Justices uphold Trump tax on overseas investments in win for Biden

By John Fritze and Tami Luhby, CNN

(CNN) — The Supreme Court on Thursday upheld a Trump-era tax on overseas investments, rejecting an argument from a Washington state couple in a case that could have jeopardized existing tax provisions and torpedoed Democratic talk of a wealth tax.

A 7-2 majority upheld the tax, though several justices offered differing rationales.

In reading his opinion from the bench, Justice Brett Kavanaugh repeatedly stressed that the court’s decision was “narrow” and did not implicate the raging debate over a wealth tax.

At issue in the closely watched tax case was whether the government could levy a tax on investment proceeds that had not yet been received. Charles and Kathleen Moore, a Washington state couple, challenged a $15,000 tax bill they received because of their investment in an India-based company. The profit at issue, the Moores claimed, were reinvested and never distributed to them.

The tax involved was enacted by Congress in 2017 as part of a larger package signed by then-President Donald Trump. The one-time mandatory repatriation tax was levied on shareholders on undistributed profits accrued between 1986 and the end of 2017 by certain foreign corporations that are majority owned by Americans. The provision was expected to raise $340 billion over a decade.

“The Supreme Court heeded the warnings of a broad and bipartisan set of tax experts and roundly rejected the Moores’ radical theory that threatened to upend central pillars of the tax system,” said Chye-Ching Huang, executive director of the Tax Law Center at NYU Law.

The court, Huang said, “exercised restraint by deciding only what it had to: that Congress could tax the Moores on their share of income realized at the corporate level.”

Looming debate over wealth tax

Some conservative groups warned that a win for the government could open the door to a federal tax on wealth, which President Joe Biden and several congressional Democrats have eyed in recent years. But during oral arguments in December, both conservative and liberal justices appeared to be looking for a narrow outcome that wouldn’t undermine current taxes or dip into the debate over a wealth tax.

And Kavanaugh on Thursday repeatedly noted the ruling shouldn’t impact the debate.

“Those are potential issues for another day, and we do not address or resolve any of those issues here,” Kavanaugh wrote in Thursday’s opinion. “This court has long upheld taxes of that kind, and we do the same today with the MRT.”

Any other outcome, Kavanaugh wrote, could have led to challenges of other federal taxes.

“The upshot is that the Moores’ argument, taken to its logical conclusion, could render vast swaths of the Internal Revenue Code unconstitutional,” Kavanaugh wrote. “And those tax provisions, if suddenly eliminated, would deprive the U. S. Government and the American people of trillions in lost tax revenue.”

Kavanaugh’s opinion was joined by Chief Justice John Roberts as well as Justices Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson. Justices Amy Coney Barrett and Samuel Alito concurred with the court’s bottom-line conclusion but for different reasons. Justices Clarence Thomas penned a dissent, joined by Justice Neil Gorsuch.

Notably, four justices – Barrett, Alito, Thomas and Gorsuch – would have gone further in striking down discussion of a wealth tax. They would have ruled that proceeds must be “realized” in order to be taxed under the 16th Amendment.

The narrowly crafted decision sends a warning shot to Biden and other wealth tax proponents who have floated proposals on taxing income that has not yet been received, said Steve Rosenthal, senior fellow at the Tax Policy Center, a non-partisan research organization.

“It augers badly for future wealth and billionaire taxes,” Rosenthal told CNN.

But several progressive groups applauded the decision, suggesting it left the door open to other types of taxes.

“The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair,” Sen. Elizabeth Warren, a Massachusetts Democrat, posted on X.

Containing the ‘blast radius’

Biden and other Democrats have proposed new taxes on the wealthy to fund their spending plans, many of which are aimed at helping lower-income and middle-class Americans. Some proposals seek to tax annual increases in the value of unsold assets, also known as unrealized capital gains. Currently, this growth is typically only taxed at time of sale.

Other proposals would establish a tax on the net worth of the uber-wealthy.

Biden has pushed for a “Billionaire Minimum Income Tax,” which would require those worth over $100 million to pay a tax rate of at least 25%. It would levy the tax on the wealthy’s “full income,” including unrealized gains. Warren, Democratic Sen. Ron Wyden of Oregon and Independent Sen. Bernie Sanders of Vermont have also unveiled tax proposals that would hit the wealthiest Americans.

Those proposals have so far not gained political traction in Congress.

The Justice Department declined to comment on the decision.

Dan Greenberg, general counsel of the Competitive Enterprise Institute, which had represented the Moores, said the group was disappointed with the ruling.

“This decision lets the government levy income taxes on foreign shareholders who have never received income,” Greenberg said. “We think that is unfair, because the Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control.”

The case was also being closely watched for its potential impact on other current tax provisions that typically fall on wealthy Americans, including several international tax rules designed to prevent US residents or corporations from shifting assets and operations overseas to avoid paying federal taxes. Former House Speaker Paul Ryan, who helped draft the 2017 tax cut law, said at a panel last year that if the Moores prevailed, it could undermine a third of the tax code.

In explaining the case, Kavanaugh said the Moores chose to “contain the blast radius” of their legal theory by trying to distinguish the Trump-era tax from others like it that have long been in place and found to be constitutional.

“The Moores have advanced an array of ad hoc distinctions to try to explain why those longstanding taxes are constitutional and why those precedents are correct, and to simultaneously try to explain why those taxes and precedents do not eviscerate their argument that the MRT is unconstitutional,” Kavanaugh wrote. “But the Moores’ effort to thread that needle, although inventive, is unavailing.”

Aside from the legal issues involved, Moore v. United States drew attention to the Supreme Court for other reasons. Democrats on Capitol Hill had called for Justice Samuel Alito to recuse himself because one of the lawyers representing the Moores co-authored two favorable opinion pieces about the justice in the Wall Street Journal last year.

Alito balked at that recusal request in a September court filing.

Outside groups also raised questions about whether the attorneys representing the Moores had fully disclosed the couples’ involvement with the company. Filings reviewed by a publication for tax professions called Tax Notes suggested Charles Moore had a closer relationship to the India-based company, KisanKraft, than was first known, including that he was a previous member of the company’s board.

Alito absent

Alito was not present Thursday as his colleagues took their seats to announce the day’s opinions – a relatively rare absence.

The Supreme Court did not immediately respond to a request for comment about Alito’s absence.

This story has been updated with additional developments.

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