A challenge against the constitutionality of a provision of President Donald Trump’s 2017 tax reform law recently reached the Supreme Court for oral arguments.
The provision is the one-time repatriation tax on American taxpayers’ investments in foreign corporations.
Opponents of the lawsuit have warned that the Supreme Court ruling against the particular tax would “wreak havoc” more broadly on the tax code.
Potentially, it could cost the U.S. government trillions of dollars in potential tax revenue, according to NPR.
However, the challengers against the repatriation tax have argued that it violates the U.S. Constitution’s 16th Amendment in that it imposes a tax on purported “income” that may or may not have actually been realized or received by a taxpayer.
The 16th Amendment, which took effect in 1913 after the Supreme Court had previously struck down prior income tax laws, 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.”
In the case of Moore v. United States, which was argued before the court this month, the question at issue is “Whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”
At the center of that lawsuit are Washington state couple Charles and Kathleen Moore.
Nearly 20 years ago, the Moores invested $40,000 in an India-based power tools company and have since seen the value of their initial investment grow substantially to more than $500,000, though they’ve never received or realized any actual monetary return on that investment.
Nonetheless, due to the repatriation tax included in the 2017 tax reform law, the Moores were forced to pay the government a $15,000 one-time tax on the unrealized “income” from their investment in a foreign corporation.
“They never saw income,” the Manhattan Institute’s Ilya Shapiro, who filed a brief in support of the Moores, said of the disputed tax, according to NPR.
“It never hit their bank account.
“They never got cash.
“They never got a check.”
Shapiro asserted that “Their stake in the company increased but they did not get any income” and stressed the fact that they “have never seen a red cent from this investment.”
In contrast, the outlet reported that the government and other supporters of the tax have argued that aside from this particular provision of the 2017 tax reform law, which was ostensibly intended to catch tax avoidance by U.S. taxpayers via foreign investments and net around $340 billion within a decade, an adverse ruling from the Supreme Court could be “disastrous” in that it would upend the tax code and call into question the constitutionality of countless other tax law provisions.
In fact, NYU Tax Law Center Director Chye-Ching Huang told the outlet that a ruling against the 2017 provision would unleash “chaos, and we would be facing a tsunami of tax litigation over years and decades trying to sort through the rubble of this.”
George Callas, a former top aide to former House Speaker Paul Ryan (R-WI) who helped draft the 2017 law, said the Supreme Court was “not playing with fire” but rather “enriched uranium” and could “blow up large portions of the tax code.”
Either those dire predictions were overwrought or perhaps were heeded and taken to heart by a majority of the justices, as SCOTUSblog reported following the arguments that the high court seemed inclined to uphold the tax on potentially unrealized gains, albeit likely with a “narrow ruling” that can’t be more broadly applied to attack or defend other questionable tax law provisions.
Quite predictably, the three liberal justices expressed skepticism toward the arguments put forward by the attorneys representing or supporting the Moores.
However, they were somewhat surprisingly joined in being skeptical by conservative-leaning Justices Brett Kavanaugh and Amy Coney Barrett, who seemed keen to avoid the broader questions about the 16th Amendment and focused closely on the particular tax at issue.
Yet, conservative-leaning Justices Clarence Thomas, Neil Gorsuch, and Samuel Alito all raised concerns about hypothetical new taxes on unrealized “income” that could be imposed by Congress if the disputed repatriation tax is upheld, including taxes on the unrealized growth in value of real estate property, retirement and savings accounts, or assorted stocks and mutual funds.
“If some of the court’s conservative members were worried about the possible implications of a rule for the government, other members of the court expressed concerns that a ruling for the Moores would put — as Kagan said — other ‘very established taxation schemes’ at risk,” SCOTUSblog concluded.
“These concerns, particularly when combined with the comments by Kavanaugh and Barrett, seemed to suggest a narrow ruling for the government, leaving broader questions for another day.”