Before then, U.S. companies paid foreign taxes on foreign profits but could defer any U.S. taxes until they brought earnings back home. Republicans switched to a system with a minimum annual U.S. tax on foreign profits and tax-free repatriation.
In that transition, to deal with 30 years of profits companies had accumulated overseas that hadn’t faced U.S. taxation, Congress imposed a one-time levy.
....But the tax also applied to some individuals, including those who owned more than 10% of a foreign corporation.
...This is what happened to Charles and Kathleen Moore, who in the early 2000s put $40,000 into a friend’s “business to supply farmers in India’s most impoverished regions with basic tools and equipment.”[8] That investment bought them about 13% of the stock in the friend’s Indian corporation, KisanKraft Machine Tools Private Limited. It did well and “was profitable almost from the start”; “Charles visited India several times and was impressed with the difference that KisanKraft was making in the lives of India’s rural poor,” but “the Moores never received any distributions, dividends, or other payments from KisanKraft,” and “as minority shareholders without any role in KisanKraft’s management, they had no ability to force the company to issue a dividend.”
And in 2018 they were hit with a $14,729 tax bill on $135,512 of historical KisanKraft earnings. They paid, sued for a refund, lost in lower courts, and appealed to the US Supreme Court, which will hear their arguments tomorrow. They argue that this isn’t income to them, so they shouldn’t have to pay taxes. The argument is that an income tax has to be based on “income they had realized,” that is, money that they actually got, not just on their ownership of property. Here is their brief.
...Here is the government’s brief, which I find more convincing. Among other things it points out that this stuff happens all the time: Partners (and limited liability company members, and S corporation shareholders) pay taxes on their businesses’ income, whether or not they actually get it in cash. If the Supreme Court decides that that’s unconstitutional, then most of the regime of US business taxation is unconstitutional.[9
... If a company sells a zero-coupon bond for $50, and it matures in five years and pays back $100, the buyer of the bond is treated as getting $10 a year of interest income,[10] even though she doesn’t actually get paid any interest until the end.
...If Congress really might tax any increase in wealth, whether or not it is realized, then that opens up a lot of new taxing possibilities, which makes people nervous. But if Congress can’t tax any unrealized increase in wealth, then that closes off a lot of taxes that already exist.
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