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The Supreme Court leaves a Trump-era offshore tax in place on investors

The U.S. Supreme Court has upheld a major offshore tax on investors.
Saul Loeb
/
AFP/Getty Images
The U.S. Supreme Court has upheld a major offshore tax on investors.

The U.S. Supreme Court on Thursday upheld a Trump-era tax provision, handing the government a victory that had huge potential consequences for the federal budget.

At issue was a tax enacted in 2017 to pay for then President Trump’s massive corporate tax cut and to prevent off-shore tax dodges. It was challenged by Charles and Kathleen Moore, who were required to pay a one-time $15,000 tax on an investment in India that grew in value from $40,000 to more than $500,000.

Backed by conservative groups, the couple claimed that because they had received no payments or dividends from the company, there was no income to be taxed, and that the tax thus violated the 16th Amendment to the Constitution, which authorizes taxes on income.

But the high court, by a 7-to-2 vote, rejected that argument. Writing for the court majority, Justice Brett Kavanaugh said that Congress has broad constitutional power to impose taxes, and not just on income that has been realized into cash. He noted, for instance, that for generations the court has upheld provisions that impose taxes on shareholders and partners of a business, even though the income has not yet been distributed.

The Moore’s argument “taken to its logical conclusion,” he said, “could render vast swaths of the Internal Revenue code unconstitutional.” Those provisions, if suddenly eliminated, “would deprive the American people of trillions in lost tax revenue,” with the consequence that Congress would either have to “drastically cut critical national programs or significantly increase taxes…on ordinary Americans.”

The Constitution, Kavanaugh said, “does not require that fiscal calamity.”

“I agree,” wrote Justice Clarence Thomas in a dissent joined by Justice Neil Gorsuch. “If Congress invites calamity by building a tax base on constitutional quicksand, the judicial power afforded this court does not include the power to fashion an emergency escape.”

Tax experts of varying political stripes reacted to the court’s decision with relief. Among them was George Callas who served for 15 years as a key GOP staffer for the tax writing committees of Congress. He particularly praised Kavanaugh’s “careful and narrow opinion” both for what it said, and didn’t say.

“The court just can’t possibly anticipate what sophisticated taxpayers are going to try to do, and so shouldn’t preemptively prevent Congress from stopping future games that they can’t even conceive of right now,” he said.

University of Chicago law professor Aziz Huq was more blunt. He saw the Moores’ challenge as “an overall conservative strategy to essentially drown the government in the bathtub by limiting its power to gather and then pass through money to government services.”

Tax expert David Schizer, a professor at Columbia Law School, noted that the 2017 tax law marked a change from earlier tax provisions that had left untaxed an estimated $2.5 trillion in multinational subsidiaries of U.S. companies. So, in an effort to bring some of that money back to the U.S., Congress enacted a one-time tax on American investors who hold a controlling interest in American subsidiaries— a tax that the Supreme Court upheld on Thursday .

What the court did not decide is whether Congress could do the same thing for American companies, operating in the U.S., as opposed to foreign subsidiaries. The court also did not take any position on the so-called wealth tax that Sen. Elizabeth Warren, D-Mass., has proposed, but that few realistically think has a chance of passage. The Moores’ challenge was widely seen as a pre-emptive attempt to kill off that proposal. Professor Schizer said that while the justices technically did not take a position on the Warren proposal, “I do think the court is heavily suggesting that the wealth tax is unconstitutional without saying so.”

Justice Amy Coney Barrett, joined by Justice Samuel Alito, agreed with Kavanaugh’s bottom line but not his reasoning.

Joining Kavanaugh’s opinion in full were Chief Justice John Roberts, and Justices Sonia Sotomayor, Elena Kagan, and Ketanji Brown Jackson.

Congress enacted the tax at the center of Thursday’s case as a one-time payment to cover the transfer from one international tax rule to another. Under the old system, if you earned foreign income overseas in a foreign corporation that you owned, you would not have to pay taxes on those earnings until you brought the profits back to the United States. Congress saw that as a perverse incentive to keep profits offshore, and by some estimates as much as $3 trillion in income was shielded in offshore profits.

In order to move to a new system, the idea was that a one-time transition tax, at a low rate, was needed. For the Moores, their one-time tax of $15,000 was coincidentally roughly the amount Charles Moore was reimbursed for travel expenses when he went to India for board meetings.

Tax law experts largely saw Thursday’s decision as a win for a variety of reasons. They noted that the tax is expected to yield $340 billion by 2027, mainly from huge corporations, and the lion's share of those taxes has already been collected, and likely would have had to be paid back if the court had reached a different conclusion.

What's more, various other tax regimes enacted to prevent tax dodges by the rich could also have been at risk, according to George Callas, who, along with then Speaker Paul Ryan, shepherded the 2017 law through Congress.

In the Moores' case, they owned 11% of the Indian company, and under federal law, that is considered a controlling interest, meaning the owners have influence over the timing of any distributions and dividends, a leverage that Congress wanted to rein in to prevent tax avoidance.

Lawyers for the couple described them as playing no active role in the company. But documentsdisclosed by the publication Tax Notes show that Charles Moore was far more involved in the company's management than he suggested. Recordsshow he served on the board of the company for five years between 2012 and 2017, that he was reimbursed for thousands of dollars in travel expenses to and from India, and perhaps most importantly, that he provided the company with short-term infusions of cash that were never used, but were repaid 60 days later with 12% interest. Former congressional tax staffer Callas sees that as clearly “suspicious.”

“Why would you loan a company money for 60 days, have it sit in a bank account, never be used, and then repay it with a big interest rate, unless you were just trying to find a way to get money out of the company without calling it that?" asked Callas, who served as counsel for former Speaker Ryan in steering the 2017 tax bill through Congress.

That said, a phalanx of conservative, anti-regulatory, and anti-tax groups was arrayed against the tax in the Moores case, including the U.S. Chamber of Commerce — even though the group supported the 2017 tax bill that included the provision at issue in the case.

Callas notes that at the request of the Chamber and other stakeholders, House Republicans made many specific changes to the 2017 tax bill, but there was "no discussion" of any "constitutional vulnerability." It was "purely a discussion of how to design the policy appropriately."

For the Chamber and other stakeholders years later “to discover constitutional concerns” that they didn't raise before, “strikes me as opportunistic,” he said.

Copyright 2024 NPR

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Nina Totenberg is NPR's award-winning legal affairs correspondent. Her reports air regularly on NPR's critically acclaimed newsmagazines All Things Considered, Morning Edition, and Weekend Edition.