The Supreme Court agreed on June 26 to consider a challenge to a wealth tax that was levied on capital gains that a Washington state couple never received.
The mandatory repatriation tax, also known as the Section 965 transition tax, was part of the Tax Cuts and Jobs Act passed by the Republican-controlled Congress in 2017 and signed into law by then-President Donald Trump on Dec. 22, 2017.
The 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 by the Competitive Enterprise Institute (CEI), which is providing legal representation to the couple.
“The Constitution does not allow Congress to point at any pot of money and call it ‘income’ and then income tax it,” said Andrew M. Grossman of Baker Hostetler, lead counsel for the couple.
“‘Income’ means the same thing now that it did when the Sixteenth Amendment was ratified: gains that have been realized by the taxpayer. We are confident that the Supreme Court will vindicate that fundamental principle and confirm that Congress’s power to tax is not unlimited,” Grossman said in a statement released after the court decided to hear the case.
Ratified in 1913, the 16th Amendment states:
“The 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.”
Several nonprofit groups filed friend-of-the-court briefs urging the Supreme Court to take up the case. Among them were the U.S. Chamber of Commerce, Landmark Legal Foundation, and Americans for Tax Reform.
The Biden administration had urged the court to deny the petition.
The Tax Cuts and Jobs Act “appears to be working largely as Congress envisioned,” U.S. Solicitor General Elizabeth Prelogar wrote in a brief filed with the court on May 16.
The Supreme Court granted the petition in Moore v. United States (court file 22-800) in an unsigned order on June 26. The court didn’t explain its decision. No justices dissented. At least four of the nine justices must vote in favor of a petition for it to advance to the oral argument stage.
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 and the Constitution’s prohibition against retroactive taxation.
Dan Greenberg, the CEI’s general counsel, previously told The Epoch Times that the meaning of the word “apportionment” in the 16th Amendment isn’t immediately obvious to many Americans.
“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,” Greenberg said.
But the tax in dispute here is “extremely difficult to square” with longstanding rules.
“There is a constitutional right under the 16th Amendment to only have the federal government levy certain kinds of taxes,” he said.
“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.”
The Moores ended up in court after they made a modest investment in an India-based company founded by a friend. The company, called 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 they supposedly 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 simply declaring them to be taxable income, a legal fiction, according to the CEI.
The Moores lost in U.S. district court, appealed, and lost again. They asked the U.S. Court of Appeals for the 9th Circuit to rehear the case after a circuit panel affirmed the district court’s dismissal of the action seeking to invalidate the tax law provision, but on Nov. 22, 2022, a divided 9th Circuit again denied the couple’s petition.
“There is no constitutional prohibition against Congress attributing a corporation’s income pro-rata to its shareholder,” the appeals court ruled.
Four of the circuit judges dissented from the decision to deny rehearing.
Judge Patrick Bumatay, who was appointed by Trump, wrote that the court erred in disregarding the realization requirement of the 16th Amendment by allowing 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.
Greenberg commented on June 26 after the nation’s highest court acted in the case: “The Supreme Court’s decision to hear Moore v. U.S. is very good news for Americans.
“A century of precedent shows that—in order to be taxed—income requires realization: This means that income taxes can only be levied on realized income. We hope that, when the Supreme Court considers Moore, it insists that its own precedents on this issue must be followed.
“As the judges who dissented from the lower court’s ruling wrote: ‘Divorcing income from realization opens the door to new federal taxes on all sorts of wealth and property.’
“That’s why advocates of new, higher taxes in Congress and the White House have been watching this case carefully. We hope the Justices will overrule the lower court’s opinion: by doing so, the Court will show respect both for the rule of law and for the settled plans and expectations of every property owner in the nation.”
The Epoch Times reached out to the U.S. Department of Justice but hadn’t received a reply as of press time.
The Supreme Court is expected to hear the case in its session that will begin in October.
