Supreme Court weighs limits on Congress’ power to tax corporate wealth

The Supreme Court on Tuesday heard a conservative challenge to Congress’ broad power to tax corporate wealth — a case that could shield wealthy Americans who invest their money overseas.

During two hours of argument, most of the justices said they wanted to resolve the tax dispute narrowly without making major changes in the law. But they also revealed a deep disagreement over the federal government’s taxing power.

The 16th Amendment in 1913 said Congress had the power to “collect taxes on incomes, from whatever source derived.” That Progressive-era amendment was adopted to reverse a conservative Supreme Court ruling from 1890 that had struck down income taxes.

Undeterred, the court’s conservative majority in 1920 sharply limited the government’s taxing authority by ruling that wealth held in stocks could not be taxed as income if the taxpayer had not “realized or received any income” from their stock holdings.

That century-old dispute was at the center of Tuesday’s argument. Should federal income taxes be limited to “realized” gains, such as stock dividends and capital gains? Or can Congress continue to assess taxes on major investors in partnerships and corporations, even if they did not receive an annual share of the profits?

Washington lawyer Andrew Grossman urged the conservative majority to rule broadly that “unrealized gains are not income” and may not be taxed. “This is an essential check on Congress’ power to tax property,” he said.

He was representing Charles and Kathleen Moore, a Washington state couple who in 2005 invested $40,000 in a company in India that makes farm equipment. The company made healthy profits, but they did not receive dividends.

When the Republican-controlled Congress passed tax cuts in 2017, it included a one-time “mandatory repatriation tax” for American investors in foreign corporations because they would benefit from other changes in the law. This provision was due to bring in $330 billion.

The Moores paid their $14,729 tax bill and then sued. Their case, Moore vs. United States, put a spotlight on the question of whether the Supreme Court would prohibit new “wealth taxes” that have been proposed by Sen. Elizabeth Warren (D-Mass.) and other progressives.

U.S. Solicitor Gen. Elizabeth B. Prelogar strongly defended Congress’ taxing power on Tuesday and said investors have long been required to pay taxes on their shares of corporate wealth, even if they received no dividends. She said the 1920 decision limiting taxes on “unrealized” income has not been followed in later rulings, and the court should not return to it now.

She said it “would cause a sea change” in the tax code and “cost several trillion dollars in lost tax revenue” if the court were to strike down the taxes on undistributed business earnings.

Justice Ketanji Brown Jackson pointed out the 16th Amendment does not include such a strict limit based on the idea of “realization.” It says taxes may be imposed on incomes “from whatever source derived.”

At a key moment in the argument, Justice Brett M. Kavanaugh suggested the tax paid by the Moores could be upheld on the grounds that they were major shareholders in a company that had annual profits.

“There was realized income here, and it can be attributed to the shareholders,” he said. “We have long held Congress may attribute the income of the corporation to the shareholders.”

Afterward, several justices said the court could rule narrowly by following Kavanaugh’s proposal.