Democrats’ Tax Plans in Jeopardy: Supreme Court Weighs Case Redefining Income

A Washington State couple is pursuing a tax refund of $14,729 and has requested that the U.S. Supreme Court overturn a section of the 2017 tax law. This case is important because it could have significant implications for large corporations and impact the ability of Democrats to implement tax policies targeting wealthy individuals.

The case revolves around the definition of income and whether it must be received or realized before it can be subject to taxation under the Constitution’s 16th Amendment. The 2017 Republican tax law lowered tax rates for both individuals and corporations. Congress implemented a one-time tax on companies with accumulated profits that had not been repatriated to finance these rate cuts. The tax also applied to individuals who owned at least 10% of certain foreign companies that had earned profits.

The Washington state couple argues that taxing them on profits they didn’t control and didn’t receive is unconstitutional. Even though they have lost in lower courts, they are still pursuing a tax refund with the backing of conservative and business organizations, such as the U.S. Chamber of Commerce.

If the Supreme Court rules in favor of the couple, it could result in larger refunds for multinational corporations that are subjected to the one-time tax and potentially open the door to future challenges against other provisions in the tax code. Moreover, such a ruling could hinder Democratic proposals, including President Biden’s plan to tax unrealized gains as income for wealthy individuals, as well as Senator Elizabeth Warren’s proposed wealth tax.

The couple’s lawyers argue that the Court must address the constitutional question of income realization now to avoid future constitutional conflicts and guide lawmakers. However, the Biden administration has urged the Court to decline the case, stating that there is no conflict among lower courts and little benefit in issuing a broad ruling on a one-time provision. 

The administration argues that the constitutional questions are unnecessary since the company did realize income.

The Supreme Court typically accepts only a small percentage of the thousands of petitions filed annually and a decision on whether to hear the couple’s case is not expected until next week. If the Court agrees to hear the case, arguments will occur in the next term, starting in October.

Before 2017, U.S. companies were not subject to U.S. taxes on foreign profits unless those profits were repatriated. This incentivized companies to accumulate trillions of dollars in foreign subsidiaries. The 2017 tax law made future repatriations tax-free but imposed a one-time tax on 30 years’ worth of accumulated profits, deeming them as income and applying discounted tax rates.

The law’s author, George Callas, a senior House Republican aide, claims that constitutional concerns were not raised during the law’s drafting. He believes it is evident that the earnings of an entity can be attributed to its owners.

The one-time tax was expected to generate $339 billion, which Republicans used to offset the rate cuts. In addition to corporations, the tax also applied to individuals like the Moores, who owned at least 10% of an India-based company called KisanKraft, which supplies tools to rural farmers.

The Moores’ lawyer argues that it is unreasonable to be taxed on money they never received and had no control over. While business groups initially supported the international tax changes in the 2017 law, some have now aligned with the Moores’ lawsuit, expressing concerns about the language used in lower-court decisions that erode Congress’s taxing power.

The Constitution grants Congress broad taxing power but stipulates that direct taxes, which are not clearly defined, must be apportioned among states based on population. In 1895, the Supreme Court nullified a previous form of income tax, which eventually resulted in the creation of the 16th Amendment in 1913. This amendment granted Congress the authority to tax incomes without the necessity for apportionment. This historical context has led to ongoing disputes over what constitutes income. 

Previous court rulings have established that certain forms of income, such as stock splits, may not be taxable. However, lawmakers have enacted taxes that do not require realization for commodities traders, securities dealers, and individuals renouncing citizenship. Some legal experts argue that Congress has deviated from its original intent in various cases.

The Moores’ briefs do not specify whether they seek to invalidate the entire one-time tax or only specific situations involving individual shareholders. A broad ruling against the tax could prompt companies to seek refunds for significant amounts they have paid and impose limitations on future tax legislation.

According to Moores’ lawyer, depending on the Court’s reasoning, the implications of the decision may extend beyond their case and have broader applicability.