The U.S. Supreme Court will hear arguments on Tuesday in a case that could upend the current U.S. tax system in a challenge to the 16th Amendment. File Photo by Jemal Countess/UPI | License Photo
Dec. 5 (UPI) -- The U.S. Supreme Court will hear arguments in a case that could reshape the U.S. tax system in a major challenge to the 16th Amendment that would impact the federal budget and potentially disrupt legislative efforts to tax wealthy Americans.
The court case, Moore vs. United States, is making waves from Washington to Wall Street as a ruling could hold enormous implications for longstanding U.S. tax laws and potentially influence the scope of Congress' taxing powers under the Constitution.
The dispute before the justices Tuesday originated in 2006, when Charles and Kathleen Moore made a $40,000 investment to help establish the India-based company KisanKraft Machine Tools, which is involved in providing equipment to farmers across India. In return for their investment, the Moores obtained a 13% stake in the company.
Every year since, the company's revenues have grown, but rather than give that bonus money back to shareholders, the owners elected to use it to expand the global footprint of the business. As a result, the Moores never received any payouts, according to documents filed with the high court.
More than a decade into their deal with the company, the Moores found out in 2018 that they were required to pay taxes on their 13% share of KisanKraft's lifetime accumulated earnings, due to the "mandatory repatriation tax" -- a provision established through the Tax Cuts and Jobs Act of 2017, which was signed into law by then-President Donald Trump.
The new tax, which was projected to generate about $340 billion in fresh government revenue over the next decade, required U.S. taxpayers who owned at least 10% of a foreign company to pay a one-time tax on their portion of corporate earnings.
Consequently, the Moores faced an additional $132,512 in taxable income, which put them on the hook for an extra $14,729 in taxes.
The couple acknowledge that, over 12 years, their initial $40,000 investment increased in value by over a half-million dollars.
They paid the tax, but feeling blindsided, filed a lawsuit against the federal government, seeking to get their money back, claiming that the mandatory repatriation tax is a violation of the 16th Amendment because it taxes unrealized gains and not actual income.
The Moores also contend that the tax contradicts the amendment's original intent.
Enacted in 1913, the 16th Amendment to the Constitution grants Congress the authority to tax "incomes, from whatever source derived."
The law states: "Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
Previously, a federal district court dismissed the Moores' case, ruling that the mandatory repatriation tax was legal under the 16th Amendment because it's a tax on income.
Later, the U.S. Court of Appeals for the 9th Circuit upheld the decision of the lower court, stating that "there is no constitutional prohibition against Congress attributing a corporation's income pro-rata to its shareholders."
After that ruling, the Moores appealed to the Supreme Court, urging the conservative majority to review the 9th Circuit decision that "sweeps away the essential restraint on Congress's taxing power, opening the door to unapportioned taxes on property ... and anything else Congress might deem 'income.'"
In another submission to the high court, the Moores argued that the mandatory repatriation tax is a government levy on property, not income. The Justice Department followed up with a filing that sought to debunk that theory.
Solicitor General Elizabeth Prelogar, who is arguing the case on behalf of the government, explained that, according to the 16th Amendment, Congress has the authority to tax a portion of shareholder earnings from corporations, even if those earnings haven't been distributed yet.
Lawyers for the Moores later cautioned that if the 9th Circuit's decision is upheld, it could open the door for Congress to have broader taxing authority, and potentially impact proposed legislation such as the "wealth tax" and a previous suggestion by the White House to establish a billionaire minimum income tax.
The issue before the Supreme Court is stirring disagreements between various libertarian advocacy groups and the legal community. While many support the constitutional validity of the tax, some lawmakers have voiced concerns about potential consequences if the court decides to overturn the law.
The American Tax Policy Institute also cautioned that a decision invalidating the mandatory repatriation tax could have widespread implications for the entire U.S. tax system, while casting uncertainty on the constitutional standing of countless provisions, and potentially triggering a surge in litigations and tax refund claims for years to come.