The US Supreme Court recently released a ruling on the tax law case Moore v. United States, which explored the scope of income taxes constitutionally allowable under the Sixteenth Amendment. The ruling favored the government under the specific circumstances of the case, but the opinions suggest that the court could rule in favor of taxpayers under different circumstances.
The case revolved around whether the plaintiffs, Charles and Kathleen Moore, could be taxed on income earned by an Indian business called KisanKraft, in which they had a partial stake. The Moores challenged a provision of the Tax Cuts and Jobs Act (TCJA) of 2017, arguing it was unconstitutional as they had not yet realized the income, and the Sixteenth Amendment allowed taxation only of realized income.
The Court’s majority opinion, authored by Justice Brett Kavanaugh, held that the income was realized by KisanKraft. It further states that Congress has the authority to tax an entity’s shareholders or partners on the undistributed, realized income of that entity. Thus, Congress could tax the Moores on the income of KisanKraft. However, the court’s opinion left many questions undecided, emphasizing the narrowness of the ruling.
While the immediate implications of the Moore ruling are relatively minor, the arguments made in the Moore case concern a very important topic: the scope of the Sixteenth Amendment, which made explicit Congress’ ability to levy an income tax. A larger scope for the Sixteenth Amendment could give a constitutional blessing to a variety of tax proposals, while a smaller scope could have foreclosed those tax proposals, and struck down parts of the current tax code as well.
For instance, one potential tax requiring an expansive Sixteenth Amendment is a net wealth tax as proposed by Sen. Elizabeth Warren (D-MA). Such a tax could fall repeatedly on unrealized and undistributed income. President Biden’s proposed billionaire minimum tax would effectively levy a one-time income tax on unrealized and undistributed income.
While the court ruled only on the Moores’ challenge to Section 965, a reading of the opinions can yield some insights into how the justices may approach future cases. The court’s majority in favor of the government was a big-tent coalition, consisting of seven justices and three opinions. However, the justices declined to answer other questions, most of which were effectively rendered moot by the finding that the income was realized.
Looking forward, while Section 965 passes constitutional muster, in the court’s holding, it does so through a very specific chain of logic. This ruling is far from blessing all kinds of taxes. If anything, the text of the opinions suggests some tax proposals may be struck down under future courts. The Barrett concurrence and Thomas dissent both proscribe taxes on unrealized income. It would take just one justice from the opinion of the court to create a majority against taxes on unrealized income, which could in turn invalidate certain tax ideas.
Consider, for example, the Biden administration’s proposed tax on unrealized gains of high-net-worth individuals. The tax as proposed is on the market value of unsold shares—not, as in the Moore case, realized income passed through to the owners. The proposed Biden tax would attempt to tax such a founder—but it would not be able to do so under the narrow rationale that upheld Section 965 in Moore.
The government won in Moore. However, given the narrow opinion of the court and the reasoning in the Barrett concurrence and the Thomas dissent, it seems likely that future rulings under other facts and circumstances could favor taxpayers instead.
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