The Supreme Court on Thursday upheld a tax on foreign income that funded President Donald J. Trump’s 2017 tax cuts, even though many experts had warned that the tax could weaken the nation’s tax system.
Justice Brett M. Kavanaugh wrote for a five-justice bench that was joined by Chief Justice John G. Roberts Jr. and the court’s three liberals in the 7-2 decision.
Justice Amy Coney Barrett, joined by Justice Samuel A. Alito Jr., wrote a concurring opinion explaining that while she agreed with upholding the tax, she disagreed with the majority’s broad reasoning. Justice Clarence Thomas, joined by Justice Neil M. Gorsuch, dissented.
The question before the justices in this case seemed narrow at first glance: Was the tax permitted under the Constitution, which gives Congress limited taxing power?
Justice Kavanaugh argued, writing, “The longstanding precedent of this Court, reflected and reinforced by the longstanding practice of Congress, establishes that the answer is yes.”
While he agreed that broader issues surrounding the limiting of federal taxing power were emerging, he said those were “potential issues to discuss another day.”
The ruling ensures that the structure of the income tax system remains in place for the time being, averting the fiscal chaos that many analysts and economists had warned could result if the system were abolished.
The decision also gave insight into what will be the next big tax case before the Supreme Court: whether Congress can effectively tax Americans on their wealth, as President Biden and other Democrats have proposed in various forms. That question featured prominently in the ruling, highlighting the sharp differences in how the justices view the concept of a wealth tax.
In her concurring opinion, Justice Ketanji Brown Jackson essentially laid out a roadmap for how the government could defend such a tax if it were enacted.
She praised the majority for “wisely” taking a “restrained approach” to the narrow ruling. She acknowledged that more tax battles are likely to come to the court in the future, but warned that the justices should approach such disputes with similar discipline.
“A future Congress will no doubt pass, and a future president will sign, a tax that infuriates one group or another — a tax that some feel asks too much and others feel asks too little,” Justice Jackson wrote. But historical examples show that such disagreements are best resolved by voters, not judges, she added.
Still, the court’s conservatives, including the two who voted in favor of the tax, argued that a hypothetical wealth tax could violate constitutional guidelines, including those set out in the 16th Amendment, which sets out what federal taxes should be.
In her concurring opinion, Justice Barrett wrote that she agreed with the Court’s ultimate decision in the case, but said that “a different tax — for example, a tax on shareholders of a widely held or domestic corporation — would be a different case.”
In a sharp dissent, Justice Thomas argued that the majority upheld the tax “simply by ignoring the issues raised.” He said the 16th Amendment’s “text and history” make clear the “necessity to distinguish between ‘income’ and the ‘source’ from which that income is ‘derived.'”
“The only ‘income’ under the 16th Amendment is realized income,” he added. “In this case, we should not have been hesitant to say that.”
The dispute involved Charles and Katherine Moore, a Washington couple who challenged the law after they were asked to pay nearly $15,000 in taxes on their investments in companies that supplied products to rural Indian farmers. The couple were backed by the Competitive Enterprise Institute, a free-market research organization in Washington.
The Moores’ investment in India fell under a little-known provision of the Tax Cuts and Jobs Act of 2017 that changed the way the federal government taxes corporate profits earned overseas. Under the provision, U.S. shareholders who own 10% or more of a foreign company that is primarily owned or controlled by Americans must pay a one-time tax. Previously, they only had to pay tax on profits brought into the U.S.
The issue is whether the Moores should be taxed even though they never earned or realised any income from the investments in question.
According to the court filing, in 2006, the Moores invested $40,000 in Kisancraft Machine Tools Private Limited, a company that supplies basic equipment to farmers. The Moores also received shares in the company, which was founded by Moore’s friend, Ravindra Kumar Agrawal.
In 2018, the Moores learned they owed income tax on the company’s reinvested profits dating back to 2006, increasing their tax bill by about $15,000. Backed by conservative and business groups, the Moores sued, arguing that the tax violated the Constitution’s apportionment requirements because it was levied on their shares in the company, which they considered personal property, rather than on income they earned.
Lower courts, including the 9th Circuit Court of Appeals, sided with the federal government. In a dissenting opinion, Judge Patrick J. Bumathai, a Trump appointee, said the appeals panel’s decision ran counter to “ordinary meaning, history, and precedent” that recognizes that “an income tax must be a tax on realized income.”
The Moores appealed to the Supreme Court, which agreed to rehear the case.
In their petition, the couple argued that the 9th Circuit’s decision “swept away essential limitations on Congress’ taxing power and paved the way for non-apportionment taxes (as in this case) on property or anything Congress considers to be ‘income.'”
Biden administration lawyers argued that the 9th Circuit Court of Appeals “rightly rejected” the Moores’ arguments that the tax is unconstitutional, arguing that the Moores’ arguments are “not supported by constitutional text, congressional practice, or our court precedent,” adding that the case lacks “imminent future importance” because it is a one-time tax that applies only to pre-2018 income.
Overshadowing the case was a larger, and still hypothetical, question: to what extent does the Constitution allow the federal government to tax the wealthy?
Currently, the federal government taxes salary income, investment income and income from the sale of assets like stocks and bonds. Progressive lawmakers, led by Sens. Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, have in recent years called for the government to go further, essentially taxing the net worth of the nation’s wealthiest people.
Their proposals include taxing very wealthy individuals on the appreciation of their investment portfolios, even if the gains are only on paper — say, a stock bought for $100,000 that grows in value to $1 million but hasn’t yet been sold. Such gains are called “unrealized” gains.
Congress has yet to approve a tax on unrealized gains, but in a decision issued Thursday in the case Moore v. United States, the justices were already weighing in on whether it would be constitutional.
The majority opinion explicitly avoids ruling on the issue but suggests that a wealth tax may have difficulty withstanding the same legal test the justices imposed in Moore.
Dan Greenberg, general counsel for the Competitive Enterprise Institute, expressed disappointment with the ruling.
But Greenberg agreed that broader issues were emerging, called the ruling “very narrow in scope,” and expressed optimism about how the majority of justices would view future tax challenges.
“If future income taxes are challenged and the court has to deal head-on with the realization requirement, it seems likely that the challenger will find a friendly audience with a significant portion of the court,” Greenberg said.
Warren welcomed the ruling but warned that a long fight lay ahead.
“Right-wing billionaires have tried to overturn our tax code in anonymous lawsuits to avoid paying the debt they owe, but this attempt failed in the Supreme Court,” Warren said on social media. “The fight continues to tax the rich, impose a wealth tax on the super-rich and billionaire, and make the system fairer.”
The case was controversial from the start.
Some tax experts had urged the Supreme Court to hear the case, arguing it was based on inaccurate information, part of growing scrutiny of how the top court hears some cases.
In a series of detailed articles, the trade publication Tax Notes reported that tax experts said the couple may have been more deeply involved in the company than they suggested in court documents.Lawyers for the Moores have disputed concerns about the Moores’ story and said the record in the case is accurate.
The Moores’ lawyer, David B. Rivkin Jr., had twice interviewed Justice Samuel A. Alito Jr. for an editorial in The Wall Street Journal in the months prior to the case, raising questions about whether Justice Alito should hear the dispute. Justice Alito refused to recuse himself from the case and said in a statement that Rivkin had interviewed him “as a journalist, not as a lawyer.”
“The case in which he is involved is never mentioned, nor is any issue related to it discussed, either directly or indirectly,” Justice Alito added. “His involvement in the case is made clear in the second article and readers can take it into account.”
Some ethics experts have called for the resignation of Chief Justice Roberts, Justice Thomas and Justice Jackson, who have pointed out that each justice holds stock in limited liability companies and partnerships that could benefit them if they were to declare the tax unconstitutional. All three justices were involved in the case.
Kitty Bennett contributed to the research.
