Jim de Bree | Peculiarities of a Landmark Tax Case

Jim de Bree
Jim de Bree

This is the first of a two-part column expanding on a column I wrote a few weeks ago about a tax case that the Supreme Court (SCOTUS) agreed to hear. There are some new developments in what may be the most important tax case SCOTUS has heard in many years. 

If you missed my previous column, the case involves a taxpayer named Moore who claims that a provision enacted as part of the Tax Cuts & Jobs Act is unconstitutional because it taxes wealth accumulation rather than income.  

Prior to 2018, U.S. shareholders of foreign corporations could defer U.S. tax on foreign earnings until the foreign corporation paid a dividend to the U.S. shareholder. 

This resulted in tax avoidance, causing Congress to change the law for foreign earnings accumulated after 2017. 

The problem with this change is that foreign earnings accumulated between 1987 and 2017 would no longer be taxed when distributed, and therefore, would escape U.S. tax. 

To close the loophole, Congress imposed a tax payable over eight years on such undistributed income accumulated by foreign corporate subsidiaries.  

Moore owned an interest in a small foreign corporation and brought suit claiming that this tax is not an income tax, but instead is a tax on wealth that is accumulated overseas. 

The 16th Amendment allows taxation of income, but not wealth accumulation.  

The circumstances around the Moore case are somewhat peculiar.  

The amount of tax involved in the Moore case is less than $15,000 and not seemingly worth the cost of litigation, which to date must have cost hundreds of thousands of dollars.  

Furthermore, instead of litigating the matter in Tax Court, a special venue designed to settle tax disputes, Moore chose to file in District Court where the judges typically do not have the same level of tax expertise as the Tax Court judges. 

Some observers have speculated that the Moore case could be a “stalking horse” for other issues benefiting large corporations and the mega-wealthy. 

As I will discuss in my next column, the Moore case potentially could have significant ramifications on the federal budget.  

So why would SCOTUS agree to hear a case that most tax scholars and two courts have found to be fairly clear-cut? SCOTUS typically does not hear cases involving well-settled law merely to reaffirm a lower court’s decision. 

Indeed, some progressive Democrats in Congress have openly discussed imposing a disguised wealth tax and SCOTUS may want to send them a signal not to go there. But overturning Moore would do more than merely sending a message to Congress; it could result in gutting the Internal Revenue Code of many provisions that raise revenue and prevent tax-motivated transactions considered abusive by Congress. 

That is tantamount to rewriting tax law by erasing long-standing provisions. 

The two justices who were most interested in hearing the case were Clarence Thomas and Samuel Alito. After Moore petitioned the Supreme Court, several parties filed amicus briefs supporting Moore’s position. 

One of them is The Manhattan Institute, an advocacy group whose chairman is Paul Singer, a billionaire hedge fund manager. 

Kathy Crow, wife of billionaire Harlan Crow, is also a trustee. 

Alito endures criticism for being a guest on a luxury fishing trip with Singer, who ostensibly had connections with entities that were subsequently involved in cases heard by SCOTUS. 

Harlan Crow, of course, is one of Thomas’ “dear friends” who has bestowed many gifts on Thomas and his family. Both justices apparently believe there are no resulting conflicts because neither Singer nor Crow have any business before the court.  

While it is true that Singer and Crow are not parties to the Moore case, they likely stand to benefit financially if Moore is overturned in the manner espoused by The Manhattan Institute.  

I have spoken with several tax scholars who believe that, based on existing case law precedent, Moore’s best chance of prevailing is by relying on two SCOTUS decisions that were rendered over 100 years ago. 

Those cases would apply narrowly to Moore’s situation and would not create precedent for overturning other tax provisions. 

Moore’s filing with SCOTUS and the amicus brief filed by The Manhattan Institute, in which both the Singer and Crow family members have leadership positions, have advocated overturning the lower courts’ Moore decision using alternative reasoning that would also apply to other tax provisions. 

Given the timing of The Manhattan Institute’s amicus brief, it is possible, perhaps even probable, that it played a role in persuading Alito and Thomas to hear the Moore case. 

My next column will discuss the potential financial ramifications to the federal government if SCOTUS overturns the Moore decision. 

Jim de Bree is a Valencia resident.

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