How a $15K Tax Bill Dispute Could Affect Investors, Tax Code and a Potential Wealth Tax
Written by
Yaël Bizouati-Kennedy
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Nicholas Morine
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A $15,000 tax bill dispute brought before the Supreme Court by a Washington state couple could have major implications for the U.S. tax code, affecting both investors and broader U.S revenue.
In December, the Supreme Court seemed likely to reject a challenge to the constitutionality of a provision of a 2017 corporate tax reform law — one which taxes the undistributed profits from U.S. shares of foreign corporations that are majority American-owned, according to the Court.
The couple in question — the Moores — are seeking a refund of the one-time $14,729 in increase in their tax bill as a result of the law. However, “The federal government’s top lawyer told the justices that a ruling in the couple’s favor could cause a ‘sea change in the operation of the tax code’ and cost ‘several trillion dollars’ in lost revenue — an argument that seemed to draw support from a majority of the justices,” according to a SCOTUS blog post.
What Happened?
In 2005, the Moores invested $40,000 to buy a 13% stake in Indian company KisanKraft, according to court documents. But in 2017, Congress passed President Donald Trump’s Tax Cuts and Jobs Act (TCJA) — from which the government was expected to derive $340 billion in tax revenue over 10 years.
As part of the TCJA, the “Mandatory Repatriation Tax” (MRT) was enacted. The MRT required corporations to pay a one-time tax on deferred foreign profits, as Foreign Policy explained.
So, in 2018, the Moores learned that under the recently enacted MRT, they owed income tax on KisanKraft’s reinvested earnings going back to 2006, according to court documents.
Yet, they argued that “The tax is unconstitutional because it applies to ‘unrealized’ income (in this case, foreign earnings that were not distributed to them),” as the Tax Foundation noted.
“The crux of the matter lies in the Tax Cuts and Jobs Act, which mandates U.S. taxpayers with significant foreign investments to pay taxes on those earnings. The Moores argue that taxing unrealized gains — money they haven’t actually received — is unconstitutional,” explained Sean Lovison, CFP, CPA, founder and lead planner at Purpose Built Financial Services. “Should the Supreme Court side with the Moores, it’s not just about one tax bill. It could fundamentally alter the U.S. tax code.”
What Are the Implications for the Government?
If the Moores win their case, the government may lose a significant revenue source from taxing foreign investments. This, of course, has federal budget implications, said Peter C. Earle, senior economist for the American Institute for Economic Research.
Indeed, the federal government could face what some experts deem a “seismic financial hit.”
“Estimates suggest a revenue loss of $87 billion by 2024, ballooning to $125 billion by 2028 if the Moores’ stance is upheld,” said Lovison. “This shortfall could necessitate the drafting and implementation of new tax laws or potentially lead to a widened budget deficit, regardless of which party is in office, impacting government-funded programs and services.”
What Are the Implications for Investors?
A court win for the Moores could encourage more U.S. investors to invest in foreign firms, knowing profits won’t be taxed until realized, according to Earle.
“On the other hand, it would likely lead to greater government scrutiny where foreign investments are concerned as well as changes in tax laws, potentially complicating future investments,” he added. “This case could make foreign firms more attractive to U.S. investors, as the risk of immediate taxation on unrealized gains would be lowered. It might also lead to an influx of American capital, boosting foreign businesses’ growth prospects.”
Another implication: If the court ends up siding with Moore and finds the transition tax unconstitutional, investors who previously paid the transition tax while filing their 2017 or 2018 returns will have to “wait and see” if the IRS voluntarily refunds it. The refund claim period would have expired for them, explained Liting Chuang, director of tax planning and associate wealth advisor at Bordeaux Wealth Advisors.
“For investors who are currently paying the transition tax under an installment plan, they should consider filing a protective refund claim as they may be able to get some of the payments back,” added Chuang.
What Are the Implications for Proponents of the Wealth Tax?
According to Earle, a ruling in favor of the Moores could severely complicate — “if not thwart, outright” — political efforts to implement some form of wealth tax, as it challenges the concept of taxing unrealized gains.
Other experts echoed Earle’s sentiment, saying that the case casts a long shadow over the feasibility of implementing a wealth tax, a topic of considerable debate among politicians.
Lovinson argued that, should the ruling favor the Moores, it could set a precedent that challenges the taxation of wealth and assets until they are sold or realized.
“This could fundamentally undermine the structure and enforceability of a wealth tax, prompting a reevaluation of how wealth is defined and taxed in the pursuit of economic equity,” he added.
On the other hand, Chuang said that if the Supreme Court sides with the government and finds that the tax assessment does not require a realization event, this decision could pave the way for a federal wealth tax, or mark-to-market tax.
“Tax laws can change, and political landscapes may shift,” said Chuang. “Investors should stay flexible in their approach to wealth management and be prepared to adjust strategies in response to legislative changes. Consult with advisors who specialize in wealth management and taxation — they can provide personalized advice based on your specific circumstances and the current tax laws.”
Biggest Winners
In addition, The Institute on Taxation and Economic Policy (ITEP) wrote in a blog post that the biggest winners from annulment of the repatriation tax would be Apple, which would be given $37 billion in tax relief. Microsoft would allegedly receive $18 billion in tax relief, Pfizer $15 billion, Johnson & Johnson $10 billion, and Google $10 billion.
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