The Supreme Court, in its usual blizzard of opinions at the end of its term, issued three opinions that could  impact  the accounting world in the future.  The first is Moore v. U.S.  A wealth tax has been discussed, most notably by Senator Elizabeth Warren, as a way of achieving tax equity.  To date, these proposals have not found their way into legislation. The idea of taxing unrealized gains have also been floated, and was proposed early on in the Biden administration. 

The Moores, part owners  in an American-controlled foreign corporation, were stung by the  Mandatory Repatriation Tax. This was a one time tax created in 2017 that attributes the realized and undistributed income of such corporations to its American shareholders. The American shareholders are then taxed on their portion of that income. The Moores paid the tax and then sued for a refund, essentially alleging Congress did not have the constitutional authority to levy this tax since they did not realize the income from their foreign investment.  The Supreme Court disagreed.  In a very narrow ruling, the Court held the attribution of income to the Moores was akin to income from a pass-through entity.  This has long been held  permissible for Congress..  In short, the Supreme Court kicked the can down the road when it comes to the wealth tax and deciding if unrealized gains are taxable income. One can’t help but feel the fact Justice Kavanaugh, who wrote the majority opinion,  noted this was a narrow ruling indicates how the majority would feel about a wealth tax and the taxation of unrealized income  if and when such a tax is  passed by Congress. 

The next two cases have implications for forensic accountants who offer expert testimony.  The first is Diaz v. U. S. Diaz was convicted of transporting illegal drugs into the United States. She claimed she did not know she was a “drug mule”.  An expert testified that most drug couriers do in fact know they are involved in an illegal activity.  In a 6-3 decision, the Court ruled  expert testimony that “most people” in a particular group have a certain mental state is not an opinion about “the defendant”  and is admissible. 

This ruling opens up what could be a Pandora’s box.  Students of forensic auditing and accounting have long been taught that the Fraud Triangle, the MICE rectangle, etc. are all not admissible in court as evidence. Could these concepts now be introduced as evidence in a court case?  One possible argument is that “most” people who do commit fraud and other offenses  do fall into one of these “geometric” schemas.  Another criticism of this decision is that judges and juries will be able to parse the testimony in a dispassionate manner, finding what opinion applies to the defendant and what doesn’t.  Modern behavioral science rejects the concept of human beings being totally rational computing machines.  We are all subject to biases and decision heuristics. In short, allowing this type of testimony could sway a jury and short cut the justice system.  One has to suspect there will be additional court cases down the road providing judges and juries with more detail on how to deal with this difficult subject. 

The third ruling of concern to accountants is Smith v. Arizona.  Smith was also convicted of a drug charge. During his trial, an expert offered testimony relying on the work of another expert who had left the employ of the laboratory.  The trial court ruled this was admissible. Smith argued this was a violation of the Sixth Amendment, which guarantees the right to confront your accusers at trial. In a 9-0 decision, the Supreme Court disagreed.  The Court held that the testifying  expert conveyed the absent lab analyst’s statements in support of the testifying expert’s opinion. As a consequence, the statements of the absent lab analyst provided that support only if true. In this situation,  the statements of the lab analyst come into evidence for their truth, and thus activate the Sixth Amendment’s confrontation clause.  Justice Kagan noted that the testifying expert can still offer important testimony such as the quality control in the lab, the proper procedures to be employed, etc. However, the truth of the supporting expert testimony still needed to be vetted at trial.

Civil trials sometimes take years to play out. Accounting firms do experience turnover in their forensic practices.  The question all accounting firms will have to answer is how do they preserve the ability to give expert testimony if the person who performed the original work has left the firm?  This is another case where additional court cases will probably provide needed guidance.