U.S. Supreme Court justices signaled they are inclined to uphold a 2017 tax on American-owned companies’ foreign profits, while trying to avoid a sweeping ruling that could give a green light to proposals for a future wealth tax.
Hearing arguments in Washington, key justices suggested the tax, which aimed to collect hundreds of billions of dollars on a one-time basis, wasn’t fundamentally different from other levies imposed by Congress over the years.
The case marks a rare test of the Constitution’s Sixteenth Amendment, ratified in 1913 to let Congress levy an income tax. Two Washington state residents, fighting a $14,729 tax bill stemming from a minority stake in an Indian company, contend the 2017 provision improperly taxes them on corporate income that was never distributed to them.
“We’ve long held that a Congress may attribute the income of the company to the shareholders or the partnership to the partners,” Justice Brett Kavanaugh said.
The disputed provision, known as the mandatory repatriation tax, was designed to offset other parts of a Republican-backed tax cut passed during Donald Trump’s presidency. The government has estimated that the tax would bring in $340 billion over 10 years, much of it from multinational companies like Apple Inc. and Pfizer Inc.
A ruling striking the tax down could require the Internal Revenue Service to refund sums companies have already paid. It could also upend other parts of the federal tax code, including rules governing partnerships and bonds, and have spinoff effects on the states.
But the two-hour session indicated that even the court’s conservative justices had little interest in going down that path. Justice Clarence Thomas suggested the couple, Charles and Kathleen Moore, would have had a stronger case had they been challenging a hypothetical tax on the appreciation of real estate they owned.
Thomas pointed to arguments that the government is simply attributing the corporation’s income to its owners. That is “a vulnerability that you would not have with real property,” he told Andrew Grossman, the lawyer representing the Moores.
Grossman told the court that “a gain is not income unless and until it has been realized by the taxpayer.”
Other conservatives suggested they were more concerned the court not pave the way for a wealth tax.
