Tax attorneys and constitutional scholars alike are likely to debate the implications of Justice Brett Kavanaugh’s opinion in Moore v. United States for years to come. The ruling from the United States Supreme Court primarily addresses the taxation of shareholders on the undistributed income of an entity when the entity itself has not been taxed on that income. This decision is carefully limited to scenarios where Congress treats an entity as a pass-through for tax purposes.
In his opinion, Kavanaugh emphasized the narrow scope of the ruling, highlighting that the decision is confined to situations where “Congress treats the entity as a pass-through.” This distinction is crucial for policymakers contemplating new tax laws targeting the undistributed income of various corporations. The decision hints that Congress must choose between taxing an entity directly on its income or imputing that income to its shareholders—but not both.
The Court’s reasoning rests on the notion that the foreign company’s operating income was “realized” by the company, which permitted Congress to attribute this income to U.S. shareholders. This attribution is permissible as long as the foreign corporation has not been subjected to U.S. tax at the corporate level. The opinion meticulously avoids addressing whether this principle would extend to domestic corporations or entities already subject to entity-level taxation.
This approach delineates a clear boundary, potentially influencing future legislative drafting and judicial interpretations concerning shareholder taxation where the underlying entity might be a domestic corporation. Notably, the decision might undermine the precedent set by Eisner v. Macomber, a 1920 Supreme Court case stating that income must be “realized” to be taxable. Critics suggest that the Moore decision, by tethering taxation to the pass-through treatment, may circumvent Macomber’s earlier principles.
As it stands, the Moore ruling has significant implications for how Congress might structure the taxation of both domestic and foreign entities in the future. The ongoing debate will likely focus on whether Kavanaugh has effectively set a precedent that income can only be taxed once—to either the corporation or to its shareholders, but not both simultaneously.
The case is Moore v. United States, U.S., 22-800, decided on June 20, 2024.