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Supreme Court hears tax case on ‘income’: It could ‘have the most important fiscal policy effects of any court decision,’ expert says

People exit the Supreme Court constructing in Washington, D.C. on Tuesday, June 27, 2023.

Minh Connors | The Washington Post | Getty Images

The Supreme Court is ready to listen to oral arguments Tuesday on a case that might affect broad swaths of the U.S. tax code and federal revenue.

The closely watched case, Moore v. United States, involves a Washington couple, Charles and Kathleen Moore. They own a controlling interest in a profitable foreign company affected by a tax enacted via former President Donald Trump’s 2017 tax overhaul.

The Moores are fighting a levy on company earnings that weren’t distributed to them — which challenges the definition of income — and will have sweeping effects on the U.S. tax code, in line with experts.

“This could have the most important fiscal policy effects of any court decision in the trendy era,” said Matt Gardner, a senior fellow on the Institute on Taxation and Economic Policy, who co-authored a report on the case.

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The case challenges a levy, referred to as “deemed repatriation,” enacted via the 2017 Tax Cuts and Jobs Act. Designed as a transition tax, the laws required a one-time levy on earnings and profits gathered in foreign entities after 1986.

While the sixteenth Amendment outlines the legal definition of income, the Moore case questions whether individuals must “realize” or receive profits before incurring taxes. It’s a difficulty that has been raised during past federal “billionaire tax” debates and will affect future proposals, including wealth taxes.

Former House Speaker Paul Ryan, who helped draft the Tax Cuts and Jobs Act, said at a Brookings Institution event in September that the goal was to “finance a conversion from one system to a different, and it wasn’t to justify a wealth tax.”

Ryan, who doesn’t support a wealth tax, said using the Moores’ argument to dam one would require eliminating “a 3rd of the tax code.”

Pass-through businesses may very well be affected

Depending on how the court decides this case, there may very well be either small ripples or a serious effect on the tax code, in line with Daniel Bunn, president and CEO of the Tax Foundation, who has written concerning the topic.

If the court decides the Moores incurred a tax on unrealized income and says the levy is unconstitutional, it could affect the longer term taxation of so-called pass-through entities, similar to partnerships, limited liability corporations and S corporations, he said. 

“You’ve got to listen to the best way the principles are going to affect your online business, especially in case you’re doing things in a cross-border context,” Bunn said.

There’s also the potential for a “substantial impact” on federal revenue, which could influence future tax policy, Bunn said. If deemed repatriation were fully struck down for corporate and noncorporate taxpayers, the Tax Foundation estimates federal revenue could be reduced by $346 billion over the subsequent decade.

However, with a call not expected until 2024, it’s difficult to predict how the Supreme Court may rule on this case. “There’s loads of uncertainty concerning the scope of this thing,” Gardner added.

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