In a high-stakes session, Supreme Court justices displayed reluctance on Tuesday to disrupt a tax levied on Americans with investments in specific foreign corporations. The crux of their contemplation centered on deciphering the concept of “income” in a case that holds the potential to challenge Democratic efforts towards imposing a wealth tax on the affluent.
The case involves Charles and Kathleen Moore, a retired couple from Redmond, Washington, who appealed a lower court’s dismissal of their challenge against the tax imposed on the earnings of foreign companies, even if these profits haven’t been distributed to shareholders.
Of particular interest is the call by some Democratic lawmakers for Justice Samuel Alito to recuse himself due to his ties to one of the plaintiff’s attorneys. Alito, however, stood firm in refusing to step aside.
The “mandatory repatriation tax” (MRT), a component of the 2017 Republican-backed tax law signed by former President Donald Trump, is under scrutiny. It applies to individuals owning at least 10% of a foreign company controlled by Americans. The focal point of the case revolves around whether this tax on unrealized gains aligns with the 16th Amendment of the U.S. Constitution, empowering Congress to “collect taxes on incomes.”
Supported by the Competitive Enterprise Institute and various conservative and business groups, the Moores argue that “income” only pertains to gains realized through payment to the taxpayer, not merely an increase in the value of property.
Justice Alito, part of the court’s 6-3 conservative majority, probed U.S. Solicitor General Elizabeth Prelogar about the limits of congressional taxation power over wealth. He offered a scenario involving a startup founder evolving into a billionaire over decades, questioning whether Congress could retroactively tax the appreciation in stock value.
The Moores seek a refund of nearly $14,729 in taxes mandated for them as minority shareholders in the Indian company KisanKraft. Some justices hinted at upholding the tax by attributing the income earned by the foreign company to its shareholders.
The case raises concerns among justices that a ruling favoring the Moores could jeopardize various provisions in the tax code, impacting business entities such as partnerships, limited liability companies, and S-corporations.
The Justice Department warned that a Supreme Court ruling invalidating the mandatory repatriation tax could cost the U.S. government $340 billion over the next decade. This potential outcome could also hinder legislative proposals by some Democrats, including Senator Elizabeth Warren, advocating for a tax on the net worth of wealthy Americans.
A ruling is anticipated by the end of June, marking a pivotal moment in the ongoing ethical debate surrounding the conduct of Supreme Court justices. Democratic senators had urged Alito’s recusal due to his ties with one of the plaintiff’s lawyers, arguing that it raised doubts about his impartiality. The case intertwines with broader discussions on ethics legislation applicable to the Supreme Court.
