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Supreme Court tax case could have outsized ramifications on income taxation

Can Congress tax gains on your home, land, business or other long-term investments?

Nov 09, 2023

Key takeaways

At issue is whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states.

A broad ruling could reshape Congress’ authorization to tax income.

The ruling could affect the viability of the Biden administration’s proposed Billionaire Minimum Income Tax.

Washington National Tax Private client services

Update: Dec. 7, 2023

In this episode of Tax Policy Now, members of RSM’stax policy and Washington National Tax teams delve into the dynamics of Moore v. United States, including the principal arguments of both parties and the implications of a broad or narrow ruling.

Update: Dec. 5, 2023 

The U.S. Supreme Court heard oral arguments in Moore v. United States. The narrow question in this case is whether Congress had the constitutional power to require U.S. shareholders in foreign corporations to pay tax on their share of the foreign company’s accumulated and undistributed earnings.  Read our insight on the briefing and the questions raised by Supreme Court justices

The Supreme Court accepts a tax case

The constitutionality of a $14,729 tax obligation has made it all the way to the Supreme Court. And if you suspect that sum is too modest for the Court to truly care about, then you’re onto why the worlds of tax and wealth management, not to mention the White House, are closely watching this case.

Whether Charles and Kathy Moore are refunded their mandatory repatriation tax payment from 2018 is a footnote relative to the question the Court might answer in Moore v. United States if it chooses to issue a broad ruling in spring 2024.

Can Congress tax wealth by imposing an income tax on paper gains on a taxpayer’s home, land, business or other long-term investments?

Challenging the constitutionality of a tax law

The Moores didn’t necessarily set out to provoke a ruling that could result in seismic changes to the U.S. tax landscape. They seek a refund on the $14,729 they were forced to pay as a result of their stake in a farming equipment corporation located in India.

The specified foreign corporation, KisanKraft, reinvests its profits; but an American tax law enacted in 2017 required a one-time repatriation on profits held overseas. Even though the Moores never received a corporate dividend, they were on the hook for the tax.

The Moores challenged the tax primarily on the grounds that it is not an income tax under the 16th Amendment because it is levied on a deemed distribution of earnings—rather than a realization event—from the specified foreign corporation.

Potential tax ramifications of Moore v. United States

A relatively narrow ruling still could revisit 100 years of settled law governing taxation of unrealized corporate income. A broad ruling, however unexpected, could upend some foundational tax laws, transform how personal wealth is taxed, and affect billions, if not trillions, in government revenue.

Upping the stakes further is President Joe Biden’s so-called Billionaire Minimum Income Tax. The dormant proposal seeks to require the wealthiest of ultrawealthy Americans to pay at least a 20% tax on their full income, including unrealized appreciation. The administration claims such a tax would reduce the federal deficit by $360 billion over the next decade.

Is such a tax even constitutional, though? The Court may see the Moore case as its opportunity to opine. After all, the issue of taxing unrealized capital gains is serious for individuals and for the capital markets.

Additional insights

Brief of Amicus Curiae L.E. Simmons
Submitted October 11, 2023 by: Shertler Onorato Mead & Sears
The L.E. Simmons brief cites several articles published by RSM to make the argument that the Government should prevail on the MRT, but only on the very narrow ground that the entity had realized income that was then properly attributed to the shareholders because no U.S. tax was imposed directly on the entity which therefore was effectively a pass-through entity. Many will be waiting for the Court’s final decision and opinion (or opinions) for statements or holdings on these important issues.

Moore: Now can we talk about attribution? repatriation tax
Published: Jan. 8, 2024; Federal Tax Notes
In this article, the authors analyze the oral arguments in Moore to assess what standard the Supreme Court may apply to determine when Congress can constitutionally attribute the realized but undistributed income of a corporation or other business entity to its owners.

Moore petitioners make strongest case to toss repatriation tax
Published: November 20, 2023; Bloomberg Tax
Charles and Kathleen Moore’s reply brief to the US Supreme Court makes the clearest arguments yet for why the justices should invalidate the mandatory repatriation tax.

US wealth tax could gain footing with Supreme Court Moore ruling
Published: October 31, 2023; Bloomberg Tax
The US Supreme Court’s decision in the foreign tax earnings case Moore v United States may have implications far beyond the question presented.

The government’s brief in Moore still has a Macomber problem
Published: October 23, 2023; Federal Tax Notes
In this Federal Tax Notes Letter to the Editor, Don Susswein reviews the government’s brief and provides insights.

What did Macomber decide?
Published: October 16, 2023; Federal Tax Notes
If Macomber is binding constitutional precedent, what are the implications of its second holding—that Congress could not constitutionally tax the shareholders of Standard Oil on the corporation’s income as if they were partners in a partnership.

Macomber: We can’t treat domestic shareholders as partners
Published: September 11, 2023; Federal Tax Notes
In this letter to the editor featured in Federal Tax Notes, Don Susswein and Ramon Camacho review the Macomber case, which considered the “realization” requirement under the 16th Amendment.

The Supreme Court, Steve Jobs, And the Billionaire Income Tax
Published: September 11, 2023; Federal Tax Notes
Explore the intersection of the Supreme Court, Steve Jobs and an income tax on billionaires in this op-ed.

Supreme Court agrees to hear a challenge to section 965
Published: September 8, 2023
The Supreme Court’s opinion may reach beyond section 965 to address the continuing relevance of the realization requirement.

Possible new issue in unrealized gains case
Published: August 28, 2023; Federal Tax Notes
In this Federal Tax Notes Letter to the Editor, Don Susswein considers if the case may clarify whether the Constitution would permit Congress to tax unrealized capital gains.

Are we missing billions in hidden corporate tax subsidies?
Published: August 7, 2023; Federal Tax Notes
Tax expenditure budgets maintained by Treasury and the Joint Committee on Taxation do not include billions in deferred capital gains taxes that meet the official definition of tax expenditure. The exclusion of these items is incorrect, or the underlying concept used to define tax expenditure needs clarification or revision.

Mark to market mechanism: MIA? A response to Avi-Yonah and Gamage
Published: October 3, 2022; State Tax Notes
Could a prominent mark-to-market proposal impose double taxation?

Is it time to tax Disney’s unrealized capital gains form 1965?
Published: June 13, 2022; Federal Tax Notes
Taxing unrealized capital gains on income-producing assets while the taxpayer still owns the asset could mean the income is taxed twice.

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