Many Winners and Losers Hinge on Under-the-Radar Court Case


Last year, the U.S. Supreme Court decided to weigh in on a matter that could profoundly affect the future of the nation, tax law, and philanthropy. The case is Moore v. United States, and it involves Charles and Kathleen Moore, a Washington-based couple that owns a minority stake in KisanKraft, a farming equipment company based in India. The couple paid a one-time mandatory repatriation tax, or MRT, under the Tax Cuts and Jobs Act signed by former President Donald Trump in 2017. The MRT was included within the larger tax cut bill to offset some of its immense cost.

The Moores subsequently challenged the legality of the MRT and demanded a refund of approximately $15,000, but the Ninth Circuit Court of Appeals rejected their claim. Then the Moores, who are backed by conservative law firm BakerHostetler, appealed to the U.S. Supreme Court and had their case accepted, though the high court rarely hears tax litigation. Oral arguments took place late last year, and many observers say the justices were atypically engaged, with most of them asking multiple questions of both sets of lawyers. So why is the Supreme Court unusually interested in the case, and why does it matter for the nonprofit sector?

What follows here will be a mere sketch, but the crux of the case is whether the U.S. Constitution's 16th Amendment can apply to “unrealized profits,” which include capital gains derived from the appreciation of stocks, property, and other instruments. The Amendment states that Congress “shall have power to lay and collect taxes on incomes, from whatever source derived,” but a key dispute concerns whether the couple derived anything from KisanKraft that can be classified as taxable income. The Moores agree that the value of their stock rose but argue that they didn't enjoy direct financial gain. The opposing contention is that the concept of unrealized profits should not be used as a dodge to avoid taxation on offshore earnings.

Virtually anyone in the nonprofit sector might note at this point that the wealthy do not generally receive their money from taxable wages, rent, and the like, but instead from inheritances, gains on investments, and other unearned income, whether onshore or offshore. They'd be correct. And the entire U.S. tax regime has, over recent decades, increasingly shifted away from investment income and onto wage earning, a fact that is a major driver of the income inequality threatening to fracture the nation into pieces.

Because court cases create winners and losers aside from the litigants that appear on the docket, any decision will have far-reaching effects. A ruling that the Moores' income is non-taxable would bring into question the constitutionality of a potential wealth tax. This is a big deal. Numerous figures, beginning with President Joe Biden, say the U.S. needs a wealth tax. Professor, lawyer, and former U.S. Secretary of Labor Robert Reich has outlined how seven tweaks to tax law—including a 2%-3% wealth tax—would generate an astounding $6 trillion in a decade, revenue which, in his view, would be enough to end poverty, fund universal healthcare, and help mitigate climate change.

And now we see why, perhaps, the Supreme Court was more engaged than usual during the oral argument session. It has the power to make a ruling that's good for wealthy donors but that simultaneously worsens inequality and instability, which many nonprofits attempt to alleviate. That's a lot riding on a $15,000 case that few have even heard about. Complicating matters is that the neutrality of the proceeding is suspect. Supreme Court watchers have noted pointedly that Justices Samuel Alito and Clarence Thomas have received and failed to disclose luxury gifts—including private jet and yacht trips, a house, and tuition for family—from the very billionaires they're now in a position to help. Their decision is slated to be announced sometime before July.

The conservative Philanthropy Roundtable filed an amicus brief with the Court in September, arguing that the intent of the Constitution and the 16th Amendment was for taxation powers to be limited and that the Ninth Circuit's decision fundamentally changes “the limits of the 16th Amendment and imperils a fair and predictable tax code.” Jack Salmon, writing for Philanthropy Daily, which also submitted an amicus brief, likewise comes out against the Ninth Circuit, warning against “dire outcomes for the philanthropic community, with the potential to undermine the transformative work nonprofits do across the nation.”

Philanthropy Roundtable notes that some proponents of wealth taxes believe these should also apply to private charitable foundations, and Salmon points out the same, writing, “Such taxes wouldn’t just impact millionaires and billionaires, the assets of charitable foundations could be targeted as well. All of this could have profound effects on the charitable sector, particularly for individual donors to charitable foundations and the individuals and communities they serve.”

The fact that philanthropy depends so much on wealthy donors is itself considered by many a symptom of structural societal ills, but even if a wealth tax on foundations sounds alarming, the areas in which philanthropy does much of its work are worsened by insufficient tax revenue. The wealthy give far less to charity than equal taxation would provide, which is a fact set aside by those who protect the assets of the wealthy on the assumption that a sufficient amount might trickle down. Elon Musk, the world's richest person, has given away less than 1% of his more than $200 billion hoard. It's safe to assume that many of the ultra-rich either pass nothing along to charity, or worse, donate to foundations dedicated to lowering their taxes even more.

Some observers believe the ultimate resolution of Moore v. United States may be for the Court to split the difference—uphold the Ninth Circuit's decision, with the plan to shoot down any wealth tax cases that come across the high bench down the line. It would be easy to assume this would please one-percenters, but recent surveys hint otherwise. Recent polling finds that 74% of the wealthy support higher taxes on their riches, 58% support the specific introduction of a 2% wealth tax on people with more than $10 million, and 54% believe extreme wealth is a threat to democracy. The fact that a majority of the wealthy being defended via court cases and amicus briefs see their extreme affluence as a symptom of dysfunction in the U.S. and the world is something that perhaps hasn't gotten the attention it deserves.

A small group of the wealthy have moved beyond anonymous survey answers and come forward to stamp their names upon the idea that U.S. taxation is unfairly skewed in their favor. For three years running, the members of the group Patriotic Millionaires have published a public demand that they be more highly taxed. The collective includes two Disney heirs, a Rockefeller heir, and more than 200 others, who characterize their assets as "unproductive private wealth" that needs to be turned into an investment for a “common democratic future.” Their public stance has helped bring more notice to the issue, but due to the current makeup of the Supreme Court, a wealth tax will almost certainly have to wait until at least a few of the justices have departed the scene.

The battle over whether the 16th Amendment allows the Moores to be taxed on their unrealized gains can't obscure the fact that, outside the court, philanthropy is not adequate for the challenges of the day. Up to $9 trillion is needed to tackle climate change alone. Poverty alleviation, food security, disease eradication, and the prevention of warfare will require trillions more. The generosity of megadonors and big foundations is laudable, but there may not be enough forward-thinking people and organizations to bring about change unless there's a structural alteration to tax laws. As things now stand, that might be decades down the line. What shape the United States is in at that point is anyone's guess.