A $15,000 tax could undo parts of the tax code in upcoming Supreme Court case

The Supreme Court early next month will hear a case that could undo part of the 2017 tax reform law enacted by Republicans and former President Donald Trump — all over a Washington state couple’s $15,000 tax bill.

Charles and Kathleen Moore’s case centers on unrealized profits from investments in a foreign company. In 2006, they invested in a friend’s business, KisanKraft Machine Tools Private Ltd., which serves rural farmers in India.

The Moores put up $40,000 for a 13% share in the foreign company, and say they never realized any profits because the money was always reinvested into the company to help it grow.

In 2018, they were told they owed money to the federal government as part of the Mandatory Repatriation Tax, which is part of the Tax Cuts and Jobs Act of 2017. They were taxed on a proportion of their ownership dating back to 2006, rendering a tax bill of $14,729.

They say the bill runs afoul of the 16th Amendment because it is a tax on income they never received from their investment, according to their court filing. The 16th Amendment allows Congress to assess an income tax without regard to a census.

The 9th U.S. Circuit Court of Appeals ruled against them, reasoning that income doesn’t have to actually be realized for it to be taxed under the Constitution and that shareholders can be taxed on their portion of a corporation’s profits, not only on the individual’s direct income.

“The decision below sweeps away the essential restraint on Congress’s taxing power, opening the door to unapportioned taxes on property (as in this case) and anything else Congress might deem to be ‘income,’” the Moores’ legal filing reads.

The federal government argues that the 16th Amendment gives Congress the power to collect taxes from income “from whatever source derived.”

“Nothing in the Amendment’s text refers to the concept of realized gains,” the federal government’s brief reads.

The central question the justices will have to grapple with is what constitutes income.

Experts say the justices could undo what’s referred to as a wealth tax. The Mandatory Reparation Tax was intended to apply to shareholders who have 10% or greater share in a corporation as a one-time tax. It was expected to generate roughly $340 billion in revenue, according to The Associated Press.

The Moores own 13% of their friend’s foreign company.

“I would be surprised if 1% of individual taxpayers are in this position,” said Duke University law professor Lawrence Zelenak. “Most of the taxpayers who are subject to this tax … are not individuals at all, they are corporations.”

“This case, where it involves married couple individual shareholders … is very atypical of the application of this tax,” he added.

In hearing the Moores’ case, the high court will take a look at a 1920 case, Eisner v. Macomber, in which justices ruled that it is unconstitutional to tax unrealized gains. That case has never been overruled, but it has not been applied over the years as tax laws have evolved.

Adam Chodorow, a law professor at Arizona State University, said if the Moores in — citing the Eisner case — it could implicate other parts of the tax code because taxes wouldn’t be due until income was actually realized. He said the partnership tax and some limited liability companies could be implicated.

“The initial effect would be corporations and the international setting, but it would expand way beyond that,” Mr. Chodorow said. “It could undo huge swaths of the tax code.”

American University law professor Caroline Bruckner said the potential effect of a ruling for the Moores is why tax experts are paying close attention to their case and how the justices reason their decision when they issue an opinion.

“If the U.S. Supreme Court rules in favor of the Moores and finds that the tax unconstitutional, there is a great deal of concern among tax experts and practitioners that other taxpayers will challenge settled law on how the U.S. taxes international investments,” Ms. Bruckner said.

A decision in Moore v. United States is expected by the end of June.