In a setback for anti-tax conservatives, the justices upheld a provision of a 2017 tax law that imposed a one-time levy on the profits of foreign corporations whose shares were owned by Americans.
The vote was 7 to 2.
The court’s decision was narrow and avoided a ruling on the issue of a wealth tax.
It left unresolved a persistent dispute over whether the Constitution’s approval of income taxes includes shares of corporate wealth or instead is limited to “realized” gains like wages or stock dividends.
“So the precise and narrow question that the court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income,” Justice Brett M. Kavanaugh wrote for the majority. “This court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.”
Some conservatives fear that a future Congress led by progressive Democrats would impose taxes on accumulated wealth.
They urged the court to hear the case of Moore vs. United States and to rule that Congress may not impose a tax on “property or wealth.”
At issue in the case was the meaning of the 16th Amendment, ratified in 1913. It says Congress has the power to “lay and collect taxes on incomes, from whatever source derived.”
A few years later, the Supreme Court said corporate shares held by taxpayers could not be taxed as income unless they were “realized or received” as income. That decision was generally understood to mean that the government may impose taxes on wages or stock dividends, but not necessarily on property or corporate wealth that grows in value. These are referred to as “unrealized gains.”
But many constitutional scholars and tax experts had questioned that interpretation of the 16th Amendment. And in recent decades, Congress has imposed taxes on individuals who are earning income in partnerships and have ownership shares in some corporations, even if dividends are not paid out each year.
The case of Charles and Kathleen Moore began when they received a $14,729 tax bill for their ownership shares of a company based in India.
The Moores, who are retired and live in Washington state, said they received no income or dividends from their investment in the company which which supplies equipment to small farmers. They sued, alleging the tax was unconstitutional under the 16th Amendment.
But a federal judge and the 9th Circuit Court of Appeals disagreed with them and upheld part of the 2017 tax bill passed by the Republican-controlled Congress and signed by President Trump. It imposed a one-time tax on Americans who owned shares in foreign corporations that gained in value. The tax measure included large tax breaks for the wealthy, but to offset those losses in tax revenue, lawmakers sought to recoup some profits that Americans held abroad.
With the backing of the U.S. Chamber of Commerce and other business groups, the Moores petitioned the court with help of Washington attorney David B. Rivkin and urged the justices to strike down the tax on overseas profits.
Some had called for Justice Samuel A. Alito Jr. to recuse himself from the matter.
Washington attorney David B. Rivkin who helped write the appeal petition, interviewed Alito for two articles that appeared in the Wall Street Journal last year.
“There was no valid reason for my recusal in this case,” Alito wrote in response in September. “When Mr. Rivkin participated in the interviews and co-authored the articles, he did so as a journalist, not an advocate. The case in which he is involved was never mentioned; nor did we discuss any issue in that case either directly or indirectly.”
Alito concurred in the outcome Thursday. Justices Clarence Thomas and Neil M. Gorsuch dissented.
Thomas wrote the 16th Amendment says income is “only income realized by the taxpayer. The text and history of the amendment make clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’ And, the only way to draw such a distinction is with a realization requirement.”