The Supreme Court is currently considering a case that has the potential to stop the implementation of a “wealth tax,” as well as to reshape certain aspects of the existing United States tax code.
Oral arguments in the case of Moore v. United States — which asks whether Congress has the power to tax unrealized sums of money — were presented before the Court on Tuesday.
Back in 2005, the defendants in this case — Charles G. Moore and Kathleen F. Moore — invested around $40,000 in an India-based company called KisanKraft in exchange for 11 percent of their shares.
As a Controlled Foreign Corporation (CFC), KisanKraft is majority-owned by Americans but operates outside of the country.
Typically, CFC shareholders are only taxed on their earnings once they are repatriated — or transferred back — to the United States.
In 2017, however, the Mandatory Repatriation Tax (MRT) — passed as part of President Donald Trump’s (R) 2017 Tax Cuts and Jobs Act (TCJA) — exacted a one-time tax on CFC’s earnings from 1986 until now — regardless of whether or not those earnings had been distributed to shareholders.
This case currently before the Court concerns the impact of the MRT on individual taxpayers.
In this case, the MRT resulted in the plaintiffs being responsible for $132,512 more in taxable income — translating to a $14,729 higher tax burden that year.
The Moores contend that the MRT is unconstitutional on the grounds that it violates the Fifth Amendment’s Due Process Clause and the Sixteenth Amendment’s Apportionment Clause.
Should the Supreme Court rule in favor of the plaintiffs and declare the MRT unconstitutional, it could cost the United States government as much as $340 billion over the next ten years, according to the United States Justice Department.
This decision could also potentially have an even more dramatic affect on the tax code more broadly, depending upon how the Court decides to elaborate upon the definition and extent of realization requirements.
Most notably, a ruling in favor of the plaintiff could end up preventing Congress from enacting a tax on unrealized capital gains — commonly known as a wealth tax.
President Joe Biden (D) has previously proposed taxing those with a personal worth of more than $100 million at a rate of at least 20% on all of their income — including their unrealized capital gains on assets.
Several Democrat lawmakers have also floated similar ideas that would impose a tax upon the realized and unrealized wealth of the richest Americans.
Should the Supreme Court determine, however, that taxation of unrealized capital gains is unconstitutional, not only would the adoption of these potential wealth taxes be out of the question, but large swaths of the existing tax code would also likely be called into question — particularly with relation to international tax law.
In the Moores’ petition for a writ of certiorari, they write that “this case provides a clean and timely vehicle for the Court to ‘solidify…the long-established norm of federal income taxation that a realization event is required before there is taxable income in the constitutional sense.'”
“The time to do so is now, to provide certainty to families and businesses arranging their financial futures and to head off a major constitutional clash when Congress accepts the Ninth Circuit’s invitation to enact an unapportioned tax on property or wealth,” the petition says.
It will likely be quite some time before the Justices release their ruling for Moore v. United States, as the Court must take time to deliberate on the case and draft their opinion.
Oftentimes, the Court’s more controversial opinions are not released until nearer their recess in late June or early July.
Consequently, a decision can be expected in this case by June of 2024.
Supreme Court opinions can be found here.