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Supreme Court ruling upholds Trump-era offshore income tax

Supreme Court ruling upholds Trump-era offshore income tax
Supreme Court ruling upholds Trump-era offshore income tax

 


The Supreme Court on Thursday rejected a challenge to an obscure provision in President Donald Trump's 2017 tax package, ending a lawsuit that many experts feared could destabilize the nation's tax system.

In a split decision, the court upheld a one-time tax on offshore income that helped finance the massive tax cut, saying it was authorized under Congress's limited taxing powers.

Some viewed the lawsuit as an attempt to preemptively block Congress from creating a wealth tax.

Writing for the majority, Justice Brett M. Kavanaugh said the challenge to the offshore income tax could have rendered large parts of the Internal Revenue Code unconstitutional.

These tax provisions, if suddenly removed, would deprive the U.S. government and the American people of trillions in lost tax revenue, he writes. The implications of the challengers' argument, he added, would have required Congress to either dramatically cut critical domestic programs or dramatically raise taxes on the remaining sources it has, including, of course, on ordinary Americans. The Constitution does not require this fiscal calamity.

Justices Clarence Thomas and Neil M. Gorsuch dissented.

The decision came near the end of a Supreme Court term that has been unusually slow and marred by new ethics questions.

The justices plan to issue a series of major decisions by the end of June or the first days of July, including whether and when Trump's lawsuits over alleged election interference can proceed in Washington; the viability of a key charge against the rioters who attacked the U.S. Capitol on January 6, 2021; access to emergency abortion care; and the future of free speech on social media platforms.

It is rare for so many high-profile cases to remain undecided this late in the term. Metal barricades lined the streets outside the court Thursday, a show of heightened security that reflected the potential for protests. The justices return to court Friday to issue more opinions, starting at 10 a.m.

An unusual political coalition championed the offshore profits tax at issue in Thursday's decision, from the Biden administration to conservatives, including former House Speaker Paul D. Ryan (R-Wis.). Not because they favor a wealth tax, but because they fear that a ruling against a little-known provision could undermine many existing taxes on investments, partnerships and income foreigners, who together generate billions, if not billions, in revenue.

The Supreme Court heeded the warnings of a broad, bipartisan set of tax experts, Chye-Ching Huang, executive director of the Tax Law Center at NYU Law, said in a statement after the decision. Today's decision will allow Congress to continue to exercise its power to tax revenue to fund the government and ensure that all taxpayers, including multinational corporations and wealthy taxpayers, pay their fair share.

The challenge to the tax was initiated by a Washington couple supported by the Competitive Enterprise Institute (CEI), an anti-regulation advocacy group. Charles and Kathleen Moore were subject to $15,000 in taxes due to the 2017 law, following investments they made in an India-based company that provides equipment to small farmers. The law created a one-time tax on certain offshore income that was previously tax-exempt unless the taxpayer brought the money back to the United States.

Dan Greenberg, general counsel for the CEI, said in a statement that the court's decision allows the government to levy taxes on foreign shareholders who never received income. We believe this is unfair because the Constitution authorizes Congress to tax citizens' income, not the income of foreign corporations they do not control.

Over 11 years, the value of Moore's initial $40,000 investment in the KisanKraft company grew to more than half a million dollars. Until the 2017 law came into force, the couple did not pay any tax on this increase. They argued that they should not be taxed because they never took any money, even though the value of their shares in the company increased.

When considering the case of Moore v. In the United States, the U.S. Court of Appeals for the 9th Circuit took a broad view and said the tax was within the power of Congress and was authorized under the 16th Amendment, whether or not the Moores received the money. In tax terminology, the 9th Circuit said Congress can tax both realized and unrealized gains.

The Supreme Court's reasoning for upholding the 2017 tax is much narrower. Kavanaugh said the high court did not need to decide the general question of whether Congress had the constitutional authority to tax unrealized gains because Moores' share of the company should simply be treated as realized income .

Citing previous cases in a lengthy review of tax policy dating back to the American Revolution, the judge wrote that U.S. tax law has long allowed partners to be taxed on their share of income received by a partnership, even if the Individual associates do not receive the money. . Someone made the earnings in this case, KisanKraft Corporation and Congress have the authority to attribute those actual earnings to the Moores.

Without this long-standing practice, Kavanaugh writes, significant sections of the tax code that raise billions of dollars a year to fund the government would not be supported. Kavanaugh's opinion was joined by four colleagues: Chief Justice John G. Roberts Jr. and the court's three liberal justices, Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson.

The specific tax that the Moores opposed paying, known as Section 965, was expected to raise more than $300 billion over 10 years. Some large companies have already paid billions in this tax.

David M. Schizer, a professor emeritus at Columbia Law School who wrote a brief urging the court to treat Moore's income as realized and taxable, said the majority's decision was limited.

The court said we are not addressing the question of whether someone can be taxed without a sale. And we don't address the question of whether one can be taxed on wealth rather than income, Schizer said. Instead, he continued, the ruling only concludes that you can, in certain circumstances, tax owners on their business income.

Disagreeing with the majority, Thomas wrote that the Constitution requires realization to levy a tax and that the Moores did not realize income from their investment.

Justice Amy Coney Barrett, joined by Justice Samuel A. Alito Jr., agreed with the outcome of the case but for different reasons and said the tax in question may or may not be constitutional, but that the Moores do not had failed to properly prove a problem with the tax, if one exists.

Barrett and Alito agreed with Thomas and Gorsuch that a taxpayer must make or collect certain income for a tax to be valid, but offered their own interpretation of different business scenarios that allow Congress to consider that the shareholders made an income.

The majority left open for another day the question of whether realization is necessary for a tax to be valid. If Congress were to pass a wealth tax, or other types of taxes very different from the one at issue in this case, the court would likely reconsider the question of whether it should be implemented.

The idea of ​​a wealth tax has been proposed by Democrats, including Sen. Elizabeth Warren (Mass.) and several state legislatures, but is not close to being adopted anywhere in the United States. The Moores and the conservative legal group that represented them in the case sought to block the concept in theory before it could come to fruition in practice.

The Moores case was not without controversy. Some tax experts said the couple was more involved in the business than they revealed in court filings and urged the court not to decide the constitutional question based on an inaccurate and incomplete record. One of the couple's lawyers defended the filing as accurate and frank.

Additionally, Democratic senators asked Alito to recuse himself from the case because one of the attorneys in the case interviewed the judge twice for articles that appeared on the Wall Street Journal editorial page. Alito, who did not attend the court's public hearing Thursday, refused to recuse himself, saying he never discussed the Moores case with attorney David B. Rivkin Jr., whose His involvement in the affair was revealed in the second article.

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