In a recent case, Moore v. United States, the US Supreme Court appeared likely to reach a narrow holding, according to the justices’ questioning during oral arguments. This state of affairs could potentially limit the case’s broader impact. The litigation in question revolves around a $15,000 tax bill brought against Charles and Kathleen Moore, minority shareholders in an Indian corporation. Attached under the 2017 Tax Cuts and Jobs Act’s mandatory repatriation tax, the Moores fell subject despite the corporation retaining all earnings and profits and making no distributions to shareholders. Read More.
The crux of Moore is the determination of whether the mandatory repatriation tax is an income tax permissible by the 16th Amendment. The petitioners assert that unrealized gains do not constitute income. They compare the corporation’s gains to an appreciation in property value for the shareholder. Representing the US government, Solicitor General Elizabeth Prelogar argued that the 16th Amendment allows income realized at the corporate level to be attributed to taxpayer shareholders and subjected to the MRT.
Preparing thoroughly for the rarely received tax cases, the Supreme Court justices delved into some detailed aspects of federal income tax law. For instance, Justice Sonia Sotomayor swiftly outlined the test for treatment under Section 952 of the tax code, while Justice Neil Gorsuch even referred to solicitor general’s tax-related briefs from over a century ago, dating 1918.
Justices Sonia Sotomayor, Elena Kagan, and Amy Coney Barrett, among others, concentrated on the potential impact on the accrual method, subchapters F and S of Title 26 of the US Code, mark-to-market, and partnership taxation, exploring arguments about the requirements for income realization and what constitutes realization under the 16th Amendment. These angles mirrored much of the discussion within tax practitioner circles, primarily concerned with how a taxpayer-favorable ruling might risk constitutional jeopardy for similar areas of the federal tax code that lack an explicit realization requirement.
The government’s argument faced its main challenge on two fronts. The first was whether the high court was being asked to explicitly overrule the realization requirement along with Eisner v. Macomber. The second was defining what limitations, if any, exist on federal income taxation if there is no realization requirement. On the other hand, the government rendered the argument that no need exists to rule on the realization requirement since it wasn’t necessary for the case. However, it was ready to argue that all the necessary elements for formally overruling Eisner v. Macomber were met, should the justices be inclined.
A narrow ruling approach, should the court decide to take it, is favored by some prominent commentators, including the American College of Tax Counsel in its amicus brief. A ruling favoring the government would likely maintain this narrow scope, leaving the question of whether a wealth tax or other forms of taxation without a clear realization event to the taxpayer being taxed are in fact constitutional. If the court rules in favor of the taxpayers on 16th Amendment grounds, the door may open for subsequent challenges of other areas of the tax code, specifically Subchapter F and Global Intangible Low-Tax Income (GILTI). This could potentially encourage taxpayers to push income offshore aggressively.
For more details on the ongoing case, refer to: Moore v. United States.