The Supreme Court on Thursday ruled against a couple who sought to undo part of the 2017 tax reforms signed into law by former President Donald Trump.
At issue was a roughly $15,000 tax bill that Charles and Kathleen Moore said they were fined over unrealized profits from an investment in a foreign company. They argued they never received profits from their investment so they should not have been taxed.
But the high court disagreed in a 7-2 ruling. Justice Brett M. Kavanaugh, writing for the majority, said the court’s precedents suggest this type of taxing scheme is lawful.
“Consistent with this Court’s case law, Congress has long taxed the shareholders and partners of business entities on the entities’ undistributed income. That longstanding congressional practice reflects and reinforces this Court’s precedents upholding those kinds of taxes,” Justice Kavanaugh wrote.
The case centered on part of the 2017 reforms enacted by Congress and Mr. Trump under the Tax Cuts and Jobs Act.
The law was intended to encourage Americans who had controlling interests in foreign corporations to invest earnings back in the U.S. In the past, foreign corporations that were American-controlled could accumulate “trillions of dollars in income abroad” that was untaxed in America, Justice Kavanaugh wrote.
The law also imposed a Mandatory Repatriation Tax on unrealized income of shareholders, but it was derived from profit of the foreign corporation.
The MRT was what the Moores took issue with in their case before the high court.
In 2006, the Moores 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 company. They said they never realized any profits because the money was always reinvested to help the company grow.
But in 2018, they were told they owed money to the federal government as part of the Mandatory Repatriation Tax. They were taxed on a proportion of their ownership dating to 2006, producing a tax bill of $14,729.
They said the bill runs afoul of the 16th Amendment, which allows Congress to tax personal income, pointing out that they never received the profits from their investment and thus it was not “income.”
A ruling for the Moores could have undone the Mandatory Repatriation Tax.
The 9th U.S. Circuit Court of Appeals ruled against the Moores, reasoning that income doesn’t have to be realized in order 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 Mandatory Reparation Tax was intended to apply to investors with a 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.
Justice Clarence Thomas wrote a dissent, joined by Justice Neil M. Gorsuch. He argued that the Moores had to pay a tax on an investment that “never yielded them a penny.” His dissent said this ran afoul of the 16th Amendment.
“Because the Moores never actually received any of their investment gains, those unrealized gains could not be taxed as ’income’ under the Sixteenth Amendment,” Justice Thomas wrote.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
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