The Supreme Court on Thursday refused to put new limits on Congress’ power to tax wealth that is not paid out in annual dividends.

In a setback for anti-tax conservatives, the justices upheld a provision of a 2017 tax law that imposed a one-time levy on the profits of foreign corporations whose shares were owned by Americans.

In a 7-2 decision, the justices said Congress has the power to tax corporate shareholders based on the company’s “undistributed income.”

“This court has long upheld taxes of that kind, and we do the same today,” said Justice Brett M. Kavanaugh for the court.

The case came to the court as a test of whether the conservative majority would put constitutional limits on “wealth taxes.”
Instead, the justices upheld an income tax that is not based on annual dividends.

While the decision upheld a Trump-era tax, progressives and tax experts cheered the ruling.

“Today’s decision will allow Congress to continue to exercise its power to tax income to fund the government and to make sure that all taxpayers — including multinational corporations and wealthy taxpayers — pay their fair share,” said Chye-Ching Huang, executive director of the Tax Law Center at NYU Law.

Alexandra Thornton of the Center for American Progress said the ruling “means that wealthy people attempting to avoid taxes by offshoring their money have to pay their fair share, just like every other American. The court’s decision avoids an outcome that would have thrown the American tax system into disarray and put at risk other forms of taxation that raise billions of dollars in revenue.”

Some noted that the ruling was limited to an unusual tax provision.

“The court makes clear it is not opening the door to a wealth tax, which would still face constitutional problems as a tax on property,” said Joe Bishop-Henchman of the National Taxpayers Union.

Thursday’s decision did not resolve a persistent dispute over whether the Constitution’s approval of income taxes includes taxing shares of corporate stock, or instead is limited to “realized” gains, such as wages, stock sales and stock dividends.

“So the precise and narrow question that the court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income,” Kavanaugh wrote for the majority. “This court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.”

Justices Clarence Thomas and Neil M. Gorsuch dissented.

Thomas wrote that the 16th Amendment says income is “only income realized by the taxpayer. The text and history of the amendment make clear that it requires a distinction between ‘income’ and the ‘source’ from which that income is ‘derived.’ And, the only way to draw such a distinction is with a realization requirement.”

Some conservatives fear that a future Congress led by progressive Democrats would impose taxes on accumulated wealth.

They urged the court to hear the case of Moore vs. United States and to rule that Congress may not impose a tax on “property or wealth.”

At issue in the case was the meaning of the 16th Amendment, ratified in 1913. It says Congress has the power to “lay and collect taxes on incomes, from whatever source derived.”

A few years later, the Supreme Court said corporate shares held by taxpayers could not be taxed as income unless they were “realized or received” as income. That decision was generally understood to mean that the government may impose taxes on wages or stock dividends, but not necessarily on property or corporate wealth that grows in value. These are referred to as “unrealized gains.”

But many constitutional scholars and tax experts had questioned that interpretation of the 16th Amendment. And in recent decades, Congress has imposed taxes on individuals who are earning income in partnerships and have ownership shares in some corporations, even if dividends are not paid out each year.

The case of Charles and Kathleen Moore began when they received a $14,729 tax bill for their ownership shares of a company based in India.

The Moores, who are retired and live in Washington state, said they received no income or dividends from their investment in the company, which supplies equipment to small farmers. They sued, alleging the tax was unconstitutional under the 16th Amendment.

But a federal judge and the 9th Circuit Court of Appeals disagreed with them and upheld part of the 2017 tax bill passed by the Republican-controlled Congress and signed by President Trump. It imposed a one-time tax on Americans who owned shares in foreign corporations that gained in value. The tax measure included large tax breaks for the wealthy, but to offset those losses in tax revenue, lawmakers sought to recoup some profits that Americans held abroad.

With the backing of the U.S. Chamber of Commerce and other business groups, the Moores petitioned the court with the help of Washington attorney David B. Rivkin and urged the justices to strike down the tax on overseas profits.

Some had called for Justice Samuel A. Alito Jr. to recuse himself from the matter.

Rivkin who helped write the appeal petition, interviewed Alito for two articles that appeared in the Wall Street Journal last year.

“There was no valid reason for my recusal in this case,” Alito wrote in response in September. “When Mr. Rivkin participated in the interviews and co-authored the articles, he did so as a journalist, not an advocate. The case in which he is involved was never mentioned; nor did we discuss any issue in that case either directly or indirectly.”

Alito concurred in the outcome Thursday.