The Supreme Court ruled Thursday that a tax on foreign investments that was nestled into former President Donald Trump’s 2017 tax cut law can remain in place, turning aside a challenge backed by business groups.
In a 7-2 decision, the high court opined that Congress was within its authority to enact a one-time levy on investors’ shares of profits that have not been passed along to them, which some critics had speculated could lay the groundwork for a future wealth tax.
Writing for the majority, Justice Brett Kavanaugh found that the anti-tax argument, brought by a Washington state couple, “taken to its logical conclusion, could render vast swaths of the Internal Revenue Code unconstitutional.”
“And those tax provisions, if suddenly eliminated, would deprive the US Government and the American people of trillions in lost tax revenue.”
The case was brought by Charles and Kathleen Moore, who had challenged a nearly $15,000 tax bill based on Charles Moore’s investment in an Indian company.
Moore said in a sworn statement that he never received any money from the company, KisanKraft Machine Tools Private Ltd.
Public documents show that Charles Moore’s involvement with the company, including serving as a director for five years, is far more extensive than court filings indicate.
Justices Clarence Thomas and Neil Gorsuch dissented, with Thomas writing that the provision violated the 16th Amendment establishing an income tax.
“Charles and Kathleen Moore paid $14,729 in taxes on an investment that never yielded them a penny,” Thomas wrote. “… Sixteenth Amendment ‘incomes’ include only income realized by the taxpayer. The text and history of the Amendment make clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’ And, the only way to draw such a distinction is with a realization requirement.”
The tax in question applied to companies that are owned by Americans but do their business overseas. It was projected to rake in some $340 billion over a decade.
Kavanaugh warned that his opinion should not be interpreted “to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity.”
Competitive Enterprise Institute initiated the Moores’ lawsuit and argued that the provision amounted to an “unapportioned direct tax on their shares,” which under current law can be taxed only when they are sold.
“The precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income,” Kavanaugh wrote.
The justice added that while there may be “wrongheaded” policy on taxation, “this court’s role in such disputes should be limited.”
“Even as the majority admits to reasoning from fiscal consequences, it apparently believes that a generous application of dicta will guard against unconstitutional taxes in the future,” Thomas responded in the dissent.
Democrats in Congress have mulled different iterations of a so-called “wealth tax,” none of which have so far come to fruition.
However, Kavanaugh seemingly kept the door open to nixing a wealth tax in the future if it came before the high court.
“The Moores argue that realization is a constitutional requirement; the Government argues that it is not. To decide this case, we need not resolve that disagreement over realization,” he wrote. “Those are potential issues for another day.”
Justice Samuel Alito, who voted with the majority, had rejected calls from Senate Democrats to step away from the case because of his ties to David Rivkin, a lawyer who represented the Moores.
Alito did not join Kavanaugh’s opinion, instead signing on to a separate concurrence written by Justice Amy Coney Barrett, who posited that the issues in the case were more complicated than Kavanaugh made out.