The Supreme Court issued a much-awaited ruling in a tax case, holding that the mandatory repatriation tax passed as part of the 2017 Trump tax cuts did not exceed Congress’ constitutional authority.
The court’s holding was narrow, and significant in large part for issues it did not address, leaving open questions related to the constitutionality of alternative taxing schemes—such as a so-called wealth tax—for another day.
The 7-2 opinion in Moore v. United States, authored by Justice Brett Kavanaugh, noted that Article I of the Constitution affords Congress broad powers to lay and collect taxes, both direct and indirect taxes, the latter of which are imposed on activities or transactions.
Indirect taxes are permitted without apportionment, but must be “uniform throughout the United States.” The court’s majority held that the MRT taxes income realized by KisanKraft, which the tax attributes to the shareholders.
The Facts
The case grew out of an overseas investment of $40,000 made by Charles and Kathleen Moore in 2005. The couple contributed the money to help a friend and former co-worker found a company named KisanKraft in India to help rural farmers.
In exchange for the investment, the Moores received about 13% of the company’s common stock.
The company, which never paid a dividend, increased in value over the next 12 years, and poured its profits back into the company. The Moores’ investment grew in value, but only on paper, as they never received any money from the company.
In 2017, Congress passed the Tax Cuts and Jobs Act, which included the MRT, which taxes the undistributed profits from U.S. shares of foreign corporations that are majority American-owned. As a result, the IRS sent the Moores a tax bill for $15,000.
The Moores challenged the tax, claiming that it violated the Constitution’s apportionment clause and 16th Amendment, arguing that “income” was long understood to refer to gains that a taxpayer actually realized—that is, received.
The government countered that the drafters of the 16th Amendment would have allowed the repatriation tax because it targeted foreign corporations that actually received income, which Congress could permissibly attribute to U.S. shareholders.
MRT Is Constitutional
The 7-2 majority held that the Supreme Court’s long-standing precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may either tax the entity or tax its shareholders or partners.
The court noted that its decision is “narrow and limited to entities treated as pass-throughs,” warning that “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.”
The court also further cabined its decision, writing: “Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.”
Barrett and Alito Concur—Sort Of
Justice Amy Coney Barrett, joined by Justice Samuel Alito, concurred in the judgment, explaining that the answer to the question presented—whether the 16th Amendment authorized Congress to tax unrealized sums without apportionment among the states—was a straightforward “no.”
Barrett stressed that the question of whether Congress can attribute KisanKraft’s income to the Moores is “more complex than the Court lets on,” and opined that a different tax, such as a tax on “shareholders of a widely held or domestic corporation, would present a different case.”
The Moores had not received a dividend (i.e., a profit from selling their shares) or any other pecuniary benefit from their stock ownership, and as such, the Moores have not yet received a return on their original investment in the company.
In short, they have not “derived” income from their shares because nothing has come in. Barrett disagreed and noted that the majority ignored several of the court’s precedents in coming to its conclusion. Barrett also stressed that the holding is narrow in scope.
Income Is Income Only When ‘Realized’
In a quintessentially Justice Clarence Thomas dissent, which was joined by Justice Neil Gorsuch, the stalwart originalist wrote that “income,” under the 16th Amendment, includes only “income realized by the taxpayer.”
Thomas dryly noted that the court upheld the “MRT only by ignoring the question presented,” and instead answered a different question, to wit: “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.”
Turning to history, Thomas noted that the 16th Amendment did nothing more than abolish the rule in Pollock v. Farmers’ Loan & Trust Co. (1895), which held that an income tax is a direct tax if a tax on the source from which it is derived is also a direct tax.
The 16th Amendment created a distinction between income and its source. Because of that distinction, Thomas emphasized, “the Amendment includes a realization requirement.”
In his view, the majority sidestepped this question of whether the 16th Amendment includes a realization requirement by first inventing an “attribution” doctrine to sustain the MRT and then comparing the MRT to long-standing congressional practice.
At most, Thomas points out, the cases relied on by the majority to support an attribution doctrine only establish that Congress may attribute income to the person “who actually controlled it when necessary to defeat attempts to evade tax liability.”
And compared to older taxes, he further observed, “the MRT is undeniably novel” in “constitutionally relevant” ways.
At the end of the day, Thomas pointed out, the majority acknowledges that its ruling is consequentialist and that “the MRT cedes additional ground to Congress.” Although the majority “arms itself with dicta to tell Congress ‘no’ in the future,” Thomas concludes, “if the Court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.”
Left for Another Day
The Supreme Court’s narrow ruling, on a one-time overseas repatriation tax, leaves for another day the question of what other tax schemes dreamed up by Congress are constitutional.
The court’s ruling Thursday has been heralded by the liberal press as a “victory” for President Joe Biden, despite the fact that the tax provision was included in the 2017 Trump tax cuts.
Of course, the real fight here is all about the Democrats’ insatiable appetite for more tax revenue, including their pipe dream of a wealth tax. As my Heritage Foundation colleagues have argued elsewhere, that sort of scheme spells doom for entrepreneurs and economic growth.
It seems to us that, when read as a whole, the majority opinion, the Barrett concurrence, and the dissent, make clear that the idea of a wealth tax is far-fetched. Those in favor of such a scheme should not take much, if any, solace in this narrow holding over an obscure tax provision.
The majority’s refusal to answer the question presented—whether “income” must be realized by the taxpayer to be taxable as such under the 16th Amendment—means that it remains an open question, which future litigants can fight about.
