One Couple’s IRS Lawsuit Over $15,000 Could Cost The Government Over $340B

Nobody likes dealing with the tax man. However, occasionally, even the tax man gets it wrong. In this case, that’s what happened to Charles and Kathleen Moore. Now, the Moores are taking the state to court over a $15,000 IRS bill. Let’s explore how this could change our lives as well.

A Guessing Game That No One Likes

Taxes in the US boil down to the state knowing how much you have to pay and you verifying that figure. Naturally, not everyone keeps all of their purchase and transfer statements on hand.

Unfortunately, if you guess the wrong number, you will have to pay the government a penalty for your guess. That’s primarily why people pay enormous sums for tax companies to do their taxes for them.

An Unexpected Bill

The Moores thought they had done everything right. They had gone through all the details for their taxes, crossed all the t’s, dotted all the i’s, and submitted their completed forms to the IRS for verification.

When they popped open their mailbox, they couldn’t have expected to run into an IRS fine of $14,729. Their incorporation of a company in India was why the IRS gave this fine.

Taxes Should Be On Profit

Generally speaking, when the IRS taxes businesses, they do so on the profit they make. This means the state can’t take anything if the company runs for the entire year and doesn’t see a profit.

The same is true for businesses that make a loss. When a company makes a loss, it can’t pay the government anything since its earnings were negative, so it cannot be taxed.

Highly Suspicious Tax Bill

Immediately, the Moores argued that since they never made money from the business in India, they weren’t supposed to pay taxes. They can’t pay taxes on money they didn’t earn.

However, the state was having none of it and insisted that the couple owed a significant amount in taxes to the government. It turns out that the Moores did make money, but it wasn’t used as income.

Moving Money Around Into Other Businesses

The Moores own several businesses, and because of that, their income from a particular company could instead be moved over to fund the creation and production of a second business.

Technically, the business in India made money, but they used that money as capital investment for another company, KisanKraft. Therefore, the Moores think it’s unfair to be taxed on money that wasn’t used as income.

How Did This Situation Arise?

In 2017, the government passed a bill known as the Tax Cuts and Jobs Act (TCJA). Under the TCJA, all international stakes in businesses are subject to a levy based on the amount invested.

The idea behind this legislation was to prevent capital flight – the movement of money out of the US. It was supposed to encourage local entrepreneurs to invest in locations where they would not be taxed -inside the US itself.

How This Affects the Moores

The Moores hold a 13% share in KisanKraft with the $40,000 they invested in the company. The TCJA is not a fan of American citizens owning shares of companies outside the US – people like the Moores.

The 13% stake that the Moores have in KisanKraft would be subject to a levy under the TCJA. Any business owner who owns more than 10% of a foreign company would have to pay the same levy.

Taxing Unrealized Income Seems Silly

Under the current regulations, the Moores owe a sum of money as a levy under the TCJA. However, paying tax for unrealized income seems like a terrible way to tax individuals.

In a recent discussion, lawyer Andrew Grossman told the Supreme Court that if the taxpayer never realized the income, then it shouldn’t be counted as a gain. In such a case, the payment to the Moores wouldn’t be taxable since they never realized it as a gain.

What Are Unrealized Gains?

Anything that shows as a gain on paper but hasn’t been converted into cash counts as an unrealized gain. For example, if you buy a stock and the price goes up by 10%, but you never sold the stock, you have a 10% unrealized gain.

In the US, the taxation on capital gains only triggers a sale. So, if you hold onto that stock and sell it for a 30% profit, you’ll be charged tax on that 30% profit as your capital gains.

How Can the IRS Tax Unrealized Gains?

The unrealized gains are still present on paper. If you hold onto your stock and it appreciates by 10%, the IRS can demand you pay taxes on that 10% extra value the stock generated.

The big problem is that it discourages investment since investors are taxed for holding and selling stock. Taxing the investor twice is an excellent way to stop people from investing in the market.

Taxed on Personal Property

Charles Moore spoke out on the lawsuit and mentioned how they would approach it. The Moores’ argument is that the IRS taxed their personal property (the business), not their income.

He makes a good point. If you haven’t earned income, how do you owe income tax for income you never received? If the income tax is a percentage of income, and the income is zero, then any percentage of zero is still zero.

Government May Not Budge On Its Position

The sad part of this situation is that the government is unlikely to think they are wrong on this score. In part, this has to do with how the taxation code sees private property and business.

It’s a good example of how the government thinks of the earnings of business people. It has no problem taxing investors and small business owners twice and will continue to do so.

A Complete Change

The Supreme Court will eventually rule on the viability of this taxation and if the Moores are correct in their claims. However, if the court rules in the Moores’ favor, it could change how taxes are calculated.

The IRS will have to revamp how it sees unrealized gains and how it taxes those things. With this one decision, the Supreme Court stands to reshape the entire US Tax Code into something a lot fairer.

A Massive Fine Looms

The Supreme Court ruling on this matter could cost the government a lot of money. The state will likely have to pay a massive reward to the Moores that could run into trillions of dollars. One lawyer estimates it could be as much as $5 trillion.

This single ruling could invalidate a large part of the existing tax code and require the IRS to go back to the drawing board. Taxation is never good for any earner, but a fairer tax infrastructure could help the economy.

The Rich Could Get Richer

The downside of the Supreme Court ruling in favor of a refund is that it could remove many of the realized taxes from the wealthiest individuals in society. This could pave the way for them to never realize income for taxation and avoid taxes altogether.

The result would be an even more massive gap in income inequality than already exists. The lack of taxation on this unrealized income will also negatively impact government income and spending. If the government is earning less money, then it will have less to spend on social and infrastructure projects.

There Might Be Some Redress

Billionaires already don’t pay their fair share, but legislation is attempting to force them to meet their tax burden more equitably. The Billionaire’s Income Tax relies on the ruling against the Moores for it to function.

Under the Billionaire’s Income Tax, any person earning over $100 million in income in a calendar year (or with over $1 billion in assets) is required to pay 20% on their unrealized income.

A Narrow Ruling is Expected

Most of us should be rooting for the Billionaire’s Income Tax Act to pass, so we would unfortunately need to be against the Moores getting their refund. However, there may be a middle ground.

The Supreme Court has long been looking at the tax code as an unfair method of taxation. Their ruling may be narrow, leaving much of the code untouched, but focusing on a specific part they see as unconstitutional.

How Often Do We See Tax Code Changes

While most people may not realize it, we see tax code changes relatively often. Every year, the tax code is revamped to take new developments into account. However, this one ruling could rewrite a lot of the tax code thoroughly.

It’s uncertain how much of the tax code could change, but it would likely be significant. Since the Supreme Court is going for a narrow ruling, they will probably leave much of the tax code intact. In any case, it would be one of the most significant changes that will happen to the code in a while.