Moore than you've bargained for? - Challenging the taxation of unrealised profits

On the face of it, Moore v United States appears to be a fairly unremarkable challenge to the legality of recently introduced US tax law. Yet the consequences – both legal and conceptual – could be far-reaching and high net worth individuals and families around the world will be watching on with interest.

Moore case

Charles and Kathleen Moore invested in an Indian business in 2005. The business was profitable and they re-invested the profits into the business (growing its worth) rather than paying them out to shareholders. So far, so good for the Moores.

Yet, as part of a new approach to taxation, Donald Trump's Tax Cuts and Jobs Act 2017 (the TCJA) levied a one-time 'repatriation' tax on unrealised profits in US-held foreign shares, even where they remained overseas. This brought the Moores' profits into charge in the US.

The Sixteenth Amendment to the US Constitution established the right of the Federal Government to levy taxes but the seminal case of Eisner v Macomber clarified that income must be realised before it can be taxed, and that wealth does not represent income.

Primarily, the Moores will argue in the Supreme Court that the TCJA is not consistent with the Sixteenth Amendment and if the Supreme Court were to decide in favour of the Moores this would also have far-reaching implications for a number of other areas of the US tax code. 

But their case will doubtless also explore the broader concept that taxing (and effectively encumbering) inaccessible wealth is unfair and illegal.

Mechanics of the charge to tax

Traditionally, countries have taxed gains on generation or receipt, in much the same way as an individual is not taxed on their headline employment salary figure, but rather on the actual receipt of that income over a particular period.

Income and gains are taxed in this manner in most of the world (including the UK). Income and capital gains taxes have a broader scope than the simple receipt of monies for duties/services performed and sales of property, respectively, but the essence of a tax arising only when income and gains are generated is consistent and well-established.

Clearly a departure from this principle could, in some instances, cause liquidity problems for individuals who are lumbered with a tax bill having not yet received the profits to meet that liability. Returning to the salary example, one suspects the taxman would not be too popular if he tried to collect income tax from an employee before he had received his pay-cheque.

Wealth taxes

Perhaps most significantly in current economic times, the taxation of unrealised profits is arguably not too far removed from a tax on an individual's personal wealth – and (despite Mr Trump's staunch conservatism) a step closer to the blanket wealth tax that has long been mooted by the Democrats and other left-leaning politicians.

As global inequality grows, there have been calls around the world in recent years to more aggressively tax the wealthy. There is a widespread belief (that grows wider in times of economic hardship) that wealthy individuals ought to bear a progressively higher tax burden to help address that inequality.

Well publicised cases of tax avoidance and evasion by some of the world's most well-known individuals and celebrities, as well as offshore leaks (such as the Panama papers) have fuelled the argument that a new approach to taxing high net worth individuals might be needed.
Of course, some would argue that the simplest way to tax the wealthy is through a wealth tax – a straightforward tax on the value of an individual's assets (deducting their liabilities).

Our closest neighbours, France, levied a wealth tax until very recently and charged (progressively, at rates from 0.5% - 1.5%) individuals' personal net wealth in excess or €1.3 million. This was eventually tweaked by Emmanuel Macron in 2018 in favour of a softer wealth tax focusing on real estate and investments, but the principle behind the charge remains.

Labour

Closer to home, Jeremy Corbyn famously threatened to introduce a wealth tax in the UK if elected in a move to redistribute UK wealth – the proposal was widely criticised at the time.

Despite some rumours, the current Labour Party leadership seem unlikely to look to introduce such a tax if they (as widely expected) are elected at the next General Election. It is thought that they would be more likely to start by targeting 'Non-Doms' (UK-resident, non-UK domiciled individuals) as Rachel Reeves has repeatedly referenced the need to stop what she sees as an "outdated tax perk".

A wealth tax may therefore not be on the immediate agenda in the UK. But if the Supreme Court of a country that defines itself by its capitalist ideology is to give the green light to a quasi-wealth tax, you can be sure that Keir Starmer (and other leaders around the world) will take note.