Watching the Case

The Supreme Court Case Moore v. United States could mean major changes to tax law, but what is the case about? Booth guides you through the basics of the case and the implications if it passes.

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• (00:00) - Watching the Case
• (01:09) - Background of the Case
• (04:39) - How Are Pass-Through Entities Taxed?
• (07:21) - What is a Wealth Tax?

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Booth Parker, CPA

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Today on the podcast we are going to talk about something that unless you watch a lot of financial news, you may not have heard about this court case. So it is a Supreme Court case called Moore versus the United States. And it's important to kind of understand this case because depending on what the ruling is, it could have some pretty large effects on the tax code going forward.

So we probably won't have a ruling before 2024, but it's still important to know the pieces involved in this case and how that decision, which, [00:01:00] whichever way it goes, can potentially affect a lot of individuals, especially those with small businesses or with any kind of investments.

So the case involves a couple from Washington State who own a controlling interest in a foreign company, I believe it is in India. And the company had income even though the funds were not distributed and repatriated to the United States. So the company had actual income and profits. Even though the actual cash funds were not distributed and sent back to the US to the Moores, so that's, that's an important piece to start with.

And the case is challenging a levy. This levy is known as deemed repatriation. That's kinda a hard word to say, isn't it deemed repatriation that was enacted during the 2017 tax cuts in Jobs Act. It was [00:02:00] basically put in to kind of offset a lot of the revenue that would be lost due to tax cuts in, in that act.

So it was a one-time levy on earnings and profits accumulated in foreign entities after 1986. That's the real boring part. Companies like Apple and Google, big companies like that had to pay billions under this new levy.

So the Moores had a tax bill that they had to pay, I believe it was right around $15,000. And they are challenging this levy on these company earnings because they never received actual cash from this income of this company.

So what they're essentially challenging is what is defined as income in the tax code. And that's where, depending on the ruling of this case, there's the potential for some pretty large um, fiscal [00:03:00] policy effects that could happen. What the 16th Amendment says. It says, the Congress shall have power to lay and collect taxes on incomes from whatever source derived without apportionment among the several states, and without regard to any census or enumeration.

So while the 16th Amendment outlines the legal definition of income, the Moore case is questioning whether individuals must realize or actually receive the profits, the actual cash before tax is incurred. This is where it gets a little political, and I'm not here to have the political debate of it, but just to explain the pieces.

So this is where the political piece comes into play because the issue has been raised during what are often called billionaire tax type debates. So it could [00:04:00] affect future proposals of tax law changes, especially around wealth taxes.

So if the court rules that the Moores did incur a tax on unrealized income and deems the levy unconstitutional, it could majorly affect the future taxation of pass through entities. Pass through entities are things like partnerships, limited liability companies, S corporations, and the like. And that would in turn, substantially affect federal revenue and future tax policy.

So it's important to understand how the pass through entities are currently taxed and have been taxed for decades. Most small businesses in the US are pass through entities. In a nutshell, here is how that process works. If you have [00:05:00] an, we'll, say, an S corporation and that S corporation, its P and L, its income statement for the year shows that it had a net profit of a hundred thousand dollars.

That $100,000 is the taxable income from that S corporation. The S corporation itself does not pay the tax. That is passed through to the individual that owns the S corporation. If there's more than one owner, it passes through pro rata based on their ownership shares, so that full a hundred thousand dollars would be taxed on the owners, the shareholders personal income tax return, even if the money was not taken out of the business, so the business maybe had a hundred thousand dollars of net profit that is taxable income, and the owner may only take $50,000 out of the company even though the full hundred thousand dollars [00:06:00] is taxed. So if it were deemed that only the income actually taken out of the business, that last example of only that $50,000 was taxable. Then the amount of federal revenue would decline substantially causing a need to obtain the money elsewhere because we know they're going to get theirs. They're not going to lower the total total tax they want to receive.

So they would need to get that money elsewhere through other taxation methods. So this is where there's the potential for some major changes to the tax law. Now, the, the way these pass through entities have been taxed. . Has has stood for a long time, so I do think it's probably going to not change the way that that is, that is taxed, but that is up on the table in the discussion of this case.

Now the crutch of the political piece here is [00:07:00] the potential effects for proposed wealth taxes. So many experts argue that the ruling could either pave the way for a wealth tax to be enacted, or it could potentially end the discussion on the possibility of a wealth tax. So what is a wealth tax?

Basically, a wealth tax is imposed on an individual's net wealth, net worth kind of kind of thought process. So there would not have to be income realized in order to assess the tax. So let me give you an example. Say on January 1st, you buy a hundred shares of X, Y, Z stock at a hundred dollars per share for a total of $10,000.

On December 31st, the shares of X, Y, Z are now worth $180 per share for a total of $18,000. [00:08:00] You did not sell any of the of the shares as you're intending to hold them long term. Under current law, you would not owe any tax unless you had actually sold those shares and realized the income from the sale.

On the flip side, a wealth tax would go ahead and tax that $8,000 gain, even though it has not been realized yet. So this is a very simple example with one stock, but think of your entire investment portfolio, things like that, that are making up your net worth. So it, it has the potential to be a large amount.

So as you can see there, there really is a lot riding on the decision of this case. There's a lot of discussion on each political side about it and there's a lot of discussion on the potential changes, drastic changes it could have on tax law [00:09:00] going forward, especially in regard to pass through entities and the potential of

A wealth tax. So, bring this up at Christmas dinner. It could be uh, create some interesting discussion depending on people's political views. So, as I said, I don't do the political thing, it's not my cup of tea, but this is very important information to know, especially if you have a pass through entity or you have a lot of unrealized gains sitting in investments and things like that.

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