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‘Quadrillion-dollar’ tax case leaves Supreme Court justices exploring narrow resolution 

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The Supreme Court explored ways to narrowly resolve a major tax case during oral arguments Tuesday, with justices raising concerns about sweeping consequences if they fully adopt either side’s position.

Specifically, the justices on Tuesday are weighing the constitutionality of a provision enacted as part of then-President Trump’s sweeping 2017 tax bill.

But at the heart of the dispute is an issue that the Biden administration warns would pose ramifications for large swaths of the U.S. tax code and one tax expert raised as a “quadrillion-dollar” question: whether the federal government can tax unrealized income without apportioning it among the states.

Experts and advocates on both sides are closely watching the case for how the decision impacts other tax provisions and whether it deems a federal wealth tax unconstitutional.

But during the two-hour argument, several justices seemed alarmed about issuing such a sweeping ruling that defines what constitutes “realization” in all scenarios.

“I guess the tenor of the questions is, that nobody’s happy with anybody’s definition of anything,” Justice Sonia Sotomayor said toward the end of the session, eliciting laughter from her fellow justices.

At issue before the court is a lawsuit brought by Charles and Kathleen Moore, who paid about $15,000 under the 2017 law’s mandatory repatriation tax, which imposed a one-time tax on Americans who owned shares in foreign corporations, based on the corporation’s past earnings.

The Constitution requires all federal direct taxes to be apportioned among the states based on population. But the 16th Amendment, ratified in 1913, provides a carve-out for “taxes on incomes, from whatever source derived.”

The Moores had invested in an Indian company, KisanKraft, that supplies farmers with tools and equipment. But the couple claims they never actually realized any income that the federal government can tax, because they never received distributions or payments from the company.

“You’re asking us to just announce what realization is out of context, and for the last hundred years, we’ve been studiously avoiding doing that,” Sotomayor pressed the Moores’ lawyer, Andrew Grossman.

“Because we recognize that it’s dangerous to do that,” Sotomayor continued. “To state a word like realization, we then have to come up with a working definition that applies to every piece of property and every way in which people gain wealth. It doesn’t seem logical to me.”

Sotomayor instead re-upped a suggestion from Justice Brett Kavanaugh to resolve the case: assume there is a realization requirement, and then uphold the tax by finding it meets that requirement anyways.

“The entity realized income,” Kavanaugh said of KisanKraft. “The question then is attribution, and we’ve long held that Congress may attribute the income of the company to the shareholders or the partnership to the partners.”

Justice Ketanji Brown Jackson probed both sides about whether the court had to reach that issue at all and could instead rule the tax at issue is an indirect tax. Such a finding would mean it is not subject to the same restrictions.

“It seems as though it’s your burden, regardless of this issue about realization, to establish that this tax is a direct tax in order to sustain your constitutional argument,” Jackson told Grossman.

Charles Moore told The Hill he thought the argument went “very well” and he was pleased with Grossman’s performance.

When asked about the justices’ various suggestions of a narrow resolution, Moore said, “I would like to see them rule in a way that makes such taxes clearly unconstitutional, taxes on gains they have not received. It’s just simply not income.”

The case has also gained attention after Democrats demanded that Justice Samuel Alito, one of the court’s leading conservatives, be recused from the case over his ties to David Rivkin Jr., another lawyer representing the Moores. Rivkin did not argue the case.

Alito earlier this year participated in two interviews with Rivkin that were published in The Wall Street Journal’s opinion section. In a rare public response, Alito in September noted other justices who had interviewed with lawyers practicing before the court.

“There is no valid reason for my recusal in this case,” Alito wrote at the time.

Alito was an active questioner at Tuesday’s argument, as he often is, and at one point said he was “quite concerned” by the potential implications of the Moores’ argument. Alito also noted how those impacts have resonated in media coverage of the case.

“You say that if we rule in petitioners’ favor, then large, important pieces of the tax code will also logically fall. And I think that’s a fair argument,” Alito told U.S. Solicitor General Elizabeth Prelogar.

“But I think it’s also a fair argument to do the same thing with your position,” Alito continued.

Justice Neil Gorsuch asked similar questions.

“I’m just asking what the limits of your argument are,” Gorsuch told Prelogar. “And it seems to me there are none.”

Anti-regulatory groups backing the Moores have portrayed the couple as sympathetic plaintiffs.

“It felt exciting to invest in a company that was going to do something really good,” Kathleen Moore said in a video released by the Competitive Enterprise Institute earlier this year. “During all these years, we weren’t getting any money, but we were really excited to be part of this company that was growing and reaching more and more people all over India.”

But some of the underlying facts are in dispute. Documents first obtained by Tax Notes showed the Moores had greater involvement than what is described in court filings.

Charles Moore was a director at the company between 2012 and 2017, received reimbursement for travel to India to visit the company and received interest payments on $245,000 the couple lent the company, Tax Notes reported.

Those discrepancies received no mention at Tuesday’s argument.

A decision in the case, Moore v. United States, is expected by the end of June.

The Hill on NewsNation

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