The Supreme Court is set to hear oral arguments in a significant case challenging the constitutionality of a provision of a 2017 corporate tax reform law. This action is a result of a case brought forth by a Washington State couple, Charles and Kathleen Moore, whose tax bill increased by a one-time payment of around $15,000 due to this law. According to the federal government, striking down this tax could lead to a potential revenue loss of hundreds of billions of dollars over the next decade. However, attorneys on both sides argue the broader implications of the case could carry even larger consequences.
The law in question stems from a 2017 investment made by the Moores in KisanKraft, an Indian corporation. They received about 13% of the shares in KisanKraft, making it a “controlled foreign corporation” – a foreign corporation where US shareholders own 50% of the stock or more. Over the years, as KisanKraft reinvested its earnings and expanded, no distributions or dividends were provided to the Moores.
Prior to 2017, US tax laws did not authorize the federal government to tax a controlled foreign corporation’s foreign income until that income came to the United States – such as through a distribution to U.S. shareholders. However, 2017 saw the enactment of a mandatory repatriation tax, a one-time tax on a controlled foreign corporation’s post-1986 earnings— whether the earnings were distributed to shareholders or not, and irrespective of whether the shareholders owned the shares when the corporation made the earnings on which they are being taxed. This law was estimated to raise about $300 billion over 10 years.
The Moores’ tax liability for 2017 increased by $15,000 due to this new tax implementation. They filed a lawsuit in federal court for a refund of these additional taxes, arguing that the tax violated the Constitution’s apportionment clause as it taxed their personal property (shares in KisanKraft) rather than income from the corporation. Their challenge, however, was rejected both by a federal district court in Washington State and the U.S. Court of Appeals for the 9th Circuit. The case is now heading to the Supreme Court after the court agreed in June to hear the case.
Interestingly, the Moores’ arguments lean on a 1920 Supreme Court decision in
Eisner v. Macomber, arguing that income is something a taxpayer receives for personal use, not merely an increase in the value of property or investments. The couple further underlines that the 16th Amendment itself mandates that income should be “derived” from a “source,” suggesting realization needs to take place, and indeed, they point out, the term “income” was understood as funds received at the time of drafting and ratification of the 16th Amendment.
If the 9th Circuit’s decision stands, the Moores caution, it could enable Congress to bypass the apportionment clause’s requirement by defining unrealized profits or property gains as “income”. The Constitutionality of other taxes may also be called into question – a point recently raised by the Moores and reported by the Washington Post.
The case casts a significant ripple in the legal and financial communities, with the verdict expected to be delivered by June 2024.
For the full story, visit SCOTUSBlog.