The U.S. Supreme Court Rules Against the Moores!
Transcript of Podcast Episode 290
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, The U.S. Supreme Court Rules Against the Moores!
On July 25, 2023, our podcast episode 239, titled “The Ultra-Wealthy Are Rooting for Charles and Kathleen Moore!”, reported on the court case of Charles and Kathleen Moore, Washington state residents, who were fighting a $14,729 tax bill. The ultra-wealthy were paying close attention to this case.
In particular, the Moores were contesting a provision called the Mandatory Repatriation Act (the “Act”) included in the omnibus Tax Cuts and Jobs Act of 2017. The Act taxes U.S. citizens on accumulated foreign earnings of foreign corporations that they may own, even if those earnings are never distributed. The Moores owned shares of KisanKraft Machine Tools Private Limited, an India-based company founded by a friend. The company reinvested all profits into the company, so the Moores never received any income in the form of dividends from the shares, nor did they realize any capital gains from the sale of shares. The IRS, however, assessed a tax based upon the Act.
The Moores contested the tax bill in U.S. District Court for the Western District of Washington on the theory that the law violated the 16th Amendment of the U.S. Constitution. The 16th Amendment states: “The 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.” The Moores argued that since they never realized any income from the ownership interest, there could be no income tax. The tax was obviously not apportioned among the states on an equal per capita basis, so if it was not an income tax, the tax was unconstitutional.
In other words, the argument was that this tax was basically a wealth tax not based upon income generated but the organic growth of assets like publicly traded stocks, which are only taxed when they are sold, and gains realized. Throughout the last several years, however, there have been several proposals by Democratic members of Congress to pass a tax based solely upon wealth. President Joe Biden has also proposed a billionaire’s minimum tax in his 2023 and 2024 budget proposals. Many states have also proposed wealth taxes.[1] The common theme of these wealth taxes is that the wealthy are not paying their fair share of taxes and therefore, a tax based upon a person’s net worth or the market value of that person’s assets, even though there are no realized gains, would remedy that. These proposals are not based upon income earned, although there are several other proposals commonly dubbed the “Millionaires Tax” that are.
The Moores lost their case in District Court.[2] They subsequently lost an appeal in the U.S. Court of Appeals for the Ninth District.[3] They were also denied a rehearing before the full judiciary of the Ninth District.[4] And now, on June 20, 2024, they have lost in the U.S. Supreme Court.[5] The Court noted that the income was realized by the company and therefore, existing law allowed it to be passed through to the Moores.
Justice Brett Kavanaugh, writing for the majority in this 7-2 case, stated: “The Court’s holding is narrow and limited to entities treated as pass-throughs. Nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax (emphasis added).”
Interestingly, in Justice Amy Barrett’s concurring opinion, joined by Justice Samuel Alito, it is their opinion that unrealized income cannot be taxed. Justice Clarence Thomas, in his dissenting opinion, joined by Justice Neil Gorsuch, also agrees that income must be realized in order to be taxed. Their dissent was based upon a disagreement with how the majority attributed the company’s gains to be taxable income to the Moores.
So, while the U.S. Supreme Court has ruled on this case, it has left open the question of whether a wealth tax could be implemented as recently proposed by leading Democrats and President Biden. We will continue to follow these developments and report back to you when news occurs.
[1] See generally – Dore, Kate. “There’s a growing interest in wealth taxes on the super-rich. Here’s why it hasn’t happened.” CNBC.com https://www.kiplinger.com/taxes/biden-billionaire-wealth-tax; https://www.cnbc.com/2022/04/09/theres-a-growing-interest-in-wealth-taxes-on-the-super-rich.html (accessed 6/24/2024) and Walczak, Jared. “Wealth Tax Proposals Are Back as States Take Aim at Investment. Taxfoundation.org https://taxfoundation.org/state-wealth-tax-proposals/ (accessed 6/24/2024).
[2] Moore v. United States, CASE NO. C19-1539-JCC (W.D. Wash. Nov. 19, 2020)
[3] Moore v. United States, 36 F.4th 930 (9th Cir. 2022)
[4] Moore v. United States, 53 F.4th 507 (9th Cir. 2022)
[5] Moore v. United States, 602 U.S. ___ (2024)
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