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A Supreme Court majority on Tuesday seemed inclined to narrowly uphold a provision of President Donald Trump’s 2017 tax package, an outcome that many experts said could put large parts of the nation’s tax system at risk. Will be saved.
The justices were considering whether the one-time tax on foreign income, which helped pay for Trump’s massive tax cuts, is allowed under the limited powers of taxation that the Constitution gives Congress.
Judges of all persuasions seemed skeptical of the challenge The bill was brought by a Washington state couple, backed by an anti-regulatory advocacy group, and is widely seen as an effort to stop Congress from creating a wealth tax. Several judges stressed Tuesday that the tax on certain foreign income was largely the same as other major forms of taxation, including income earned from business partnerships, limited liability corporations and other offshore income.
“What is the difference?” conservative Justice Amy Coney Barrett asked the couple’s attorney.
Liberal Justice Elena Kagan asked how the court could rule in favor of the couple without risking trillions of dollars in other types of taxation to the government.
“These types of taxes on profits from your stake in a foreign corporation have a century-long history,” Kagan said. “Why is it any different, and why should we not understand that it is well settled that Congress can impose those taxes?”
Although most of the justices agreed that the tax was lawful, during more than two hours of debate several justices suggested that their reasoning differed from those arguments. Introduced by the Biden administration. It seemed likely that the justices would settle for a ruling that upheld the tax but rejected the government’s broader view of the reach of Congress’s powers of taxation.
Justice Sonia Sotomayor told Solicitor General Elizabeth B. Preloger, “I don’t blame the parties for shooting the stars, but I think the gist of the questions is that no one is happy with the definition of anything.” Of the Government.
Preloger said the Supreme Court has long upheld Congress’s power to tax undistributed corporate earnings and to treat those earnings as income. Revalidating the tax, he said, “would lead to a major change in the operation of the tax code and result in a loss of several trillion dollars in tax revenue.”
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The court’s two most conservative justices – Samuel A. Alito Jr. and Neil M. Gorsuch – expressed concern about the implications of a sweeping ruling in favor of the government, suggesting that any limits on Congress’ taxing powers could be removed.
“When the Court opens a door, Congress walks in,” Gorsuch said.
The case involved a 2017 law taxing certain offshore income that was previously exempt from taxation until 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 of dollars under the tax, and a ruling invalidating the provision could mean the government would have to return tens of billions of dollars.
Under this law, Charles and Kathleen Moore will have to pay taxes on $15,000 on an investment they made in an India-based company that supplies equipment to small-scale farmers. The couple and their lawyers – some of whom are from the anti-regulation group Competitive Enterprise Institute – argue that they never made any money from the investment.
The company made profit. But instead of distributing the dividends, he reinvested them in the business. The Moores and their supporters say that taxing the money the couple had or “realized” is a tax on wealth – not income – and outside the powers the Constitution gives the federal government. The Moores filed a lawsuit demanding a refund.
The District Court for the 9th Circuit and the U.S. Court of Appeals sided with the government, holding that the tax was permitted under the 16th Amendment regardless of whether the Moores took or “received” any income.
Much of the discussion Tuesday focused on this question: Should a person receive income, such as by selling an asset or receiving a dividend, rather than simply owning the asset whose value has increased, so that Congress can tax the income? Could put. , Many judges believed that this question did not need to be resolved in this particular case. They View the Moores’ profit as income received, even if it was the company rather than the couple who received it.
But one of Moore’s attorneys, Andrew Grossman, said the provision is an unacceptable federal tax on wealth. “The couple was taxed not because they had any income, but because, in 2017, they owned shares in a corporation whose income was retained,” he said.
Grossman characterized the government’s approach as allowing Congress to tax assets that the federal government should not be able to tax under the Constitution. ,“The Government’s position would render existing law useless and cause massive confusion about how our tax system works.”
By far the toughest questions for the government came from Alito, who asked Moore’s legal team member David B. Rivkin rejected calls from Democratic lawmakers to withdraw from the case because of his ties to Rivkin. Rivkin interviewed Alito twice for articles that appeared on the editorial page of the Wall Street Journal, in which the judge 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 another article.
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Alito seemed troubled by the 9th Circuit’s holding that Congress is not required to tax income under the 16th Amendment. He and Gorsuch pressed Preloger about the limitations of the government’s argument.
Could Congress tax the millions of Americans who hold small amounts of stocks or mutual fund holdings in retirement accounts? What about property appreciation?
Preloger said she would probably defend Congress’s taxing power in those areas but later dismissed such speculation as far-fetched.
Former Solicitor General Kagan drew laughter in the courtroom when she said that by defending such hypothetical taxes – Which the justice said, “we will probably never see in our lifetime” – Preloger was doing his job as the government’s chief counsel in the Supreme Court.
At one point, Justice Brett M. Kavanaugh offered the Justice Department a lifeline, suggesting that the court need not adopt Prelogger’s approach to overpowering the government and upholding the tax.
He said, “Leaving open the question of whether realization is a constitutional requirement, here the entity realized income and then attributed it to shareholders, as Congress has done and this Court has allowed.”
The “Mandatory Repatriation Tax” is backed by an unusual political coalition, including the Biden administration and conservatives like former House Speaker Paul D. Ryan. They worry that a ruling against the vague provision could jeopardize other existing taxes on investments, partnerships and foreign income, which raise billions or trillions in revenue.
Some supporters of the provision say that the Moores were not taxed on unrealized profits, but they had to pay what other Americans routinely do, including taxes on profits earned from business partnerships, even if special. No dividends or other payments have been made to the owners during the year. ,
Neither judge asked questions about Moores on Tuesday Personal story. Tax experts say the Moores were much more involved in the company, Farmerscraft, than they disclosed in court filings, and an outside group sent a letter to the court last month informing the judges that “the factual background presented before you Not even remotely accurate.” One of the couple’s lawyers described the record as clear and accurate.
the matter is this Moore v. U.S.