On Tuesday, the Supreme Court will hear arguments in a much-awaited case that some fear might have far-reaching effects on the US tax system and derail Democratic attempts to impose a wealth tax.

Moore v. United States is a case that was brought before the court in 2006. In the same year, Charles and Kathleen Moore invested in KisanKraft Machine Tools, an Indian firm that supplies tools and equipment to farmers in India. The pair received 13% of the company's shares in return for their $40,000 investment.

(Photo : by STEFANI REYNOLDS/AFP via Getty Images)
On Tuesday, the Supreme Court will hear arguments in a much-awaited case that some fear might have far-reaching effects on the US tax system and derail Democratic attempts to impose a wealth tax.

Since its founding, KisanKraft's revenues have increased annually, and rather than paying out dividends to shareholders, the company has reinvested its earnings to grow the business.

Moore Couple's Legal Challenge and Court Ruling

Court documents show that the Moores never received any dividends, distributions, or other payments from KisanKraft. However, the pair discovered in 2018 that they were subject to pay taxes on their portion of KisanKraft's reinvested lifetime earnings due to the "mandatory repatriation tax," which was implemented by the Tax Cuts and Jobs Act, which President Donald Trump had signed into law the previous year. Over a ten-year period, the tax was expected to bring in around $340 billion in revenue.

The tax compelled U.S. taxpayers to pay a one-time tax on their proportionate part of the foreign company's earnings if they owned at least 10% of the business. The Moores were assessed an additional $132,512 in taxable income and were required to pay $14,729 in additional taxes as a result of the new requirement.

Although the couple paid the tax, they sued the government to get their money back. They claimed that because the required repatriation tax charges unrealized profits rather than income, it violates the 16th Amendment.

Siding with the U.S. government, the federal district court dismissed the complaint, ruling that the required repatriation tax is an income tax that is allowed under the 16th Amendment, which gives Congress the power to tax "incomes, from whatever source derived."

The ruling of the lower court was upheld by the U.S. Court of Appeals for the 9th Circuit, which concluded that "there is no constitutional prohibition against Congress attributing a corporation's income pro-rata to its shareholders."

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Taxing Property or Income?

In a separate court filing, the Moores argued that the mandatory repatriation tax is a tax on property, not income, and that the 9th Circuit's decision "sweeps away the essential restraint on Congress's taxing power, opening the door to unapportioned taxes on property... and anything else Congress might deem 'income.'" They also asked the Supreme Court to review the 9th Circuit's decision.

The Moores' attorneys cautioned that upholding the 9th Circuit's ruling might open the door for Congress to enlarge its taxation authority. For instance, Congress is considering legislation to enact a so-called wealth tax, and the White House has suggested a minimum income tax for billionaires.

However, the Justice Department contended that the required repatriation tax is an income tax and informed the court as much in a filing. Solicitor General Elizabeth Prelogar wrote that Congress can tax the pro rata portions of undistributed corporate gains as income because of the 16th Amendment.

Prelogar, who represents the government before the Supreme Court, stated in the brief that the Moores' "contention that the MRT is a tax on property cannot be squared with the MRT's terms or longstanding historical practice."

A Supreme Court ruling that might limit Congress's ability to tax some unrealized profits has caused division among the groups involved and brought together former political rivals who fear the verdict's consequences.

In a friend-of-the-court brief, the libertarian think tank Cato Institute stated that other taxes that resembled the required repatriation tax would not be challenged since they all taxed income in the year they were implemented.

The mandatory repatriation tax, however, could have a significant impact on the entire American tax system, the American Tax Policy Institute cautioned, and it could "create doubts about the constitutional status of many provisions, generating a wave of tax refund claims and litigation in the coming years."

The Moores' case was referred to as a "misguided challenge" by former House Speaker Paul Ryan, who also forewarned that "a lot of the tax code would be unconstitutional" if the justices ruled in favor of the couple. In 2017, Ryan led the house in passing Republicans' tax reform proposal.

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