The Supreme Court has been on a roll lately, but, unfortunately, not in the right direction.
On June 29, the conservative majority on the Court voted to strike down affirmative action admissions policies at our nation’s colleges and universities. (Click HERE to read the Patriotic Millionaires’ response to the decision.) The next day, June 30, the same majority then voted to block the implementation of President Biden’s student loan forgiveness program.
Both decisions received significant media coverage given the harmful impact that they will have on young people, particularly disadvantaged minorities, trying to improve their lot in life through higher education. For today’s Closer Look, however, we want to discuss an upcoming Supreme Court case, Moore v. United States, that has the potential to do even more harm than both the Court’s recent rulings combined.
Background of Moore v. United States
On June 26, a few days before the affirmative action and student loan decisions dropped, the Supreme Court announced that it had agreed to hear Moore v. United States in its next term. The Court will probably hear the case in the fall, and then release a decision some time in 2024.
The case was brought by Charles and Kathleen Moore over the constitutionality of the mandatory repatriation tax (MRT) enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). The details are a bit dense, but hang with us, we’ll get through it together.
The MRT was a one-time tax levied in 2018 on the offshore profits of controlled foreign corporations (CFCs), i.e. foreign companies majority-owned by Americans. Before the new law, people who owned foreign companies only had to pay taxes on their earnings when they were distributed to them as dividends. However, that rarely happened: CFCs would earn profits – or, “realize” income – but then keep those profits in the foreign country instead of distributing them to shareholders. In practice, this meant that US shareholders could defer tax on their CFC earnings essentially forever.
The MRT looked to put a stop to this. One analysis estimated that CFCs had more than $2 trillion in reinvested earnings that had gone untaxed since 1986. With the passage of the MRT, large shareholders in CFCs had to pay a one-time tax on all of their deferred income from 1986 to 2017 (which they could pay over a period of several years). After the MRT, the TCJA then put in place a new system for taxing CFC earnings on a regular basis. Under the new rules, US shareholders would pay a minimum tax on their CFC earnings every year, instead of waiting to pay tax on dividends from these companies.
To put it much more simply, Americans who owned foreign corporations used to not have to pay taxes on money earned by those corporations until that money was brought back to the US (which it almost never was, to avoid taxes). The TCJA changed that rule so that people had to pay taxes on all of that money earned in the past but not taxed, and all future foreign earnings.
Charles and Kathleen Moore, the plaintiffs in the Supreme Court case, were one of the many Americans impacted by the MRT. Back in 2005, they invested $40,000 in their friend’s company, Kisan Kraft, which is based in India. Between 2005 and 2017, Kisan Kraft turned a profit but put its earnings back into the company, which meant that the Moores never paid tax because they never received payouts in the form of dividends. Then, in 2018, the MRT hit the Moores with a $14,729 tax bill, proportional to their share of the company’s earnings ($132,512) that had gone untaxed over the years.
The Moores were unhappy with the tax and have challenged its constitutionality. They contend it is a tax on income from a foreign company that they have not actually received (in the form of dividends). Income taxes, they contend, as allowed by the 16th Amendment, apply only to realized income, and are asking the Court to rule as such.
The Moores further argue that the MRT constitutes a “direct tax” and is therefore unconstitutional, since it is not apportioned among the states according to their populations, as is required by the Constitution. This apportionment requirement is almost impossible for any modern tax to meet, because it requires taxes to be the same per person in every state. If Georgia has exactly twice the population of Colorado, then a direct tax must raise exactly twice as much from Georgians as it does from Coloradans, regardless of the relative wealth of those states. This is obviously unworkable, because it would lead to wildly different tax rates in different states.
Potential Implications of Moore v. United States
The Moores are essentially arguing that they themselves need to literally, physically receive money in order for it to be subject to tax. To them, income realized by companies that they own is not taxable to them under the 16th Amendment.
To be sure, the Court ultimately ruling in the Moores’ favor seems highly unlikely. The Moores’ constitutional argument runs counter to the logic underlying many taxes, including those on income of S-corporations, limited liability companies (LLCs), and other pass-through entities. These taxes look through businesses and tax owners on the income received by their companies. The federal courts, including the Supreme Court, have heard many cases involving the taxation of income from pass-through entities, and none have questioned the constitutionality of the provisions subjecting their owners to tax on that income.
If the Court were to rule in favor of the Moores, the result would be to upend massive swaths of the tax code. Further, if the MRT were sufficiently integral to the Tax Cuts and Jobs Act, a ruling in the Moores’ favor could render the entire TCJA unenforceable.
We don’t think even this Supreme Court is prepared to take that step.
So why did the Court agree to hear the case? Here’s what could be at the root of the Court’s decision:
America’s ultrarich have paid stunningly low income taxes in recent decades. They accomplish this largely by holding assets that increase dramatically in value, like shares of Tesla or Amazon, for example. As long as they don’t sell those assets, they don’t have taxable income under current tax law. And if they’re short on cash, they can borrow against the assets, still without paying tax.
Congress is considering two types of taxes to overcome this form of tax avoidance by the billionaire class: taxes on wealth, such as Senator Warren’s Ultra-Millionaire Tax, and income taxes on unrealized gains, such as President Biden’s Billionaire Minimum Income Tax and Senator Wyden’s Billionaires Income Tax.
Many of America’s billionaires vehemently oppose those proposals, and are using the various organizations they control – from the Chamber of Commerce to the Cato Institute to Americans for Tax Reform – to try to stop them through a SCOTUS decision on Moore.
Because the direct tax apportionment requirement in the Constitution could potentially be applied to either taxes on wealth or unrealized gains, the Court could use the Moore case as an opportunity to effectively declare either or both of those taxes unconstitutional. Should it do so, nearly all hope would be lost in the battle to ensure billionaires finally start paying what they owe the country in taxes.
Make no mistake – this case is all about billionaires trying to hedge their bets with a sympathetic Supreme Court to irrevocably prevent wealth taxes or taxes on unrealized gains from putting a dent in their fortunes. It’s that simple.
Over the past few months, report after report has detailed the intimate connections that some Supreme Court Justices have developed with billionaires. Justice Clarence Thomas has taken lavish vacations with billionaire (and prolific GOP donor) Harlan Crow, and even accepted tuition payments from Crow for his grandnephew’s private schooling. Justice Samuel Alito took a luxury fishing trip (and a ride on a private jet, to beat) with hedge fund billionaire Paul Singer. Nine days after he was confirmed on the Court, Justice Neil Gorsuch sold real estate to Brian Duffy, the CEO of one of the nation’s largest law firms. And it’s not a coincidence that Crow, Singer, and Duffy have all had cases before the Supreme Court.
Billionaires clearly have easy access to Supreme Court Justices, and they’re cashing in on that access like never before. If the Court rules their way in Moore v. United States and nixes the future of wealth taxes, their years of courting will have all paid off.
We’ll be holding our breath and crossing our fingers that the Court will do the right thing and keep the path clear for Congress to effectively tax billionaires and corporations. But we won’t hold it too hard, because it’s obvious now that this Court doesn’t seem too keen to help the little guy.