A $14,729 tax bill is at the root of a U.S. Supreme Court Case that poses a question of whether income must be realized to be taxed.
On December 5, 2023, the U.S. Supreme Court heard the case Charles G. Moore v United States. Charles and Kathleen Moore invested $40,000, or a 13 percent stake, in KrisanKraft, an Indian enterprise that gives assistance to small farmers in India.
The Tax Cuts and Jobs Act enacted during the Trump presidency changed the way some items, like expenses, depreciation, and tax credits were handled by businesses. As per the Internal Revenue Service (IRS), the measure created a “transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated.” According to a SCOTUS blog post devoted to this case, the “tax applies regardless of whether the earnings were distributed to shareholders or whether the shareholders owned the shares when the corporation made the earnings on which they are being taxed.”
That transition tax is at issue in the Moore v U.S. case, where tax counsel for the Moore’s argues that they should be taxed only on actual dividends, not potential unrealized gains. Further, plaintiff argues that the tax is unconstitutional and violates the Sixteenth Amendment. At the federal level, taxes on unrealized income currently exist on partnerships and other arrangements. Should SCOTUS eliminate taxes on unrealized income, it could leave wage workers footing the tax bill, instead of wealthy taxpayers with more elusive unrealized income.
During oral argument, counsel for the Moores argued that a “gain is not income unless and until it has been realized by the taxpayer.” The U.S. Solicitor General countered the argument by explaining the 16th Amendment and reminded the Court they could make a narrow ruling that the tax rightly targets foreign income realized and attributed to shareholders in the U.S.
Looming large in the arguments were the politics of the matter and concern on the conservative side that a ruling for the government could result in tax overreach. Justices Thomas and Gorsuch wondered whether taxes would increase on real estate valuations or retirement accounts.
Ultimately, the SCOTUS blog author suggests a narrow ruling might occur on behalf of the government without addressing the larger issues potentially triggered by the case. We’ll see.
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