supreme or appellate court cases support your conclusion?

ANSWER 2:

Unfortunately, there isn’t a single Supreme Court case directly defining “profit” for the purposes of the Sixteenth Amendment’s income tax. The concept of profit for tax purposes is established through various court cases and IRS regulations.

Here’s a breakdown of how we reach the conclusion about profit and inflation:

• Sixteenth Amendment: The amendment itself focuses on income without defining it. “[I]ncomes, from whatever source derived” is the key phrase, leaving interpretation to the courts and legislative bodies
• Income vs. Profit: Courts have generally accepted that income for tax purposes includes profits earned from business activities and capital gains.
• Capital Gains: Supreme Court cases like Eisner v. Macomber (1920) solidified capital gains as taxable income. While not explicitly mentioning inflation, the focus was on the “gain realized” from the sale of assets.
• Tax Code and Regulations: The Internal Revenue Code and IRS regulations provide more specific rules on calculating capital gains. These don’t typically factor in inflation adjustments.

While there isn’t a single court case on point, the legal understanding of profit for tax purposes is built on this combined framework. If you’re interested in further details, you can explore these resources:

• Eisner v. Macomber (1920) Supreme Court case
• Internal Revenue Code (IRC) Section 1001: Defines how capital gains are calculated
• IRS Publication 550: Provides a general overview of capital gains and losses