Supreme Court Hears Landmark Case That Could Upend Tax Code

Moore v. Mnuchin Poses Existential Threat to Longstanding Anti-Avoidance Measures

On Tuesday, the U.S. Supreme Court will hear oral arguments in a seemingly innocuous tax case that has sparked alarm amongst tax law experts. At its core is a challenge to a provision in former President Donald Trump’s 2017 tax cuts brought by Charles and Kathleen Moore, backed by anti-regulatory groups. While the case may at first glance appear to be an obscure legal skirmish, specialists warn it could have profound implications for the federal budget and the tax code if the Moores prevail.

The 16th Amendment and Efforts to Collect Income Tax

To understand the case, a brief history lesson is in order. The 16th Amendment to the Constitution, ratified in 1913, enables the federal government to collect income tax. It was passed mainly to override a previous Supreme Court ruling that had made federal income taxation effectively impossible.

For over a century, the 16th Amendment has been interpreted to give Congress broad powers to levy taxes on all kinds of income. This authority now hangs in the balance as the Moores specifically dispute a provision in President Trump’s 2017 tax cuts meant to finance the conversion to a new international corporate tax scheme.

At the heart of their complaint is the argument that a one-time tax on their overseas investment violates the Constitution’s ban on direct taxes without apportionment among the states. While their stake in an Indian power tool company has grown over $500,000, the Moores claim they have never actually received any of those earnings. Taxing such “unrealized” gains, they contend, goes beyond what even the 16th Amendment allows.

Knock-On Effects Feared

Beyond their own tax bill, the Moores’ case raises the specter that a ruling in their favor could undermine efforts to tax wealth and prevent abuse of offshore tax havens. Supporters portray the couple as sympathetic plaintiffs struck by an unfair levy. But records show Charles Moore played an active role in managing the Indian firm, including a position on its board.

Opponents of the tax provision warn the Supreme Court risks “blowing up” major planks of the tax code if it sides with the Moores. George Callas, an architect of the 2017 tax law for House Republicans, stresses other longstanding measures to curb tax avoidance could also be jeopardized. For decades, Congress has enacted safeguards to prevent corporations from indefinitely shielding foreign profits in offshore subsidiaries without paying U.S. tax.

According to Callas, ruling the one-time transition tax unconstitutional based on it being on “unrealized income” would undermine how many business partnerships are currently taxed. It could open the floodgates to new litigation seeking to dismantle layers upon layers of tax code aimed at boosting compliance.

The Supreme Court justices now bear the weighty responsibility to clarify the scope of Congressional authority on taxation granted by the 16th Amendment. Their decision in this case will shape not only the federal balance sheet but also how amenable the tax system remains to gaming by those with means and motive. As arguments get underway on Tuesday, much more hangs in the balance than just one couple’s tax grievance. The very foundations of equitable tax policy may rest on how the Court proceeds from here.

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