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Supreme Court airs caution on limiting congressional tax power

In challenge to a 2017 provision, justices focus on how their decision could reshape tax code

The Supreme Court in 2022.
The Supreme Court in 2022. (Tom Williams/CQ Roll Call)

Most of the Supreme Court expressed skepticism Tuesday about a challenge to the constitutionality of a 2017 tax provision that could have far-reaching effects on the U.S. tax code.

The justices focused on those potential consequences through much of the two-hour oral arguments in the case, in which Charles and Kathleen Moore challenge a roughly $15,000 tax bill tied to their shares in a company in India.

The case turns on how the court handles the definition of “income” under the 16th Amendment to the Constitution, passed in response to an 1890s decision by the Supreme Court invalidating the first income taxes. The justices will decide the case before the conclusion of their term at the end of June.

Several members of the court raised the possibility of issuing a decision that would uphold the 2017 law in the case and avoid answering broader questions about the constitutionality of income taxes, since that could help tax dodgers.

The 2017 tax law included a mandatory “repatriation” tax provision meant to initiate a one-time tax on earnings held in overseas corporations.

Andrew Grossman, the attorney for the Moores, argued that the 2017 tax law effectively taxed the couple on the value of their shares in the Indian company even though none of the earnings had been distributed to them.

The couple has a minority stake in the business, which supplies farmers in impoverished regions in India, the couple’s court papers said. The Moores say they have not realized any income because the company has invested revenue back into the business.

Allowing a tax under those circumstances would “open the door to taxation of practically everything,” Grossman said.

Justice Sonia Sotomayor and others pointed out that other portions of the tax code, already upheld by the court, can tax corporate shareholders based on a corporation’s earnings.

Sotomayor said Grossman was effectively asking the court “to just announce what realization is out of context.” Sotomayor said later “we recognize it is dangerous to do that,” because it may encourage tax avoidance.

Justice Amy Coney Barrett similarly said there was a “real danger” in restricting what Congress can tax under the 16th Amendment because taxpayers may seize on that to try and dodge their tax liability.

Government argument

Solicitor General Elizabeth Prelogar, representing the Biden administration, argued that overturning the law could put at risk tax laws meant to capture what wealthy taxpayers earn and discourage tax cheats.

Prelogar said that tossing the tax, which is projected to generate about $340 billion, was just one part of the stakes in the case.

She argued Tuesday that siding with the Moores would be a “sea change” in the court’s approach to taxes, jeopardizing trillions of dollars in federal revenue and incentivize the wealthy to dodge their taxes.

Prelogar argued that the court should have “no bright line rule” about what constitutes income that qualifies for an income tax under the 16th Amendment.

Justices Samuel A. Alito Jr., and Neil M. Gorsuch pressed Prelogar about whether a decision that sides with the government would open the door to more taxation methods.

Gorsuch said siding with the Biden administration’s approach to the 16th Amendment may depart with decades of the court’s precedent and end up endorsing a broader range of taxes on assets such as stocks.

“Would you agree, general, that when the Court opens a door, Congress tends to walk through it?” Gorsuch asked.

Prelogar responded that Congress has taxed shareholders based on corporate earnings for decades. Provisions such as “mark-to-market” taxes, as well as those on life insurance, certain futures contracts and the like, were passed by Congress in response to specific efforts to dodge tax liability.

Justice Brett M. Kavanaugh pointed out that “we don’t have to agree” with the Biden administration’s broad definition of income to uphold the tax in this case.

And Kavanaugh said that many of the hypothetical taxes proposed by Gorsuch and Alito were unlikely to pass Congress.

“On the proverbial ‘open door’ for Congress, Congress members want to get reelected,” Kavanaugh said, which caused laughter in the courtroom.

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