A Washington state couple will soon ask the Supreme Court to disallow what they consider to be an unconstitutional wealth tax that was levied on capital gains they never received.
In 2017, Congress passed the Tax Cuts and Jobs Act. The new law, a reform of the federal tax code, also included a provision known as the Mandatory Repatriation Tax, or the Section 965 Transition Tax. This provision taxes U.S. citizens on certain accumulated foreign earnings of foreign corporations going back 30 years, even if the earnings haven’t been distributed. This means taxing people on income that they never received and never owned, according to a summary provided by the Competitive Enterprise Institute (CEI), which is providing legal representation to the couple.
Charles and Kathleen Moore, a married couple from Washington state, argue that this tax violates the Constitution’s requirement that direct federal taxes must be apportioned among the states, as well as the Constitution’s prohibition against retroactive taxation.
The Moores made a modest investment in an India-based company founded by a friend. The company, KisanKraft, supplies power tools to small-scale, individual Indian farmers with the aim of helping to make their operations more productive. The Moores had owned KisanKraft shares for more than a decade but never received any income from the shares because the company plowed all its profits back into the business.
But after the 2017 tax law change was enacted, the Moores received an unexpected tax bill from the IRS for $14,729 for additional income tax that they owed despite having never received any payments from KisanKraft.
Although such profits aren’t considered income unless shareholders either receive dividends or sell the shares for a capital gain, the Mandatory Repatriation Tax attempts to tax these funds as income by way of a legal fiction, by simply declaring them to be taxable income, according to CEI.
Four judges dissented from the decision to deny rehearing.
Judge Patrick Bumatay, a Trump appointee, wrote that the court erred in disregarding the realization requirement of the 16th Amendment by allowing what’s called an unapportioned direct tax on unrealized income—undistributed earnings of a foreign corporation owned by a U.S. taxpayer—without offering any other limiting principle. Bumatay said the court opinion opens the door to new federal taxes on other kinds of wealth and property being categorized as an “income tax” without the constitutional requirement of apportionment.
Dan Greenberg, general counsel for the Competitive Enterprise Institute, said the meaning of the word “apportionment” in the 16th Amendment, which was ratified in 1913, isn’t immediately obvious to many Americans. The amendment states:
“The Congress shall have the 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.”
The tax in this case runs afoul of the 16th Amendment, Greenberg told The Epoch Times in an interview.
“I think it’s fair to characterize it as a wealth tax or property tax because the real question is not what name we assign it but what function the tax has. It functions as a property tax, and it is practically impossible to have a type of wealth tax or a property tax under the Constitution that is consistent with the rules of the 16th Amendment,” Greenberg said.
“A tax that’s apportioned ... means that, for instance, if Congress decided to tax everyone in the United States $10—what’s called a head tax—that would be perfectly constitutional because it’s proportional, or as it is in the language, it’s apportioned.”
But the tax in dispute here is “extremely difficult to square” with the rules in place regarding constitutional rights over more than the past century, he said.
“There is a constitutional right under the 16th Amendment to only have the federal government levy certain kinds of taxes,” Greenberg said.
He also said he was optimistic about the case.
“I really like our chances. We are on the side of roughly a century’s worth of law,” Greenberg said.
He said the Moores’ petition will be filed with the Supreme Court on either Feb. 20 or 21.
The Epoch Times reached out to the U.S. Department of Justice for comment but hadn’t received a reply as of press time.
