Is the U.S. Supreme Court posed to slam the door shut on efforts by some to impose wealth taxes across the country? We may soon find out.
Multiple states, Idaho and Montana included, along with over 25 organizations have filed amicus briefs in favor of a Washington state couple, Charles and Kathleen Moore against the United States, for what is anticipated to be the biggest tax case to reach the Supreme Court of the United States in several decades. This upcoming term, the highest court will hear Moore v. United States, which is on appeal from the 9th Circuit. This litigation poses the Court with the ultimate question: is a realization event necessary for the federal government to impose a tax? A realization event occurs when a taxpayer has money in their hands.
Here is what we know about the case: The Moores hold an 11% ownership interest in KisanKraft, a farming manufacturing company operating out of India. Since the Moores bought in, the company has done exceptionally well, with profits increasing each passing year. The Moores are seeing gains on paper from their overseas investment, but they haven’t cashed in here in the United States. They were taxed on this increase in investment value, which only existed on paper.
The Moores' position is that the tax imposed is unconstitutional under the Sixteenth Amendment. They argue several long-standing precedents apply such as Eisner v. Macomber, 252 U.S. 189 (1920), “for ‘a gain’ to be income, it must be ‘received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” They also are relying on a case which was a landmark, thirty-five years after Eisner, Comm’r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955), defining income as “undeniable accessions to wealth, clearly realized, and over which taxpayers have complete dominion.” (emphasis added). These arguments are to be expected, given “the realization requirement gives us consistency, objectivity, and certainty in tax.” (See: The Fundamentals of Federal Taxation). The Moores argue that the Ninth Circuit essentially took away the constitutional limit of the federal government to only tax what is deemed as income, and that, “This case is the cleanest vehicle the Court will ever see to address realization under the Sixteenth Amendment.” (Petitioner’s Brief, Page 3).
The dispute arose due to Section 965 of the Internal Revenue Code, the repatriation tax, being applied to the Moores. This tax was a result of the Tax Cuts and Jobs Act of 2017, requiring U.S. corporations operating outside of the country to transfer wealth back, a one-time tax. The portion affecting the Moores requires that any person who holds more than 10% of a foreign company that is composed of over 50% U.S. ownership, also called a “CFC”, is subject to taxation; realization event, or not. The Moores were placed in this category due to their 11% ownership in KisanKraft, a CFC. Sec. 965 was codified to combat companies leaving the U.S. and making their money elsewhere.
The Government’s position is that while it is true that the government has not historically implemented a tax without realization, “the Supreme Court has made clear that realization of income is not a constitutional requirement. See Helvering v. Horst (1940) ("[T]he rule that income is not taxable until realized . . . . [is] founded on administrative convenience.” Moore v. United States, 36 F.4th 930, 936 (9th Cir. 2022). Essentially, the Government seeks to overturn the definition put forth in Glenshaw Glass, that “undeniable accessions to wealth” are taxable. The Government seeks to broaden what constitutes a taxable event.
If the Court decides in favor of the Moores, it is likely the Court will attempt to sever the statutory language. This would be the easiest solution, as it would allow for the single clause of the repatriation tax to discontinue while maintaining the other portions of the Trump tax legislation, and there is a strong presumption of severability. See Barr v. Am. Ass’n of Political Consultants. If the Court sides with the government, this decision would have great implications for Americans - both financially, and administratively. Not only would the government create greater amounts of paperwork for the taxpayer and the government, but it would also tax money that individuals don’t actually have, in their hands. The greater concern this case presents is the impact on the legality of wealth taxes.
The National Taxpayers Union Foundation amicus brief offers what several Mountain State policy analysts believe the Court will do; “This Court could uphold the MRT for C corporations but excuse individuals such as the Moores. This Court could determine that the MRT does not violate the realization requirement because the business realized them even if the individuals did not receive a distribution." Under this likely approach, the purpose of the MRT is maintained while upholding the constitutionality of a realization requirement.
The Moore name might be on the documents, but there are many Americans whose interests could be significantly hindered if the government prevails. As stated in my previous Pinnacle article on the reversal of Chevron, this is a conservative Court. This is not a Court that has shown a desire to increase tax liability. It is unlikely the majority will be receptive to accepting the Solicitor General’s arguments on behalf of the government during oral arguments. But, as lawyers say daily, it depends.