Last week, the Supreme Court issued its much-anticipated opinion on Moore v. United States, a decision that could have led to significant changes in tax law and provided insight into whether a wealth tax could survive judicial scrutiny.
In Moore, the taxpayers were shareholders in a foreign corporation since 2005. Despite the corporation’s annual profits, the Moores did not receive any dividends because the profits were reinvested. Generally, U.S. taxpayers could defer foreign corporation income until repatriated, with some exceptions under Subpart F of the tax code.
The Mandatory Repatriation Tax (MRT), enacted in 2017 as part of the Tax Cuts and Jobs Act, imposed a one-time tax on prior years’ offshore profits back to 1986, resulting in a $14,729 tax bill for the Moores. After payment, they sued for a refund, arguing that the MRT is not an income tax but a direct tax requiring apportionment, unlike income taxes under the Sixteenth Amendment.
By a 7-2 decision authored by Justice Brett Kavanaugh, the Supreme Court held that the MRT is a constitutional income tax without the need for apportionment. Key to this was past case law permitting Congress to attribute realized and undistributed business income to shareholders or partners and tax them accordingly.
A significant issue was whether income must be realized to be taxable, a concept traditionally understood to mean a transaction that makes wealth accrual concrete. The court did not formally define this but noted the MRT taxes realized corporate income attributed to shareholders.
The decision was cautiously narrow, limiting its applicability to specific circumstances involving undistributed income attributed to shareholders. The ruling did not address broader questions including potential future efforts to tax appreciated assets or impose a wealth tax.
For more detailed information, the case and the court’s opinion can be reviewed here.
Justice Jackson’s concurring opinion suggested that the realization requirement might be outdated, while Justices Barrett and Alito emphasized their agreement based on the Moores’ concession of Subpart F’s constitutionality. Justices Thomas and Gorsuch dissented, asserting the need for a realization event before taxation without apportionment.
This Supreme Court decision, narrowly confined to the MRT context, sets significant yet limited precedents, and has sparked a renewed national debate on tax policy and constitutional constraints.