June 20, 2024
The Supreme Court just issued its ruling in a major tax case that could have upended our tax system and could have cost the United States government hundreds of billions of dollars. Today’s ruling says congress’s current interpretation of taxable income is correct.
In a 7 to 2 ruling – with the majority opinion written by Justice Kavanaugh — the justices ruled a specific and obscure trump era tax is constitutional. Justices Thomas and Gorsuch dissented.
So what is this tax? And what does this mean for you.
Well, it’s complicated– but let me simplify as much as possible…this case stems from a lawsuit brought by Charlie and Kathleen Moore. They sued the US government over almost $15,000 they were taxed. The tax was created in 2017 under the Trump administration. It requires u-s investors in foreign companies to pay a one-time tax on accumulated foreign profits going back several decades—it’s called the mandatory repatriation tax –or MRT. The law says American taxpayers who own more than 10% of foreign corporations, even if the companies’ earnings have not been given to us shareholders – or realized — are subject to the tax. The Moores say they hadn’t realized any actual income from their investment in an India-based company so the $15,000 tax bill the received was bogus. They sued saying based on the 16th amendment, congress took its taxing power too far by considering unrealized income as taxable income. The couple also argued that these same 16th amendment questions will come up again if president Biden and Democrats are successful in their attempts to create new taxes for the super wealthy. Well throughout today’s ruling, the justices call the Moore’s arguments “misplaced”, “implausible” and “incorrect.”. Justice Kavanaugh writes, “in any event, the Moores’ attempted distinctions of the various taxes fail on their own terms.”
In the past – the supreme court has rarely gotten involved in setting boundaries or rules for what counts as income and what congress considers taxable. And in today’s ruling – the justices kept with that precedent saying, “congress has long taxed shareholders of an entity on the entity’s undistributed income, and it did the same with the MRT. This court has long upheld taxes of that kind, and we do the same today with the MRT.” This ruling was narrow and specifically pointed out that it should not be misconstrued to imply the supreme court is giving any kind of green light to congress to create a so-called wealth tax. Congress can, of course, do that under article one of the constitution and the 16th amendment, but whether that particular type of tax on holdings, wealth, net worth or appreciation is consistent with the constitutional text is something the Supreme Court says they’ll decide on another day….if it becomes a reality.
So, how does this impact you if you’re not invested in foreign companies? Well – these types of taxes are currently generating billions of dollars in revenue. And that revenue goes to pay for all the things the government spends money on including social security, national defense, and to offset the deficit. If the supreme court had ruled the other way, that revenue source may have dried up and the government probably would have been forced to issue tens of billions of dollars in refunds to these people.
Read the Moore vs United States ruling here.
