Early this month, the Supreme Court heard opening arguments in Moore v. United States, a tax case that could rewrite over 100 years of precedent. If successful, the legal challenge would send massive ripples throughout the tax code, potentially initiating billions of dollars in IRS repayments. Read on to learn more about the arguments, how they could change the code, and the political odds of such a case.
Moore v. United States
At the heart of the case, Moore v. United States, is a challenge to the Tax Cuts and Jobs Act passed by Congress in 2017. Plaintiffs Charles and Kathleen Moore argue that certain provisions of the bill are unconstitutional and unenforceable by the IRS.
The plaintiffs are rallying against the Mandatory Repatriation Tax included in the 2017 bill. This provision applied to certain taxpayers with an ownership interest in foreign companies. The rule required taxes to be paid on some of such a company’s income, whether it was distributed to the taxpayer or not.
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The crux of the Moores’ case is that taxation on unrealized gains is not permitted by the 16th Amendment, which grants Congress the power to tax income. Over a century of tax law precedent has defined income broadly to include unrealized gains, but the plaintiffs are arguing against that interpretation. And if they can convince the Supreme Court that they’re right, the impact would be enormous.
A major change to the tax code
For the average American investor with a brokerage account, unrealized gains are already not taxed. But that isn’t the case for everyone. Over the last century, Congress has included certain provisions in the tax code to prevent certain tax avoidance strategies.
If the Supreme Court sides with the plaintiffs, the ruling could open the floodgates for taxpayers to challenge many of those provisions, which make up a substantial portion of the current tax code. Short-term effects could include changes to the way that business owners with pass-through entities and foreign businesses pay taxes. Investors could also be affected by such a ruling, which could make certain bonds attractive for tax-avoidance purposes.
Long-term effects could include a fundamental prohibition on a wealth tax, an increasingly popular proposal by Democrats. These are only some of the possible effects of such a ruling, and it can be hard to predict the changes that could come with such a major rewrite of the tax code. It is almost certain, however, that such a ruling would spark a wave of anti-tax litigation.
The plaintiff’s anti-tax argument has drawn support and criticism from leaders across the political spectrum. Democrats have largely rallied against such a major change to the tax code, which would threaten the future of a wealth tax. Republicans are more split on the issue, with some framers of the Tax Cuts and Jobs Act arguing against a major challenge to the bill, and other members of the party supporting such a change.
It is important to note that, like all Supreme Court cases, Moore v. United States has previously faced lower court rulings. Both a district court and the Ninth Circuit of Appeals ruled in favor of the United States. However, the Supreme Court’s willingness to hear the case indicates that previous rulings could be overturned, regardless of political backlash.
Moore v. United States could have a major impact on the tax code as it exists today, effectively eliminating the government’s ability to tax unrealized gains. Wide-ranging effects of such a change are hard to predict, but such a ruling would likely result in a deluge of similar suits. And although the move is politically unpopular and has been rebuffed by lower court rulings, the final ruling will fall to the Supreme Court.
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