WASHINGTON (CN) — The Supreme Court signaled little interest in deciding the future of a wealth tax on Tuesday as the justices looked toward a narrow ruling — one that would uphold a Trump-era tax law without wading into the constitutionality of taxes on unrealized earnings.
U.S. Solicitor General Elizabeth Prelogar urged the justices to issue such a ruling to uphold the 2017 tax and avoid a sea change in the country’s tax code. There looked to be agreement on the bench for that outcome; however, the broader implications of the case split the high court, as some justices seemed to worry about the future constitutionality of a wealth tax.
“Leaving open whether realization is a constitutional requirement, there was realized income here to the entity, and then it's attributed to the shareholders in a manner consistent with how Congress has done that in and this court has allowed,” Justice Brett Kavanaugh said during oral arguments.
Much of the two-hour session was consumed by debate over court precedent, which stretches back over 100 years. Justice Sonia Sotomayor said the court had resisted defining taxable income for a century and shouldn't do so now.
“You're asking us to just announce what realization is out of context,” Justice Sonia Sotomayor said in response to arguments urging the court to overturn the 2017 law for taxing unrealized income. “And for the last hundred years, we've been studiously avoiding doing that because we recognize that it's dangerous to do that.”
At the center of the debate was the 1920 ruling Eisner v. Macomber. According to the Washington couple that brought the case before the court Tuesday, the case defined taxable income as a gain or profit a century ago.
“Appreciation in the value of a home, a stock investment, or other property is not and never has been taxed as income,” Andrew Grossman, an attorney with Baker & Hostetler representing the couple, said. “The reason is that a gain is not income unless and until it has been realized by the taxpayer. The court squarely held as much in Eisner v. Macomber just a few years following the adoption of the amendment, and the court's decisions have held that line for a century.”
Charles and Kathleen Moore are challenging a provision within the Tax Cuts and Jobs Act that placed a one-time mandatory tax on previously untaxed earnings by foreign corporations that were not distributed.
The Moores owned shares in an Indian tool supply company, KisanKraft Machine Tools Private Limited. The Moores claim they have yet to receive a penny back from their initial investment in the company because KisanKraft has reinvested its earnings since 1986. However, under the 2017 law, the Moores would be responsible for their slice of KisanKraft’s earnings in the form of a $15,000 tax bill.
After paying their taxes, the Moores sued the government, claiming it had unconstitutionally taxed the couple’s unrealized gains. A federal judge dismissed the case and the Ninth Circuit affirmed, however, the Supreme Court revived the issue when it agreed to hear the case.
The couple’s arguments were met with skepticism from the high court. Justice Elena Kagan noted that similar taxes have been upheld by the court.
“There's a long century-old history of these kinds of taxes on gains from your holdings in a foreign corporation,” the Barack Obama appointee said. “Why is this any different and why shouldn't we understand that to be quite well settled, that Congress can implement those taxes and enforce those taxes for those purposes?”
Although the Moores attempted to distinguish the 2017 tax, the justices seemed unconvinced that a ruling in the couple’s favor wouldn’t alter other areas of the tax code.
“Does your theory put at risk limited liability companies, closely held corporations, limited partnership corporations,” Sotomayor asked. “I mean, there's all sorts of corporate forms that your definition, I think, would affect the government's ability to tax those individual partners, no? Those individual shareholders.”
The government urged the justices not to side with the couple — an outcome she described as extending Macomber.
“The court has limited Macomber to taxes on particular stock dividends that are not at issue here,” Prelogar said. “If the court now extended Macomber's discussion to invalidate all taxes on undistributed business earnings, it would cause a sea change in the operation of the tax code and cost several trillions of dollars in lost tax revenue.”
Chief Justice John Roberts described the government’s arguments as an attack on Macomber.
“You've buried Macomber, I mean, and that takes away a lot of the strong support for a pretty basic proposition that the government can't tax as income to the property owner the appreciation in value of the property,” Roberts said. “So, what is left to defend that proposition without Macomber?”
Prelogar argued that it was actually the court’s subsequent ruling that limited Macomber.
The government said there were dangers in trying to define income, as Macomber attempted, because taxpayers will latch onto the court’s language to try and avoid paying taxes. Roberts suggested that may be the lesson of Macomber’s demise.
Justice Samuel Alito stood out in his opposition to the government’s arguments. Alito faced calls to recuse himself from the case after sitting for an interview with an attorney involved in the Moores’ defense. The George W. Bush appointee seemed to think the consequences of the Moores had unfairly overshadowed the implications of the government’s arguments.
“It has resonated a lot in the coverage of this case is that the adoption of the petitioners' arguments would have far-reaching consequences … So do you think it is fair then to explore what the consequences of your argument would be?” Alito asked the government.
Alito’s questions hinted at a goal of some progressive lawmakers: the wealth tax. Senator Elizabeth Warren advocated for a tax on the country’s most wealthy individuals during her 2020 presidential election campaign. Warren’s proposal would place a 2% tax on Americans worth over $50 million.
The judge said the government's argument "allows the taxation of income, and you define income as an increase in economic gain between two points in time.”
“So let's say that somebody graduates from school and starts up a little business in his garage, and years later, 30 years later, the person is a billionaire. Under your argument, can Congress tax all of that, on the ground that it's income?”
Justice Neil Gorsuch expressed similar concerns, noting the justices' ruling in the case will likely be analyzed by lawmakers.
“When the court opens a door, Congress tends to walk through it,” Gorsuch said.
The court’s majority seemed unlikely to issue a bright line ruling on the constitutionality of a wealth tax, but individual justices could choose to write separate opinions opining on the issue, signaling to Congress how they might rule should the issue come before the high court in the future.
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