The Supreme Court is about to redefine what unrealized capital gains are

Could entrepreneurs and businesses recoup billions of dollars in taxes paid after Congress passed the Tax Cuts and Jobs Act in 2017? A case being heard by the U.S. Supreme Court starting this week will answer that question.

SCOTUS is now hearing arguments in Moore v. U.S. The 2017 tax law included a one-time levy on profits made outside the country on American-owned businesses to help pay for lower income tax rates. The law also imposed taxes on Americans who owned 10% or more of certain foreign companies that owned profits. Before the 2017 law, businesses were able to hold onto trillions of dollars in foreign assets without paying U.S. taxes on them.

Charles and Kathleen Moore are seeking a $14,279 refund on an Indian company they owned a substantial stake in. That company, KisanKraft, sells tools to rural farmers, from which the Moores argue they never received a distribution, dividend or other kind of payment.

The Moore case will therefore decide whether income must be realized (or received) before it can be taxed under the Constitution’s 16th Amendment, passed by Congress in 1909. Just four years after that, President Woodrow Wilson signed the Revenue Act which imposed a 1% income tax on the wealthy.

Tax code chaos on the horizon?

A victory for the Moores could squash Democrat plans to enact various wealth taxes on stocks and index funds. For example, Democratic Senator Elizabeth Warren of Massachusetts wants to tax households worth $50 million or more 2% and tack on a 1% federal tax on billionaires.

Former House Speaker Paul Ryan, the Republican from Wisconsin who championed the 2017 tax law, predicts “chaos” if SCOTUS clearly defines unrealized gains as exempt from federal taxation. “I’m not for a wealth tax … but I think if you use this as the argument to spike a wealth tax, you’re going to basically get rid of, I don’t know, a third of the [federal tax] code,” Ryan told attendees at a Brookings Institute event in September.

Congress punted for the 100th time on making substantial spending cuts this fall. Funding for all federal agencies runs out in February. The Pentagon claims it’s out of money to continue funding the war in Ukraine.

No doubt a ruling for the Moores will escalate panic on Capitol Hill and spur many lawmakers to call for higher income taxes. Republican lawmakers for the most part won’t budge if they want to get re-elected. SCOTUS will announce its decision no later than June.