SCOTUS Case Could Quash Democrats' Wealth Tax Plans
(HATIM KAGHAT/Belga/Sipa USA/Newscom)
Case concerns limits of IRS power. The Supreme Court has agreed to hear a tax law case that could "yield billions of dollars for large corporations, block Democrats' proposals to tax wealthy Americans and upend longstanding chunks of the tax code," as the Wall Street Journaldescribes it. At issue is "whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states," SCOTUSblog explains.
The case—Moore v. United States—involves a Washington state couple challenging a $14,729 tax bill on income that they say shouldn't count as income. Charles and Kathleen Moore were sent a bill by the IRS saying they owed taxes on income received from their investment in the company KisanKraft. The Moores owned shares in this company for more than a decade but say they never received any income from these shares, because all company profits had been reinvested in the company.
At the center of the case is something called the Mandatory Repatriation Tax, which was passed as part of the 2017 Tax Cuts and Jobs Act. It let the IRS levy a one-time tax on shares in a foreign company even if said shares had not yielded any profits for the shareholders. The tax applied to individuals with at least 10 percent ownership of a foreign company as well as to U.S.-based companies.
Opponents of the Mandatory Repatriation Tax say it functions as a wealth tax or a property tax—types of direct taxes only allowed by the federal government if they're applied proportionally by state population.
But the U.S. Court of Appeals for the 9th Circuit agreed with the government that the Mandatory Repatriation Tax is a form of income tax.
In their lawsuit, the Moores—who are being represented by the Competitive Enterprise Institute and the law firm BakerHostetler—argue that the tax is unconstitutional because it violates the 16th Amendment's requirement regarding direct taxes and state proportionality.
"The Constitution does not allow Congress to point at any pot of money and call it 'income' and then income-tax it," Andrew M. Grossman, the Moores' lead counsel, said in a statement. "'Income' means the same thing now that it did when the Sixteenth Amendment was ratified: gains that have been realized by the taxpayer."
At stake in this is the scope of permissible taxation by the federal government.
"Divorcing income from realization opens the door to new federal taxes on all sorts of wealth and property,'" warned 9th Circuit Judge Patrick Bumatay in a dissent from the appeals court's decision not to rehear the case en banc.
"Our court dislodged settled constitutional limits on federal taxation by aggrandizing Congress's power to levy unapportioned taxes on unrealized gains," wrote Bumatay. "This holding conflicts with the Sixteenth Amendment's original meaning and misconstrues binding precedents. And the consequences of our decision extend far beyond the Mandatory Repatriation Tax."
The Journal teases out some possible outcomes:
A ruling upholding the law would leave the status quo in place. But if the court rules in favor of the Moores, it could have widespread implications, depending on what the justices say.
First, if the court sided with the Moores, it could mean that companies that have been paying the one-time tax may be able to seek refunds totaling hundreds of billions of dollars.
Second, it could affect existing pieces of the tax code that impose taxes without realization of income. That includes taxes on individual shareholders in foreign companies with passive income, investors who buy certain discounted bonds, and wealthy people who renounce their citizenship. …
And, looking forward, a realization requirement could block some of Democrats' most ambitious tax proposals. President Biden has called for an annual minimum tax on wealthy Americans, based in part on their unrealized capital gains. And some Democrats, such as Sen. Elizabeth Warren (D., Mass.), want an annual tax on the net worth of the richest households.