By Christopher Cox, Hank Adler | Wall Street Journal
The 16th Amendment authorizes the federal government only to tax income, but some members of Congress would love to tax wealth as well. That is widely understood to be unconstitutional, but a recent ruling from the Ninth U.S. Circuit Court of Appeals upholding a form of wealth tax could upend that conventional wisdom if it is allowed to stand.
The case, Moore v. U.S., involves a unique provision of the 2017 Tax Cuts and Jobs Act, which imposed a one-time retroactive tax applicable to individual U.S. shareholders of foreign corporations. Under previous law, U.S. taxpayers had to pay taxes on overseas corporate income when that income was repatriated to the U.S. in the form of dividends. The 2017 act abolished the tax on overseas income, bringing the U.S. tax system into line with those of most other developed countries. But it also created a “mandatory repatriation tax” on the corporation’s undistributed income since 1986, payable not by the corporation but its shareholders.
The result was that without selling their stock or receiving a dividend, U.S. investors were deemed to have received “income” and suddenly became liable for the new tax.
The plaintiffs are a couple, Charles and Kathleen Moore, who purchased 11% of a small foreign corporation in 2005. The Moores were passive investors, never participating in management of the corporation. The corporation never paid dividends. More than a decade after their investment, they suddenly became liable for a hefty tax bill under the new law, which applied to any shareholder with an interest of more than 10%.
“This would be devestating for real estate investors and homeowners alike as it could destroy a fundamental principle of tax policy by allowing the taxation of appreciated assets without a realization event (sale).”
Cameron Carter, Rose Law Group partner and director of transactional department