Four Tax Cases Before the Supreme Court to Watch This Fall

The US Supreme Court will hear a case this fall that could transform the way the federal government taxes unrealized gains, and will also consider picking up three more large tax cases for the term that opens next week.

A petition in another federal tax case deals with the timing for filing partnership petitions with the IRS. Meanwhile, two state petitions seek the court’s eye on the constitutionality of Washington state’s new tax on capital gains and a Michigan tax sale statute.

Here’s what tax practitioners should look out for this term.

Moore v. United States

Justices could decide the fate of hundreds of billions of dollars in potential revenue in Moore v. United States, which challenges the constitutionality of a shareholder foreign earnings tax created by the 2017 tax law.

Under Internal Revenue Code Section 965, the one-time tax collects on earnings held offshore from 1986 to 2017 as though they were repatriated. The Joint Committee on Taxation estimated this provision would raise $338 billion from 2018 to 2027 by collecting on foreign earnings that could otherwise escape US taxation.

A Washington couple, Charles and Kathleen Moore, said they are entitled to a refund of just under $15,000 because they were taxed on gains that were never distributed to them from an Indian company offering equipment to small-scale farmers. In June, the Supreme Court decided to hear the case.

The Moores argued the mandatory repatriation provision targets unrealized gains and that such a tax isn’t protected by the Sixteenth Amendment because the Constitution requires money be realized to be considered income. The court will likely decide whether the Sixteenth Amendment does possess a “realization requirement"—and if it does, whether the 2017 law exceeds Congress’ tax powers because it is unapportioned.

A Moore victory could reverberate through other portions of the internal revenue code and inhibit Democratic proposals in Congress to tax billionaires for their wealth, said Beverly Moran, a tax expert and professor of law at Vanderbilt Law School.

If the Supreme Court agrees that realization is constitutionally required, then “it could blow up a serious part of the Internal Revenue Code,” since several provisions tax without realization, Moran said.

The government will defend its Ninth Circuit victory, where the panel found the mandatory repatriation tax didn’t violate the Constitution’s apportionment clause. Its respondent’s brief is due Oct. 16.

The case is Moore v. United States, U.S., 22-800, petition granted 6/26/23.

Quinn v. Washington

Washington’s new capital gains tax will come under the court’s microscope if it takes up the challengers’ petition in Quinn v. Washington.

The taxpayers are seeking review of a March Washington Supreme Court decision that upheld the measure as a permissible excise tax in a state that strictly limits income taxes. The 7% tax applies to gains over $250,000 per year, excluding those from retirement account sales, real estate, and certain small businesses. More than half of the $855 million raised by the tax in its first year came from just 10 of the thousands of people who paid it.

Labeling the measure an excise tax solved the state law problem but created a federal law problem in the process, the challengers argued. The tax reaches sales that take place in other states if the seller or beneficiary of the transaction is a Washington resident, which violates the rule that states can’t tax transactions beyond their borders, the petition said.

Brian Minnich, executive vice president of the Freedom Foundation, which represents the challengers, warns the Supreme Court could “open up a Pandora’s Box” for other states to tax extra-territorial transactions.

Arizona State University Law School professor Erin Scharff said current dormant commerce clause jurisprudence supports the state’s right to tax transactions made by its residents.

Washington’s brief is due Nov. 3.

The case is Quinn v. Washington, U.S., No. 23-171, petition filed 8/21/23.

Seaview Trading LLC v. Commissioner

This fall the US Supreme Court will decide whether to hear a dispute over when late partnership returns sent to the IRS are considered filed, which could impact all taxpayers by potentially closing the door to this commonly used submission method.

Seaview Trading LLC petitioned the high court in August, disputing a “Kafkaesque” Ninth Circuit decision that held that a late tax return the company submitted to IRS employees wasn’t considered filed because it had to be delivered to a designated service center. As a result, the agency could assess a $35.5 million tax bill on the company, stemming from the agency’s 2010 disallowance of a claimed loss deduction.

The case concerns whether Seaview, which was classified as a partnership for federal tax purposes, had filed its delinquent return for the 2001 tax year through a 2005 fax or a 2007 mailing. If either submission counted, the IRS’s 2010 decision to disallow Seaview’s $35.5 million claimed loss would have come too late.

The appeals court based its ruling on a reading of Treasury regulation T.D. 1.6031(a)-1, requiring that partnerships like Seaview had to file “with the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form.”

The ruling was the second time the Ninth Circuit weighed in on the dispute. In March, an 11-judge panel reversed a 2022 panel ruling from the same circuit and ultimately sided with the IRS against Seaview, which held the company’s tax return wasn’t filed either through faxing a copy to an IRS agent or mailing a copy to an IRS lawyer.

Seaview had submitted multiple delinquent returns to the IRS its 2001 tax year and filed partnership returns with agency employees in 2005 and 2007, however the IRS disallowed the company’s $35.5 million deduction in 2010, according to court documents. The company claimed that lack of regulation on filing late returns led to the repeated filings, the petition said.

Anthony Box, a tax partner at Gray Reed & McGraw LLP, said a Supreme Court ruling for the IRS could have huge implications beyond partnerships if the service center rule can be applied towards individual taxpayers.

“There’s going to be thousands of people who will believe that their returns are filed but in reality they were not,” Box said of a scenario where the high court sides for the IRS. “And in some cases if they never sent it to a service center, then it constitutes never been filed, and so the statute of limitations will be open forever.”

The high court requested a response from the agency by Oct. 16.

This case is Seaview Trading, LLC v. Commissioner, U.S., 23-125, petition filed 8/9/23.

Meisner v. Sinclair

The Supreme Court could expand property rights if it hears Meisner v. Sinclair, which asks if a tax foreclosure of a home violates the Takings Clause of the Fifth Amendment when the property is worth more than the tax delinquency.

Not only could the case potentially dictate how much equity property owners are entitled to, but the real estate market and how local governments function could also be impacted, according to Daniel Rosenbaum, an assistant professor at Michigan State University College of Law.

Under Michigan’s General Property Tax Act, when a tax delinquent property is foreclosed, the state or a local government have a right of first refusal to obtain the property after paying the taxes owed and related interest and fees.

If the state or a local government forgoes the opportunity, then the property is put up for a public auction sale. If the amount paid surpasses the tax delinquency, the excess is paid to the former property owner under the GPTA.

In a resemblant case from 2020 called Rafaeli LLC v. Oakland County—which had the same defendant as Meisner—the Michigan Supreme Court found that the amount exceeding the tax delinquency when the property is publicly sold is treated as a surplus. If the surplus amount is not paid to the former property owner, that would violate the Michigan Constitution’s Takings Clause, the court found.

Marion Sinclair, the plaintiff in the pending SCOTUS case, lost her home after not paying off taxes owed on the property. The City of Southfield used its right of first refusal to purchase the property from Oakland County for an amount much less than the home’s fair market value, according to Sinclair.

In her proposed class action, Sinclair has argued that she’s owed the value of her home minus the tax debt because she holds a cognizable property interest in the equity of her home. Sinclair alleges that other African American homeowners were discriminated under this foreclosure process.

In December 2022, the Sixth Circuit held that the government’s acquirement of property worth more than its tax debt is a taking.

Oakland County told the Supreme Court in its petition for writ of certiorari that it would only owe her money if there was a public foreclosure sale that produced a surplus in excess of the delinquent amount.

The Supreme Court ruled on a similar case in Tyler v. Hennepin County. There, a Minnesota County sold a woman’s condo for $40,000 when the tax debt was $15,000 but kept all the sales money. The Supreme Court found in May that because the county kept the surplus it committed an unconstitutional taking.

The justices declined to review a nearly identical case, Hall v. Meisner, about a month after deciding Tyler.

The case could most impact those with tax delinquent properties and several other states—including Michigan—that practice strict tax foreclosures, Rosenbaum said.

If the Supreme Court hears Meisner and applies it retroactively, that application could also affect former property owners that already lost their homes in strict tax foreclosures, he said.

The case is Meisner v. Sinclair, U.S., 22-1264, petition filed 3/14/23.