On Tuesday, the Supreme Court is scheduled to deliberate on a legal challenge concerning a tax imposed on individuals owning foreign corporations. This case has already generated debate, particularly around Justice Samuel Alito’s participation due to calls for his recusal.
The appeal involves Charles and Kathleen Moore, a retired couple from Redmond, Washington, who are contesting a lower court’s decision that upheld a tax on earnings from foreign companies, even when those profits haven’t been distributed. This tax, known as the “mandatory repatriation tax” (MRT), was introduced in a tax bill supported by Republicans and enacted by former President Donald Trump in 2017. It targets taxpayers with at least a 10% stake in certain foreign corporations.
Central to the case is the question of whether this tax on unrealized gains conforms with the Constitution’s 16th Amendment, which authorizes Congress to levy taxes on incomes. The Moores, supported by the Competitive Enterprise Institute and various conservative and business groups, argue that “income” should only encompass gains received by the taxpayer, not merely an increase in asset value.
If the Supreme Court sides with the Moores, the decision could impact a broad range of tax code aspects, including those affecting small business structures like partnerships, LLCs, and S-corporations. It might also hinder proposals by some Democrats, such as Sen. Elizabeth Warren, who advocate for a wealth tax on the total assets of the ultra-rich, not just their income.
The Moores are seeking a refund of about $14,729 in taxes they paid under the 2017 law as minority stakeholders in KisanKraft, a Bangalore-based company supplying farming equipment.
The case garnered more public attention amidst broader concerns about the ethical conduct of Supreme Court justices. This included issues like undisclosed luxury travel funded by affluent donors. Justice Alito, a part of the court’s conservative majority, defended the court in The Wall Street Journal’s opinion section, asserting that Congress cannot regulate the Supreme Court. His involvement became more controversial when Democratic senators called for his recusal because David Rivkin Jr., one of the Moores’ attorneys, co-authored the articles in The Wall Street Journal.
The senators questioned Alito’s impartiality due to Rivkin’s association with him and efforts to support Alito’s public statements. Alito, however, declined to recuse himself, stating Rivkin acted as a journalist rather than an advocate in those articles.
Amidst these pressures, the Supreme Court recently introduced a formal ethics code, which has been criticized for lacking enforcement mechanisms.
In 2019, the Moores filed a lawsuit against the U.S. government challenging the mandatory repatriation tax. However, the 9th U.S. Circuit Court of Appeals in San Francisco dismissed their case, citing Supreme Court precedents that do not necessitate the realization of income for taxation purposes.
