Can the government levy taxes on unrealized wealth and paper profits if the owner never turned the gains into actual income?
Wide swaths of the tax code are poised to revert to 2017 rules if Congress doesn’t pass new tax laws. The fight over what’s next for taxes is a “hurricane” in the making, some tax advisers say.The underlying case before the Supreme Court stems back to a Washington State couple’s 2006 investment decision. Charles and Kathleen Moore invested $40,000 to buy a minority stake in an Indian business focused on helping rural farmers.
The tactic kept the money from domestic tax authorities until it came back via avenues like a foreign subsidiary’s dividend, according to the Tax Policy Center. As of 2015, U.S. corporations built up $2.6 trillion in earnings within their foreign subsidiaries, the think tank said, pointing to a report from Congress’ nonpartisan Joint Committee on Taxation.
Far beyond the particular tax, the decision created an opening for Congress to go much farther, according to Moore’s lawyers at the right-leaning Competitive Enterprise Institute and the international law firm Baker & Hostetler. “Lawyers for the federal government say the Constitutional amendment’s wording does not say income must be turned into a realized gain in order for income taxes to apply.”
On Monday, Moore’s attorneys lauded the Supreme Court’s decision to include the case in its fall docket. “The Constitution does not allow Congress to point at any pot of money and call it ‘income’ and then income-tax it,” said Andrew Grossman, a partner at Baker Hostetler and the lead lawyer for the Moores.