Judges appear skeptical about challenging Trump-era tax provisions

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

A majority of the justices seemed skeptical about eliminating the tax. Instead, the justices, including the court’s liberal wing and more moderate conservatives, appeared to be looking for a path to a limited ruling that would not set a more sweeping precedent.

“I don’t blame the parties for shooting for the stars,” Judge Sonia Sotomayor said about halfway through the more than two-hour, highly technical argument. “I think the point of the questions is that no one is happy with anyone’s definition of anything, okay?”

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

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

The case appears at first glance to be a narrow dispute over a tax law, but many tax experts said it could fundamentally change the way income is defined and block future attempts to tax the wealth of billionaires.

This involved legislation signed by President Donald J. Trump at the end of 2017. The law, called the Tax Cuts and Jobs Act, included a provision that changed how foreign profits of U.S. companies could be taxed. It imposed a one-time tax on the income of foreign subsidiaries. Before the law, taxes were only due on profits brought into the United States.

The case, Moore v. United States, No. 22-800, centers on what seems like a fairly simple question: what counts as income, and when should it be subject to such a tax?

The one-time tax typically applies to businesses, but a couple in Washington state challenged the law after being forced 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. In 2017, they said the company employed more than 350 people across 14 regional offices in India.

Mr. Moore went to India several times to observe the company, according to court documents, which note that he was “impressed by the difference 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 of almost $15,000. When the couple asked a former colleague, they said in court documents, he told them a new law meant they now owed income taxes on KisanKraft’s 2006 reinvested earnings.

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

The Moores’ attorney, 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 that “income” means only profits derived from payments to a taxpayer, and not from an increase in property values.

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

Solicitor General Elizabeth B. Prelogar, representing the government, argued that the tax provision at issue was “firmly entrenched in the text and history of the 16th Amendment.” She added that the amendment “allows Congress to impose taxes on income” and that “the framers of the 16th Amendment” would have understood that taxes on income would include taxes like the provision in question.

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

Justice Samuel A. Alito Jr. had a sharp and lengthy exchange with Ms. Prelogar, expressing skepticism about the government’s view that the case would have “far-reaching consequences.”

He asked a hypothetical question, describing someone who “graduates from school and starts a small business in his garage, and twenty years later, thirty years later, that person is a billionaire.” He asked whether Congress could then tax that money on the basis that it is income.

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

Justice Gorsuch intervened, 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 aren’t any.”

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

After Justice Gorsuch told Ms. Prelogar that he was “unwilling to overturn a hundred-year precedent,” Justice Kagan quickly followed suit.

“Judge Gorsuch said you were asking us to overturn 100 years of our precedent,” Judge Kagan said. “Sounds bad. Are you?”

Those 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 generated some controversy.

Some tax policy experts have urged the court not to hear the case. claiming it is based on incorrect factsreflective increasing control about the way in which some cases come to trial.

Some conservatives, including Paul Ryan, the former Speaker of the House of Representatives who helped write the law, have also criticized the Moores’ case. Mr Ryan has said a ruling in their favor could pose danger up to one-third of the US tax code.

Judge Alito drew even more attention to the case when he gave an interview to one of the Moores’ attorneys in The Wall Street Journal, prompting calls for his dismissal.

Democratic lawmakers had accused him of crossing an ethical line by conducting multiple interviews with that lawyer, David B. Rivkin Jr., who writes for the Journal’s op-ed pages. Judge Alito denied these demands and indicated that he intended to hear the case.

Adding to the controversy, some ethical experts have suggested that Chief Justice John G. Roberts Jr., Justice Clarence Thomas and Justice Jackson also recuse themselves. They have pointed out the interest that each judge has in a limited liability company or partnership, which could benefit him if the judges were to declare the tax unconstitutional.