US Supreme Court considers definition of ‘income’ in tax case

US Supreme Court considers definition of 'income' in tax case

In a case that has already generated controversy due to a request for Justice Samuel Alito’s recusal, the United States Supreme Court explored on Tuesday a challenge to the constitutionality of a tax that targets the owners of foreign firms. This tax may potentially undercut attempts to impose a wealth tax on the extremely wealthy.

The judges were listening to arguments in an appeal filed by Charles and Kathleen Moore, a retired couple from Redmond, Washington, who had challenged the tax on foreign firm revenues, but a lower court had rejected their case, despite the fact that the profits had not been disbursed.

In 2017, Republicans supported and Ex-President Trump signed into law a tax measure that included a one-time “mandatory repatriation tax” (MRT) affecting taxpayers with a 10% or more ownership stake in specific overseas firms.

The contention here is on the constitutionality of this tax on unrealized profits in light of the 16th Amendment, which grants Congress the authority to “collect taxes on incomes.” Protesting what they see as an expansion of the definition of “income” to exclude profits from property appreciation, the Moores have the support of conservative and corporate organizations, including the Competitive Enterprise Institute.

It was clear from the justices’ early questioning that they were worried a Moores victory may affect a broader range of tax code provisions, including those pertaining to partnerships, limited liability firms, and S-corporations.

Sotomayor informed Moores’ lawyer Andrew Grossman, “Your definition, I think, would affect the government’s ability to tax… those individual shareholders.” Sotomayor is a liberal justice.

Disagreements persisted.

The Justice Department has cautioned the Supreme Court that, in the next decade alone, the invalidation of the required repatriation tax could cause the government to lose $340 billion, with “potentially far more” at stake if other tax laws are also invalidated.

A finding along these lines may potentially derail plans advocated by Senator Elizabeth Warren and other Democrats to tax the ultra-wealthy based on their net worth, which includes all of their assets and not just their income.

As minority shareholders in KisanKraft, an agricultural equipment supplier based in Bangalore, India, the Moores are requesting a return of around $14,729 in extra taxes imposed on them in 2017.

The case had received little public notice on its route to the Supreme Court until discoveries revealed the justices’ concealed luxury travel, supported by rich patrons, sparking an ongoing controversy about their ethical conduct.

In pieces published in the Wall Street Journal’s opinion section, Alito argued in favor of the court. While Democrats sought ethical legislation that would have applied to the Supreme Court, Alito—who argued as part of the court’s 6-3 conservative majority—said that Congress does not have the authority to control the highest court in the United States.

Due to the fact that David Rivkin Jr., one of the Moores’ attorneys, co-wrote the Wall Street Journal stories, Democratic senators pushed for Alito’s removal from the case.

Senators have expressed concerns about Rivkin’s impartiality in judging the case due to his attempts to “air his personal grievances” with Alito and his access to the justice. Resisting the urge to step aside, Alito justified Rivkin’s involvement in the pieces by stating that he was acting “as a journalist, not an advocate.”

The court finally issued its official code of ethics last month after months of lobbying. Some legal professors and Democrats have said that the code isn’t effective since it doesn’t have a way to ensure compliance.

In 2019, the Moores took legal action against the United States government, suing over the obligatory repatriation tax. By citing Supreme Court precedent, the 9th U.S. Circuit Court of Appeals in San Francisco dismissed the lawsuit, explaining that “realization of income is not a constitutional requirement.”

It is anticipated that the matter will be decided by the end of June.

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