- The Supreme Court seemed inclined to issue a narrow ruling during oral arguments Tuesday for a major tax case, Moore v. United States.
- The case considers whether the Sixteenth Amendment permits taxing unrealized gains, a question Solicitor General Elizabeth Prelogar told the justices Tuesday they did not need to reach in their decision.
- “[T]he tenor of the questions is that nobody is happy with anybody’s definition of anything,” Justice Sonia Sotomayor said.
The Supreme Court seemed unlikely Tuesday to issue a sweeping ruling in a major case considering whether the Sixteenth Amendment permits taxing unrealized gains.
During oral arguments for a case that raised popular concerns about upending the tax code and shutting down any Democrat plans for a wealth tax, Solicitor General Elizabeth Prelogar, arguing for the government, urged the Court to rule on narrow grounds. The justices seemed inclined to do so, though Justice Samuel Alito and Neil Gorsuch spent an extensive amount of time probing the limits of the government’s position.
The case, Moore v. United States, stems from Kathleen and Charles Moore’s 2019 lawsuit against the government over a $14,729 tax bill imposed on their investment in an overseas company, which they never received a profit from. The mandatory repatriation tax (MRT) was a result of Congress passing the 2017 Tax Cuts and Jobs Act, which included a one-time tax on shareholders with a 10% stake in foreign companies that earned profits, even if those profits were not received.
The Ninth Circuit upheld the tax in a ruling that dissenting judges said made it “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.’”
Prelogar presented the justices with a way out of deciding the Sixteenth Amendment question: they could find the income had been realized by the company and that Congress had attributed it to the shareholders.
“Would you agree, General, that when the Court opens a door, Congress tends to walk through it?” Gorsuch asked.
“If the only bar to Congress from enacting a tax on millions of Americans retirement accounts and mutual funds is administrability, they’re pretty clever over there, aren’t they?” he continued. “They know how to get around administration concerns pretty well, don’t they?”
Gorsuch did acknowledge there is room for ruling on a “narrow ground” in the government’s favor.
“You make a pretty persuasive argument that under the MRT, the Moores do have constructive control, that it is fairly attributable to them because they are a 10% stakeholder and some other facts,” he said.
Alito suggested Prelogar made a “fair argument” that ruling in the Moores’ favor could mean “large, important pieces of tax code will logically fall.” He said it’s also fair to question the potential implications of the government’s position.
“What about the appreciation of holdings in securities by millions of millions of Americans?” he asked. “Can those be taxed under the Sixteenth Amendment?”
“We would likely defend it as an income tax,” Prelogar said. “But you don’t agree that that tax would be valid in order to uphold the MRT.”
Multiple justices raised concerns that siding with the Moores’ argument could affect the government’s ability to tax individual shareholders in LLCs or partnerships. Many other questions centered on discussing the parties’ various definitions of realization and attribution.
“I don’t fault the parties for shooting for the stars,” Justice Sonia Sotomayor said. “But the tenor of the questions is that nobody is happy with anybody’s definition of anything.”
Andrew M. Grossman, partner at BakerHostetler and attorney for the Moores, said in a statement after arguments that “all bets are off” if income does not need to be realized before Congress can tax it.
“The word ‘income’ in the Sixteenth Amendment means the same thing today that it meant in 1913: economic gains coming in to the taxpayer,” he said. “That’s why appreciation in the value of a home, a stock investment, or other property is not and never has been taxed as income.”
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