Episode 155 – Wealth Tax: Moore vs United States – Tom Wheelwright & Joe Bishop-Henchman

Speaker 1: 

This is the Wealth Ability Show with Tom Wheelwright. Way more money, way less taxes. 

Tom Wheelwright: 

So what if the government could tax the increase in the value of your home before you ever actually sold your home? Or worse yet, what if the government could tax your business as it grew in value? So not just tax the income from your business, but also tax the increase in value of your business as you become more successful. That is exactly what we're going to discover today, is what the Supreme Court is going to look at this session in the next month or two and distinguish, can the US government actually impose what we would call or deem a wealth tax? 

This is, I think, one of the most important tax court cases we have had in many, many, many years. Not pretty unknown, but we wanted to have a real discussion about what this actually means because there's so much technical aspects to it. We're going to simplify this. I want you to see just how this applies to investors and entrepreneurs. With us today, we have Joe Bishop Henchman, who is from the National Taxpayers Union, which is a nonprofit pro taxpayer organization. Joe, it is a pleasure and an honor to have you with us today. 

Joe Bishop-Henchman: 

Great to be with you, Tom. 

Tom Wheelwright: 

So if you would just give us a little of your background and what you do there at the NTU. 

Joe Bishop-Henchman: 

Sure. I'm a lawyer, so sorry if you hate lawyers, but we defend taxpayers against the IRS, against state tax administrators. 

Tom Wheelwright: 

We like those kinds of lawyers, Joe. 

Joe Bishop-Henchman: 

Yeah, sometimes they're needed. And so we file original actions. We file briefs as we did in this case. And then of course, NTU is more than just our legal program. We also rate members of Congress each year. We analyze anything that may affect taxpayers that's being considered on Capitol Hill and do a lot of testimonies and research publications on our websites at NTU.org. 

Tom Wheelwright: 

Thank you for doing that. It's a very, very important public service. So let's talk about kind of the basics here. So we all know that the 16th Amendment basically allowed a tax on income. And really the question here is the definition of income and what constitutes income. And historically we've had a difference. We've distinguished or the courts have distinguished, and in fact, I think the founders of this country distinguished between realized and unrealized income. In other words, income that we actually have money from and income that we don't have money's from. Can you talk just a little bit about a little of the history of where this idea came from, of what constitutes income and why is that important? 

Joe Bishop-Henchman: 

Yeah, no, it's an important question and it'll all be involved in this case. And so we're all kind of digging out our copies of Madison's notes from the Constitutional convention, which is really the only contemporaneous source. It's not like they had somebody transcribing what they were saying. All we really have are Madison's notes and the final product, as well as the Federalist Papers, which were written by a lot of people who had debated those. And then the subsequent history leading up to the 16th Amendment, and then the court cases afterward that you just talked about. 

So originally when they set up the federal government, there was obviously a big fear about the federal government getting too big. And so the Constitution was designed to create this kind of middle ground of a stronger federal government than the articles of Confederation one, which had no taxing power at all. The way they funded themselves was by sending requests for money to the states. And those requests were all ignored. And so that's why that experiment didn't work. So they wanted to give a little bit more taxing power than that, but not so strong that it would become tyrannical. And so what they came up with in writing in the Constitution was that the new federal government could levy indirect taxes, but if they levied direct taxes, they had to be in proportion to state population. And- 

Tom Wheelwright: 

So real quick, if you would explain the difference between an indirect tax and a direct tax, maybe give an example. 

Joe Bishop-Henchman: 

Yeah. Well, in fact, that was the very first question by one of the very first Supreme Court cases called the Hilton case, I think that was 1796. Congress had enacted a tax on carriages, that was the equivalent of a tax on rich people back then. Rich people had carriages, most people did not. And the question was, was this an indirect tax or a direct tax? And the court kind of split the difference down the middle a little bit. They did rule it was an indirect tax, but didn't clearly explain why it was. And what we see is kind of how that came about is it's a tax on the purchase and usage of a carriage rather than necessarily on the owning of it. And so that's where the line kind of comes along. But we wrote in our brief and what we've pulled together from the history is the difference between indirect and direct is if the person paying the tax is also the person who bears the economic burden from it. 

So if for instance, there is a tax on gasoline, it's the gasoline retailer that pays it, but it's not the retailer that actually bears the economic burden of it. It's the person buying the tax. So we would call that indirect. And the courts have generally called a gasoline tax to be an indirect tax, whereas an income tax, and this is what the court eventually ruled in the 1800s, late 100s, an income tax would be direct because the person who's having to pay the bill, sign the check or suffer the withholding is also the person who's bearing the economic burden of it. 

And so you mentioned the 16th amendment that was adopted to allow for an income tax. And how they did that was they took income tax out of this requirement. So direct taxes still have to be apportioned by state population unless they're an income tax. Congress can just do income taxes. So to sum it all up, we have a situation where excise taxes and indirect taxes are constitutional, income taxes are constitutional, but non-income direct taxes that are not apportioned by population are not constitutional. And the question here is, would a wealth tax fall under that third category, which- 

Tom Wheelwright: 

So let me ask you a question a little off, but I think it's relevant. So if we had a national sales tax, that would be constitutional because that would be an indirect tax, right? 

Joe Bishop-Henchman: 

Yeah. And it just goes to, I try to distinguish between what is good policy and what is constitutional. I think there are things that are constitutional and bad ideas just like I think there are things that are good ideas, but unconstitutional. So yeah, no, I think that would be constitutional. 

Tom Wheelwright: 

Got it. Okay. So let's move forward a little bit to what is income? So what, as you've been doing your research in looking at this case and your historical research, what have you found as to this whole idea of, well, what's income? Right? How do you determine, because if you said in the 16th amendment that income is now constitutional because we had an amendment to the constitution, it's now constitution, then all you have to say is, well, now we have to define what income is. 

Joe Bishop-Henchman: 

Yeah. The word itself comes from, well, the two little words in it, to come in. So money that is received. And at some point in the 1950s, the IRS happened upon a definition that they've liked ever since called the Hague Simons definition, which includes that money received element. I think everybody agrees money received is income, but adds a second element, which is the net change in wealth. So you'll hear this in a lot of federal income tax classes at law schools. You'll hear this in a lot of accounting things in that part of the federal government's underlying definition of income is any net appreciation in value, even if it's not cashed out or actually received. Now, we don't generally tax that. There are some exceptions, but for the most part, your increase in your home value does not subject you to income tax in a year, or the growth in your 401k in a year does not, you don't have to pay tax on. 

Tom Wheelwright: 

And are you saying that you don't see that as a constitutional issue? You'd rather see that as a policy issue? 

Joe Bishop-Henchman: 

No, I see it as both. The question has been, well, why don't we tax those things? And some people like me argue it's a constitutional barrier that is why we don't tax those things. Other people, like in academia, they say it's perfectly constitutional to do that, but it's a matter of administrative convenience that we don't make everybody pay on the increase in their home value or their 401k in a year. And I mean, ultimately this is a question that could be resolved by the Supreme Court in this case because that's what's coming to a head here. Is this a constitutional restriction or just a mere policy decision by Congress and the IRS? 

Tom Wheelwright: 

So let's kind of talk a little bit about this case. I don't want to get into too much into the weeds here, but this is the Moores. And if you could just walk us through very much the basic facts. What did the Moores own and what tax did the IRS assess? 

Joe Bishop-Henchman: 

Yeah, it's a very fascinating facts. The case is Moore et uxor v. United States, et uxor is Latin for and wife, so it's Moore and wife we like, we lawyers like sprinkling Latin wherever we can into things. So it's a husband and wife. It's a couple who invested into a company in India that a friend was founding to sell agricultural equipment to farmers in India. And I hadn't heard of the company before, but from the description, it sounds like it's a mostly charitable endeavor to try to provide at cost things, although the company itself is profitable to some degree, but to help improve life in India and bring more modern agricultural practices there. And so they bought some shares at the beginning and at least from their description, kind of forgot about it after that. They kind of viewed it as a charitable endeavor of putting in some money on this. 

And I think they got financial statements every year, and they probably had some tax reporting obligations, getting some forms in the mail that they threw on the pile on their desk like we all do. And I guess it was a surprise for them when in 2019, I think they got a notice in the mail that they owed tax accumulated tax on the earnings from the company. And so where that came from was in 2017, we passed a big tax bill. I'm sure you and your listeners are very aware of that fact, and being a big tax bill, it had a lot of pieces in it. And one of those pieces was switching our international business taxation system from worldwide to territorial. So we used to tax US companies and US residents on income. They earned wherever it was in the world. 

Now we've switched it to taxing US companies only on the income they earned within the United States. And as part of that switch, there was a question of, well, what do we do with the $2 trillion or so of accumulated owed tax that hadn't been paid because it hadn't been brought back to the United States. And so what Congress came up with as is typical for Congress was a compromise that we will tax it immediately, but not at the 35% rate and not even at the new 21% rate, but at a discounted, works out to about 11, 12% rate. And so anybody who owned a assets overseas, including the Moores, got a tax bill in that amount saying, you have eight years to pay this and then you will not owe tax on this forevermore. And I guess the Moores were very surprised by it and very angry by it and filed a lawsuit about it. 

Tom Wheelwright: 

So essentially, let me see if I can distill this down. So what happened was is this income was accumulating in India inside the company and was actually being used for reinvesting in the company, et cetera. And it was not, the Moores never took any money out. Is that fair? But what happened was is they were actually successful. And so basically there was income that had accumulated and basically the value of their shares had increased. And because as I understand, because they're more than 10%, right? Because they're- 

Joe Bishop-Henchman: 

Because they're a controlled foreign corporation. 

Tom Wheelwright: 

Controlled foreign corporation. So that's a little technical detail for everybody. If you own more than 10% your controlled foreign corporation, you're in a whole different world than if you own a couple of shares of Apple. 

Joe Bishop-Henchman: 

I think they needed a better tax advisor because I think they owned 11% of the company. If they owned 9% of the company, we wouldn't be here. 

Tom Wheelwright: 

Right? Right. No, they clearly needed, clearly needed better tax advisor. They at least needed a tax advisor that would've alerted them to this issue that would've actually followed this. But then what happened? So now we've got this income that's accumulated. Well, that's typically an increasing in value. It's a little like increasing the value of your Apple stock and then all of a sudden getting a bill saying, well, that increase in the value of the Apple stock, because Apple, of course is notorious for keeping all the money in the business and reinvesting it so they have billions of dollars sitting in the business, which increases the share price of Apple stock by having that in their business. 

Joe Bishop-Henchman: 

And I think you're hitting on the important question here. This is all very interesting on the Moores. It's not really going to affect anyone other than the Moores, these particular facts. But whatever the court decides, the very next question will be, well, what about the accumulated growth in Apple stock? Because a lot of people have that in their 401k's. Is the fact that we, and right now we don't tax that until it's sold by the person who owns it, but is the reason we don't tax it until it's sold a constitutional restriction or just an administrative restriction that Congress can change anytime it wants? Sorry for interrupting. 

Tom Wheelwright: 

Exactly. No, and this is exactly the point. So one of the arguments of the tax the rich group of people, even people who are on Wall Street who want the rich be taxed, but only of all the rich are taxed, not just themselves. Seriously, I've had this conversation on a podcast previously with the head of a group. He's a multi-millionaire from Wall Street. He has this group that wants to tax through Rich. And I asked him, well, why didn't you just pay more tax? You can do that on your tax return. 

Joe Bishop-Henchman: 

Check the box. You could send a check in. They will cash it. 

Tom Wheelwright: 

Check the box, check the box, pay in more money. He said, well, I'm not going to do it if everybody doesn't have to do it. I'm going, okay, well, so you got to put your money where your mouth is. But here's the problem. What they're saying is, look, we have this. They consider it a defect in the tax law where they say, well, you can, so the rich, they can build up their wealth, taking Elon Musk as he would be the prime example, he's got huge amounts of wealth, or Jeff Bezos, huge amounts of wealth, and it's all in their stock. It's in the stock of their company, and they're not being taxed on that. They can borrow against that stock. Borrowings aren't taxable, which they can't be because it's not your money, but it's by definition not income, but they borrow against it. And then when they die, they actually don't have any income tax. 

Well, they have an estate tax, but those people who are arguing this never understand that the estate tax is to compensate for not having an income tax while you were living. In any case, the argument is, well, wait a minute, that is liquid. It's liquid, right? An increase in Apple stock, you could sell that any time. You could margin it at any time. It is a liquid asset. It's very easy. Now, what's interesting to me is I think the Moore case brings out the point that yes, but not always the case. And once you get on the slippery slope, where does it go? Because the Moores, for example, that's a closely held business. That is not a tradable asset. It's not something they could easily sell. And so now what you're saying is either you pay this tax or you literally have to distribute income away from the business and take money away from the business to send to the shareholders, which is taxed again, by the way, under our system, a second time. And for them to pay that tax. 

Joe Bishop-Henchman: 

Which incidentally, when Congress debated this in 2017, normally I'm not defending what Congress does. Congress does some crazy stuff, but here they didn't want that to happen. They didn't want to forced sales of all these assets of successful businesses owned by Americans all over the world. So that's why they went with this approach rather than requiring distributions and dividends and everything. And we're talking about the wealth tax. This is not just a hypothetical conversation. Senator Elizabeth Warren in Massachusetts has introduced a bill. 

Tom Wheelwright: 

Very clear. 

Joe Bishop-Henchman: 

Does it every year, and this year actually got friends in eight states to introduce state level bills to enact wealth taxes, none of which passed this year. But obviously there's interest and momentum in trying to do something on that. And there's administrative questions about a wealth tax because things like publicly traded stocks, okay, you can price those any day of the year. That's not too hard to do. But closely held stocks, as you mentioned, it's a lot harder to do. 

And then we get into assets that are traded less frequently. Home prices, I think we have an apparatus for pricing those, but anybody that's ever challenged their home valuation knows that that's not perfect either. And then there's stuff like, what do copyrights and trademarks, what are those worth? What's art worth? What's collections worth? And these are a lot harder to do. The IRS just wrapped up 10 years of litigation over the Michael Jackson estate and what that was worth, because the trustees said, no one's asking for Michael Jackson's endorsements. Other than the Beatles catalog, everything else we have is worth nothing. And the IRS said, no, no, no, no, because celebrity endorsements are valuable. So we think it's worth a billion dollars plus the Beatles endorsement. 

Tom Wheelwright: 

Yeah, I think the estate said it was worth what, 7 million? 

Joe Bishop-Henchman: 

Yeah, yeah. No, the IRS ended up being wrong on that, but it took 10 years of litigation, 10 years of litigation to determine what Michael Jackson's endorsements are worth. So you think that they're going to have an easy time with valuing all the other stuff in America? So that's administrative questions. And then we get into policy questions about whether this is a good idea or a bad idea for economic growth and incentives and everything. And then the constitutional questions that I think are coming up. 

Tom Wheelwright: 

Well, it's interesting because you're talking about practicality and where does practicality come, but we actually know that we've had court cases and most recently Wayfair, which was really a court case on practicality when you look at it, because the previous cases had said, well, you can't tax sales in estate unless you have a physical presence. That was the constitutional requirement. And really the previous case was a catalog company like Wayfair. And the court said, well, it's impractical to do this effectively, to assess this tax. And this time the court said, well, it's no longer impractical. We have technology that allows it to be practical now and effectively that's what they said. So now we have, instead of the physical presence test, we have an economic presence test. And it seems like that's something that could happen. So let me ask you this question. 

We have pretty conservative justices on the Supreme Court. It would be pretty surprising if they didn't take a strict constitutional view of this, but let's say it became practical. So in other words, let's say there became pricing mechanisms that allowed us to do simple valuations. At that point, we still had the same issue. And the issue is, well, but how do I get money out of that? Because if I can't get money out of it, I have to sell it in order to pay the tax. And that is, that can't ever possibly be good public policy. 

Joe Bishop-Henchman: 

We've seen this play out in the countries, not the United States, but in other countries that have tried enacting a wealth tax, expecting a big inflow of resources. But what happens is people just leave and the money just departs. I think France had it and they exempted art. So what did all the rich people shift their assets to? Art. A lot of huge art collections in Chateaus in Paris, and then the Macron government ended up repealing it because it just was not achieving the results that they wanted. We see this too with the estate tax. The estate tax is regrettably mainly attacks on people that hadn't yet gotten around to formulating an estate plan. 

Warren Buffett likes to talk about how he's very public and civic minded, but most of his assets are not going to be paid in estate tax. He's put them into a charity, the Bill and Melinda Gates Foundation, which I actually personally think is probably a better use of that money than paying it in estate tax. So I applaud his decision on that. But it is at odds with this argument that, oh no, everybody should pay, rich people should all give 40% of their assets to the government on their death and everything. And I think we're going to face that problem with the wealth tax because is it really better off to force Warren Buffett to sell whatever percent of his assets every year? Is that going to result in a more prosperous future for everybody? 

Tom Wheelwright: 

Well, and to me, just like the income tax, when it was first enacted, affected a very small portion of the public, only the very, very, very rich, and only at a very small rate. 

Joe Bishop-Henchman: 

Operated 6% on, I think it'd be the equivalent of about a half a million dollars today, something like that. 

Tom Wheelwright: 

Oh, I actually think it's on the equivalent of today, several million dollars. It's actually several million dollars that you wouldn't pay the tax unless you were over that several million threshold. So you can say, well, wait a minute. Warren Buffett's assets pretty much are liquid. He could sell assets, no big deal. But what about you? What you with your family farm? What about the business owner? What about your house? What about your jewelry? Let's say you've got some investments, I mean, you've got investments in real estate and those real estate investments go up in value. Let's say you're buying real estate, as the market continues to go down in real estate, you get some good deals on real estate. The Fed- 

Joe Bishop-Henchman: 

Well that raises the question too, when the market goes down, what happens when it's going the other way? 

Tom Wheelwright: 

Exactly. 

Joe Bishop-Henchman: 

Are we paying out refunds to the wealthiest people in the country? I mean, how long is that going to last when we're writing checks? 

Tom Wheelwright: 

Well, or do they do it like they do with capital losses where capital losses, right, you just carry them over. You don't get to deduct capital losses until you have have capital gains. 

Joe Bishop-Henchman: 

Yeah, but we cap that, you can only do up to $3000. 

Tom Wheelwright: 

But that's what I'm saying. You could have a loss, let's say one year, let's say in 2021, you had a massive gain in real estate, which a lot of people did. Okay? And then in 2023, you had this massive decline. So in 2021, you pay this high tax. In 2023, you have a loss, but you don't get to use that loss until you have another tax situation. And to me, that's likely what would happen because what we do with capital, with relapse capital, 

Joe Bishop-Henchman: 

And it's actually a real situation right now with cryptocurrency people because a lot of them had a lot of paper gains, and then now they've had these losses. 

Tom Wheelwright: 

Right. That would be a perfect example. 

Joe Bishop-Henchman: 

If you've got $500,000 in loss carry forwards, but you can only use $3,000 a year, but you still owe this $300,000 tax bill, that's not very equitable. 

Tom Wheelwright: 

Well, it's not just a matter of being equitable. It's a way to decimate an economy is what it is. It's a nuclear bomb that's being dropped on the economy. So let me ask you just final words. What do you think could come out of this, and what do you think that, if anybody's got any interest or they're worried about this, what can they do about it? 

Joe Bishop-Henchman: 

So there's going to be a lot of paper on the case. Already there's been a number of briefs that have been submitted on the taxpayer side or neither side. And we actually did a brief on neither side. We wanted to present the whole history of the case and kind of give a path for the court to go forward that we hope they'll take a look at. Briefs fully in support of the taxpayer are due this month, and then the court's going to schedule it for oral argument. And the Supreme Court, they do everything within a year. So this decision will be issued by summer of next year, if not earlier. Oral argument I expect will be by the end of this calendar year. And that's when we will really get insight based on the justice's questions on what their view is and why they took this case and what they're looking to get out of it. 

Tom Wheelwright: 

So what I find interesting is that this is happening during an election cycle, because the logical conclusion is if somehow they don't rule against the wealth tax and somehow the ninth Circuit, which ruled in favor of the wealth tax, basically they gave them carte blanche, so this is an appeal from the ninth Circuit, which is California. 

Joe Bishop-Henchman: 

Yeah. Ninth Circuit opinion said, well, government can do whatever it wants on tax policy. So it's not a good thing. 

Tom Wheelwright: 

Exactly. And unfortunately, I live in the ninth Circuit, but so what could happen? Then you have to look at the next election cycle and you have to go, well, wait a minute. You have Elizabeth Warren, you have Bernie Sanders, you have these people that really want a wealth tax. And if this court case turns out in such a way that it basically says it's okay, or really doesn't even opine on it, which people are hoping they will opine on this wealth tax, then we could easily have a wealth tax. And that's actually what we have to look out for because it's never a single court case. It's never a single situation, it's never a single decision. Every decision affects other decisions. And in this case, it's going to affect political decisions. And frankly, honestly, you may want to think about it from your voting decision. Do you want those kinds of aggressive taxes? 

And if you do, great, then you should vote that way. And if you don't, then don't vote that way. So we do have that ability in the United States still to vote. And that's one thing to do. And the other thing is we can always write letters. You can write amicus curiaes, and the rest of us, the rest of us can write letters. But it is important that we pay attention to this because this I think would be, this isn't a historic case, or could be a historic case depending on how narrowly they define their answer, their conclusion, and how narrowly they write their decision. But these things are important. We need to pay attention to them. I want to thank Joe for joining us today. If you can, tell us where we could find more about your organization, 

Joe Bishop-Henchman: 

NTU.org. And thanks for having me, Tom, and we'll certainly be posting more about this case as it progresses. 

Tom Wheelwright: 

Awesome. Thank you. And remember, as we watch these types of issues that are going on and these court cases that are going on, by paying attention to them and really dealing with what we can do from tax side, we're always going to make way more money and pay way less tax. We'll see you all next time. 

Speaker 1: 

You've been listening to The Wealth Ability Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.