The Supreme Court on Thursday upheld a tax on foreign income that helped finance the cuts President Donald J. Trump imposed in 2017 in a case that many experts had cautioned could undercut the nation’s tax system.
Justice Brett M. Kavanaugh wrote for five justices in the 7-to-2 decision. He was joined by Chief Justice John G. Roberts Jr. and the court’s three liberals.
In a concurring opinion, Justice Amy Coney Barrett, joined by Justice Samuel A. Alito Jr., explained that although she agreed with upholding the tax, she disagreed with the broader reasoning by the majority. Justice Clarence Thomas dissented, joined by Justice Neil M. Gorsuch.
The question before the justices in the case appeared limited at first glance: Is the tax in question allowed under the Constitution, which gives Congress limited powers of taxation?
Justice Kavanaugh asserted that it was, writing, “This court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.”
He nodded to broader issues at play over the limits of federal taxation power but said those were “potential issues for another day.”
The ruling preserved the structure of the income tax system for now, avoiding what many analysts and economists warned could have been fiscal chaos if the system had been struck down.
It also opened a window into what could be the next major tax case to come before the court: whether Congress can impose what is effectively a tax on Americans’ wealth, as President Biden and other Democrats have proposed to do in various forms. That question loomed large in the opinions, highlighting the stark divisions among the justices in how they view the notion of a wealth tax.
In a concurrence, Justice Ketanji Brown Jackson laid out what was essentially a road map for the government to defend such a tax, should it be enacted.
She praised the majority for “wisely” taking “a restrained approach” in issuing a narrow ruling. Acknowledging that more tax fights were likely to reach the court, she cautioned that the justices should approach such disputes with similar discipline.
“I have no doubt that future Congresses will pass, and future presidents will sign, taxes that outrage one group or another — taxes that strike some as demanding too much, others as asking too little,” Justice Jackson wrote. But, she added, historical examples showed that such disagreements were best settled by voters, not the justices.
Still, conservatives on the court, including two who voted to uphold the tax, argued that a hypothetical wealth tax could violate the Constitution’s guidelines, including those laid out in the 16th Amendment, for what federal taxes must look like.
Although Justice Barrett, in a concurring opinion, wrote that she agreed with the court’s ultimate holding in the case, she said that “a different tax — for example, a tax on shareholders of a widely held or domestic corporation — would present a different case.”
In a sharp dissent, Justice Thomas argued that the majority upheld the tax “only by ignoring the question presented.” He said that “the text and history” of the 16th Amendment made it clear that “it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’”
“Sixteenth Amendment ‘income’ is only realized income,” he added. “We should not have hesitated to say so in this case.”
The dispute involved a Washington State couple, Charles and Kathleen Moore, who challenged the law after they were required to pay nearly $15,000 in taxes stemming from their investment in a company in India supplying rural farmers. The couple was backed by the Competitive Enterprise Institute, a free-market research organization in Washington.
The Moores’ investment in India fell under an otherwise obscure provision of the Tax Cuts and Jobs Act of 2017 that altered how the federal government taxes corporate profits that are earned abroad. Under the provision, U.S. shareholders who own 10 percent or more of foreign corporations primarily owned or controlled by Americans must pay a one-time tax. Previously, they owed taxes only on profits that were brought into the United States.
At issue is whether the Moores should be subject to the tax, even though they never received, or realized, income from the investment in question.
In 2006, according to their petition to the court, the couple invested $40,000 in the company, KisanKraft Machine Tools Private Limited, which supplied farmers with basic tools. The Moores also received shares in the company, which was started by a friend of Mr. Moore’s, Ravindra Kumar Agrawal.
In 2018, the Moores learned that they owed income tax on the company’s reinvested earnings dating back to 2006, adding about $15,000 to their tax bill. Backed by conservative and business groups, the Moores sued, saying that the tax violated the Constitution’s apportionment requirements because it taxed their shares in the company, which they characterized as personal property, rather than on income they had gained.
Lower courts, including a panel of judges on the U.S. Court of Appeals for the Ninth Circuit, sided with the federal government. In a dissent, Judge Patrick J. Bumatay, a Trump appointee, wrote that the decision by the appeals panel conflicted with “ordinary meaning, history and precedent,” all of which recognize that “an income tax must be a tax on realized income.”
The Moores appealed to the Supreme Court, which agreed to review the case.
In their petition, the couple argued that the Ninth Circuit’s decision “sweeps away the essential restraint on Congress’s taxing power, opening the door to unapportioned taxes on property (as in this case) and anything else Congress might deem to be ‘income.’”
Lawyers for the Biden administration argued that the Ninth Circuit had “correctly rejected” the Moores’ contention that the tax was unconstitutional and contended that the Moores’ claims were “unsupported by constitutional text, congressional practice or this court’s precedent.” The case, they added, lacked “pressing prospective importance” because it was a one-time tax that applied only to pre-2018 income.
Shadowing the case was a larger — and still hypothetical — question of how far the Constitution permits the federal government to go in taxing wealthy individuals.
Currently, the federal government taxes income from wages, investment returns and the sale of assets like stocks and bonds. Progressive lawmakers, led by Senators Bernie Sanders of Vermont and Elizabeth Warren of Massachusetts, have in recent years called for the government to go further and tax what is effectively the net worth of the wealthiest people in the country.
Their proposals would include taxing very wealthy individuals on the rising value of their investment portfolios, even if those gains exist only on paper — like a set of stocks purchased for $100,000 that grow in value to $1 million, but have not yet been sold. Those gains are known as “unrealized” gains.
Congress has not yet approved a tax on unrealized gains. But in the opinions in the case on Thursday, Moore v. United States, the justices were already fighting over whether it would be constitutional to do so.
The majority opinion explicitly steers clear of a ruling on that issue, but it offers hints that it could be difficult for a wealth tax to survive the same legal test that the justices imposed in the Moore case.
The Competitive Enterprise Institute’s general counsel, Dan Greenberg, expressed disappointment with the ruling.
However, nodding to the broader issues brewing, Mr. Greenberg pointed to what he described as the decision’s “extremely narrow scope” and voiced optimism about how a majority of the justices would view future tax challenges.
“If there is a challenge to a future income tax in which the court must deal with the realization requirement squarely, it appears that the challengers are likely to receive a friendly audience from a substantial portion of the court,” Mr. Greenberg said.
Ms. Warren celebrated the ruling but warned of a prolonged fight ahead.
“Right-wing billionaires hoped an obscure legal case would blow up the tax code to avoid paying what they owe, but this effort failed at the Supreme Court,” Ms. Warren said on social media. “The fight goes on to tax the rich, pass a wealth tax on ultra-millionaires and billionaires, and make the system more fair.”
The case has elicited controversy from the start.
Some tax experts had urged the court not to hear the case, saying it was based on inaccuracies, part of the growing scrutiny over how some matters come before the Supreme Court.
In a series of detailed articles, the trade publication Tax Notes reported that the tax experts say the couple may have been more deeply involved in the company than they suggested in court filings. Lawyers for the Moores have rebutted concerns about the Moores’ story, saying the record in the case was accurate.
A lawyer for the Moores, David B. Rivkin Jr., had twice interviewed Justice Samuel A. Alito Jr. for The Wall Street Journal editorial page in the months before the case, raising questions over whether the justice should hear the dispute. Justice Alito declined to recuse himself from the case and wrote in a statement that Mr. Rivkin had interviewed the justice “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,” Justice Alito added. “His involvement in the case was disclosed in the second article, and therefore readers could take that into account.”
Some ethics experts had also suggested that Chief Justice Roberts, Justice Thomas and Justice Jackson recuse. They have pointed to the stake each justice holds in a limited liability company or partnership that could benefit them should the justices declare the tax unconstitutional. All three participated in the case.
Kitty Bennett contributed research.