How a Legal Fight Over a $15,000 Tax Bill Could Upend the U.S. Tax Code

Speaking to business leaders at a 2018 dinner at his New Jersey golf club, former President Donald J. Trump hailed the achievement of his recently enacted tax cuts, highlighting a provision that he said would reel in trillions of dollars that American companies had been holding overseas.

“We expect to have in excess of $4 trillion brought back very shortly,” Mr. Trump said. “This is money that would never, ever be seen again by the workers and the people of our country.”

Mr. Trump was referring to measures in the 2017 Tax Cuts and Jobs Act that overhauled how the United States taxed corporate profits that were earned abroad. Those provisions dramatically reduced the incentives that big companies had to keep their cash parked overseas in hopes that those funds would be reinvested at home.

Mr. Trump did not mention that along with that lower tax on foreign earnings, known as the global intangible low-taxed income — or the acronym GILTI — came a one-time levy on three decades’ worth of foreign corporate earnings that would be “repatriated.” Five years later, that tax is the subject of a case being heard before the Supreme Court on Tuesday that has implications for the entire U.S. tax code.

GILTI as charged?

Before the 2017 tax law was enacted, American companies paid taxes on their worldwide profits at a rate of 35 percent. But they were able to indefinitely defer taxes on profits they earned abroad as long as that money stayed overseas.

If a company wanted to bring that money back into the United States, it would have to pay the 35 percent corporate tax rate minus whatever it had already paid abroad. The potential for a big tax hit encouraged multinational companies to stash their profits in low-tax jurisdictions likes Bermuda, Ireland and the Netherlands.

The “GILTI” tax that was enacted as part of the 2017 tax law imposed a tax of at least 10.5 percent on the foreign earnings of American companies so that businesses such as Microsoft, Merck and Facebook would see less benefit from pushing profits into foreign subsidiaries. The law also applied a one-time “transition” levy on cash and assets that companies had kept overseas over the previous three decades that had essentially escaped U.S. taxation.

The changes to the international tax code, which were the subject of intense lobbying by corporate America, were projected to raise more than $300 billion over a decade.

A tricky transition tax

The transition tax is at the heart of the case being heard by the Supreme Court on Tuesday, Moore vs. U.S.

While the tax broadly applied to big corporations like Apple and Alphabet, it also hit some individuals if they owned more than 10 percent of a foreign company. Charles and Kathleen Moore, who live in Washington state, owned an 11 percent stake of KisanKraft, an Indian firm that provides equipment for small farmers. That stake was worth about $500,000.

Because of the transition tax, the Moores owed $15,000 to the U.S. government even though they had never “realized,” or actually received, any of their profits from the investment.

In their lawsuit seeking a refund, the Moores argued that the one-time levy fell outside the power Congress has under the 16th Amendment to tax income.

A ruling with big implications

Legal experts and economists have been following the arguments in the Moore case closely and will be listening for the tenor of questions from the justices because the ruling has the potential to upend large swaths of the U.S. tax code.

In particular, it could influence the ability of the United States to tax overall wealth, including assets like real estate, stock ownership and other assets that have accrued value but whose gains have not been realized by its owners. In other words, whether the government can tax earnings that exist on paper but have not yet been recognized.

The Committee for a Responsible Federal Budget, a fiscal watchdog, estimates that the decision could end up costing the federal government anywhere from $3 billion to $1 trillion of lost revenue over the decade and create an array of new loopholes.

A narrow ruling in favor of the Moores, the group suggests, could strike down the transition tax for individuals and “pass-through” firms, whose profits go directly to owners that are taxed as individuals. A broader ruling could strike down the entire transition tax, which could cost nearly $350 billion in lost revenue, and the 10.5 percent tax on foreign earnings, which could cost another $350 billion.

If the Supreme Court takes a more expansive view, it could theoretically also invalidate the new 15 percent corporate minimum tax that Democrats passed as part of the Inflation Reduction Act of 2022. That tax applies to financial income that companies report to their shareholders that could be considered “unrealized” profits.

And potential for global fallout

Although these taxes were passed by Republicans and signed into law by Mr. Trump, the Supreme Court ruling could have ramifications for a key part of President Biden’s economic agenda.

In 2021, the Biden administration reached an agreement with more than 130 countries on a new 15 percent “global minimum tax” that would require companies to pay a rate of at least that much on their global profits no matter where they set up shop. The threshold was intended to give companies less reason to flee to countries with rock-bottom rates, and to put less pressure on nations to slash their tax rates to attract foreign investment.

To comply with that agreement, the U.S. said it would overhaul the 2017 international tax, raising the rate to 15 percent from 10.5 percent.

It would also seek to change the structure of the GILTI tax so that the new minimum tax is applied on a country-by-country basis, preventing companies from lowering their tax bills simply by seeking out tax havens and “blending” their tax rates.

Congress so far has been unable to pass legislation that would allow the U.S. to comply with the agreement it brokered. A ruling from the Supreme Court that says the U.S. cannot tax foreign income would represent another blow, according to a recent Congressional Research Service report, by making it impossible for the U.S. to conform to the deal’s rules.