SCOTUS Takes a Pass on Constitutionality of “Wealth Tax”

The Supreme Court ruled Thursday that a 2017 policy imposing a one-time tax on certain shareholders regardless of whether or not their earnings had been distributed was constitutional.

Despite speculation that the opinion could potentially shed light on the constitutionality of a future “wealth tax” on unrealized capital gains, the Justices emphasized in their majority opinion that they did not need to “resolve that disagreement over realization” to make their decision.

“Those are potential issues for another day, and we do not address or resolve any of those issues here,” the Justices said.

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.

At the center of this case were concerns regarding 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.

[RELATED: The Supreme Court Case That Could Make the Taxation of Unrealized Income Unconstitutional]

The majority opinion was authored by Justice Brett Kavanaugh and joined by Chief Justice John Roberts, Justice Sonia Sotomayor, Justice Elena Kagan, and Justice Ketanji Brown Jackson.

The Court found that Congress did not exceed its constitutional authority in establishing the MRT since “Article I of the Constitution affords Congress broad power to lay and collect taxes,” and this law does so within bounds.

“The Court’s longstanding precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may either tax the entity or tax its shareholders or partners,” the opinion states.

The Justices went on to explain that “Congress’s longstanding practice of taxing the shareholders or partners of a business entity on the entity’s undistributed income reflects and reinforces the Court’s precedents.”

“Consistent with this Court’s case law, Congress has long taxed the shareholders and partners of business entities on the entities’ undistributed income. That longstanding
congressional practice reflects and reinforces this Court’s precedents upholding those kinds of taxes,” they wrote.

In doing this, however, the Court was careful to specify the scope and applicability of its ruling.

“Nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity,” they wrote. “Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement
for an income tax.”

Justice Jackson filed a concurring opinion, while a separate concurring opinion was filed by Justice Amy Coney Barrett and joined by Justice Samuel Alito.

Jackson’s concurring opinion builds on the majority opinion by delving briefly into two arguments of which she believes the Court would need to be persuaded in order to strike down a tax such as the one in this case.

“I write separately to emphasize that, before taking up petitioners’ invitation to strike down a lawfully enacted tax, the Court would need to be persuaded of several additional arguments that we wisely do not reach,” Jackson wrote.

“First, we would need to agree with petitioners that Congress can tax income only if it is actually received or ‘realized,” said Jackson. “Second, even if we were to hold that a uniform tax violated the Sixteenth Amendment, we would still need to confirm that the tax was a direct tax before requiring apportionment.”

The concurring opinion authored by Justice Barrett is in agreement with the outcome of the majority’s ruling but proffers a different line of reasoning.

Justice Alito and Barret also emphasized the narrow nature of their reasoning, explaining that “a different tax—for example, a tax on shareholders of a widely held or domestic corporation—would present a different case.”

“As I understand our precedent, it leaves room for Congress to disregard the corporate form in some circumstances. But that is not because Congress—as the Court suggests—can treat corporations interchangeably with partnerships, whose partners have
always been subject to pass-through taxation on the partnership’s income,” said Alito and Barrett. “Rather, our cases allow Congress to disregard the corporate form to determine whether the shareholder received income in substance, if not in form.”

Dissenting were Justice Clarence Thomas and Justice Neil Gorsuch.

Authored by Justice Thomas, this opinion directly takes on the question of realization, suggesting that “the Court upholds the MRT only by ignoring the question presented.”

“Because the Sixteenth Amendment requires a way to distinguish between income and source, it includes a realization requirement,” they wrote. “The text of the Amendment incorporates such a requirement, and the concept of realization was well understood at the time of ratification. The Constitution thus limits unapportioned income taxes to taxes on realized income.”

Justice Gorsuch and Thomas also directly challenged the reasoning laid out in the majority opinion, arguing that it fails to stand up to scrutiny.

They also accuse the majority’s opinion of having a “consequentialist heart.”

“Because it wrongly concludes that the Moores’ constitutional argument would invalidate not only the MRT but also other longstanding taxes, the majority frets that the Moores would ‘deprive the U. S. Government and the American people of trillions in lost tax revenue’ and ‘require Congress to either drastically cut critical national programs or significantly increase [other] taxes,'” they wrote.

“Sensing that upholding the MRT cedes additional ground to Congress, the majority arms itself with dicta to tell Congress ‘no’ in the future,” said the dissent. “But, if the court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.”

“The Court today upholds the MRT, but not because it endorses the Ninth Circuit’s erroneous view that ‘realization of income is not a constitutional requirement,'” Thomas and Gorsuch said. “The majority acknowledges that the Sixteenth Amendment draws a distinction between income and its source. And, it does not dispute that realization
is what distinguishes income from property.”

“Those premises are sufficient to establish that realization is a constitutional requirement. Sixteenth Amendment ‘income’ is only realized income,” they concluded. “We should not have hesitated to say so in this case.”

Click Here to Read the Court’s Majority, Concurring, and Dissenting Opinions

Had the Supreme Court ruled in favor of the plaintiffs and declared the MRT unconstitutional, it would have cost the United States government as much as $340 billion over the next ten years, according to the United States Justice Department.