Supreme Court’s Decision on Moore v. United States: A Narrow Ruling with Broad Implications
On Thursday, the U.S. Supreme Court issued a decision in the tax law case Moore v. United States. The ruling, which favored the government by a 7-2 margin, delved into the intricate boundaries of constitutionally permissible income taxes under the Sixteenth Amendment. While the judgment specifically addressed the narrow context of the case, the opinions left room to suggest that future rulings might swing in favor of taxpayers under different circumstances.
At the heart of the case were plaintiffs Charles and Kathleen Moore, who contested the taxability of income generated by an Indian company, KisanKraft, in which they held a partial interest. Before the Tax Cuts and Jobs Act (TCJA) of 2017, taxpayers were allowed to defer taxes on foreign business earnings until those profits were repatriated. However, the introduction of the TCJA brought about Section 965, which mandated taxation of unrepatriated income as of 2017, treating it as if it had been repatriated. The Moores claimed this provision was unconstitutional, arguing that the income, not having been realized, couldn’t be taxed under the Sixteenth Amendment.
Justice Brett Kavanaugh, writing for the majority, determined that KisanKraft had, in fact, realized the income. The ruling clarified that even though the income was not distributed, existing case law permits Congress to tax shareholders or partners on the realized, yet undistributed, income of an entity. Hence, the Moores’ share of KisanKraft’s income was fair game for taxation. Nonetheless, the Court’s decision left several key questions unresolved:
"The Court’s holding is narrow, confined to entities treated as pass-throughs. This opinion does not authorize hypothetical congressional efforts to tax both an entity and its shareholders on the same undistributed income realized by the entity… Nor does it resolve whether realization is a constitutional requirement for an income tax," the opinion stated.
Scope and Future Implications
The immediate outcome of the Moore case isn’t particularly impactful. The Court upheld a relatively minor tax law, and the Moores will not receive the $14,729 refund they sought. However, the broader arguments addressed concern the reach of the Sixteenth Amendment, which explicitly empowers Congress to levy an income tax. If interpreted broadly, the Amendment could validate numerous tax proposals. Conversely, a narrower interpretation might invalidate certain provisions of the current tax code and stop various tax proposals in their tracks.
For instance, a broader interpretation would support a net wealth tax as proposed by Sen. Elizabeth Warren, which could repeatedly impose taxes on unrealized or undistributed income. Similarly, President Biden’s proposed billionaire minimum tax aims to impose a one-time income tax on unrealized gains.
A narrow interpretation, however, could challenge other existing tax provisions like Subpart F or the inclusion of GILTI (Global Intangible Low-Taxed Income). It could also question the legitimacy of the new corporate alternative minimum tax, which might indirectly fall on unrealized income. If the scope is confined too narrowly, it could mean that income would only be taxable once money lands in an individual’s hands, potentially invalidating significant portions of tax revenue based on previous analyses.
Many stakeholders, far removed from the specific context of Section 965 repatriation, were keenly interested in the case. Various parties filed amicus briefs, hoping the Court’s decision might favor or oppose broader tax policies.
The Court’s Deliberations
The majority opinion, a coalition of seven justices across three different opinions, ultimately supported the government. Kavanaugh’s written opinion, supported by Justices Roberts, Kagan, and Sotomayor, held that KisanKraft had realized income and it was lawful under existing precedent to pass that income to the Moores for taxation.
Justice Jackson concurred but suggested there is no need for income to be realized to be taxable, arguing there is no realization requirement in the Sixteenth Amendment. She found fault with the plaintiffs’ reliance on Eisner v. Macomber, noting that subsequent case law contradicted this precedent.
Justice Barrett, with Justice Alito joining, concurred but clearly opposed the taxation of unrealized income. Barrett acknowledged the income realization by KisanKraft but questioned whether it could genuinely be attributed to the Moores.
Justice Thomas, in dissent, emphasized that income must be realized to be taxable and criticized the attribution doctrine used to connect KisanKraft’s gains to the Moores.
Future Considerations
Although Section 965 withstands constitutional scrutiny for now, this does not constitute a broad approval of all tax types. The opinions suggest that future courts might strike down taxes on unrealized income. This logic raises questions about the feasibility of proposed taxes like President Biden’s on unrealized gains of high-net-worth individuals, which could falter under tighter judicial scrutiny.
The government may have won this round, but the narrow ruling and the nuanced opinions of the justices indicate that future cases could reserve victories for taxpayers, reshaping the tax landscape significantly.
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