The Supreme Court will soon announce whether it will hear a case with the potential to undermine Democrats’ plans for a wealth tax, as well as other proposals to tax income before it is received.
Washington couple Kathleen and Charles Moore sued the government in 2019 for a refund on the $14,729 tax bill imposed on their small investment in an overseas company from which they never received any profit, according to court documents. The couple was stuck with the bill following Congress’ passage of the 2017 Tax Cuts and Jobs Act, which, to offset other tax changes, included a one-time tax on shareholders with a 10% stake on foreign companies that earned profits—even when those profits had not been received.
The couple’s case strikes at the heart of a question beneath a number of “wealth tax” proposals, which would levy taxes on unrealized income, currently being floated by Democrats: whether the 16th Amendment, which gives Congress the power to tax incomes “without apportionment among the several States,” allows Congress to impose taxes on income before it is received. Should the Supreme Court rule that Congress cannot tax unrealized income, the legal basis for a wealth tax would be undermined.
Hank Adler, Burra Executive Professor of Accounting at Chapman University, called the Moores’ case “the most important tax case in almost 100 years.”
If the justices do not take the case, “it would present the opportunity for Congress to pass a tax on appreciation or a wealth tax,” Adler told the Daily Caller News Foundation. “Then we start all over through the court system knowing that if the case went to the Ninth Circuit, the court would rule a tax on appreciation is constitutional.”
Policies such as President Joe Biden’s proposal to tax unrealized gains and Senate Finance Committee Chairman Ron Wyden’s proposal to tax annual gains on tradable assets like stocks demand an answer to this question, the Moores’ lawyers argue in their petition.
“There is every reason for the Court to resolve the pivotal constitutional question of realization now, when its judgment can inform lawmakers and stands to head off a major constitutional clash down the line,” the lawyers told the Supreme Court in the petition.
Previously, the Ninth Circuit Court of Appeals affirmed a lower court decision that upheld the tax and denied the Moores rehearing the case before the full court, a decision dissenting judges said made them “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.’” The Moores filed a petition with the Supreme Court in February, which the justices considered last week and considered again Thursday.
“The Moores are facing income tax for income they never received,” Dan Greenberg, General Counsel at the Competitive Enterprise Institute, an organization representing the Moores, told the DCNF. “That’s not the way income tax is supposed to work.”
While letting the Ninth Circuit’s decision stand would not necessarily provide a “green light” to wealth tax proposals that ends future legal challenges, the Ninth Circuit’s decision presents a “yellow light” for such policies that leaves matters very uncertain, Erik S. Jaffe, a partner at Schaerr Jaffe and adjunct fellow in legal studies at Pacific Research Institute, told the DCNF.
“As anyone who drives in New York or D.C. knows, a yellow light often means go,” he said.
An update on whether or not the case will be heard will be issued on Monday.
Greenberg said the Ninth Circuit’s ruling is “contrary to the way that the tax laws have been interpreted and understood over the last century” and “opens the doors to taxation of other assets that have grown in value but not produced income.”
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