The Supreme Court Very Rarely Votes Against Federal Tax Policy. Especially Now…
The Supreme Court recently ruled 7-2 to uphold a specific tax targeting U.S. taxpayers with shares in certain foreign corporations, part of the 2017 tax reforms initiated by Republicans. The tax, known as the mandatory repatriation tax (MRT), was challenged by a Washington couple, Charles and Kathleen Moore, who argued that it violated the Constitution. However, the Court, with Justice Brett Kavanaugh authoring the majority opinion, affirmed its constitutionality under Article I and the 16th Amendment.
The Supreme Court rules to uphold a tax on foreign income over a challenge backed by business and anti-regulatory interests.@DevinDwyer has more on the 7-3 opinion and other high-stakes rulings expected this month. pic.twitter.com/fhfFSrqZd5
— ABC News Live (@ABCNewsLive) June 20, 2024
Justice Kavanaugh clarified that the question at hand was whether Congress could tax shareholders on the undistributed income of entities they part-owned, to which the Court answered affirmatively. This precedent, he noted, was well-established and reinforced by historical legislative practices. Kavanaugh emphasized that this ruling did not extend to potential future taxes on wealth or unrealized gains, which were issues left for another time.
In their lawsuit, the Moores had faced a nearly $15,000 tax bill due to their 13% ownership in an India-based company, KisanKraft Tools, which had reinvested its earnings rather than distributing them as dividends. This tax, levied as part of the Tax Cut and Jobs Act signed by former President Donald Trump, targeted U.S. taxpayers owning at least 10% of a foreign company, taxing them on earnings since 1986, and was expected to generate about $340 billion over a decade.
🔵 US SUPREME COURT WON'T UPEND TAX ON AMERICANS' FOREIGN EARNINGS
The U.S. Supreme Court on Thursday ruled against a challenge to a tax on Americans who have invested in certain foreign corporations, issuing the decision at a time when some Democratic lawmakers are seeking to… pic.twitter.com/p9xPqzYtIQ
— PiQ (@PiQSuite) June 20, 2024
The federal district court and the U.S. Court of Appeals for the 9th Circuit both sided with the government, stating that the MRT was within congressional powers granted by the 16th Amendment. The Supreme Court’s affirmation thus avoided a broader legal upheaval that could have jeopardized trillions in tax revenue by potentially invalidating other parts of the tax code, as Justice Kavanaugh pointed out.
Justice Amy Coney Barrett, concurring with the majority, agreed on the outcome but differed slightly in reasoning, suggesting that the 16th Amendment might not allow for taxing unrealized income without apportionment among the states. In contrast, Justices Clarence Thomas and Neil Gorsuch dissented, arguing that the tax on unrealized gains did not constitute a tax on income as defined by the Constitution.
Justice Thomas criticized the majority for potentially setting a precedent that could extend congressional taxing authority unduly. He lamented that the Court’s reluctance to address constitutional limitations in this case might weaken its stance in future tax-related disputes.
This ruling also highlighted the Court’s ongoing debate about the scope of congressional taxing powers, reflecting broader national discussions on fiscal policy and economic management. The decision leaves open questions about the limits of these powers, particularly concerning unrealized income and wealth, signaling potential legal battles ahead.
Major Points
- The Supreme Court upheld a mandatory repatriation tax (MRT) from the 2017 tax reform, ruling it constitutional under Article I and the 16th Amendment.
- The decision was a 7-2 vote, with Justice Brett Kavanaugh writing the majority opinion, focusing on the legality of taxing shareholders on undistributed foreign income.
- The tax targets U.S. taxpayers owning at least 10% of a foreign corporation, as experienced by Charles and Kathleen Moore, who faced a significant tax bill from their shares in an Indian company.
- Justices Clarence Thomas and Neil Gorsuch dissented, arguing that the tax on unrealized gains was unconstitutional.
- The ruling avoided broader financial implications that could have arisen from declaring the tax unconstitutional, which would have impacted other parts of the tax code and resulted in significant revenue loss.
TL Holcomb – Reprinted with permission of Whatfinger News