Liberal academics defending a key part of the Trump Tax Cuts & Jobs Act? A conservative Supreme Court ready to strike it down? A case about the tax treatment of an investment in India somehow potentially disrupting much of the U.S. tax code? It could all come to a head next week at the Supreme Court.
On Tuesday, December 5, the U.S. Supreme Court will hear arguments in Moore, et ux. v. United States. At one level, the case is a sleeper one: whether an American couple owes the one-time mandatory repatriation tax of the 2017 Tax Cuts & Jobs Act (TCJA) on their foreign income. But a broad ruling in their favor could unravel wide swaths of the U.S. tax code that rely on deferral or unrealized earnings such as 401(k) accounts and mark-to-market valuations, and a broad ruling against them could establish a constitutional foundation for a national wealth tax.
I reviewed the facts of the case when the Court accepted the appeal back in June: Mr. & Mrs. Moore invested in an Indian business and, according to their filers, never took any distributions. When the TCJA switched from taxing American businesses on their worldwide profits to only taxing profits earned on American territory, Congress had to decide what to do about the accumulated overseas profits upon which tax had been deferred. Force sales and tax them at 35%? Waive the tax completely? They chose a middle policy: a one-time 15.5% U.S. tax on accumulated assets, payable over 8 years. The tax was "deemed" - paid whether you liquidated assets or not in order to avoid asset firesales. After that, overseas profits are only taxed by the host country with no additional U.S. tax.
The Moores allege this deemed repatriation tax is not a tax on income, since they never took or realized any cash distributions from the business and thus have no income to tax. The U.S. Constitution prohibits federal direct taxes unless they are apportioned by state population or (after the Sixteenth Amendment was ratified in 1913) unless it is an income tax. Where everyone agrees: if it is a direct tax, and unapportioned, and not an income tax, it is unconstitutional. When everyone disagrees: what is a direct tax? Was this income? If this tax is unconstitutional, what about the rest of the TCJA, and other parts of the tax code that rely on deferring tax, such as 401k accounts?
The Ninth Circuit Court of Appeals ruled against the Moores, holding that the tax was on income. The federal government here argues the same, additionally noting that taxation of business income flowing through the Moores’ tax return - as opposed to the Moores’ personal income - is an indirect tax under court precedents. The Moores say no realization means it’s not income and they can’t constitutionally be taxed. (For our part, we submitted a brief to the Court explaining why a wealth tax is unconstitutional but the TCJA and this tax is constitutional.)
43 outside briefs have been filed in the case: 22 in support of the Moores, 18 in support of the federal government, and 3 (including NTUF’s) in support of neither party. I summarized key points from each of the briefs here. As the Washington Post summarized, the arguments break down into three. One group says the tax is on unrealized gains, which is beyond the power of the federal government. A second group says unrealized gains can be taxed. A third group says realization did happen: the Moores are being taxed on their business’s earnings and profit, not just the change in value. However the Court rules, whether their decision is narrow or broad will be a key thing to watch.
Oral argument will occur on December 5 at 10 a.m. Eastern Time, and is livestreamed at Court’s website and on C-SPAN’s website. The Supreme Court generally decides all cases by June.