Supreme Court Income Tax Case: Landmark Decision in Moore v. U.S.

At a glance: 

• The main takeaway: On June 20, 2024, the United States Supreme Court (SCOTUS) handed down its decision in the tax case Moore v. United States, which challenged the constitutionality of the foreign deemed repatriation transition tax enacted by the Tax Cuts and Jobs Act of 2017. By a 7-2 margin, the Court affirmed Congress’s right to impose tax on unrealized accumulation held offshore by U.S. taxpayers. However, the decision explicitly left open the question of whether Congress may impose tax “on holdings, wealth, or net worth.”
• Impact on you: The Court’s decision to uphold the transition tax represents a victory for the status quo and could have far-reaching impact to both tax and administrative law.
• Next steps: How does this ruling impact you, your wealth, and your business? Let Aprio’s International Tax advisors navigate you through the complex rules and regulations in the ever-changing tax world. 

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The full story:

Moore v. United States was widely seen as a potential bellwether case which could provide a view as to how SCOTUS might address not only the tax question presented by the plaintiffs, but also how broadly the Court would use its powers to limit legislative exercise of both tax and administrative powers. A broad ruling in favor of the Moores could have opened more challenges to the constitutionality in other areas of taxation not related to foreign income recognition, including the treatment of domestic pass-through entity taxation. One commentor said that a win for the Moores would expose almost 50% of the U.S. federal tax law to elimination. 

Enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, the transition tax subjected post-1986 accumulated earnings and profits of certain foreign corporations owned by U.S. residents and taxpayers to a one-time, mandatory tax under Subpart F at the level of 10% for U.S. shareholders.

Under Internal Revenue Code Section 965, the transition tax applied if U.S. shareholders had income or income appreciation, even if that appreciation was never actually realized. As a result of the transition tax, the Moores, who made a 13% investment in an India-based company, had an income inclusion with respect to their shares of the foreign company’s accumulated earnings and profits, which resulted in a tax due of nearly $15,000.

Who are The Moores?

Charles and Kathleen Moore are a Washington-based retired couple who own a minority stake in a foreign company that sells farming equipment. The Moores owned shares of a foreign entity as an investment but had neither sold the shares for profit nor received any dividends. They paid a one-time “deemed repatriation tax” under the provisions of Internal Revenue Code Section 965. However, they subsequently challenged the constitutionality of the provision that required recognition of taxable income before the taxpayer actually received the amounts being taxed. The Moores are seeking a refund of nearly $15,000 in taxes they paid on earnings from their foreign-based company, after a lower court’s decision rejected their challenge and upheld the transition tax on foreign company earnings.

Unlike the majority of the few tax cases that reach the Supreme Court, the Moores were challenging a legislatively enacted tax, rather than seeking relief from the IRS’s interpretation or application of an existing tax law. In a rare constitutional challenge, the Supreme Court agreed to hear the Moore case, with the justices slated to consider whether the transition tax is a tax on income within the meaning of the 16th Amendment, or a direct non-income tax that must be apportioned among the states.

The case goes before the SCOTUS

The Supreme Court heard oral arguments on December 20, 2023. The attorneys representing the Moores argued that a foundational underpinning of the U.S. income tax code is the principle that taxpayers were not subject to income tax on the increase in value of investment assets until the taxpayers “realize” that increase in value through liquidation of the asset, either through direct sale or other taxable transfer. 

During oral arguments, most of the Justices seemed skeptical of the plaintiffs’ arguments. Justice Kavanagh in particular tied the provisions of the transition tax to other provisions in the Internal Revenue Code. The Justices queried the attorneys for both parties as to how the transition tax the Moores were challenging differed from other provisions in the Internal Revenue Code, most notably Subpart F and domestic pass-through entities.

SCOTUS published its opinion on June 20, 2024. By a 7-2 margin, with Justices Thomas and Gorsuch dissenting, the Court held in favor of the government, upholding the transition tax as constitutional. Writing for the majority, Justice Kavanagh directly tied the mandatory repatriation tax not only to Subpart F, but also to the taxation of pass-through entities such as trusts, partnerships, and S corporations.  

The majority opinion also left room for different treatment of unrealized gain from U.S.-based securities, writing that “…the constitutionality of a hypothetical un-apportioned tax on appreciation may depend on…whether realization is a constitutional requirement for an income tax.” This part of the decision, along with Justice Barrett’s concurring opinion, seems to be trying to forestall a proposed “wealth tax” on unrealized gains, a proposal which has some adherents within Congress and among some economists.

You may read the full opinion by following this link: https://www.supremecourt.gov/opinions/23pdf/22-800_jg6o.pdf

The bottom line

The Court’s decision in the Moore case reflects the majority’s understanding that a holding in favor of the taxpayers that realization was a requirement for any federal tax to be constitutional under the direct tax distinction. However, the Court’s dictum stating that it likely would apply different standards to other attempts to impose taxes on unrealized gains, particularly in the treatment of domestically held assets.  

Aprio’s Tax advisors are closely monitoring the broader implications of how this decision could impact you, your wealth, and your business. Schedule a consultation to discover how Aprio can help you navigate complex rules and regulations in the ever-changing tax world.

Related Resources

Moore v. United States: 3 Key Details You Need to Know
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