We have been waiting several months for the Supreme Court of the United States (SCOTUS) to render a decision in Moore v. United States. Initially, our questions focused on the issue of “realized or unrealized income” and whether income could be taxed before it is “realized.” The Court avoided this issue almost entirely. So, how did Moore v. United States change U.S. tax law?
The 7-2 SCOTUS Decision in the Case of Moore v. United States
In its decision, SCOTUS ruled 7-2 rejected Moore’s primary assertion that the issue of “mandatory repatriation” was unconstitutional. Writing for the majority, Justice Brett Kavanaugh noted, “The precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.” In short, the answer to that question is a simple “yes.” The decision cites multiple precedents and the history of Congressional practices.
“The Court’s holding is narrow and limited to entities treated as pass-throughs. Nothing 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.
The decision avoids explicitly direct confrontation of other issues, such as taxes on an individual’s net worth or holdings or appreciation on those holdings. Instead, SCOTUS ruled that Congress has a long history of taxing an entity’s realized yet undistributed income, and the issue of Mandatory Repatriation Tax (MRT) falls squarely within that same tradition.
Before the decision, many in the tax community asked if the Court’s ruling would affect the constitutionality of substantial existing corporate tax law as it applies to offshore or foreign income. Would the ruling address U.S. corporate alternative minimum tax or an alternative minimum tax on foreign unrealized income? How would the ruling affect “Pillar Two,” which established a minimum tax rate of 15% on foreign corporate profits of large multinational corporations worldwide?
The decision recognized the potential consequences of an expansive ruling and how it would have impacted many other components or provisions of the U.S. tax code. The majority decision noted that accepting the arguments presented by the Moores would have made “vast swaths” of existing U.S. tax laws “unconstitutional.” The Court also noted the impact these changes would have had upon the revenues of the U.S. government and the massive spending cuts and existing programs that would have lost funding, and the impact such a decision would have upon “ordinary Americans.”
“The (U.S.) Constitution does not require that fiscal calamity.”
With Such a Tightly Focused Decision, How Did Moore v. United States Change U.S. Tax Law?
If the decision was tightly focused, how did Moore v. United States change U.S. tax law? The actual answer may be “not much.” The decision upholds a very tightly focused and small provision of the U.S. tax code. It specifically avoids many of the issues raised by the Moores’ arguments. The U.S. can “attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.”
Nothing else has changed.
There will be many questions going forward as Congress and the Executive Branch propose taxation, such as a minimum tax based on income level or a “wealth tax.” None of those questions were addressed in this decision.
One of the main arguments in the case centered on the issue of realized income versus unrealized income. In essence, the decision walks a fine line between income that is “realized” versus that which is “distributed.” It has been carefully crafted to avoid “unrealized income” altogether.
A substantial portion of the U.S. tax code requires income to be realized in order to be taxable. Generally speaking, the taxpayer with realized income has converted (sold) an asset and (in theory) has cash in hand from the proceeds and, therefore, has the money with which to pay applicable taxes on any resulting gains (earnings).
In this specific case, the majority opinion basically argues that the Indian company in question realized income, so the MRT is an income tax and not a direct tax.
In their dissent, Justices Thomas and Gorsuch note “(the decision) does not address the Government’s argument that a gain need not be realized to constitute income under the Constitution. Instead, the Court answers the question whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.”
The majority opinion states it more directly: “Nor does this decision attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.”
Did Moore v. United States change U.S. tax law? A little. However, the real congressional battles and ultimately legal issues are still in front of us.
