High Court Tax Case Could Curb Congress’s Revenue-Raising Powers

An unusual alliance of tax professionals across the political spectrum is sounding the alarm about how a foreign income tax case on the Supreme Court’s docket not only could upend large swaths of the US tax code but also reshape Congress’s ability to amend that code.

Justices will hear Moore v. US this fall, which challenges the “transition tax” on unrealized foreign earnings brought back to the US, enacted in the Republicans’ 2017 tax overhaul. Former GOP staffers, lawmakers, practitioners, and the Joint Committee on Taxation fear, though, that the Supreme Court will have a tough time narrowing its ruling enough to prevent more lawsuits challenging other parts of the code.

A broad ruling in favor of the plaintiffs would limit how Congress can raise revenue in many ways, potentially setting up more uncertainty with the 2025 expiration of tax provisions, tax professionals said.

That possibility has created an unlikely union of defenders of the 2017 tax law provision—from former House Speaker Paul Ryan to the Biden administration—while some conservatives are turning against the transition tax.

“I think 2025 is already set up to be an enormously complex Rubik’s cube and this would just add another order of magnitude to how we negotiate something,” said George Callas, a former House Ways and Means and Republican leadership tax policy staffer.

Charles and Kathleen Moore are seeking a $14,729 refund of taxes they paid on undistributed earnings from an Indian company they owned shares in. They argue that tax code Section 965‘s charge on unrepatriated foreign earnings from 1987 to 2017 is unconstitutional. The “transition tax” was created using the 2017 Republican tax law, to ensure the earnings didn’t escape US taxation as the country transitioned to a new international tax regime.

Senate Finance Chair Ron Wyden (D-Ore.) cautioned earlier this summer that the case could upset “decades of settled tax law and bipartisan agreement on Congressional authority, all for the benefit of the ultra-wealthy.”

Ways and Means Ranking Member Richard Neal (D-Mass.) said Tuesday that justices may “wipe out bipartisan, settled provisions of the tax code.” Ways and Means Chair Jason Smith (R-Mo.) didn’t immediately respond to a request for comment and Senate Finance Ranking Member Mike Crapo (R-Idaho) declined to comment.

Narrow Ruling?

While the Moores are only seeking thousands of dollars, the government has estimated the transition tax would generate $340 billion over 10 years. But if the ruling calls into question other parts of the tax code, trillions could be at stake, according to a Tax Foundation report that also noted that scenario was unlikely.

Conservative groups also see the case as an opportunity to take down a provision of the Republican tax law they now say they opposed. Americans for Tax Reform and the Cato Institute both wrote in friend-of-the-court briefs in the Moore suit that the transition tax is unconstitutional.

Even a narrow ruling only focused on the transition tax will still likely cause uncertainty, said Chye-Ching Huang, who heads the Tax Law Center at New York University’s law school. Unless justices examine each provision of the tax code, it’s difficult to avoid the years of litigation that will potentially spring from this case, Huang said.

Finding a way to agree with the Moores but not call into question other, similar taxes would be tough, said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.

“It’s difficult to draw the line and that’s why a lot of people here are worried,” he said.

Problems for 2025

Much of the 2017 tax law expires in 2025, meaning congressional taxwriters will face the momentous task of extending those provisions or making other changes to the tax code.

“It might not be immediately clear what the Supreme Court ruling means, which means they would be legislating in somewhat of an uncertain future as well,” Huang said.

Courts might need to settle questions of the constitutionality of taxes on partnerships and pass-through entities, taxes on corporations’ foreign income such as Subpart F, and the tax on the global intangible low-taxed income, or GILTI, practitioners said.

“I mean, a lot of the tax code would be unconstitutional if that thing prevailed,” Ryan said at a Brookings Institution event Sept. 27. “You know, Subpart F, I could just go on and on and on.”

Callas said that Congress would need new ways to raise revenue if the high court decides for the Moores, but lawmakers wouldn’t necessarily know what’s constitutional.

If the Supreme Court does limit Congress’s ability to levy taxes in certain ways, congressional taxwriters will need to come up with alternatives, Pomerleau said. It’s not immediately clear how Congress could make up the lost revenue in the taxation of pass-through entities, whose profits are taxable to the owners even when the profits aren’t distributed.

If Democrats were to take control of Congress in 2025, the ruling may also affect tax policies they hold dear. Some Democrats have proposed raising revenue by taxing capital gains as they accrue rather than when they’re realized—an unlikely scenario if the high court rules lawmakers can only tax income when it’s realized, Pomerleau added.

“It’s my view that Congress should have the flexibility to decide whether it wants to do that or not,” Pomerleau said. “So it would be a downside if the Supreme Court just said that, ‘No, you can’t do that sort of taxation.’”