US Supreme Court ponders meaning of 'income' in tax dispute

The Justice Department has warned the Supreme Court that invalidating the mandatory repatriation tax could cost the government $340 billion over the next decade

Published : 5 Dec 2023, 07:35 PM
Updated : 5 Dec 2023, 07:35 PM

US Supreme Court justices on Tuesday appeared hesitant to upend a tax targeting owners of foreign corporations that could undermine efforts at imposing a wealth tax on the very rich in a case that has sparked controversy over a call for Justice Samuel Alito to recuse.

The justices heard arguments in an appeal by Charles and Kathleen Moore - a retired couple from Redmond, Washington - of a lower court's decision rejecting their challenge to the tax on foreign company earnings, even though those profits had not been distributed.

The one-time "mandatory repatriation tax" (MRT), which applied to taxpayers owning at least 10 percent of certain foreign corporations, was part of a 2017 Republican-backed tax bill signed into law by former President Donald Trump.

At issue in the case is whether this levy on unrealized gains is allowed under the US Constitution's 16th Amendment, which enabled Congress to "collect taxes on incomes." The Moores, backed by the Competitive Enterprise Institute and other conservative and business groups, contend that "income" means only those gains that are realized through payment to the taxpayer, not a mere increase in the value of property.

Some of the questions posed by the justices appeared aimed at potentially upholding the tax by attributing the income earned by the company to its shareholders, but also probing the limits of the government's broad taxing power.

"Even assuming or leaving it open whether realization is a constitutional requirement, there was realized income here to the entity that is attributed to the shareholders in a manner consistent with how Congress has done that and this court has allowed," conservative Justice Brett Kavanaugh told US Solicitor General Elizabeth Prelogar, defending the tax for President Joe Biden's administration.

Some of the justices expressed concern that a ruling favoring the Moores could strike at a wider array of tax code provisions including those related to other business entities such as partnerships, limited liability companies and S-corporations.

"Your definition, I think, would affect the government's ability to tax ... those individual shareholders," liberal Justice Sonia Sotomayor told Andrew Grossman, an attorney for the Moores.

The Justice Department has warned the Supreme Court that invalidating the mandatory repatriation tax could cost the government $340 billion over the next decade - and "potentially far more" if it upends other tax provisions as well.

Such a ruling also could frustrate policies favored by some Democrats, including Senator Elizabeth Warren, for a tax on the net worth - meaning all assets and not just income - of the super-rich.

The Moores are seeking a refund of nearly $14,729 in additional taxes that the 2017 law required them to pay as minority shareholders in a company in Bangalore, India, called KisanKraft that supplies equipment to farmers.

The case became enmeshed in the ongoing debate over the ethical conduct of the justices amid revelations about issues including undisclosed luxury travel funded by wealthy benefactors.

Alito defended the court in articles in the Wall Street Journal's opinion section. Alito, a member of the court's 6-3 conservative majority, argued that Congress lacks power to regulate the top US judicial body, even as Democrats pursued ethics legislation that would apply to it.

Democratic senators urged Alito's recusal from the case involving the Moores because one of their attorneys, David Rivkin Jr., co-authored the Wall Street Journal articles.

Rivkin's access to Alito and efforts to help the justice "air his personal grievances" cast doubt on his ability to fairly judge the case, according to the senators. Alito refused to recuse, saying that Rivkin's role in the articles was "as a journalist, not an advocate."

The Moores sued the US government in 2019. The San Francisco-based 9th US Circuit Court of Appeals threw out the case, noting that under Supreme Court precedent the "realization of income is not a constitutional requirement."