Supreme Court hears a case that holds sweeping ramifications for the US tax code

The Supreme Court heard oral arguments this week in a case that on its face calls into question a tax on foreign income, but that also holds sweeping ramifications for the entirety of the U.S. tax code.

At the heart of the case, Moore v. the United States challenges the constitutionality of a provision tucked into former President Donald Trump's sweeping tax overhaul. The measure, Section 965, imposed a one-time transition tax on foreign earnings accrued by certain overseas corporations owned by U.S. shareholders between 1986 and the end of 2017 that had previously benefited from deferral.

The plaintiffs – Charles and Kathleen Moore, who are backed by anti-regulatory groups – argue that Section 965 is unconstitutional because it applies a tax to "unrealized" income, which they say violates the 16th Amendment. The Moores, who were investors in an India-based company, were required to pay a one-time $15,000 tax bill on their foreign investment. However, they contend that they have never received any actual money from the investment, because the profit was reinvested into the company, KisanKraft, which sells farm equipment in India, and thus never "realized." 

Experts say the case is really a proxy battle over the legality of a wealth tax.

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People walk past the U.S. Supreme Court in Washington, D.C., on Nov. 13, 2023. (Mandel Ngan/AFP via / Getty Images)

"The mandatory repatriation tax is the subject of this litigation," Gary Scanlon, a principal in the international tax group within KPMG's Washington National Tax office, told FOX Business. "But you can tell from the oral arguments, from the briefing, that there’s a real focus on a wealth tax and whether that wealth tax, if ever passed by Congress, is constitutional." 

The Moores dispute centers on the 16th Amendment. Enacted in 1913, it says: "Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

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"If you haven’t received any income, how can you be required to pay income taxes?" Charles Moore said in a video shared by the Competitive Enterprise Institute, a libertarian group that is representing the Moores. "It seemed, to both of us, unconstitutional." 

The Moores invested about $40,000 in KisanKraft in 1980 – an investment that is now worth more than $500,000. 

The Department of Justice has in turn argued that the one-time repatriation tax is constitutional, and that the 16th Amendment does not require Congress to tax only realized gains.

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The IRS building in Washington, D.C., on Jan. 24, 2023. (Stefani Reynolds/AFP via / Getty Images)

If the Moores were to win, it could lead to substantial revenue losses by forcing the federal government to pay back potentially billions of dollars in collected taxes. 

A victory for the Moores could also preemptively outlaw a wealth tax similar to one proposed by Sen. Elizabeth Warren, D-Mass, in addition to making large chunks of the tax code obsolete. 

"A decision for the Moores would necessitate a rethink of, quite frankly, the entire tax code," Scanlon said. "That really, to cut to the chase, in the oral arguments, that was clearly a concern articulated by the justices themselves."

Former House Speaker Paul Ryan, who helped to draft the Trump-era tax law, has echoed similar concerns that a victory for the Moores could make large swaths of the tax code unconstitutional.  

"A lot of the tax code would be unconstitutional if [Moore] prevailed," Ryan warned recently. "I think it’s a misguided challenge."

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A majority of Supreme Court justices seemed skeptical on Tuesday of the claim by the U.S. Solicitor General Elizabeth Prelogar that there is no realization requirement included in the 16th Amendment – but they also cast doubt on the attorney representing the Moores and the prospect of striking down the tax. 

Justice Brett Kavanaugh suggested the court could issue a narrow ruling and thereby avoid the question of whether income must be realized in order for Congress to tax it.

"Even assuming or leaving open whether realization is a constitutional requirement, there was realized income here to the entity and then it's attributed to the shareholders in a manner consistent with how Congress has done that, and this court has allowed," he said.

A ruling in the case is expected by next June.

LINK: Get updates and more on this story at foxbusiness.com.

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