The Supreme Court hears relatively few tax cases, but in late June, it agreed to hear the case of Moore v. U.S. This case gives the court an opportunity to significantly modify the Internal Revenue Code in a manner that could reduce the tax burdens of multinational companies, Wall Street and billionaires.
In recent years, progressives including Bernie Sanders and Elizabeth Warren have suggested various wealth tax proposals. There are two problems with those proposals. A wealth tax is extremely difficult to administer, and more importantly, the Constitution does not permit the federal government to impose a wealth tax.
The Constitution’s 16th amendment authorizes Congress to impose an income tax on individual taxpayers. While the 16th amendment does not precisely define income, the courts have found that mere wealth accumulation is generally not taxable — even when such accumulation is treated as income under generally accepted accounting principles.
For example, if a taxpayer owns stock and the share price increases, that appreciation in value is wealth accumulation, even though generally accepted accounting principles may include such appreciation in income. Generally, stock appreciation is not subject to income tax until the shares are sold.
Several years ago, a Midwest university professor opined that many provisions of the Internal Revenue Code unconstitutionally tax wealth instead of income. In response to the progressive wealth tax proposals, several right wing think tanks have expanded the professor’s thesis to argue that certain types of taxable income are wealth accumulation that is improperly taxed. Based on my discussions with numerous tax scholars, most knowledgeable tax academics and practitioners discredit these views. A detailed discussion of those situations is rather wonky and is beyond the scope of this column.
In 2017, Congress changed the income tax regime for multinational taxpayers. In order to close a huge loophole created by those 2017 changes, Congress added a provision that accelerated income for certain taxpayers who conducted business abroad. The provision was poorly drafted, but was needed to offset tax revenue lost from corporate tax cuts.
A taxpayer named Moore brought suit in federal District Court claiming that the loophole-closing provision was unconstitutional because it was a wealth tax. The court ruled against Moore, who appealed the decision to the 9th Circuit Court of Appeals, which upheld the District Court’s decision. When Moore appealed his case to the Supreme Court, most tax scholars believed that the court would refuse to hear the case.
Last spring, one of my former partners wrote a column that was published in the Wall Street Journal arguing that SCOTUS should overturn the Moore decision. After that, many lobbying groups filed amicus briefs arguing the same position.
My colleague tells me that he understands that his column and the amicus briefs persuaded Justices Samuel Alito and Clarence Thomas to hear the case. He also is optimistic that Moore will be overturned by a 5-4 or 6-3 vote. If SCOTUS uses the lobbyists’ rationale to overturn Moore, then there will be a cascading effect on many other Internal Revenue Code provisions that would also represent unconstitutional wealth taxes under such reasoning.
While nobody has attempted to estimate how much that would cost the U.S. Treasury, it conceivably could be a budget-busting amount. Making loophole-closing provisions unconstitutional would be a huge windfall to multinational corporations, to Wall Street in general and to hedge funds in particular. That would allow the mega-wealthy to shelter their income and avoid tax.
Two people who potentially would enjoy substantial collateral tax benefits if Moore is overturned are hedge fund manager Paul Singer (who entertained Justice Alito) and billionaire Harlan Crow (who is a “dear friend” of Justice Thomas). While it is improbable that either have discussed the Moore case with those justices, it is conceivable that they set forth views that may influence how those justices assess the Moore situation.
As a CPA, over the last half-century I have read a lot of court cases involving tax issues. One thing that stands out is that, while the judiciary is knowledgeable about legal matters, their ability to articulate accounting concepts is not as robust. When the Moore case is heard, interpreting accounting principles will be of paramount importance.
If Moore is overturned and the emerging collateral consequences cause a significant decrease in tax revenues, those reductions will have to be made up by offsetting tax increases. I suspect that you and I would bear a greater share of such increases than those who will benefit from overturning the Moore decision.
Jim de Bree, a Valencia resident, is a CPA and adjunct professor who has practiced and studied taxes and tax policy for nearly 50 years.