Champions of a future billionaire wealth tax can breathe a small sigh of relief after Tuesday’s Supreme Court argument in Moore v. United States. Additionally, those worried that the justices could be eager to blow up the current federal income tax system can sleep better, too. While juris doctors don’t take the Hippocratic Oath, the justices’ questions suggest that the Court’s liberals and conservatives are adopting a “first do no harm” approach regarding the tax code.
Less is Moore
What’s at issue is what constitutes income and when the federal government can tax it—a pivotal question for many concerned about growing wealth inequality in the United States and one that puts the 16th Amendment, the Progressive Era measure that led to the nation’s first federal income tax since the Civil War, in the spotlight.
In the case before the Supreme Court this week, the petitioners, Charles and Kathleen Moore, are a well-off married couple from Washington State who filed a lawsuit in 2019 seeking a $14,729 tax refund. A year earlier, they reluctantly paid that amount as a one-time tax on profits accumulated over a decade by a foreign corporation based in India, where Mr. Moore held a controlling stake. Having to pay the money addled him—so much so that he decided to challenge the law on constitutional grounds. In a short video posted by the Competitive Enterprise Institute—the free-market, pro-business organization providing the couple with legal support—he asked in a pitched voice, “If you haven’t received any income, how can you be required to pay income taxes?”
It seems like a reasonable question—but only if you know nothing about how the federal government has raised taxes for over a century. There is a long history of Congress attributing profits a business earns to its owners, even when those owners never receive a penny. For instance, partners get taxed on partnership income even when not distributed. Similarly, income from what’s called an S-Corp is attributed to its owner. The same goes for limited liability companies (LLCs) that select so-called pass-through taxation, even when money is not distributed to them. Congress has, since at least the 1930s, sought to tax U.S. shareholders on portions of the earnings of foreign corporations in which they own shares. Furthermore, to get very wonky, even Moore admitted that there’s also something called Subpart F, which has been around since the John F. Kennedy presidency that allows for taxation of certain income of foreign corporations, even when it is not paid to the U.S. owners. In other words, just like the Moores.
The couple contends that they had no income to be taxed because the foreign corporation never paid them any dividends. Instead, the company, KisanKraft, which sells farm equipment to small farmers in India retained the earnings in India to expand the business. They argue that this made the tax on their investment a federal tax on property, something not authorized under the 16th Amendment. (If you own land, for instance, the federal government cannot tax you on its value until you do something to extract money from it, like sell it. In contrast, the income you receive from renting out your home is taxable.) The Moores claimed that the 16th Amendment required the “realization” by them of the income KisanKraft earned before they could be personally taxed. The taxpayer has actually to receive the money, they argued. Both the trial court and the 9th Circuit Court of Appeals disagreed with the Moores.
Undaunted, the Moores appealed to the Supreme Court. Many experts panicked in June when the Court agreed to hear their case. If the tax the Moores paid was unconstitutional, then what about all those other categories? It would end the tax world as we know it and could be a roadblock to many forms of taxation trying to close the loopholes that allow billionaires to avoid paying taxes by buying assets that grow in value on paper but never selling them. By borrowing against their financial assets to get cash to spend, they can avoid paying taxes on that money. Plus, by using complex estate planning techniques, even their heirs can squeeze money out of the assets they essentially inherit tax-free. It is this buy-borrow-die approach that Senator Ron Wyden is trying to stop with his “Billionaires Income Tax” bill he introduced last week.
Follow the Money
You may wonder why the Supreme Court took the case since there were no divergent opinions among circuit courts to settle. And you might ask why there were numerous counsels of record, including lead counsel Andrew Grossman, a partner from the white shoe firm BakerHostetler. As Watergate leaker “Deep Throat” apocryphally said, the answer is: “Follow the money.” We’re talking sums, not in the tens of thousands but in the hundreds of billions.
Here’s that bigger context, pared down to the essentials with a tad of color to keep you awake (this is tax-related, after all). In the flurry of legislation before the holiday adjournment in December 2017, Congress passed, and President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) with its $1.9 trillion in tax cuts that primarily benefited big corporations and the very wealthy. Included in this package was a reduction in the corporate tax rate from 35 to 21 percent. These tremendous cuts were supposed to be offset by new revenue. One large revenue raiser the Republicans wrote into the law was a mandatory repatriation tax or MRT. This was not a new tax; instead, Congress said enough is enough. We allowed you to defer paying taxes for decades on accumulated profits offshore. Now pay up. The MRT promised to deliver some $340 billion to the Treasury on corporate profits piled up offshore through foreign corporations controlled (and often wholly owned) by American conglomerates. Could it be that the Republican drafters of these provisions had a good sense they would be challenged and possibly struck down by the Court in a bait-and-switch maneuver?
The name-brand corporations most impacted by the MRT included Apple, Microsoft, Pfizer, Johnson & Johnson, and Google. At the top of the list, according to the Institute on Taxation and Economic Policy, Apple has already paid more than $37 billion in repatriation tax, and Microsoft has paid more than $18 billion. While these big players challenged the law at the Supreme Court this week, they will reap the windfall if it were struck or pared down.
Supreme Arguments
Grossman, on behalf of the Moores, argued to the Court that the MRT was a tax on property ownership, a direct tax under the Constitution that would need to be apportioned to the states in proportion to their population.
Within minutes, it was clear that the argument was a loser. Other than Justice Samuel Alito, who rarely spoke during Grossman’s argument, the others didn’t buy it. Chief Justice John Roberts concluded that the corporation Charles Moore invested in had realized income. Justice Sonia Sotomayor seemed wary of the effects on corporations and income distributed to shareholders or partners. And Justice Amy Coney Barrett seemed to agree. Justice Elena Kagan wondered how his theory would continue to allow four long-standing types of taxation where the taxpayer did not receive income. She also reminded Grossman of the “century-old history” of Congress taxing American shareholders on their income from foreign corporations.
Trump appointees echoed the sentiment. Justice Brett Kavanaugh agreed on distinguishing the MRT from the long-standing taxing income from foreign corporations: “The only real wrinkle, I think, here is that it goes back and captures prior years’ income.” And Justice Neil Gorsuch was of no help to Grossman. Like Roberts, he said there was no question the corporation had realized the income. The only question was that of attributing that income to the Moores. Given that Congress always decided attribution, he suggested this was not a Constitutional question but a statutory one. And Justices Sotomayor, Barrett, and others also wondered whether looking back to attribute 30 years of income to shareholders might raise due process concerns.
Justice Ketanji Brown Jackson asked Grossman whether, even if he convinced the Court that both the 16th Amendment’s definition of income requires realization and that the MRT does not meet that realization requirement, wouldn’t he also have to prove that it was a direct tax, as opposed to an “excise tax” (imposed for the privilege of doing business) which even calculated based on income, was permitted at the federal level before the 16th amendment, even without apportionment? From there, the newest justice gave hints that she might remand the case to the 9th Circuit to decide that question. In this, the reticent Alito found his opening to ask Grossman whether the excise tax argument was in the question presented and if it was preserved. Grossman answered no in an attempt to close the door on saving the MRT if that was the only narrow way to do so.
Setting Limits without Killing a Billionaire Wealth Tax
Though a so-called billionaire wealth tax was never mentioned explicitly during arguments, the prospect was implied when conservative justices raised concerns about the “far-reaching consequences” of siding with the government in this case. Solicitor General Elizabeth Prelogar’s responses ruled out only one form of wealth tax. She agreed with Kavanaugh that a tax on the value of real property (like your home) or personal property (such as a yacht) at a point in time is a direct tax and would need to be apportioned based on population, something that would make it a non-starter.
The justices seemed more sympathetic to Prelogar, but several pushed her for a limiting principle. Alito and Gorsuch asked what would stop Congress from taxing people on unrealized gains in the value of real estate, for example, something states do. Prelogar would not rule that out. However, she emphasized that such a tax was not unlikely and difficult to assess and collect. Plus, she explained, it might not stand up to a challenge as it is not supported by historical tradition. She also noted that the first tax passed by Congress after the 16th Amendment was ratified in 1913 involved taxing shareholders on unrealized gains. As for the due process concerns in retroactively taxing 30 years of income, Prelogar reminded the Justices that the 9th circuit below had already rejected that argument and that the Moores’ counsel had not raised it here.
What to Expect When You Were Expecting Chaos
Watching oral arguments at the Court—live, as I did—it seems that most of the justices are likely to determine that there was a realization of income by the foreign corporation Moore had a controlling stake in and that it’s appropriately within Congress’s role to decide whether to attribute that income to him. I’d also bet that the majority will simply elide the question that the Moores and other supporters hoped they would answer, namely whether the 16th Amendment to the Constitution requires income realization.
That doesn’t mean the Roberts Court will instantly rule against the Moores and also uphold the mandatory repatriation tax. For those of us concerned about growing inequality and persistent tax-dodging efforts of the overclass, upholding the law is probably the best outcome. It might not be that simple, though, as the Court may choose to remand the case to the 9th circuit to determine whether looking back 30 years to capture deferred profits to tax is fair as a matter of due process. Nevertheless, with a limited ruling, sidestepping a thorny question about what income is under the 16th Amendment, the Court will avoid, at least for now, barring a future Congress from enacting a billionaire wealth tax on unearned income. Given how the Court has been eager to overturn decades of precedent in regulatory and other cases to help major corporations, this kind of restraint (if it comes to fruition) ought to count as a victory.
