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Trillion-Dollar SCOTUS Hearing: Is a Wealth Tax Constitutional?

The case offers an early peek at Justices' thinking on a critical tax issue.

In 2006, Charles and Kathleen Moore invested $40,000 in a friend’s company in India. They owned 13% of KisanKraft, which court documents state was “formed to empower India’s underserved rural farmers.” The Moores never sold their stake in the company nor received any dividend income or other shareholder disbursements. Nevertheless, the Tax Cuts and Jobs Act of 2017 made them liable for paying taxes on KisanKraft’s earnings back to 2006. Today (Dec. 5), the Supreme Court will hear Moore v. United States of America, a suit to recover those taxes, and is expected to reveal how the Court will treat a wealth tax – recently touted by President Biden’s X account. The result is a torrent of interest in the case.

Nothing Is Certain but Death and Taxes

New banner Legal Affairs with ScottThe 2017 tax bill included a Mandatory Repatriation Tax, crafted by Republicans to end the practice of deferring taxation of foreign income indefinitely by retaining earnings in a foreign subsidiary. So, Apple, for instance, couldn’t continue to park $250 billion overseas without ever paying taxes on the earnings. Also, the Moores would now be charged for every year the company made a profit. The new law treated KisanKraft’s profits as paid out or distributed, even though the Moores never saw a dime. As the petition reads:

“Ultimately, the Moores had to declare an additional $132,512 as taxable 2017 income and pay an additional $14,729 in tax.”

Wealth Tax

In 1895, the Supreme Court protected Americans by declaring the newly implemented federal income tax unconstitutional in a case called Pollock v. Farmers’ Loan & Trust. Not keen on keeping their hands out of the people’s wallets, in 1913, politicians ratified the 16th Amendment, allowing an income tax.

Since 1920, the Supreme Court has held that taxes have to be on a realized gain. Owners of stocks or bitcoins don’t owe an income tax even though the day’s exchange numbers may indicate they are much richer than the day before, because the gains are unrealized – they only exist on paper, and have yet to be sold for an actual sum of money. However, the Biden administration has floated the idea of a tax on these intangible monies, a policy it says would only affect billionaires. As Liberty Nation’s Andrew Moran reported in 2021:

“Instead of waiting until shareholders find buyers for their stocks, Treasury Secretary Janet Yellen believes the taxman is entitled to this money before the shares are even liquidated. So, for example, if Acme International stock starts the year at $10 and soars to $60 per share at the end of the year, and investors have yet to sell, the Internal Revenue Service (IRS) would get a portion of that $50-a-share capital gain.”

That kind of tax on ownership is called a direct tax, and it has a special significance because Article I, Section 2, Clause 3 of the Constitution requires that direct taxes imposed by the national government be apportioned among the states based on population. As the National Constitution Center published:

“At the time of the Constitutional Convention, states with large amounts of land, as well as those with large populations, feared heavier taxes on their land and populations, including slaves, as compared to smaller and less populous states. The apportionment requirement, which also governs representation in the House of Representatives, became the compromise.

“To be apportioned, a tax must be the same amount per person in every state, a very difficult burden to satisfy. For example, a dollar-per-acre tax would fail unless every state had the same acreage per capita. As a result, federal land taxes do not exist.”

The Supreme Court may rule that the 2017 levy is a direct tax, and since its proceeds are not apportioned as required, it is therefore unconstitutional. Such a ruling would make the imposition of a wealth tax much more difficult, if not impossible, without a new authorizing constitutional amendment. That is a decision limited-government advocates are intensely eager for and big-government spenders are desperate to avoid.

Read More From Scott D. Cosenza, Esq.

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