WASHINGTON (CN) — The Supreme Court on Thursday issued a narrow ruling upholding a Trump-era tax law, avoiding broader constitutional questions around a wealth tax.
In a 7-2 ruling, the justices said a 2017 tax on unrealized gains from foreign corporations did not violate the 16th Amendment. Charles and Kathleen Moore challenged the law, attempting to sway the court and avoid a $15,000 tax bill.
“The logical implications of the Moores’ theory would therefore require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it — including, of course, on ordinary Americans,” Justice Brett Kavanaugh wrote for the majority. “The Constitution does not require that fiscal calamity.”
The court, however, did not resolve whether a theoretical wealth tax would be constitutional. Senator Elizabeth Warren recently proposed a 2% tax on the net worth of households and trusts valued over $50 million and an additional 1% tax on those worth more than $1 billion.
Under the 2017 Tax Cuts and Jobs Act, individuals with foreign investments were forced to pay a one-time mandatory tax on unrealized gains. For the Moores, this meant they owed $15,000 in taxes for an investment they claim hasn’t landed a dime in their pockets.
The Moores sued the government, claiming taxes on unrealized gains were unconstitutional. Their case was dismissed by a federal judge and an appeals court before the Supreme Court agreed to review the case.
Taking a history-and-tradition approach, Kavanaugh traced precedents that support tax’s constitutionality. He said that in 1913, Congress placed a new income tax on shareholders for their portion of the incomes of corporations formed or used to evade taxes.
Almost two decades later, the court upheld this approach in Burnet v. Leininger. In this 1932 ruling, the justices affirmed that Congress has the authority to tax business partners.
Kavanaugh connected that foundation to a 1918 tax on shareholders of personal service corporations as well as a 1985 tax on shareholders of S corporations, which have 100 or fewer shareholders.
That tradition continued, Kavanaugh said, when Congress enacted taxes on foreign corporations in 1962. Kavanaugh noted that the leading challenge to subpart F, which treats foreign corporations as pass-throughs, was found to be frivolous in light of the court’s prior findings.
Kavanaugh said the Moores tried to distinguish the 2017 tax from all the examples from the court’s precedents to contain “the blast radius of their legal theory.”
“But the Moores’ effort to thread that needle, although inventive, is unavailing,” Kavanaugh wrote.
Similar taxes on partnerships, S corporations and subpart F income, Kavanaugh said, cannot be meaningfully distinguished from the 2017 tax. So if the court were to endorse the Moores’ theory, it would undermine many other taxes.
“The upshot is that the Moores’ argument, taken to its logical conclusion, could render vast swaths of the Internal Revenue Code unconstitutional,” Kavanaugh wrote.
Kavanaugh repeatedly noted that the court’s ruling was narrow, alluding to the implications for a potential wealth tax.
“Nothing in this opinion should be read 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,” Kavanaugh wrote. “In such a scenario, the entity would not simply be a traditional pass-through.”
Several justices were critical of the majority opinion for not answering whether a tax on unrealized gains — such as the wealth tax — was constitutional. Justices Amy Coney Barrett and Samuel Alito said it was not. Still joining the court’s judgment, however, Barrett classified the 2017 law as “a specific tax imposed upon the American shareholders of a closely held foreign corporation.”
Alito, whose participation in the case was questioned after an interview with one of the advocates, was not on the bench as the ruling was read. The court did not provide an explanation for his absence.
Justice Ketanji Brown Jackson took the opportunity to set some parameters for a future challenge to the hypothetical wealth tax.
“I have no doubt that future Congresses will pass, and future Presidents will sign, taxes that outrage one group or another — taxes that strike some as demanding too much, others as asking too little,” the Joe Biden appointee wrote. “There may even be impositions that, as a matter of policy, all can agree are wrongheaded.”
To rule against something like a wealth tax, Jackson said the court would have to agree that Congress can only tax income that is actually received, a requirement that she said appears nowhere in the text of the 16th Amendment. Jackson said the court would then have to decide if such a tax were a direct tax.
Jackson cautioned that the court’s role should be limited in future disputes, instead suggesting the answer be found at the ballot box.
Justices Clarence Thomas and Neil Gorsuch disagreed with the court’s ruling entirely. Thomas said the text and history of the 16th Amendment weighed in favor of the Moores.
The George H.W. Bush appointee said the Constitution requires a distinction between income and its source. Thomas said the only way to do that is with a realization requirement.
“Because the Moores never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income’ under the 16th Amendment,” Thomas wrote.
Thomas said the majority upheld the 2017 tax by ignoring the central question in the case.
While Thomas acknowledges that the Moores’ argument would upend other longstanding taxes, he said the court shouldn’t have upheld the law just to save lawmakers from their own mess.
“If Congress invites calamity by building the tax base on constitutional quicksand, ‘[t]he judicial power’ afforded to this court does not include the power to fashion an emergency escape,” Thomas wrote.
The Center for American Progress lauded the ruling, stating that it forced wealthy people to pay their fair share.
“The court’s decision avoids an outcome that would have thrown the American tax system into disarray and put at risk other forms of taxation that raise billions of dollars in revenue,” Alexandra Thornton, senior director of financial regulation at the Center for American Progress, said in a statement. “The ruling prevents the ultrawealthy and corporations from gaming the system to pay even less in taxes.”
Follow @KelseyReichmann
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