For months, the kinds of people who anxiously await Supreme Court decisions on technical tax issues have anxiously awaited a Supreme Court decision on a technical tax issue. But while such behavior can sometimes be chalked up to how us D.C. tax policy wonks like to spend our time, this time it was very much justified — depending on the direction it decided to take, the Supreme Court could have done anything from undermining vast swathes of the tax code to giving Congress the go-ahead to levy a wealth tax.
There is danger every time a group of lawyers with no tax policy background are left to tackle complex tax issues, but Moore v. United States represented a unique opportunity to create broad-based chaos. Given that danger, it’s for the best that after being bombarded by amicus briefs warning of the dangers of a broad decision, the Supreme Court elected to make a molehill out of this particular mountain.
While the 2017 Tax Cuts and Jobs Act (TCJA) is best remembered for individual and corporate tax cuts, it also included a significant overhaul of how the tax code treats the foreign income of American resident individuals and corporations, all intended to bring corporations and jobs back to the country. The main thrust of this effort took the form of a carrot, reforming the tax code to make America more internationally competitive. But the TCJA also included a one-time “deemed repatriation” of foreign assets, subjecting American residents like the Moores who held shares of certain types of foreign corporations to a tax obligation.
The Moores claimed that this represented an unconstitutional tax on “unrealized income.” Unrealized income differs from realized income in that it only takes place on paper. In other words, if a taxpayer’s car appreciates in value, that is income, but not realized income. The income only becomes “realized,” and therefore taxable, when the taxpayer sells the car for a gain and turns the theoretical value increase into cold, hard cash.
The tie-in with an increasingly contentious tax issue allowed the case over this highly technical provision to gain a far broader significance. The notoriously progressive Ninth Circuit court dismissed the Moores’ argument, claiming there was no constitutional requirement for income to be realized before it could be taxed.
But this focus on realization was somewhat misplaced. Certain types of businesses, known as pass-throughs, do not pay tax, but rather pass the income through to owners or shareholders who report the income on their individual income tax returns. The income in question was pass-through income that was only untaxed to this point because of what are known as Subpart F rules, which essentially allowed taxpayers to defer tax until they repatriated it to the United States. Under the TCJA, this deferred income, which would previously have been subject to a far higher tax rate, instead faced a far lower, one-time rate of between 8 and 15.5 percent.
That’s a lot of technical information, but suffice it to say that what was really at issue was whether Congress could end the temporary deferral program it had heretofore provided and instead subject the income to an immediate tax at a far lower rate. The danger was that the Court would blindly stumble into a situation where it accidentally overturned various corporate income tax provisions, taxation of partnerships, Roth IRAs, and so on. On the other hand, a lack of clarity could have allowed the Ninth Circuit’s blessing of a wealth tax to stand.
In the end, the Court ruled narrowly against the Moores, electing not to dive into the question of realization and clarifying that its ruling should not be construed as supportive of a wealth tax. While an ideal ruling would have explicitly expressed that wealth taxes are unconstitutional while also avoiding the above pitfalls, the number of bullets dodged makes up for this missed opportunity.
On the other hand, efforts by the usual suspects such as Senator Elizabeth Warren (D-MA) to argue that this constitutes a win for wealth tax advocates are wide of the mark. The Court did not explicitly strike down wealth taxes, but it also went out of its way to clarify that it was not blessing them by ruling in favor of the government. Likewise, only one justice, Justice Ketanji Brown Jackson, argued in favor of the constitutionality of all taxes in her concurrence.
For a tax case receiving as much attention as this one did, Moore may not have had the most exciting result. But sometimes it’s best when taxes remain boring.
