Overview
In Moore v. United States, the Supreme Court held that the Mandatory Repatriation Tax (MRT), a tax that attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders, falls within Congress’s constitutional taxing power.[1]
In 2006, Charles and Kathleen Moore invested in a foreign corporation (KisanKraft) in exchange for a 13% ownership share in KisanKraft. KisanKraft generated substantial income over the years; however, it made no distributions to its American shareholders, such as the Moores, from 2006-2017. This meant that neither the Moores nor KisanKraft paid US taxes on the accumulated income.
In 2017, Congress passed the Tax Cuts and Jobs Act, which imposed a one-time, backwardlooking, pass-through tax on the income of American-controlled foreign corporations (CFCs) known as the Mandatory Repatriation Tax.[2] This tax was imposed on certain American shareholders of CFCs to address the trillions of dollars in undistributed income that foreign corporations, such as KisanKraft, had accumulated over time.[3]
At the end of the 2017 tax year, the Moores were subject to the MRT based on their pro rata share of KisanKraft’s accumulated income, resulting in a tax obligation of $14,729. The Moores paid the tax and sued for a refund in District Court. Their case was built on two constitutional arguments against the MRT. First, they argued that the MRT contravened the Direct Tax Clause, insisting it was an unapportioned direct tax on their shares in KisanKraft. Second, they argued that the MRT violated the Due Process Clause of the Fifth Amendment, because it applied retroactively to past income.
The District Court dismissed the suit, and the US Court of Appeals for the Ninth Circuit affirmed. The Ninth Circuit held that the MRT was a constitutionally valid income tax since “KisanKraft earned significant income, and the MRT assigns only a pro-rata share of that income to the Moores.”[4] Additionally, the Ninth Circuit dismissed the Moores’ claim regarding the MRT’s retroactivity. Unwilling to accept this outcome, the Moores appealed to the Supreme Court, presenting only their argument pertaining to the Direct Tax Clause.
In an opinion by Justice Kavanaugh, the Supreme Court held that the MRT, a tax that attributes the realized and undistributed income of an American-controlled foreign corporation to its American shareholders and subsequently imposes taxes on those shareholders based on their respective portions of that income, falls within the purview of Congress’s constitutional powers.
The Court clarified that Article I of the Constitution gives Congress broad power to levy and collect taxes. This includes both direct taxes (those imposed on persons or property) and indirect taxes (those imposed on activities or transactions). Furthermore, the Court noted that the Sixteenth Amendment emphasizes that income taxes need not be apportioned, and are thus categorized as indirect.
The government argued that the MRT is an income tax and therefore does not require apportionment. The Moores countered this, asserting that the MRT is a tax on property, and hence, unconstitutional since it was not apportioned. The Moores reasoned that income requires realization, and the MRT does not tax any income they had realized. However, the Court reasoned that the MRT does indeed tax realized income – specifically, income realized by KisanKraft, which is then attributed to the shareholders under the MRT.
The Supreme Court referred to longstanding precedents,[5] reinforced by Congress’s longstanding practices, to confirm that Congress can attribute an entity’s realized and undistributed income to the shareholders or partners of the entity, and then tax the shareholders or partners on their portions of that income. The Court noted that this principle already applied to partners in partnerships, shareholders of S corporations, and US shareholders of foreign entities and controlled foreign corporations under subpart F.
The Moores’ argued that the MRT was distinguishable from those longstanding provisions—particularly Subpart F—on the ground that those laws apply “the doctrine of constructive realization.” The Court disagreed. Citing the Amicus Brief for The American Tax Policy Institute, the Court concluded that “the term [‘constructive realization’] seems to be a one-off label woven out of whole cloth by the Moores to allow them to sidestep any existing tax, especially subpart F, that does not accord with their proposed constitutional rule.”[6] Therefore, the Court held that such ad hoc distinctions could not undermine the clear rule established by the Court’s precedents – that Congress may tax and attribute an entity’s realized and undistributed income to the shareholders or partners of that entity.
The opinion does not address many of the issues that had concerned practitioners. The Court’s ruling is narrow and limited to the taxation of shareholders on undistributed income realized by an entity and attributed to the shareholders when the entity has not been taxed. The Court explained that “[n]othing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity.”[7] The Court noted that the due process clause would prevent such arbitrary attribution. Finally, the Court declined to rule on whether realization is a constitutional requirement for an income tax.
Moore was regarded by many practitioners as potentially the most significant tax case in the last fifty years. Many assumed the Supreme Court granted certiorari because of the implications a ruling might have regarding a potential wealth tax. The Court though may not have anticipated the “parade of horribles” that might result if it ruled in favor of the taxpayer’s position. Amicus briefs filed by several prominent tax groups, such as The American Tax Policy Institute, pointed out the disruption to the tax law that could arise if the Court ruled in favor of the Moores. Many longstanding provisions of the Code, in fact, tax income that is not realized by the taxpayer in the year when tax is imposed (e.g., partners of partnerships, shareholders of S Corporations, and US shareholders of foreign entities and controlled foreign corporations under subpart F). Thus, the Court’s conclusion that Congress may tax and attribute an entity’s realized and undistributed income to the shareholders or partners of that entity, largely preserves the status quo. At the same time, the Court’s acknowledgement that the due process clause would prevent arbitrary attribution, including “any hypothetical congressional effort to tax both an entity and its shareholders,” places the constitutionality of a wealth tax in doubt.
[1] Moore v. United States, No. 22-800 (June 20, 2024).
[2] See § 965. The Mandatory Repatriation Tax is more commonly referred to as the Transition Tax.
[3] §§ 965(a)(1), (c), (d).
[4] Moore v. United States, No. 22-800 (June 20, 2024).
[5] See, e.g., Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110 (1925); Heiner v. Mellon, 304 U.S. 271 (1938); Helvering v. National Grocery Co., 304 U.S. 282 (1938).
[6] Moore v. United States, No. 22-800 (June 20, 2024) (citing Brief for The American Tax Policy Institute as Amicus Curiae 28, noting that “‘constructive realization’ actually is a new, amorphous phrase of petitioners’ devising”). Lawrence M. Hill of Steptoe LLP co-authored the Brief for The American Tax Policy Institute as Amicus Curiae.
[7] Moore v. United States, No. 22-800, slip op. at 4 (June 20, 2024).