Last year, the U.S. Supreme Court heard oral arguments in Moore v. United States, a case that, at first glance, is one dispute over taxation of unrealized foreign gains. However, many on both sides believe that a ruling favoring the plaintiffs in this landmark case could have historic ripple effects on what Congress can or cannot tax — especially wealth.
In Moore, the plaintiffs argue that a mandatory repatriation tax (MRT) introduced by the 2017 Tax Cuts and Jobs Act (TCJA) is unconstitutional. The one-time tax is supposed to prevent shareholders from obtaining windfalls on undistributed offshore earnings. The IRS levies the tax on U.S. taxpayers with a specified amount of ownership in certain foreign corporations.
We won’t know from the Dec. 5 arguments which way the justices will vote until the summer when the Court typically releases rulings. But since the case has the potential to change the U.S. tax landscape and is happening as the IRS is cracking down on wealthy taxpayers, here's what you need to know now.
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Supreme court income tax case: How we got here
The Moores invested in a foreign company, and due to tax law changes in 2017 (the TCJA, also known as the "Trump Tax Cuts”), the couple had to pay $15,000 in taxes on overseas earnings attributed to them. However, since the Moores didn’t receive dividends or income from their ownership stake, they argue that only realized income is taxable under the 16th Amendment of the U.S. Constitution. (The 16th Amendment grants Congress the power to impose a federal income tax.)
However, the lower and appellate courts ruled against the Moores, finding that the mandatory repatriation tax accomplishes a “legitimate purpose through rational means.” The Ninth Circuit Court of Appeals noted that "courts have consistently upheld the constitutionality of taxes similar to the MRT” and that “the realization of income does not determine the tax’s constitutionality."
The Moores appealed to the Supreme Court, which agreed to consider the case, causing a stir in the tax community. So, a key sticking point now is whether income must be realized to be taxable under the Constitution.
Moore v. U.S. Supreme Court oral arguments
During oral arguments, the justices considered historical definitions, direct, indirect, and excise taxes, and the fact that the 16th Amendment doesn’t mention realization. Some focus was also on Subpart F, which deals with income earned in a controlled foreign corporation (CFC). Arguing for the petitioners, attorney Andrew Grossman conceded the constitutionality of Subpart F but said the tax in this case could be distinguished.
Overall, there seemed to be a desire to find limiting principles on both sides and potential grounds for a narrow ruling.
- Justice Samuel Alito expressed concern about the far-reaching implications of the petitioner's argument and that of the federal government.
- Justice Ketanji Brown Jackson pondered, "Who makes the definition of realization?" Essentially, Justice Jackson wondered if the court could find realization under a definition it appreciates.
- Several justices delved into past cases. In a moment of levity, Justice Sonia Sotomayor wondered what the government sees as the current state of the Supreme Court’s precedent. “Are you asking us to overturn 100 years of precedent?”
- Justice Amy Coney Barrett asked if the court needs to define income in a new way. Arguing for the government, Solicitor General Elizabeth Prelogar said the court didn’t need to adopt a universal definition of income to resolve the case.
Billionaire tax: A preemptive strike?
Predicting how the Supreme Court will rule based on oral arguments is beyond difficult. However, Congress has had the authority to tax international and capital transactions for over a century. The Moores have asked the court to find that to be taxed, earnings must be realized. If the court agrees, it could mean adopting an interpretation of Congress's taxing power that conflicts with long-established principles, rules, and regulations.
Some believe that the legal battle over taxing unrealized gains could impact tax policies for multinational corporations and the wealthy, including proposed billionaire taxes by President Biden, Sen. Elizabeth Warren (D-Ma.), and U.S. Senate Finance Committee Chairman Ron Wyden (D-Ore.). Wyden’s Billionaires Income Tax Act proposes to ensure billionaires start paying their “fair share” in taxes by ending the “buy, borrow, die” tax strategy. Those, and other, proposals in several states targeting the wealthy, are one reason why the Moore case is seen by some as a strategic move in this broader tax policy battle.
It should also be noted that this is happening against the backdrop of the IRS receiving billions of dollars under the Inflation Reduction Act to increase tax enforcement on complex partnerships and high earners. That includes what the agency describes as "tax-evading millionaires" and billionaires. Some of those funds have already been used for that purpose.
Nothing certain…but taxes?
If the High Court invalidates the mandatory repatriation tax, could it lead to widespread confusion? Will taxpayers dispute regulations or refuse to pay specific taxes, and will corporations receive massive tax refunds? Additionally, will the U.S. Treasury experience a loss of revenue? (Early predictions for potential revenue losses differ, ranging from hundreds of billions to trillions of dollars over time.)
Or, as some who support the Moores' contention contend, will a ruling in favor of the government rightfully prevent the “scary prospect” of Congress having seemingly unlimited power to tax? Though the Court seemed unlikely to strike down the tax, only time will tell.
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