The Supreme Court is hearing a case that could make it more difficult for Congress to impose a wealth tax. The case is Moore vs United States.
The case involves a couple who owned a controlling interest in a foreign corporation. They argue that a Trump-era tax is unconstitutional under the 16th Amendment.
Some groups allied with the couple argue that the challenged provision is similar to a wealth tax. A wealth tax would apply to the assets of the richest Americans, like stock holdings, instead of their incomes.
A ruling in favor of the couple could also upend other proposals to tax the richest Americans. These include:
- A wealth tax based on an individual’s net worth
- An income tax on wealthy people’s unrealized capital gains
- A billionaire minimum income tax
During more than two hours of arguments, the justices peppered lawyers for both sides with questions about the implications of their positions and appeared aware of how a sweeping ruling would reverberate across the U.S. tax system and put existing tax laws at risk.
Solicitor General Elizabeth Prelogar, who represents the U.S before the high court, warned the justices that invalidating the mandatory repatriation tax would “cause a sea change in the operation of the tax code and cost several trillion dollars in lost tax revenue.”
But Andrew Grossman, who argued on behalf of the Moores, told the court that allowing a tax on income that a taxpayer has not yet received “sweeps away what the framers regarded as the essential check on Congress’ power to tax property.”
Addressing the ramifications of a decision striking down the mandatory repatriation tax on the tax system, Justice Sonia Sotomayor noted that the provision is similar to the tax treatment of partnerships, S-corporations and foreign corporations controlled by U.S. taxpayers.
“These are longstanding taxing mechanisms by the government,” she said. “Your theory would undermine those as well, wouldn’t it?”
She later pointed out that the drafters of the 16th Amendment, which clarified the federal government’s authority to tax income, could have specified that only realized income could be taxed, but they didn’t.
“The concept of realization was very well-established at the time the 16th Amendment was adopted, but the amendment does not reference realization,” she said. “All that the drafters had to do was add the word ‘realized’ after income … but they never used the word ‘realized.'”
Justice Elena Kagan said there is a “long, century-old history of these kinds of taxes on gains from your holdings in a foreign corporation” and questioned why the mandatory repatriation tax was different.
The potential impact of a decision by the Supreme Court addressing Congress’ power to tax certain types of unrealized gains, and, conversely, the consequences a ruling invalidating the mandatory repatriation tax would have on the broader tax system, sparked questions from many of the justices.
Justice Brett Kavanaugh suggested that the court could rule narrowly and avoid the question of whether income must be realized in order to be permissibly taxed under the 16th Amendment.
“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.
But Justice Neil Gorsuch repeatedly pressed Prelogar to lay out the limits of Congress’ taxing power, suggesting that siding with the government could prompt lawmakers to levy new taxes, such as on Americans’ retirement accounts or gains in the value of property. “Would you agree that when the court opens a door, Congress tends to walk through it?” he asked.
Justice Samuel Alito said it’s a “fair argument” that if the Supreme Court rules for the Moores, “large, important pieces of the tax code will also logically fall,” citing concerns raised by Prelogar in filings. But he said he wanted to understand the limits of the government’s position.
“How far may Congress go in attributing income to someone who has not realized that income, in the standard understanding of that term?” he asked. The effects of a decision striking down the mandatory repatriation tax was raised in several briefs filed with the court in the run-up to arguments.
The American Tax Policy Institute warned that a decision invalidating the mandatory repatriation tax could have a broad reach throughout the U.S. tax system and “create doubts about the constitutional status of many provisions, generating a wave of tax refund claims and litigation in the coming years.”
Former House Speaker Paul Ryan, who led the chamber when it passed Republicans’ tax reform plan in 2017, called the Moores’ lawsuit a “misguided challenge,” and warned that if the justices rule for the couple, “a lot of the tax code would be unconstitutional.”
“I’m not for a wealth tax, but I think if you use this as the argument to spike a wealth tax, you’re going to basically get rid of, I don’t know, a third of the tax code,” Ryan said during a September event at the Brookings Institution.
While the case attracted input from a slew of nonprofit organizations and states, it was also ensnared in the ongoing scrutiny over the ethics practices at the Supreme Court after Alito participated in interviews with David Rivkin, a lawyer who is representing the Moores, and James Taranto, an editor at the Wall Street Journal.
In the article published in the Wall Street Journal in July, Alito criticized Congress for its efforts to impose a binding code of conduct on the Supreme Court and said it does not have the authority to regulate the high court. The Supreme Court adopted its own code of conduct, the first in its history, last month, though it lacks an enforcement mechanism.
In response to Alito’s interviews, Democrats on the Senate Judiciary Committee urged Chief Justice John Roberts to ensure Alito recused himself from future cases concerning legislation that regulates the Supreme Court and the tax dispute brought by the Moores. The Senate Democrats warned that Rivkin’s access to the justice could create an appearance of impropriety.
But Alito refused to step aside from the case, saying in a statement in September there was “no valid reason” for his recusal. Alito argued Rivkin was participating in the interviews as a “journalist, not an advocate,” and said the case pending before the high court was never mentioned.
