Last summer, I wrote two columns about a peculiar tax case that the Supreme Court decided to hear. Although the amount of tax involved in the case was less than $15,000, ruling in the taxpayer’s favor could have fundamentally gutted the Internal Revenue Code.
A major part of the 2017 Tax Cuts and Jobs Act changed the way multinational corporations are taxed. The U.S. imposed taxes on corporations’ worldwide income, while most other countries taxed them solely on the income earned within the taxing jurisdiction. U.S. taxation of earnings of foreign corporate subsidiaries was deferred until those earnings were repatriated to the U.S.
The TCJA changed the regime to a territorial approach where the U.S. generally taxes only domestic profits after 2017. Unfortunately, this transition was extremely costly. To help pay for this change, Congress imposed a one-time, backward-looking tax on income accumulated in foreign subsidiaries. That backward-looking tax is known as the Mandatory Repatriation Tax or MRT.
Charles Moore and his wife, a retired couple, owned an interest in a corporation based in India and were subject to a MRT of $14,729. They paid the tax and sued the U.S. government for a refund in the 9th Circuit District Court. Moore’s assertion that the MRT is unconstitutional was novel and controversial. Many tax scholars thought it was frivolous.
The District Court ruled against Moore. Moore appealed the decision to the 9th Circuit Court of Appeals, which affirmed the lower court’s decision. Shortly thereafter, pro-business commentators wrote columns in the editorial pages of prominent newspapers, including the Wall Street Journal, suggesting that Moore should ask the Supreme Court to hear the case.
Few tax scholars thought SCOTUS would agree to hear the case, but to almost everyone’s surprise they did. Numerous amicus briefs were filed on Moore’s behalf. The problems with the positions espoused in those briefs is that the logic applied to reach their conclusion is also applicable to dozens of other provisions in the Internal Revenue Code.
The Tax Foundation published a study of the impact on three other corporate tax provisions and concluded that, if those three provisions were deemed unconstitutional, it would add nearly $6 trillion to the national debt.
Many of Moore’s arguments are based on interpretations of accounting principles. Based on prior court cases involving tax accounting issues, judges frequently do not properly understand the accounting principles at hand. I was worried that this would happen in the Moore case.
When the case was heard, I was very impressed with Justice Amy Coney Barrett’s questions. She clearly had been briefed on how the accounting rules work. Justices Brett Kavanaugh and Ketanji Brown Jackson followed Barrett’s line of questioning, while Justices Clarence Thomas, Samuel Alito and Neil Gorsich asked pro-taxpayer questions about the amicus briefs that were submitted.
On June 20 the Court published a 7-2 decision in favor of the government. Kavanaugh wrote the opinion eviscerating Moore’s arguments. In the opinion, Kavanaugh cited 65 sections of the Internal Revenue Code that would be unconstitutional if SCOTUS ruled in favor of Moore. He stated, “… those tax provisions, if suddenly eliminated, would deprive the U. S. government and the American people of trillions in lost tax revenue.” That would have been a devastating blow to the federal government’s finances.
Kavanaugh then went on to explain why Moore’s arguments did not apply. Barrett wrote a concurring opinion, providing considerable detail setting forth clarifying that this decision does not conclude that a wealth tax is constitutional. Alito signed onto Barrett’s opinion, indicating he might have had a change of heart. Jackson wrote a concurring opinion amplifying some of Kavanaugh’s points.
Kavanaugh’s opinion and the two concurring opinions are among the best opinions I have seen a court write when discussing a tax issue.
Justice Thomas wrote a dissenting opinion, with which Justice Gorsich concurred. The dissent rambled, but my big takeaway is that Thomas and Gorsich do not believe that wealth tax is constitutional.
Several progressive members in Congress, led by Bernie Sanders and Elizabeth Warren, want to impose a wealth tax. I suspect the reason why SCOTUS took the case was to send a clear message to Congress not to try to impose a wealth tax. As a tax professional, I agree that a wealth tax is probably unconstitutional and would likely be impossible to administer.
Recently, I have been critical of the Supreme Court, but I am happy with this decision. It shows that the justices can work together and overcome their differences to resolve an issue in a coherent manner.
Jim de Bree is a semi-retired CPA and college professor who resides in Valencia.