Recent Supreme Court Case Could Impact the Potential for “Wealth Tax”
In June 2024, the United States Supreme Court ruled on a case that could have a far-reaching effect on federal income tax law and policy going forward.
Background of Moore v. United States
As part of the Tax Cuts and Jobs Act, Congress created a Mandatory Repatriation Tax (MRT), which was a one-time, backward-looking, pass-through tax on US taxpayers on undistributed earnings in applicable Controlled Foreign Corporations (CFCs).
The petitioners, Charles and Kathleen Moore, invested in the CFC KisanKraft. From 2006-2017, KisanKraft generated net income but did not actually distribute any income to its shareholders. As of the end of 2017, the MRT was applied to KisanKraft’s undistributed earnings, resulting in a $14,729 tax bill to the Moores. The Moores paid the tax and then sued for a refund, claiming the MRT violated the Direct Tax Clause of the US Constitution because they believed the MRT was an unapportioned direct tax on their shares of KisanKraft stock.
In a 7-2 decision, the Supreme Court ultimately ruled that the MRT is constitutional and ruled against the petitioners. The Court was careful to issue a very narrow ruling that found the MRT is an income-based indirect tax, not a property-based direct tax that would need to be apportioned among the states.
In addition, the Court found that the Moores did realize income, even though no income was distributed from KisanKraft. The Court’s own long-standing precedents confirm that Congress can attribute a pass-through entity’s undistributed income to its shareholders or partners and then tax those shareholders or partners on their share of the income. The established precedent is that Congress may either tax the entity or tax its shareholders or partners – this is how passthrough entity taxes generally work. Whether or not a partner receives a distribution from a partnership, the partner will be taxed on their share of partnership income instead of the partnership itself being taxed.
Impact on global taxation and the potential for a “Wealth Tax”
Consistent with trends in other countries, there have been proposals to possibly enact net wealth or billionaire minimum tax in the United States, which would levy a one-time income tax on unrealized and undistributed income.
While the decision in the Moore case focuses solely on the MRT, there is language in the decision that we can apply to the constitutionality of any potential wealth or billionaire minimum tax. The Moore’s primary argument was that the MRT was unconstitutional since it was taxing their unearned income, raising the question of whether income would need to be recognized first before it can be taxed. The Court specifically declined to answer whether realization of income was required under the 16th Amendment to tax income in this case. The question was rendered moot by the fact that the Court ruled the income was realized. However, the Moore case does have future implications for the constitutionality of any type of tax on foreign, and possibly also domestic, unrealized income as it does hint at how the Justices would rule if a wealth tax were ever imposed.
In addition, at least four Justices indicated in the Moore case that realization was required before income could be taxed. As proposed, the wealth tax is a one-time tax on unrealized income, therefore not meeting the realization requirement hinted at by the current Supreme Court.
Conclusion
Based on the general tax policies of the incoming Trump administration and the next congress, it appears unlikely that a wealth tax would be enacted in the next four years. In addition, despite the SCOTUS decision in the Moore case, it does seem that the current Supreme Court might determine that a wealth tax is unconstitutional.
We will continue to monitor the fallout from the Moore case and provide any updates regarding any potential wealth taxes.
Please reach out to your Herbein tax advisor if you have questions regarding this article or international tax matters.
Article contributed by Sarah R. Knox
