Some viewed the lawsuit as an effort to preemptively block Congress from creating a wealth tax.
Writing for the majority, Justice Brett M. Kavanaugh said the challenge to the tax on offshore earnings could have rendered “vast swaths of the Internal Revenue Code unconstitutional.”
“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.”
Justices Clarence Thomas and Neil M. Gorsuch dissented.
The ruling landed near the end of a Supreme Court term that has been unusually slow-moving and marred by fresh ethics questions.
The justices plan to deliver a slew of major decisions by the end of June or the first days of July, including whether and when Donald Trump’s prosecution for alleged election interference can proceed in D.C.; the viability of a key charge against the rioters who attacked the U.S. Capitol on Jan. 6, 2021; access to emergency abortion care; and the future of free speech on social media platforms.
It is rare for so many high-profile cases to remain undecided this late in the term. Metal barricades lined the streets outside the court on Thursday, a show of heightened security that reflected the potential for protests. The justices return to the bench Friday to deliver more opinions, starting at 10 a.m.
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 D. Ryan. 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,” Chye-Ching Huang, executive director of the Tax Law Center at NYU Law, said 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 challenge to the tax was initiated by a Washington couple backed by the Competitive Enterprise Institute, an anti-regulatory advocacy group. Charles and Kathleen Moore were subject to $15,000 in taxes because of the 2017 law, springing from investments they had made in a company based in India that supplies equipment to small-scale farmers. The law created a one-time tax on certain offshore earnings that had previously been exempt from taxation unless the taxpayer brought the money back to the United States.
Dan Greenberg, CEI’s general counsel, said in a statement that the court’s decision “lets the government levy income taxes on foreign shareholders who have never received income. We think that is unfair, because the Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control.”
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 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. U.S., 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 G. Roberts Jr. and the court’s three liberal justices, Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson.
The specific tax that the Moores objected to paying, known as Section 965, was forecast to raise more than $300 billion over 10 years. Some major corporations have already paid billions under this tax.
In dissent, Thomas took the opposite view of the majority, writing that realization is a requirement under the Constitution and that the Moores did not realize income from their investment.
Justice Amy Coney Barrett, joined by Justice Samuel A. Alito Jr., 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.
The idea of a wealth tax has been proposed by Democrats including Sen. Elizabeth Warren of Massachusetts and several state legislatures, but has not come close to being enacted anywhere in the United States. The Moores and the conservative legal group that represented them in the case sought to block the concept in theory before it could ever come to pass in practice.
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.
