Justices Seem Skeptical of Challenge to Trump-Era Tax Provision - The World News

Justices Seem Skeptical of Challenge to Trump-Era Tax Provision

The Supreme Court seemed open on Tuesday to narrowly upholding a tax on foreign income in a case that many experts had warned could rewrite vast portions of the U.S. tax system.

A majority of the justices appeared skeptical of striking down the tax. Instead, the justices, including the court’s liberal wing and more moderate conservatives, seemed to be searching for a way toward a limited ruling that would not establish a more sweeping precedent.

“I don’t fault the parties for shooting for the stars,” Justice Sonia Sotomayor said about halfway through more than two hours of dense, highly technical arguments. “I guess the tenor of the questions is that nobody’s happy with anybody’s definition of anything, OK?”

She suggested there were “two ways to narrowly rule.”

Justice Neil M. Gorsuch appeared to agree. After Justice Sotomayor spoke, he turned toward her and said, “I do think there is room for some narrow ground, as Justice Sotomayor suggested.”

The case, Moore v. United States, appears on its surface to be a limited dispute over a tax law, but many tax experts said it could fundamentally change how income is defined and could block future efforts to tax billionaires’ wealth.

At issue was legislation signed in late 2017 by President Donald J. Trump. The law, called the Tax Cuts and Jobs Act, included a provision that changed how foreign profits of American companies could be taxed. It imposed a one-time tax on earnings from overseas subsidiaries. Before the law, taxes were owed only on profits that were brought into the United States.

The case hinges on what may appear to be a fairly straightforward question: What counts as income, and when should it be subject to such a tax?

The one-time tax typically applies to corporations, but a couple in Washington State challenged the law after being required to pay nearly $15,000.

The couple, Charles and Kathleen Moore, who are backed by conservative and business groups, had invested in a friend’s company in 2006, a venture to help rural farmers in India with agricultural equipment.

In court filings, the couple said they invested $40,000 in the company in exchange for receiving shares in the venture, KisanKraft. By 2017, they said, the business employed more than 350 people in 14 regional offices in India.

Mr. Moore went to India several times to observe the company, according to court filings, which note that he “was impressed with the difference that KisanKraft was making in the lives of India’s rural poor.” The couple said they received no dividends or other payments.

But in 2018, the couple received a surprise tax bill for nearly $15,000. When the couple asked a former co-worker about it, they said in court documents, he told them that a new law meant that they now owed income tax on KisanKraft’s reinvested earnings dating back to 2006.

The particulars of the Moores’ story were almost entirely absent from the court’s oral argument, which focused on the history of the tax code and various interpretations of income.

The lawyer for the Moores, Andrew M. Grossman, began by arguing that the government misinterpreted the meaning of the word “income” and that a court ruling that adopted the government’s definition would “make a hash of the current law.”

The Moores have said “income” means only gains made through payment to a taxpayer, not through an increase in the value of property.

The court’s liberal wing — Justices Sotomayor, Elena Kagan and Ketanji Brown Jackson — all pushed against those arguments.

Solicitor General Elizabeth B. Prelogar, representing the government, contended that the tax provision at issue was “firmly grounded in the 16th Amendment’s text and history.” She added that the amendment “allows Congress to impose taxes on incomes” and that “the 16th Amendment’s drafters” would have understood taxes on incomes to include taxes like the provision in question.

She said that a broad decision by the court for the Moores “would cause a sea change in the operation of the tax code and cost several trillions of dollars in lost tax revenue.”

Justice Samuel A. Alito Jr. engaged in a sharp, lengthy back-and-forth with Ms. Prelogar, expressing skepticism toward the government’s view that the case would have “far-reaching consequences.”

He posed a hypothetical, describing somebody who “graduates from school and starts up a little business in his garage, and 20 years later, 30 years later, the person is a billionaire.” He asked if Congress could then tax that money on the grounds that it is income.

Ms. Prelogar quickly responded that his example “sounds to me like the hypothetical is actually functioning as a property tax.”

Justice Gorsuch jumped in, questioning the scope of Ms. Prelogar’s arguments.

“I’m just asking what the limits of your argument are,” he said. “And it seems to me there are none.”

“Well, I certainly think that Congress has broad taxing power,” Ms. Prelogar replied.

After Justice Gorsuch told Ms. Prelogar that he was “not willing to overturn a hundred years’ worth of precedent,” Justice Kagan quickly followed up.

“Justice Gorsuch said you were asking us to overrule a hundred years of our precedent,” Justice Kagan said. “Sounds bad. Are you?”

Those gathered in the courtroom laughed.

Ms. Prelogar clarified that she was “not asking the court to overrule any precedent in this case” and that she was “asking the court to follow its precedent.”

The case, while highly technical, has also kicked up some controversy.

Some tax policy experts have urged the court not to hear the case, claiming it is based on inaccurate facts, reflecting growing scrutiny over how some matters come before the court.

Some conservatives, including Paul Ryan, the former House speaker who helped write the law, have also criticized the Moores’ case. Mr. Ryan has said that a ruling in their favor could endanger up to a third of the U.S. tax code.

Justice Alito drew further attention to the case when he gave an interview to one of the lawyers for the Moores in The Wall Street Journal, prompting calls for him to recuse from the case.

Democratic lawmakers had accused him of crossing an ethical line by sitting down for multiple interviews with that lawyer, David B. Rivkin Jr., who writes for the opinion pages of The Journal. Justice Alito rejected those demands and indicated he planned to hear the case.

Adding to the controversy, some ethics experts have suggested that Chief Justice John G. Roberts Jr., Justice Clarence Thomas and Justice Jackson recuse themselves from the case. They have pointed to the stake each justice holds in an limited liability company or partnership that could benefit them should the justices declare the tax unconstitutional.

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