Two Supreme Court Cases Could Change the Tax Landscape

published 7 October 2023

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The Supreme Court’s new term started October 2. There are some interesting cases on its docket. Two could majorly change the tax landscape.

First, is taxing unrealized income valid? This has come up in a case in which a couple who are minority owners of an Indian corporation were charged the repatriation tax. The 2017 tax law assessed a mandatory one-time tax of up to 15.5% on previously untaxed offshore accumulated earnings of many U.S.-owned foreign corporations. The tax was due from U.S. owners based on their ownership, regardless of whether they got a distribution. The couple asserts that because the tax is assessed on unrealized earnings, it’s not an income tax and must be apportioned among the states to be a constitutional tax under the Sixteenth Amendment.

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We don’t know whether the Court’s ultimate ruling will be broad or narrow. If it’s a broad ruling that taxing unrealized income is unconstitutional many provisions in the federal tax laws could be implicated. Among them:

Taxation of pass-through income from partnerships and LLCs
Original issue discount on zero-coupon bonds
Mark-to-market rules for securities dealers
Numerous statutes impacting U.S. multinationals, as well as foreign companies doing business in the U.S
The new 15% minimum tax on adjusted book income of large corporations

A broad ruling from the Supreme Court could also put a dent in some Democrats' efforts to hit the rich with a wealth tax or to impose a mark-to-market tax regime on assets of wealthy individuals.

A second case involves the judicial deference given to government regulations. The petitioners in the case want the Court to curb or overrule the Chevron doctrine, which is derived from a 40-year-old high court case that says when a federal statute is ambiguous, a reasonable interpretation by the agency writing the regulations will be upheld.

The case now before the Court involves the regulation of commercial fishing boats. It doesn’t deal directly with taxes. However, if the Court reverses or pares back the Chevron doctrine, it would greatly impact the IRS’s and Treasury’s rulemaking going forward. And more taxpayers will be emboldened to sue the IRS, challenging its regulations.

The Court might also rule on three other tax cases if it chooses to take them:

Can the state of Washington impose a 7% capital gains tax on high earners? Opponents claim the tax is an improper property tax on income. The state’s high court disagreed, saying it was not an unlawful property tax, but instead a valid excise tax.

Is a return that’s given to an IRS agent filed for statute-of-limitation purposes?
A revenue agent notified a partnership in 2005 that the IRS had never received the firm's Form 1065 for 2001. The partnership then faxed the return to the agent, who audited it. In 2010, the agent sent the partnership a notice of adjustment. The partnership claimed the notice was invalid because it was issued more than three years after the partnership faxed its return to the agent. An appeals court ruled that because the partnership’s tax return wasn’t filed with the IRS's service center, no return was actually filed by the partnership for 2001.

For purposes of valuing a decedent’s shares in a closely held corporation, when do life insurance proceeds increase the estate tax value of the stock?
Two brothers who owned a corporation entered into a stock purchase agreement that required the company to acquire all the shares of the first brother to die. The firm bought life insurance to make sure it had enough cash to acquire the stock. Upon the death of one of the brothers, the company used the life insurance proceeds to purchase the decedent's shares. An appeals court disregarded the share value formula in the stock purchase agreement and added the corporate-owned life insurance proceeds when valuing the decedent’s shares in the corporation for estate tax purposes.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

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Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.