The Supreme Court is considering a major case that could change the tax laws, doom "wealth tax"

Washington – The Supreme Court is set to hear arguments Tuesday in a closely watched case that some warn could have far-reaching consequences for the U.S. tax system and derail proposals by some Democrats to create a wealth tax.

The dispute before the courts, known as Moore v. United States, dates back to 2006. That year, Charles and Kathleen Moore made an investment to help start the India-based company, KisanKraft Machine Tools, which supplies farmers in India with tools and equipment. The couple invested $40,000 in exchange for 13% of the company’s stock.

KisanKraft’s revenue has grown every year since it was founded, and the company has reinvested its earnings to grow the business instead of distributing dividends to shareholders.

The Moores received no distributions, dividends or other payments from KisanKraft, according to application with the Supreme Court. But in 2018, the couple learned they would have to pay taxes on their share of KisanKraft’s reinvested lifetime earnings under the “mandatory repatriation tax” enacted through the Tax Cuts and Jobs Act, which was signed by President Donald Trump the previous year. The tax was projected to generate about $340 billion in revenue over 10 years.

The tax required US taxpayers who owned at least 10% of a foreign corporation to pay a one-time tax on their proportionate share of the corporation’s earnings. As a result of the new requirement, the Moores were assessed to have an additional $132,512 in taxable income and had to pay $14,729 more in taxes.

The couple paid the tax but filed a lawsuit against the government to get the money back. They said the mandatory repatriation tax is a violation of the 16th Amendment because it taxes unrealized gains and not income.

The Federal District Court sided with the US government and dismissed the case, concluding that the mandatory repatriation tax is a tax on income authorized by the 16th Amendment, which gave Congress the power to tax “incomes from whatever source they may derived from.”

The U.S. Court of Appeals for the 9th Circuit affirmed the lower court’s decision, finding that “there is no constitutional prohibition against Congress attributing a corporation’s income pro-rata to its stockholders.”

The Moores asked The Supreme Court to review the 9th Circuit’s decision, arguing that its ruling “sweeps away the essential limitation on Congress’ taxing power, opening the door to unapportioned taxes on property … and anything else Congress might deem ‘income.'” The mandatory repatriation tax, they said in one separate filing to the court, is a wealth tax, not income.

People walk past the Supreme Court in Washington, DC on November 13, 2023.
People walk past the Supreme Court in Washington, DC on November 13, 2023.

MANDEL NGAN/AFP via Getty Images

Lawyers for the Moores also warned that allowing the 9th Circuit’s decision to stand would pave the way for an expansion of Congress’ taxing powers. There are e.g. introduced legislation in Congress to establish a so-called wealth tax, while the White House has suggested what it calls a billionaire minimum income tax.

But the Justice Department disagreed, telling the court in one case that the mandatory repatriation tax is an income tax. The 16th Amendment, wrote Solicitor General Elizabeth Prelogar, gives Congress the power to tax shareholders’ pro rata shares of undistributed corporate earnings as income.

Moore’s “claim that the MRT is a property tax cannot be squared with the MRT’s terms or long-standing historical practice,” said Prelogar, who is arguing on behalf of the government before the Supreme Court. archiving.

Warnings about disturbances in the tax system

The potential impact of a Supreme Court ruling addressing Congress’ power to tax certain types of unrealized gains has sparked controversy among organizations weighing in while rallying former political opponents who warn of the consequences of a ruling.

The Cato Institute, a libertarian think tank, said in a friend-of-the-court card that because other taxes, similar to the compulsory repatriation taxation, each tax revenue during the year in which it was realized, their constitutionality would not be called into question.

“Thus, a holding in favor of taxpayers here can — and should — be simple and narrow: MRT required taxpayers to treat as income amounts of which they were clearly unaware, and to that extent it is unconstitutional,” lawyers for the group wrote . .

But the American Tax Policy Institute warned that a decision invalidating the mandatory repatriation tax could have broad reach throughout the US tax system and “cast doubt on the constitutional status of many provisions, generating a wave of tax refund claims and litigation in the coming years.”

Former House Speaker Paul Ryan, who led the chamber when it passed the Republican tax reform plan in 2017, called the Moores’ lawsuit a “misguided challenge” and warned that if the courts rule for the couple, “much of the tax code would be unconstitutional.”

“I’m not in favor of a wealth tax, but I think if you use this as an argument to increase the wealth tax, you’re basically going to get rid of, I don’t know, a third of the tax code.” Ryan said during a September event at the Brookings Institution.

Rejection question

While the case has attracted input from a number of nonprofits and states, it has also been caught up in the ongoing investigation into the ethics practices at the Supreme Court after Justice Samuel Alito participated in interviews with David Rivkin, an attorney representing the Moores. , and James Taranto, editor at the Wall Street Journal.

In the article published in the Wall Street Journal in July, Alito criticized Congress for its efforts to impose a binding code of conduct on the Supreme Court, saying it does not have the authority to regulate the high court. The Supreme Court adopted its own code of conductthe first in its history, last month, although it lacks an enforcement mechanism.

In response to Alito’s interviews, Democrats on the Senate Judiciary Committee urged Chief Justice John Roberts to ensure that Alito recuses himself from future cases on legislation governing the Supreme Court and the tax dispute brought by the Moores. Senate Democrats warned that Rivkin’s access to justice could create the appearance of impropriety.

But Alito refused to step aside from the case, saying in a statement in September that there was “no valid reason” for his refusal. Alito claimed Rivkin participated in the interviews as a “journalist, not a lawyer,” and said the case pending before the high court was never mentioned.

A decision from the Supreme Court is expected this summer.

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