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Supreme Court seems inclined to narrowly uphold Trump tax provision

A majority of the Supreme Court on Tuesday seemed inclined to narrowly uphold a provision of President Donald Trump’s 2017 tax package, an outcome that many experts said would avoid imperiling large swaths of the nation’s tax system.

The justices were considering whether a one-time tax on offshore earnings that helped pay for Trump’s massive tax cut is permitted under the limited powers of taxation that the Constitution grants Congress.

Justices from across the ideological spectrum seemed skeptical of the challenge that was brought by a Washington state couple, backed by an anti-regulatory advocacy group, and is widely viewed as an effort to preemptively block Congress from creating a wealth tax. Several justices emphasized Tuesday that the tax on certain offshore earnings was substantially similar to other major forms of taxation, including on income earned by business partnerships, limited liability corporations and other offshore income.

“What is the distinction?” conservative Justice Amy Coney Barrett asked the lawyer for the couple.

Liberal Justice Elena Kagan asked how the court could decide in favor of the couple without putting at risk other types of taxation worth trillions of dollars to the government.

“There’s a long century-old history of these kinds of taxes on gains from your holdings in a foreign corporation,” Kagan said. “Why is this any different, and why shouldn’t we understand that to be quite well settled, that Congress can implement those taxes?”

Even though a majority of justices appeared to think the tax is valid, several suggested during the more than two-hour argument that their reasoning was different from the arguments presented by the Biden administration. The justices seemed likely to settle on a ruling that upholds the tax but rejects the government’s broad view of the reach of Congress’s powers of taxation.

“I don’t fault the parties for shooting for the stars, but I guess the tenor of the questions is that nobody’s happy with anybody’s definition of anything,” Justice Sonia Sotomayor told Solicitor General Elizabeth B. Prelogar, who defended the tax on behalf of the government.

Prelogar said the Supreme Court has long upheld Congress’s power to tax undistributed corporate earnings and to treat those earnings as income. Invalidating the tax, she said would “cause a sea change in the operation of the tax code and cost several trillion dollars in lost tax revenue.”

Two of the court’s most conservative justices — Samuel A. Alito Jr. and Neil M. Gorsuch — expressed concern about the implications of a broad ruling in favor of the government that they suggested could remove any limits on Congress’s taxing powers.

“When the Court opens a door, Congress tends to walk through it,” Gorsuch said.

The 2017 law at issue in the case imposed a tax on certain offshore earnings that had previously been exempt from taxation unless the taxpayer brought the money back to the United States. The tax, known as Section 965, is projected to raise more than $300 billion over 10 years. Some large corporations have already paid billions under the tax, and a ruling that invalidates the provision could mean that the government has to refund tens of billions of dollars.

The law subjected Charles and Kathleen Moore to $15,000 in taxes stemming from investments they made in a company based in India that supplies equipment to small-scale farmers. The couple and their attorneys — some of whom are from the anti-regulatory group the Competitive Enterprise Institute — argue that they never earned any money from the investment.

The company generated a profit. But instead of distributing dividends, it reinvested in the business. Taxing the couple on money they never had or “realized,” the Moores and their supporters say, is a tax on property — not income — and outside the powers the Constitution gives the federal government. The Moores sued, asking for a refund.

The District Court and U.S. Court of Appeals for the 9th Circuit sided with the government and said the tax is allowed under the 16th Amendment regardless of whether the Moores took in, or “realized,” any income.

Much of the discussion on Tuesday centered on that question: whether a person must have received income, such as by selling an asset or receiving a dividend, rather than simply owning an asset that has increased in value, in order for Congress to tax the income. Many of the justices seemed to think the question did not need resolving in this particular case. They view the Moores’ gains as realized income, even if it was the company rather than the couple that realized it.

But Andrew Grossman, one of the Moore’s attorneys, said the provision is an impermissible federal tax on property. The couple was taxed “not because they had any income but because, in 2017, they happened to own shares in a corporation carrying retained earnings on its books,” he said.

Grossman portrayed the government’s view as allowing Congress to levy taxes on holdings that the federal government should not be able to tax under the Constitution. “The government’s position would make a hash of existing law and cause enormous confusion with respect to how our tax system functions.”

By far the toughest questions for the government came from Alito, who had dismissed calls from Democratic lawmakers to recuse from the case because of his ties to David B. Rivkin, a member of Moore’s legal team. Rivkin twice interviewed Alito for articles that appeared on the Wall Street Journal editorial page in which the justice defended the court’s ethical practices. Alito said he and Rivkin did not discuss the Moore lawsuit and disclosed the lawyer’s involvement in the case in the second article.

Alito seemed troubled by the 9th Circuit’s holding that realization is not required for Congress to tax income under the 16th Amendment. He and Gorsuch pressed Prelogar about the limits of the government’s argument.

Could Congress tax millions of Americans with small amounts of stock in retirement accounts or holdings in mutual funds? What about the appreciation of property?

Prelogar said she would likely defend Congress’s taxing power in those areas but later referred to such hypotheticals as far-fetched.

Kagan, a former solicitor general, drew laughter from the courtroom when she noted that by defending such hypothetical taxes — which the justice said “we’ll probably never see in our lifetimes” — Prelogar was just doing her job as the government’s chief advocate at the Supreme Court.

At one point, Justice Brett M. Kavanaugh seemed to offer the Justice Department a lifeline, suggesting that the court did not have to embrace Prelogar’s view in order for the government to prevail and the tax to stand.

“Leaving open whether realization is a constitutional requirement, there was realized income here to the entity and then it’s attributed to the shareholders in a manner consistent with how Congress has done that and this Court has allowed,” he said.

The “mandatory repatriation tax” is backed by an unusual political coalition, including the Biden administration and conservatives such as former House speaker Paul D. Ryan. They worry that a ruling against the obscure provision could put at risk other existing taxes on investments, partnerships and foreign income, which raise billions or even trillions of revenue.

The Moores were not taxed on unrealized gains, some supporters of the provision say, but required to pay what other Americans routinely do, including taxes on profits earned by a business partnership even if there are no dividends or other payments made to owners in particular year.

None of the justices on Tuesday asked questions about the Moores’ personal story. Tax experts say the Moores were more involved in the company, KisanKraft, than they disclosed in court filings, and an outside group sent a letter to the court last month informing the justices that the “factual background presented to you is not remotely accurate.” One of the couple’s lawyers defended the record as candid and accurate.

The case is Moore v. U.S.

This post appeared first on The Washington Post

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