Paul L. Caron

Saturday, October 7, 2023

Sarin: The Supreme Court Tax Case That Could Blow A Hole In The Federal Budget

Washington Post Op-Ed:  The Supreme Court Tax Case That Could Blow a Hole in the Federal Budget, by Natasha Sarin (Yale; Google Scholar):

This summer, the high court agreed to hear Moore v. United States, a case that opens up the possibility that large swaths of the tax code, particularly as applied to trillions of dollars in business and investment income disproportionately earned by the wealthy, could be deemed unconstitutional. At a time of large and growing deficits and significant inequality in the United States, that seems … bad. ...

In 2006, Charles and Kathleen Moore invested in KisanKraft, a foreign corporation dealing in farm equipment. The company is headquartered in India but is more than 90 percent owned by U.S. shareholders, and for years it turned a profit. But before the 2017 Tax Cuts and Jobs Act, the Moores and U.S. taxpayers like them could indefinitely defer paying taxes on such foreign earnings unless and until they were brought back into the United States. This became a useful tool for tax-dodging: By 2017, large corporations — including Apple, Microsoft and Google — had more than $2 trillion stashed at foreign affiliates that had never been taxed.

The Tax Cuts and Jobs Act — a.k.a., the Trump tax cuts — included expensive, broad-based tax reductions for individuals and corporations. To pay for at least some of those cuts, the law also changed the tax liability on the Moores and other similarly situated taxpayers, imposing on them a one-time transition tax on the income that their foreign ownership stakes had racked up over the years. The congressional Joint Committee on Taxation estimated that this tax would raise $339 billion over a decade.

The Moores contested their tax bill, which totaled nearly $15,000, and now the case has reached the high court. In short, the couple argues that the 16th Amendment’s apportionment exemption doesn’t apply to them because they never “realized” any income from their foreign ownership stake, for example in the form of dividends. ...

[T]his is a bonkers argument for the Moores to be making, because in this case, income was realized. The corporation the Moores owned an interest in (they were the second-largest shareholder) earned profits!

Taxing the Moores on their ownership stake is akin to what happens all over the tax code: For example, S-corporations, general and limited partnerships, and limited liability companies don’t pay any tax at the entity level on the income that they earn, but “pass through” profits or losses to individual partners (hence the name) who then pay taxes. ...

The consequences are huge: The right-leaning Tax Foundation estimates that an extreme outcome would cost the federal government nearly $6 trillion over 10 years. That’s why former speaker Paul D. Ryan (who drafted the legislation) recently called the case a “misfire” with the potential to upend the entire tax code. ...

A bad ruling in this case would make needed reforms harder, casting the tax code in a shroud of uncertainty. The only winners? Tax advisers and lawyers bringing these cases.

Prior TaxProf Blog coverage:

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