It’s Time for the U.S. to Adopt a Realization Standard: Looking Outward for a Starting Point
Although the Internal Revenue Code never explicitly states it, the realization requirement, the principle that income must be realized before it can be taxed, has become a bedrock concept of U.S. tax law. This requirement was judicially created in Eisner v. Macomber, where the Supreme Court sought to clarify when income is realized and subject to tax.[i] However, the standard of what constitutes realized income has evolved over the last century since we were first introduced to the realization requirement.
In Macomber, the court defined realization as requiring a severance from the capital that produced the gain; the idea that the taxpayer must receive something distinctly separate and for their own benefit, rather than merely experiencing an increase in the value of property they already own.[ii] Over time, however, new situations arose that challenged the idea that realization required a distinct severance event. In Helvering v. Bruun, a landlord leased land with an old building, allowing the tenant to make improvements that would revert to him if the lease was forfeited.[iii] The tenant replaced the old building with a new one, but later defaulted, returning the improved property to the landlord.[iv] The Supreme Court held that the building was still taxable income, despite the fact that it was still attached to the land and was therefore not severable.[v] In Helvering v. Horst, a taxpayer detached interest coupons from bonds and gave them to his son, who later collected the payments.[vi] The Supreme Court held that the taxpayer realized income by exercising control over the right to receive income, emphasizing that the power to dispose of income is equivalent to ownership, shifting the focus from severance to control.[vii]
This trend culminated in 2024, when the Supreme Court missed a golden opportunity to clarify what constitutes a realization event. In Moore v. United States, the Supreme Court considered whether taxing undistributed foreign corporate earnings under the Mandatory Repatriation Tax violated the realization requirement.[viii] The case squarely presented the question of what counts as a realization event under the Sixteenth Amendment, but instead of defining it, the Court upheld the tax by reasoning that the income had already been realized by the corporation, missing a pivotal opportunity to clarify the constitutional meaning of realization.[ix] This uncertainty has created confusion for courts, policymakers, and taxpayers alike, undermining consistency and potentially costing the government significant revenue.[x]
Perhaps one way forward is for the U.S. to look outward and take after other countries that have provided clearer statutory guidance on when income is considered realized. In many jurisdictions, realization is tied to disposition, a concept the U.S. could adopt to set a clearer standard for what constitutes a realization event. In Canada, for example, a realization event occurs upon the disposition of property.[xi] As the Canadian Parliament explains, “[o]rdinarily, capital gains are taxed on realization - that is, when the owner has sold the property and has realized the gain,” though certain “deemed dispositions,” (emphasis added) such as death of the taxpayer, also result in a taxable event even without an actual sale.[xii] In Australia, the definition of a realization event depends on the type of transaction, though the common thread is that realization occurs upon disposition. For example, “[f]or a CGT asset, a realisation event is a CGT event,” which occurs “when you dispose of an asset that is subject to capital gains tax (CGT)” (emphasis added).[xiii] Likewise, for items classified as “trading stock,” the disposal of the item triggers a realization event.[xiv]
Ultimately, disposition could serve as a workable standard, a concept already familiar in U.S. tax law.[xv] Whatever approach is chosen, the U.S. must finally define what constitutes a realization event, and the clearer frameworks adopted abroad offer a valuable starting point.
Gilad Menashe is a staff member of Fordham International Law Journal Volume XLIX.
[i] See Eisner v. Macomber, 252 U.S. 189 (1920).
[ii] See id. at 207.
[iii] See Helvering v. Bruun, 309 U.S. 461 (1940).
[iv] See id.
[v] See id. at 469.
[vi] See Helvering v. Horst, 311 U.S. 112 (1940).
[vii] See id. at 116–117.
[viii] See Moore, 602 U.S. 572 (2024); Enacted as part of the Tax Cuts and Jobs Act, the Mandatory Repatriation Tax imposes a one time tax on certain U.S. shareholders’ previously untaxed foreign earnings, whether or not distributed. I.R.C. § 965.
[ix] See Moore v. U.S, 602 U.S. at 584.
[x] See The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax, ProPublica (Jun. 8, 2021), https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax.
[xi] See Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), § 40(1) (Can.).
[xii] House of Commons Canada, Third Report of the Standing Committee on Finance - 1. Capital gains, non-residents and migrants (Sept. 1996), https://www.ourcommons.ca/Archives/committee/352/fine/reports/03_1996-09/fine-03-chap1-e.html. (Accessed on: November 10, 2025).
[xiii] Income Tax Assessment Act 1997, No. 38 of 1997, § 977-5 (Austl.). (Hereafter, “ITAA”); Australian Taxation Office, CGT events (Jun. 23, 2025), https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-events. (Accessed on: November 10, 2025).
[xiv] See ITAA 1997, § 977-5.
[xv] See 26 U.S.C. § 1001; see also 26 U.S.C. § 904(f)(3) (providing that when property used predominantly abroad is disposed of the taxpayer is deemed to recognize foreign-source income to recapture prior foreign losses).
This is a student blog post and in no way represents the views of the Fordham International Law Journal.