On December 9, 2023, the Supreme Court heard oral argument in Moore v. United States, an appeal challenging a one-time "Mandatory Repatriation Tax" (MRT) on U.S. shareholders of a foreign corporation for accumulated, but undistributed, earnings of the corporation. The taxpayers ask the Court to invalidate the MRT as a tax on "unrealized" income because the Sixteenth Amendment, they argue, has a realization requirement, meaning that the taxpayer must receive or enjoy an economic gain for earnings to qualify as income. The government argues that the Sixteenth Amendment contains no such realization requirement and that other taxes Congress has enacted would be invalidated should the Court agree with the taxpayers' interpretation.
Moore has attracted attention from Congress, tax law practioners, and the general public over how a broad ruling from the Court could expand or constrain Congress's power to tax income under the Sixteenth Amendment. This Legal Sidebar provides an overview of the constitutional jurisprudence at issue in this case, as well as a discussion of the specific facts and arguments raised in Moore, including the Justices' questioning at oral argument. It also highlights concerns the case has generated. The Sidebar concludes by discussing the potential implications of Moore for Congress.
Legal Background
Article I, Section 8, Clause 1 of the U.S. Constitution authorizes Congress "[t]o lay and collect Taxes, Duties, Imposts and Excises." Section 2, Clause 3 and Section 9, Clause 4 of Article I limit this power, however, so that "direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers" and "[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census." Thus, under the "rule of apportionment" applicable to direct taxes, amounts raised by a direct tax must be divided among the states according to each state's population.
The Constitution contains no further definition of "direct tax." In 1895, the Supreme Court held in its two decisions in Pollock v. Farmers' Loan & Trust Co. that a tax on income derived from property was a direct tax requiring apportionment.
Less than two decades later and in direct response to Pollock's prohibition of the unapportioned taxation on income, Congress passed and the states ratified the Sixteenth Amendment. The Amendment gives Congress the power "to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." In other words, the Sixteenth Amendment exempts income taxes from the rule of apportionment.
The Supreme Court later held in a 1920 case, Eisner v. Macomber, that a stock dividend—i.e., when a corporation issues new stocks to its stockholders—did not become taxable income until the stock is sold or converted, and then only to the extent that the stockholder realized a gain upon the proportion of the original investment that the stock represented. Subsequent cases narrowed the application of Macomber, but the Court has not overturned it.
The Mandatory Repatriation Tax
As part of P.L. 115-97, commonly referred to as the 2017 Tax Cuts and Jobs Act (TCJA), Congress enacted the MRT, which taxes U.S. shareholders owning at least 10% of a U.S.-taxpayer-controlled foreign corporation. For the 2017 tax year, such U.S. shareholders had to include in their gross income their pro rata share of the foreign corporation's "deferred foreign income" after 1986, and the shareholders were subject to a one-time tax on that income. Congress intended the MRT to offset other tax benefits in the TCJA, and it was projected to generate approximately $340 billion in revenue.
Moore v. United States: Factual Background and the Parties' Briefing
Charles and Kathleen Moore received 13% of the shares of a corporation located in India for contributing start-up capital to the corporation in the mid-2000s. The Indian corporation generated profits every year after its founding, but instead of distributing the profits to its shareholders as dividends, it reinvested them into the business.
Per the MRT, the Moores reported their pro rata share of the Indian corporation's deferred foreign income in their 2017 taxable income, which resulted in about $15,000 in additional taxes. The Moores paid their MRT liability and then sued the government for a refund. The U.S. District Court for the Western District of Washington denied the refund and the U.S. Court of Appeals for the Ninth Circuit affirmed the denial. The Moores then sought review by the Supreme Court, which the Court granted.
Relying principally on Macomber for the proposition that the Sixteenth Amendment requires income to be realized to be taxed without apportionment, the Moores argue that the MRT is an impermissible tax on unrealized income because they never received earnings from the Indian corporation; rather, its earnings were reinvested. Thus, they argue that the MRT is a direct tax on property—the shares—that requires apportionment, rather than an income tax. The Moores further argue that interpreting the Sixteenth Amendment not to include a realization requirement would render the apportionment requirement meaningless, "opening the door to unapportioned taxation of anything that Congress might deem a person's 'income,' from property to growth in retirement investments to uncertain or even fictional gains."
The government contends that the Sixteenth Amendment has no realization requirement, emphasizing that the Amendment never references "realization." The government also argues that Macomber has been substantially narrowed to apply only in the stock dividends context that was at issue in that case. The government further asserts that other taxes on undistributed corporate income similar to the MRT would be invalidated should the Court agree with the Moores' interpretation.
Concern over a Broad Ruling
Moore has attracted attention from tax attorneys and the general public over how a broad ruling from the Court could expand or constrain Congress's power to tax income under the Sixteenth Amendment.
Some commentary on Moore has echoed the government's concern that a realization requirement could invalidate other taxes, leading to a substantial loss in tax revenue. Other commentary expresses concern that the lack of a realization requirement could leave Congress's income-taxing power unrestrained, paving the way for a "wealth tax."
Eighteen amicus curiae briefs have been filed in support of the government, while twenty-two have been filed in support of the Moores. Three amicus curiae briefs support neither party. The briefs represent the perspectives of states, taxpayers, tax law practitioners, academia, and think tanks.
Oral Argument
As a threshold matter, at oral argument the Justices pressed both parties on their definitions of income and realization. Upon questioning from Justice Clarence Thomas, the Moores' attorney defined realization to be "receipt" or "enjoyment of an economic gain such that the taxpayer can put that gain to his or her own uses and benefits." Justice Elena Kagan asked the Moores' attorney to opine on Macomber's definition of realization: "That which precedes from the property is severed from the capital, is received or drawn by the recipient, that is, the taxpayer, for his separate use." While acknowledging that the Court has not applied the Macomber definition in all contexts, the Moores' attorney stood by the general proposition that Macomber imposes a realization requirement.
In its briefing, the government put forward a definition of income as economic gain between two points in time. The Moores' attorney argued against that definition because, "if the time is set at a person's birth or many decades in the past, that could reach some or potentially all of their property." Justices Samuel Alito and Amy Coney Barrett questioned the logical extent of the definition and if it would allow for an income tax on appreciation of an asset's value. Justice Thomas asked whether Congress could tax an increase in the value of real property, while Justice Neil Gorsuch asked about the possibility of a tax on retirement investment accounts. Justice Brett Kavanaugh, on the other hand, expressed that some of the hypothetical taxes presented by other Justices are "farfetched" since "members of Congress want to get reelected." In response to questioning about its definition of income, the government clarified that the Court need not adopt a definition of income as economic gain and expressed apprehension regarding a definition for all purposes. The government agreed that some of the hypotheticals presented by the Justices "are unlikely to ever come to pass" since Congress frequently chooses to tax based on realization because of administrative practicalities.
Justice Sonia Sotomayor expressed hesitancy for coming up with a definition "that applies to every piece of property and every way in which people gain wealth," later stating that "nobody's happy with anybody's definition of anything." Justice Ketanji Brown Jackson asked if Congress or the Court has the authority to define what constitutes realization.
Some of the Justices asked the Moores' counsel to distinguish between the MRT and other taxes conceded to be constitutional. Justice Kagan specifically asked for a distinction between the MRT and four kinds of taxing methods that Congress has enacted and that have been raised in briefing as comparable to the MRT:
Some of the Justices questioned whether the Court needs to decide if there is a realization requirement to resolve the case. Justice Sotomayor suggested two possibilities for a narrow ruling: "[F]irst, we can say there is a realization requirement, and, here, it was realized because the corporation realized it. . . . or we could . . . assume that there's a realization requirement . . . and it was met here." The government stressed the importance of adopting the latter option, which Justice Kavanaugh paraphrased earlier as, "[E]ven assuming or leaving open whether realization is a constitutional requirement, there was realized income here to the [corporation], and then it's attributed to the shareholders in a manner consistent with how Congress has done that and this Court has allowed."
Justices Sotomayor, Barrett, Kavanaugh, and Gorsuch asked if the issue, rather than being about the Sixteenth Amendment, is whether Congress permissibly attributed corporate income to individual shareholders with the MRT. The Moores' attorney maintained that the case is about the Sixteenth Amendment, not attribution. The government argued that the Court does not need to resolve whether the Sixteenth Amendment requires realization, but that the Court could find Congress permissibly attributed foreign corporate earnings to U.S. shareholders under a reasonability standard. Justice Gorsuch asked the government for some factors for the Court to consider in deciding if Congress permissibly attributes corporate earnings to a shareholder. The government listed some, stressing "the taxpayer's overall relationship to the income . . . and the entity."
Considerations for Congress
Moore has attracted attention from Congress about how a potential realization requirement could implicate other current taxing schemes. On a request from Ranking Member Richard E. Neal, a letter from the Chief of Staff of the Joint Committee on Taxation identified provisions in the Tax Code that could be affected by a ruling for the Moores holding that the Sixteenth Amendment has a realization requirement. A CRS In Focus examined the potential economic implications of the case.
Much of the oral argument focused on the role of Congress. Justice Jackson asked if Congress has the authority to define what constitutes realization. Other Justices acknowledged Congress's authority to attribute corporate income to individuals. The government's counsel stated that Congress frequently taxes based on realization, not because it is a constitutional requirement, but because of "administrative practicalities," since it is easier to calculate tax liability on a realization event. Justice Kavanaugh suggested that political and electoral considerations would caution Congress away from more far-reaching taxes.
Document ID: LSB11100