A case now before the Supreme Court involves, technically, the constitutionality of a tax that was added by 2017 tax reform, one that imposes inclusion of accumulated foreign earnings.
More simply, though, Moore v. United States could have major implications for the taxation of realized and unrealized revenue and the whole concept of an American wealth tax.
The plaintiffs, a Washington couple and minority shareholders in an Indian farming supply corporation, argue that taxing unrealized income is unconstitutional. They have sued over owing $15,000 because of the mandatory repatriation tax on foreign assets. The case is viewed as a constitutional test for wealth taxes in that proposals for such a tax generally include regular taxing of unrealized gains.
“How the court decides the case could potentially drastically change the future landscape of tax policies,” said Liting Chuang, CPA, director of tax planning and associate wealth advisor for Bordeaux Wealth Advisors. “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.” (The latter is a method of regularly measuring an individual’s assets based on current market values.)
“If the Supreme Court upholds the constitutionality of a tax on accumulated foreign earnings, then it could be interpreted as a tax on unrealized income,” said Mallon FitzPatrick, managing director, principal at Robertson Stephens Wealth Management, New York. “Republicans are concerned that an affirmative decision could open the door to other types of taxes on unrealized income such as a wealth tax, versions of which progressive Democrats have been trying to implement at both the federal and state level for years.
“Herein lies the quandary for conservative judges,” FitzPatrick added, “who likely prefer to retain the federal government’s ability to tax foreign investments but may want to prevent the Democrats from expanding the definition of taxable income.”
Certain clients may want to pay immediate attention to Moore. “For ease of administration, Congress and the IRS generally do not assess tax on income or profits until there’s a realization event,” Chuang said. “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, as the refund claim period have expired for them,” she added. “Investors who are currently paying the transition tax under an installment plan should consider filing a protective refund claim as they may be able to get some of the payments back.”
“None of our clients asked about the Moore case yet [but] we had conversations about a wealth tax in 2021-2022 when Democrats proposed such measures,” FitzPatrick added. “Our conversations with clients centered around the unlikelihood of a wealth tax due to administrative and enforcement challenges. The net worth of a wealthy complex household is challenging to calculate due to the volume of holdings, illiquid assets and changing valuations of business interests. Accurately calculating net worth for a wealthy individual is like valuing an estate after death: The process is difficult and can take one to three years. Imagine needing to perform the same feat each year.”
Based on comments of Supreme Court justices during oral arguments, early indications are that the court is not inclined to invalidate the repatriation tax and decide for the Moores, court watchers say.
Affected wealthy clients shouldn’t be that concerned about the case—yet, advisors say.
“Even if a decision in the Moore case supported a broader wealth tax, the current Congress is unlikely to pass wealth tax legislation,” FitzPatrick said. “It’s premature at this point to prepare. If the Supreme Court strikes down this provision of the Tax Cut and Jobs Act, wealthy taxpayers could in theory benefit by deferring income but it’s not entirely clear how the ruling would be implemented. Legislation would likely be needed to clarify how the IRS should interpret the Court’s ruling.”