Topline
The Supreme Court heard oral arguments Tuesday in a case concerning whether a couple had to pay taxes on an investment they didn’t profit from—potentially calling a significant number of provisions in the tax code into question and thwarting Democrats’ efforts to impose a wealth tax on the richest Americans depending on how the court rules.
Key Facts
Moore v. United States was brought by couple Charles and Kathleen Moore, who made a $40,000 investment in Indian company KisanKraft Machine Tools Private Limited, and reinvested the money they made from that investment back into the business without taking a profit.
The Moores were taxed $14,729 on that investment under a provision in the GOP’s signature 2017 tax law called the “mandatory repatriation tax” (MRT), which imposed a one-time tax on U.S. individuals and companies who have a significant stake in foreign corporations controlled by Americans.
The couple subsequently sued the government, arguing they shouldn’t have been taxed on their “unrealized” gains — income from investments or assets is generally taxed after those assets have been sold at a profit, meaning the gains are “realized.”
While the case centers on the MRT, tax experts have warned it could have broader impacts on the tax code and economy, both for foreign earnings and because the concept of taxing unrealized gains affects other tax provisions — particularly for businesses.
Business owners in partnerships can be taxed on their company’s profits without selling their stake in it, for instance, and other taxes that could be affected include a tax on foreign earnings from things like trademarks and copyrights — plus Democratic-led states argued it could “destabilize” state taxes as well, because over a dozen states have tax provisions that conform to affected federal laws.
Accepting the idea that only realized income can be taxed “could place several long-standing provisions of the current federal income tax at risk and cause substantial revenue losses,” according to a report published by the Tax Policy Center at the Urban Institute and Brookings Institution, and tax economists warned in an court filing the resulting impact on the economy could be “profound.”
A ruling in the Moores’ favor could also upend proposals that Democrats have put forth for taxing the richest Americans, including a “wealth tax” based on an individual’s net worth, or an income tax proposed by the Biden administration on wealthy people’s unrealized capital gains.
The Moores acknowledged those tax proposals in their petition to the Supreme Court, arguing a ruling in their favor would “[stand] to head off a major constitutional clash” over whether such a tax is legal, and Sen. Ron Wyden (D-Ore.), who introduced a billionaires tax bill, said in a statement when the court took up the case that a ruling for the petitioners “could potentially lock in a right for billionaires to opt out of paying anything remotely close to a fair share in taxes.”
What To Watch For
A ruling is not expected for several months, though some time before the court’s term ends in June 2024. In oral arguments Tuesday, justices signaled they were wary to side with the Moores, with justices pointing out the broader impact a ruling in the couple’s favor could have on the tax code and even conservative-leaning Justice Clarence Thomas suggesting that unrealized income from stocks can be taxed. “Why is it that you think we can decide for you without putting any of those kinds of very established taxation schemes at risk?” Justice Elena Kagan asked the Moores’ attorney.
Big Number
$340 billion. That’s how much a ruling that invalidates the MRT could cost the federal government over the next decade in lost tax revenue, the Justice Department said in a court filing. If the Supreme Court were to issue a broader ruling that affected all undistributed business earnings — meaning all corporate earnings, foreign and domestic, that aren’t paid out to shareholders but are instead kept within the company — rather than just unrealized income through the MRT, a study by the Tax Foundation estimated it could reduce federal tax revenue by nearly $5.7 trillion over the course of a decade.
Chief Critics
Some tax experts have criticized the Moore case as using the couple’s dispute as a vehicle to stop a future wealth tax. Tax law professor Donald Tobin told blog Law Dork, “I think the idea that we may totally upend the entire Internal Revenue Code based on the fact that someone is afraid that sometime in the future there might be a wealth tax is a huge mistake.” Steven Rosenthal, senior fellow at Urban-Brookings Tax Policy Center, told the Guardian that “the billionaires financing the litigation are the real parties of interest” in the case, rather than the Moores. (The Moores’ case is being backed by Competitive Enterprise Institute, a libertarian think tank funded in part by the Charles Koch Foundation.)
Key Background
The Moores brought their case to the Supreme Court after losing at both the federal district and appeals courts, which held the federal government was within its rights to tax the Moores’ KisanKraft shares under the Sixteenth Amendment, which gives Congress its taxation powers. The appeals court noted the potential economic ramifications in its ruling for the government, writing that ruling in favor of the Moores would “call into question the constitutionality of many other tax provisions that have long been on the books.” Taxes on the ultrarich have become a popular proposal on the left in recent years, with Sen. Elizabeth Warren (D-Mass.) making a wealth tax on households with a net worth of more than $50 million a central issue of her 2020 presidential campaign. President Joe Biden separately proposed a “Billionaire Minimum Income Tax” on households worth more than $100 million in March 2022, which would require the top earners to pay a tax rate of at least 20% on their full income, including their unrealized capital gains. Proponents argue taxing top earners would force the wealthiest Americans to pay their fair share in taxes while also producing much-needed government revenue — the Biden administration estimates its tax would reduce the federal deficit by $360 billion over the course of a decade — but Democrats’ proposals face long odds of ever coming to fruition given Republican opposition.
Tangent
The Moore case has also drawn attention for how it’s intersected with the ongoing ethics controversy at the Supreme Court. Justice Samuel Alito rejected calls from Democratic lawmakers to recuse himself from the case, after one of the attorneys arguing the case, David Rivkin, conducted interviews with Alito that were published in the Wall Street Journal. Alito claimed there was “no valid reason for my recusal in this case,” claiming Rivkin participated in the interviews “as a journalist, not an advocate.” Additionally, one of the the groups that has filed amicus briefs encouraging the justices to side with the Moores is the Manhattan Institute, which argued against a wealth tax in its filing, saying such a policy would “undermine fundamental principles of economic liberty, discouraging entrepreneurship, innovation, and upward mobility.” The organization’s leadership and trustees, the Guardian noted, includes billionaire hedge fund Paul Singer — who invited Alito on a luxury fishing trip that raised ethics concerns — and the wife of Harlan Crow, the real estate magnate who has drawn widespread controversy after a series of reports detailed how he’s treated Justice Clarence Thomas to years of luxury travel, funded his grand-nephew’s school tuition and bought real estate from the justice.
Contra
The American College of Tax Counsel sought to distance the case from the debate over a wealth tax in an amicus brief with the court, arguing the Supreme Court can issue a ruling that narrowly decides the Moores’ case “without proactively weighing in on the constitutional parameters of wealth taxes.” Calling the MRT “conceptually distinct from wealth taxes in important ways,” the organization argued that the issue of whether or not a wealth tax is constitutional would “likely turn on the specific details of the actual wealth tax before the Court.” “It may be that such a wealth tax would in fact run afoul of the Constitution,” the organization wrote. “But these are not the questions before the Court today.”
Surprising Fact
Critics of the Moores’ lawsuit have called for their case to be thrown out, because records suggest the couple has closer ties to the Indian company they invested in than their lawsuit suggests. While the lawsuit claims the couple only invested $40,000 in KisanKraft, records reported by Tax Notes claimed the Moores actually committed $400,000 to the company, and Charles Moore served as a director for the company. “I’m confident that our filings are candid and accurate,” the Moores’ attorney Dan Greenberg said in a statement to the Washington Post about the reported discrepancy.
Further Reading
Supreme Court Will Hear Case Targeting Tax On Unrealized Gains (Forbes)
Supreme Court Will Hear Case That Could Upend The Current Tax System (Forbes)
Moore Money, More Tax Problems? Analyzing Moore V. United States (Forbes)
In SCOTUS Moore Case, Taxation Without Receipt Of Cash Is Fair Game (Forbes)