It would be difficult to imagine a case with more potential to disrupt the Tax Code than Moore v. U.S.
Currently before the Supreme Court — oral arguments are set for today, Dec. 5 — Moore involves the constitutionality of the deemed repatriation under Section 965 of the code, added by the Tax Cuts and Jobs Act of 2017. Section 965 imposes a one-time inclusion of accumulated foreign earnings over the past 30 years, a pay-for for reforms including a dividends-received deduction for repatriated foreign earnings.
The plaintiffs are individual shareholders with a controlling interest (greater than 10%) in a foreign company that became subject to the deemed repatriation. The plaintiffs argue that the tax is unconstitutional since it applies to unrealized income and that it applies retroactively to past earnings that are "property" under the 16th Amendment, which requires that income be realized before it can be taxed. Their investment of $40,000 would subject them to a $14,729 Mandatory Repatriation Tax.
Academics have come down on both sides of the argument. In an amicus brief, Fordham Law Professor John Brooks and Indiana University, Bloomington, Maurer School of Law Professor David Gamage argue that Congress has the power to tax unrealized income and gains.
"The Sixteenth Amendment is not what gives Congress its income tax power," they assert. "Congress' ability to tax came long before the 16th Amendment. The amendment instead overruled a Supreme Court case (one of only two amendments that did that) that had placed a new obstacle in front of income taxation. With that case overruled, things went back to the prior status quo."
The potential implications of the case encompass several different layers, according to Amy Miller, director of public policy at Carta.
"The first implication involves the Moores themselves," she indicated. "The mandatory repatriation could go away. The next layer, depending on how the court rules, could invalidate most of the TCJA reforms. The decision could also call into question the pass-through treatment of S corporations and partnerships, and the mark-to-market regime. These are taxes assessed on profits that partners or shareholders may not have personally received."
"The Moores are saying that they never realized gain on their investment, so the MRT is taxing them on income that they never received," she explained. "Since they are being taxed on income they never received, that means it cannot be considered a tax on income. This means it should be considered a tax on ownership in property, which is not a tax on income, but a direct tax. And direct taxes, under the Constitution, must be apportioned among the states."
"If the Moores lose, we will have more certainty in how the U.S. tax law has been applied and upheld the past 100 years," according to Ryan Losi, executive vice president of Virginia CPA firm Piascik. "If they prevail, it will dramatically affect the entire Internal Revenue Code due to the concept of 'realization.' That's just one very narrow area — the Section 965 transition tax — where there is a deemed inclusion of foreign earnings even though they are not distributed. Where it would really cause uncertainty is S corporations and partnerships, since millions of small businesses operate through these entities."
"If the Moores win, I'm going to be a very busy practitioner for the rest of my career," he concluded.
