To the dismay of those with foreign business holdings, the Supreme Court of the United States (SCOTUS) upheld a transition tax on the unrealized profits of foreign business entities owned by American taxpayers.
During the Trump presidency, passage of the Tax Cuts and Jobs Act created a one-time tax on “untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated.” This means that Americans who invest in offshore companies must pay a singular tax on their share of profits they have not received. The thinking goes that the tax offsets other tax benefits gained through the investment.
In the case, Charles G. Moore v United States, Kathleen and Charles Moore protested their $14,729 tax bill based on their 13 percent stake in an Indian enterprise. The Moore’s argued they should only be taxed on dividends earned, not on unrealized profit from assets owned. This last thought launched a larger conversation about high-wealth taxpayers that the tax could be equated with a wealth tax. The Moore’s are supported by the Competitive Enterprise Institute, a libertarian think-tank aimed at reducing regulation and limiting government.
While it was a potentially surprising decision from SCOTUS, Justice Kavanagh, writing for the majority opined, “…those tax provisions, if suddenly eliminated, would deprive the U. S. Government and the American people of trillions in lost tax revenue. The logical implications of the Moores’ theory would therefore require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it—including, of course, on ordinary Americans. The Constitution does not require that fiscal calamity.”
Justice Kavanagh also noted, “we emphasize that our holding today is narrow.” The narrow ruling could leave the door open for other parties challenging tax laws and to those interested in limiting the ability of Congress to impose taxes.
While the Moore’s initial investment was approximately $40,000, and the sum of the one-time tax is approximately $15,000, their original investment has grown to approximately $500,000. Despite the enforcement of the transition tax, the largess enjoyed by the Moore’s is significant.
No doubt future cases will reapproach. Critics of the case cited insufficient records provided by the Moores and suggest the Moores have more involvement in the offshore company than they have disclosed. Another case may challenge with stronger facts. With the narrow ruling in this case, SCOTUS may be favorably disposed to wider findings that serve to protect the interests of wealth going forward.
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