Don't Mess With Taxes

Update, Thursday, June 20, 2024: The Internal Revenue Code is safe. The Supreme Court today ruled that the 2017 Tax Cuts and Jobs Act's mandatory repatriation tax, or MRT, which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity's American shareholders, and then taxes the American shareholders on their portions of that income, does not exceed Congress's constitutional authority.

On Tuesday, Dec. 5, the Supreme Court of the United States (SCOTUS) heard oral arguments in the tax case Moore v. United States.

Charles and Kathleen Moore filed the lawsuit challenging the Mandatory Repatriation Tax provision in the Tax Cuts and Jobs Act (TCJA) of 2017.

That section of the tax reform law was designed to discourage U.S. corporations from keeping funds overseas by reducing certain taxes on foreign earnings. But in exchange In exchange for those tax cuts, investors and corporations had to pay a one-time, retroactive tax on all foreign income dating back to 1986.

The repatriation provision, which was added to help pay some of the costs of the tax reform bill, ended up costing the Moores, a retired couple from Redmond, Washington, a one-time payment of roughly $15,000.

Unrealized income issue: The couple filed the federal lawsuit, arguing they are being unconstitutionally taxed on unrealized income since they have not recouped their earnings from their investment, although on paper the original $40,000 they put into the foreign company has increased in value to more than half a million dollars.

Basically, the country's highest court is being asked to decide whether the Constitution of the U.S. places limits on the ability of Congress to tax what is essentially unrealized income.

Much has been written about how, depending on what and wide-ranging the justices rule, could dramatically affect the current U.S. tax code. Descriptions like upend, dismantle, and wreak havoc have been used.

Then there are the dollars. It's always about the money, and the federal government could be forced to pay back billions of dollars in corporate tax collections if SCOTUS decides fully in the Moores' favor.

SCOTUS shouting: Since this is essentially an obscure and complicated part of the tax code, it's a good topic for this weekend Saturday Shout Outs. Here are some articles that provide background on the tax law, the lawsuit, last week's Supreme Court hearing, and possible outcomes expected by next June.

Justices to hear major tax case, by Amy L. Howe at her blog Howe on the Court provides a good preview-plus-explainer of the case.

US Supreme Court wary of upending tax on Americans' foreign earnings write Andrew Chung and John Kruzel in their report on the hearing for Reuters.

Supreme Court hears tax case on 'income': It may 'have the biggest fiscal policy effects of any court decision,' expert says, in Kate Dore's article for CNBC. Among those offering insight in the piece is former House Speaker and GOP vice presidential candidate Paul Ryan, who helped draft the TCJA, the first major tax reform since the 1986 Internal Revenue Code overhaul.

Supreme Court hears a case that experts say could wreak havoc on the tax code notes NPR legal correspondent Nina Totenberg in her piece for Morning Edition.

How the Moore Supreme Court Case Could Reshape Taxation of Unrealized Income is the focus of the Tax Foundation piece by Daniel Bunn, Alan Cole, William McBride, and Garrett Watson.

One Supreme Court Case Could Mess Up Chunks of the Tax Code write Richard Rubin and Jess Bravin in the Wall Street Journal.

With the Moore vs. United States Case, the Supreme Court Could Unleash Chaos on Our Tax System writes Steve Wamhoff, Federal Policy Director for the Institute on Taxation and Economic Policy (ITEP) at the organization's Just Taxes blog.

Moore v. United States Oral Argument: The Slippery Slope of Taxing Unrealized Gains is the focus of Jack Salmon's piece for the Philanthropy Roundtable.

What a major income tax case before the Supreme Court means for states, by Liz Farmer at Route Fifty, takes a look at how the federal lawsuit could have tax implications across the country.

Finally, this Saturday Shout Out collection wraps up with a couple of items from TaxVox, the blog for the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

Eric Toder's analysis back in October in Examining the Tax Rules at Risk in SCOTUS Moore v. US Case offered this warning:

But any Court decision in Moore that casts doubt on the constitutionality of taxing unrealized income will create considerable uncertainty for taxpayers and the government. It could lead to substantial revenue losses and embolden taxpayers to take more aggressive positions on their unrealized income, in the hope that future court rulings sanction their tax planning choices. In the long run, it could also create serious challenges for lawmakers hoping to maintain the progressivity of the federal income tax.

The news from Toder's colleague Howard Gleckman the day after the SCOTUS hearing is a bit more comforting. Gleckman's The Supreme Court’s Search For An Off-Ramp In the Moore Case begins with this:

Yesterday's oral arguments in Moore v. United States made one thing clear: The Supreme Court has little interest in blowing up the tax code. While many lawyers and economists feared that a far-reaching opinion in an otherwise insignificant dispute could undermine the foundations of much of US tax law, the justices seemed to realize they had fired up an earthmover when a shovel would do. They spent much of the more than two hours of oral argument thinking aloud about how they could narrow their opinion to the case at hand.

The Moores are well within their rights to challenge the tax law. But here's hoping the Supreme Court's apparently cautious take is true.

You also might find these items of interest:

• Hunter Biden sues IRS over tax disclosures
• 'Better Call Saul' wins real-life Liberty Tax trademark lawsuit
• Elderly MN woman wins SCOTUS property tax case, heads back to court to collect her $25,000

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