US Supreme Court sidesteps wealth tax question in closely watched case

The Supreme Court’s decision will leave in place a 2018 tax on offshore profits. Photo / Mariam Zuhaib, AP

The US Supreme Court disappointed campaigners for and against a wealth tax on the mega-rich on Thursday by refusing to decide whether such a levy would be constitutional.

A 7-2 majority sidestepped the question in a much-anticipated tax case that experts said had the potential not just to curb future policy-making but also to upend large parts of the existing tax code.

In the end — and over the dissent of the conservative justices Clarence Thomas and Neil Gorsuch — the court issued a narrow ruling in the case, which was brought by a couple who challenged the Donald Trump administration’s 2018 levy on offshore profits.

Petitioners Charles and Kathleen Moore challenged the $15,000 (NZ$24,500) they were forced to pay under the mandatory repatriation tax, saying it amounted to an unconstitutional raid on “unrealised” profits from an investment they had made more than a decade earlier in an Indian rural farming enterprise.

Lower courts had ruled against them, including the US Court of Appeals for the Ninth Circuit, which said realisation was not a constitutional requirement for an income tax.

“The Moores argue that realisation is a constitutional requirement; the government argues that it is not,” Justice Brett Kavanaugh wrote in the court’s majority ruling.

“To decide this case, we need not resolve that disagreement over realisation. Those are potential issues for another day, and we do not address or resolve any of those issues here.”

The ongoing fight over when income needs to be “realised” for taxation purposes had attracted the support of campaigners who hoped a Supreme Court ruling in their favour could shut the door on future wealth taxes.

“They avoided the issue they said they were going to rule on, the issue that killed hundreds of trees to bring to the court,” said Don Susswein, head of the partnership tax group in the Washington national tax office of the accounting firm RSM.

“On one side you had people using this as a stalking horse to say Congress cannot impose a wealth tax, the people on the other side were saying they liked the Ninth Circuit ruling that the Constitution doesn’t require realisation. The court didn’t accept either argument.”

Justices Thomas and Gorsuch, in their dissent, wrote that the Constitution did not permit a tax on unrealised gain.

“16th Amendment ‘income’ is only realised income,” they wrote, referencing the constitutional amendment that established Congress’s authority to levy an income tax. “We should not have hesitated to say so in this case.”

Two other justices, Amy Coney Barrett and Samuel Alito, wrote a separate opinion concurring with the ruling but arguing that income needed to be realised to be taxed. Justice Ketanji Brown Jackson wrote in her own concurring opinion that it did not.

Campaigners against a wealth tax “got half a loaf”, said Michael Mollerus, tax partner at law firm Davis Polk.

“People are putting down stakes for the next case, and only one justice came out saying realisation is not required. Four came out against.”

Tax experts largely breathed a sigh of relief at the wording of the ruling, which the justices calibrated not just to put off the wealth tax issue but also to avoid calling into question other existing taxes, such as those on the unrealised gains in securities dealers’ portfolios.

“The logical implications of the Moores’ theory would require Congress to either drastically cut critical national programmes or significantly increase taxes on the remaining sources available to it, including, of course, on ordinary Americans,” Kavanaugh wrote.

“The Constitution does not require that fiscal calamity.”

Written by: Stephen Foley in New York

© Financial Times