Chief Justice John Roberts may have given away the outcome in Moore v. United States on Tuesday as he wrapped up the two-hour oral argument session. “Thank you, counsel, the case is dismiss—submitted to the court,” he told the lawyers, quickly correcting his verbal flub midsentence.
The high-profile tax case saw the justices and the lawyers spar over many moving parts: a tax-code change that was made five years ago, the Sixteenth Amendment, and the idea of what, precisely, counts as “income” under the Constitution. Lawyers for the Moores, the couple at the center of the case, warned that ruling against them would radically expand Congress’s taxation power. The Justice Department countered that a defeat for them would “wreak havoc” on the federal tax code.
But the justices appeared more interested in steering the case toward a narrower, lower-impact outcome. Weighty decisions on the exact meaning of “income” and what counts as “realization” did not appear to be imminent. “Nobody’s happy with anybody’s definition of anything,” Justice Sonia Sotomayor said at one point toward the end of the arguments. Nor was it clear whether there were five votes to kill any future Democratic proposals for a wealth tax before congressional Democrats could pass one—a legal conquest that some right-wing legal activists had sought to achieve.
The case stems from the Tax Cuts and Jobs Act, or TCJA, the 2017 overhaul of the federal tax code passed by a Republican-led Congress and signed into law by then-President Donald Trump. The TCJA revamped all sorts of things that affected everyday Americans: who fell into which income tax bracket, how personal exemptions and the standard deduction work, and how much could be gained from the family tax credit. It even zeroed out the Affordable Care Act’s individual-mandate penalty in a failed bid to render that law unconstitutional.
The TCJA also tackled some of the tax code’s more esoteric aspects. Among those changes was a major shift in how the United States taxes income earned by Americans who own all or part of a foreign corporation. Since 1986, that small subset of Americans only faced taxes when the corporation paid out dividends to shareholders. This led to a tax-avoidance strategy whereby those companies would simply not pay out dividends to avoid a taxable event.
By the government’s estimates, that strategy allowed Americans who owned significant chunks of foreign companies to evade taxes on nearly $2.3 trillion in offshore earnings between 1986 and 2015. The TCJA’s overhaul eliminated the tax on dividends from foreign-owned companies as part of a broader shift in how the U.S. taxes overseas earnings. To avoid rewarding those who had kept their earnings offshore, it also imposed a one-time tax known as the Mandatory Repatriation Tax, or MRT, on the foreign corporate holdings.
The vast majority of Americans will never have to care about this because the vast majority of Americans don’t own enough shares in foreign corporations to fall under these obscure tax laws. These new taxes only kicked in for people who own more than 10 percent of a foreign company; anyone whose 401(k) has a few shares of Toyota or Samsung in it needn’t be personally preoccupied by these prestidigitations. Moreover, none of these changes apply going forward: If you didn’t pay the MRT five years ago, you won’t have to pay it ever.
The same thing can’t be said for Charles and Kathleen Moore, a married couple from Washington. The Moores invested $40,000 in a family friend’s toolmaking company in India in 2005 and saw their share grow to roughly $500,000 in value by 2017. When they filed their 2018 taxes, they discovered that they owed about $15,000 under the MRT alone. They paid the requisite amount to the IRS and then sued to recoup it, arguing that the MRT violated the Sixteenth Amendment.
“The word ‘income’ is not an inkblot,” Andrew Grossman, who represented the Moores on Tuesday, told the justices in reference to the amendment’s text. He argued that while the Sixteenth Amendment gave Congress the power to impose an income tax, it did not allow lawmakers to tax unrealized income, meaning income that had not directly passed into the taxpayers’ hands.
The Moores failed to persuade the lower courts that a 1920 case known as Eisner v. Macomber had adopted this understanding of realization. The Justice Department also rejected that reasoning by noting that the court had largely ignored the stray language in Macomber in the 103 years since it was handed down.
“In arguing that the Sixteenth Amendment’s grant of power somehow stripped Congress of the preexisting authority upheld in Hubbard, [the Moores] stake their case on dictum from Eisner v. Macomber,” the government wrote in its brief for the justices, referencing another case that addressed similar issues. “But that dictum was poorly reasoned and has been abrogated by many later decisions limiting Macomber to the stock-dividend context in which it arose.”
Solicitor General Elizabeth Prelogar, who argued for the government, told the justices that the MRT was “firmly grounded in the Constitution’s text and history.” She framed Macomber as an outlier and noted that Congress, the IRS, and even the courts had gone to great lengths to never define “income” for the federal tax code. Doing so, Prelogar argued and past courts had also reasoned, would effectively be creating a road map for legalized tax avoidance.
Beyond their personal stakes in the case, the Moores are also hoping to use this case to preemptively strike down a major Democratic policy proposal. They explicitly argued to the court in their petition for review that a ruling in the Moores’ favor would also prevent Congress from enacting a wealth tax. More than a few Democratic policy leaders have proposed wealth taxes, most notably Massachusetts Senator Elizabeth Warren, who championed it during her 2020 run for the White House. Some Democratic senators have pursued similar legislation.
What sets this case apart is how the Moores and their lawyers explicitly framed it as a vehicle for the justices to kill a wealth tax before Congress can pass one. “There is every reason for the Court to resolve the pivotal constitutional question of realization now, when its judgment can inform lawmakers and stands to head off a major constitutional clash down the line,” they argued in their petition for review, citing proposals for wealth taxes in the public discourse.
This is not how the legislative or judicial process is supposed to work. If Congress were to pass a wealth tax, the Supreme Court would then be free to decide its constitutionality. (A challenge would be virtually guaranteed since it’s an ongoing debate among legal scholars.) But the courts are not supposed to preemptively tell Congress what it can or can’t pass.
The Moores’ lawyers don’t share that vision of the separation of powers. In addition to the requests in their briefs, they also mounted a public lobbying campaign for the justices to use the case to kill a wealth tax. In a 2021 op-ed in The Wall Street Journal, Grossman and fellow lawyer David Rivkin argued that “the courts” should use their clients’ case because it “stands to slam shut the door on a federal wealth tax like the one Sen. Elizabeth Warren wants to enact.”
To complicate matters further, Justice Samuel Alito was even interviewed by Rivkin and a Journal editorial columnist about the court’s work in general. That led Senate Judiciary Committee Chairman Dick Durbin, a Democrat, and other critics to suggest that Alito should recuse himself from the case. In response to the public criticism, Alito wrote a short statement explaining why he would continue to participate in the case. He argued that justices are interviewed by news outlets from time to time and that it hasn’t led to recusals in the past.
“This argument is unsound,” Alito wrote. “When Mr. Rivkin participated in the interviews and co-authored the articles, he did so as a journalist, not an advocate. The case in which he is involved was never mentioned; nor did we discuss any issue in that case either directly or indirectly. His involvement in the case was disclosed in the second article, and therefore readers could take that into account.”
While neither the justices nor the lawyers referenced the wealth-tax proposals, they hovered on the edge of the oral argument session in more ephemeral ways. Alito and Justice Neil Gorsuch peppered Prelogar with questions about whether Congress could tax unrealized gains in mutual funds and retirement accounts as income.
Prelogar argued that the government could do so under its reading of the Sixteenth Amendment, but also said the court could weigh such taxes down the road based on historical practice. In a more practical sense, she noted, such proposals were “unlikely to ever come to pass” and were “far-fetched hypotheticals” that shouldn’t be used to draw bright-line constitutional rules.
Gorsuch, for his part, appeared unpersuaded. “Wouldn’t you agree that when the court opens a door, Congress tends to walk through it?” he asked Prelogar. But other key members of the court were more skeptical. “Members of Congress want to get reelected,” Justice Brett Kavanaugh noted in one exchange with Prelogar. “That’s why the hypotheticals are far-fetched.” Roberts and Justice Amy Coney Barrett also appeared reluctant to potentially upend the federal tax code, as did all three of the court’s liberals.
With a tangled nest of precedents to wrestle with and an apparent desire to avoid a wave of other legal challenges to similar pass-through provisions, the justices wrapped up the session by all but saying they wanted a low-key ruling in the case. “There is some room for narrow grounds, as Justice Sotomayor suggested,” Gorsuch eventually noted in a friendly exchange with Prelogar.
But the exact contours are unclear, and the justices could always change their minds once the opinion writing begins. For now, Congress’s power to tax appears intact—and a right-wing legal activist bid to curb it seems to be going nowhere.
