Justices uphold taxing investors on foreign gains | The Arkansas Democrat-Gazette

WASHINGTON — The Supreme Court on Thursday upheld a tax on foreign income over a challenge backed by business and anti-regulatory interests, declining their invitation to weigh in on a broader, never-enacted tax on wealth.

The justices, by a 7-2 vote, left in place a provision of a 2017 tax law that is expected to generate $340 billion, mainly from the foreign subsidiaries of domestic corporations that parked money abroad to shield it from U.S. taxes.

The law, passed by a Republican Congress and signed by then-President Donald Trump, includes a provision that applies to companies that are owned by Americans but do their business in foreign countries. It imposes a one-time tax on investors’ shares of profits that have not been passed along to them, to offset other tax benefits.

But the larger significance of the ruling is what it didn’t do. The case attracted outsize attention because some groups allied with the Washington couple who brought the case argued that the challenged provision is similar to a wealth tax, which would apply not to the incomes of the very richest Americans but to their assets, like stock holdings. Such assets now get taxed only when they are sold.

Justice Brett Kavanaugh wrote in his majority opinion that “nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity.”

Underscoring the limited nature of the court’s ruling, Kavanaugh said as he read a summary of his opinion in the courtroom, “the precise and very narrow question” of the 2017 law “is the only question we answer.”

“Those tax provisions, if suddenly eliminated, would deprive the U.S. Government and the American people of trillions in lost tax revenue,” he wrote. The implications of the challengers’ argument, he added, would have required Congress to “either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it — including, of course, on ordinary Americans. The Constitution does not require that fiscal calamity.”

An unusual political coalition defended the offshore-earnings tax at issue in Thursday’s ruling, from the Biden administration to conservatives including former House Speaker Paul Ryan, R-Wis. Not because they favor a wealth tax, but because they worried a ruling against one little-known provision could undermine a large number of existing taxes on investments, partnerships and foreign income, which together raise billions or even trillions in revenue.

“The Supreme Court heeded the warnings of a broad and bipartisan set of tax experts,” said Chye-Ching Huang, executive director of the Tax Law Center at NYU Law, in a statement after the ruling. “Today’s decision will allow Congress to continue to exercise its power to tax income to fund the government and to make sure that all taxpayers — including multinational corporations and wealthy taxpayers — pay their fair share.”

The court ruled in the case of Charles and Kathleen Moore, of Redmond, Wash. They challenged a $15,000 tax bill based on Charles Moore’s investment in an Indian company, arguing that the tax violates the 16th Amendment. Ratified in 1913, the amendment allows the federal government to impose an income tax on Americans. Moore said in a sworn statement that he never received any money from the company, KisanKraft Machine Tools Private Ltd.

Over the course of 11 years, the value of the Moores’ initial investment of $40,000 in the KisanKraft company grew to more than half a million dollars. Until the 2017 law took effect, the couple paid no taxes on that increase. They argued that they should not be taxed because they never actually took in money, even as the value of their share in the company grew.

When considering the case of Moore v. United States, the U.S. Court of Appeals for the 9th Circuit took an expansive view and said the tax was within Congress’s power and permitted under the 16th Amendment regardless of whether the Moores received the money. In tax terminology, the 9th Circuit said Congress can tax both “realized” and “unrealized” gains.

The Supreme Court’s reasoning for upholding the 2017 tax is much narrower. Kavanaugh said the high court did not need to decide the broad question of whether Congress has the constitutional authority to tax unrealized gains because the Moores’ share in the company should simply be treated as realized income.

Citing previous cases in a lengthy review of tax policy going back to the American Revolution, the justice wrote that U.S. tax law has long permitted taxation of partners on their share of income taken in by a partnership, even if the individual partners don’t receive the money. Someone realized the income — in this case, the KisanKraft company — and Congress has the power to attribute that real income to the Moores.

Without that long-standing practice, Kavanaugh wrote, major sections of the tax code that take in billions of dollars a year to fund the government would be unsupported. Kavanaugh’s opinion was joined by four colleagues: Chief Justice John Roberts and the court’s three liberal justices, Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson.

But Kavanaugh said the tax the Moores disputed was akin to other taxes, including those on foreign-earned income and partnerships. A ruling for the Moores could have called into question those other provisions of the tax code and threatened losses to the U.S. Treasury of several trillion dollars, Kavanaugh noted, echoing the argument made by the Biden administration.

DISSENTING OPINION

Justice Clarence Thomas, joined by Justice Neil Gorsuch, wrote in dissent that the Moores paid taxes on an investment “that never yielded them a penny.” Under the 16th Amendment, Thomas wrote, the only income that can be taxed is “income realized by the taxpayer.”

Lawyers for the Moores said they were disappointed by the ruling, but took some hope from its narrowness. “What this means is that the constitutionality of other species of future taxes — such as a national wealth tax — remains entirely unaddressed by the court’s opinion,” said Dan Greenberg, general counsel of the Competitive Enterprise Institute.

Justice Amy Coney Barrett, joined by Justice Samuel Alito, agreed with the outcome in the case but for different reasons and said the tax at issue “may or may not be constitutional” but that the Moores failed to properly prove a problem with the tax, if it exists.

Barrett and Alito agreed with Thomas and Gorsuch that a taxpayer must realize — or take in — some income for a tax to be valid, but came up with their own interpretation for the different business scenarios that allow Congress to consider shareholders to have realized income.

The majority left open for another day the question of whether realization is necessary for a tax to be valid. If Congress were to pass a wealth tax, or other types of taxes that are very different from the one at issue in this case, the court would probably revisit the question of realization.

Kavanaugh’s opinion left the issue of realization open and there are now four justices, one shy of a majority, who have declared their opposition to taxes, like a wealth tax, that don’t require realization.

UNSETTLING DECISION

Leslie Samuels, a tax expert who served in the Treasury Department during the Clinton administration, said the court’s decision was unsettling because it seemed to encourage more legal challenges to taxes and warn Congress that its ability to impose new taxes may be restricted.

“While the government won, the Moores’ backers effectively achieved some important and disquieting successes for the future,” Samuels said.

The Moores’ case was not without controversy. Some tax experts said the couple were more involved in the company than they disclosed in court filings and urged the court not to decide the constitutional question based on an inaccurate, incomplete record. One of the couple’s lawyers defended the record as accurate and candid.

In addition, Democratic senators asked Alito to recuse himself from the case because one of the attorneys in the matter interviewed the justice twice for articles that appeared on the Wall Street Journal editorial page. Alito, who did not attend the court’s public session Thursday, refused to recuse, saying he never discussed the Moores’ case with the attorney, David B. Rivkin Jr., whose involvement in the matter was disclosed in the second article.

Public documents show that Charles Moore’s involvement with the company, including serving as a director for five years, is far more extensive than court filings indicate.

The case is Moore v. U.S., 22-800.

Information for this article was contributed by Mark Sherman and Fatima Hussein of The Associated Press and by Ann E. Marimow and Julie Zauzmer Weil of The Washington Post.