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Supreme Court upholds Trump-era tax provision

HAIYUN JIANG/THE NEW YORK TIMES
                                The Supreme Court building in Washington, on April 25. In a 7-2 decision handed down today, the Supreme Court upheld a tax on foreign income that helped finance the tax cuts President Donald Trump imposed in 2017. Many saw the challenge as a bid to preemptively block Congress from passing a wealth tax.
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HAIYUN JIANG/THE NEW YORK TIMES

The Supreme Court building in Washington, on April 25. In a 7-2 decision handed down today, the Supreme Court upheld a tax on foreign income that helped finance the tax cuts President Donald Trump imposed in 2017. Many saw the challenge as a bid to preemptively block Congress from passing a wealth tax.

WASHINGTON >> The Supreme Court today upheld a tax on foreign income that helped finance the tax cuts President Donald Trump imposed in 2017 in a case that many experts had cautioned could undercut the nation’s tax system.

The vote was 7-2, with Justice Brett Kavanaugh writing the majority opinion. He was joined by Chief Justice John Roberts, and the court’s three liberals. Justice Amy Coney Barrett wrote a concurring opinion, joined by Justice Samuel Alito, and Justice Clarence Thomas dissented, joined by Justice Neil Gorsuch.

The question before the justices appeared narrow at first glance: Is the tax in question allowed under the Constitution, which gives Congress limited powers of taxation?

In the majority opinion, Kavanaugh wrote that the tax fell within the authority of Congress under the Constitution.

Many tax experts had warned that striking down the tax could have wide repercussions. Such a move could have threatened to fundamentally change how income is defined, block efforts to tax billionaires’ wealth and undermine enforcement for all sorts of other taxes, which amount to billions in revenue for the government.

Among the defenders of the law was Paul Ryan, the Republican and former House speaker who helped write the legislation. Upending the tax, Ryan said, could endanger up to a third of the U.S. tax code. He joined the Biden administration and some other conservatives in seeking to keep the law intact.

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 Moores’ investment 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% 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 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 Ltd., which supplied farmers with basic tools. The Moores also received shares in the company, which was started by a friend of Charles Moore, 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, claiming 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 9th U.S. Circuit Court of Appeals, 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 9th Circuit’s decision “sweeps away the essential restraint on Congress’ 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 9th Circuit had “correctly rejected” the Moores’ contention that the tax was unconstitutional, contending 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 only applied to pre-2018 income.

The details of the Moores’ story played little role in the oral argument, held in early December, which centered on how to interpret income and the history of the country’s tax code. The court’s three liberals and more moderate conservatives appeared to be looking for a way to devise a limited ruling that would avoid the prospect of upending the nation’s tax system.

The case has elicited controversy since the justices agreed to take up the dispute.

Some tax experts had urged the court not to hear the case, claiming it is based on inaccuracies, reflecting 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 pushed back against concerns about the Moores’ story, saying the record in the case is accurate.

A lawyer for the Moores, David B. Rivkin, had twice interviewed Alito for The Wall Street Journal editorial page in the months before the case, raising questions over whether that posed a conflict of interest for the justice to hear the dispute. The justice declined to recuse himself from the case and wrote in a statement that 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,” 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 Roberts, Thomas and Justice Ketanji Brown 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.

This article originally appeared in The New York Times.

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