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Editorial 8 MIN READ

Moore v. United States: what the Court decided, and what it pointedly did not

A 7-2 majority saved the §965 transition tax while leaving the realization fight for another day

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. What §965 actually does
  2. What the Court held, and how narrowly
  3. What this preserves
  4. What it does not decide
  5. What practitioners should do differently
  6. Sources

n June 20, 2024, the Supreme Court handed down Moore v. United States and upheld the TCJA's §965 Mandatory Repatriation Tax by 7-2. The holding is narrower than the argument, and the argument was narrower than the briefs. Anyone reading Moore as a green light or a red light for a federal wealth tax is reading a case the Court declined to decide.

The decision preserves roughly a third of a trillion dollars in one-time revenue that Treasury had already booked, leaves subpart F and GILTI on firm ground, and hands the realization question back to Congress and future litigants substantially unresolved.

What §965 actually does

The Mandatory Repatriation Tax, enacted as part of the Tax Cuts and Jobs Act of 2017, was the cost of moving the United States from a worldwide corporate tax system to a quasi-territorial one. Prior to TCJA, U.S. shareholders of controlled foreign corporations generally deferred U.S. tax on foreign earnings until those earnings were repatriated as dividends. Decades of deferral had left an estimated $2.6 trillion in accumulated post-1986 foreign earnings sitting offshore.

Section 965 reached back and taxed those earnings once, on a deemed-repatriation basis, at bifurcated rates (15.5% on cash and cash-equivalent assets, 8% on illiquid assets), payable over eight years if elected. Ten percent U.S. shareholders of specified foreign corporations had to include their pro rata share of the accumulated earnings in income for the last taxable year beginning before January 1, 2018. No actual dividend had to be paid. No cash had to move.

Charles and Kathleen Moore owned roughly 13% of KisanKraft, an India-based farm-equipment company founded by a friend. KisanKraft had reinvested its earnings rather than distributing them. The Moores' share of accumulated earnings under §965 came to about $508,000, and their MRT bill came to $14,729. They paid and sued for a refund, arguing that the MRT was a direct tax not apportioned among the states and thus unconstitutional under Article I, §9, cl. 4 and the Sixteenth Amendment, which authorizes taxation of "incomes, from whatever source derived" without apportionment.

The Ninth Circuit held for the government. The Supreme Court granted certiorari on the question of whether income must be "realized" before it can be taxed without apportionment.

What the Court held, and how narrowly

Justice Kavanaugh wrote for a five-Justice majority (Roberts, Sotomayor, Kagan, Jackson, and himself). The holding is that Congress may attribute an entity's undistributed income to the entity's shareholders or partners and tax those persons on that income, provided the income was in fact realized by the entity and there is sufficient nexus between the entity and the taxpayer. That rule, the majority wrote, is the mechanism behind partnership taxation, S-corporation taxation, and subpart F, all of which have been on the books for decades and all of which would be disturbed by a contrary ruling.

The opinion repeatedly emphasizes what it is not deciding. The Court wrote that the "precise and narrow question" it was resolving was whether Congress may attribute realized-and-undistributed income of a foreign entity to a U.S. shareholder, and tax the shareholder on that income. Whether Congress may tax unrealized appreciation, whether a wealth tax is constitutional, and whether the Sixteenth Amendment contains a realization requirement at all, were all set aside. The majority simply observed that nothing in the opinion should be read to authorize a tax on "holdings, wealth, or net worth," and moved on.

Justice Jackson concurred separately to note that, in her view, a realization requirement is not embedded in the Sixteenth Amendment and that the government had the better of that argument on the merits. She was the only member of the majority willing to say so.

Justice Barrett, joined by Justice Alito, concurred only in the judgment. Her concurrence is narrower than the majority opinion. She agreed that the Moores' MRT liability was constitutional because KisanKraft had in fact realized income, and because §965's attribution mechanics fell within Congress's taxing power as a matter of a longstanding and unbroken tradition. She declined to join the majority's broader discussion of attribution doctrine and signaled, in several places, that she is skeptical of any reading of the Sixteenth Amendment that would permit a direct tax on unrealized gain.

Justice Thomas dissented, joined by Justice Gorsuch. The dissent would have held that "income" in the Sixteenth Amendment means realized income, that attribution of an entity's realized income to a shareholder who has not herself realized anything is constitutionally suspect, and that the MRT therefore fails as an unapportioned direct tax. Thomas walked through Pollock, Eisner v. Macomber, and the drafting history of the Sixteenth Amendment to support a realization floor.

Count the votes carefully. Five Justices joined an opinion that expressly reserves the realization question. Two Justices (Barrett and Alito) wrote separately to say that realization matters and that the government wins here only because KisanKraft actually realized the income. Two Justices (Thomas and Gorsuch) dissented on realization grounds. On the narrow question the Court decided, the vote was 7-2. On the underlying constitutional theory of a realization requirement, the Court is closer to 4-4-1 than to anything resembling a clean majority.

What this preserves

Subpart F, codified at IRC §§ 951 through 965, taxes U.S. shareholders of controlled foreign corporations on certain categories of the CFC's income (passive income, insurance income, related-party sales income) whether or not that income is distributed. GILTI, enacted as part of TCJA at IRC § 951A, taxes U.S. shareholders on their CFC's global intangible low-taxed income on a current basis. Both regimes rely on exactly the attribution theory the majority endorsed: the CFC has realized the income, the statute attributes the pro rata share to the U.S. shareholder, and the U.S. shareholder owes tax on it. Moore leaves both untouched.

Partnership taxation under subchapter K and S-corporation taxation under subchapter S also rely on attribution. If the Court had announced a general rule that a person cannot be taxed on income the person has not individually received, the administrative disruption would have extended far beyond the MRT. The majority's emphasis on "longstanding congressional practice" and on the absurd consequences of a contrary ruling reads as a deliberate effort to foreclose that disruption.

Mark-to-market regimes that tax already-realized or constructively-realized gains, such as IRC § 1256 for regulated futures contracts and certain foreign currency contracts, are unaffected by Moore. Section 1256 treats gains and losses on covered contracts as if the positions were sold at fair market value on the last business day of the year. The theory has always been that these are highly liquid, marked-to-market-in-practice positions, and the Court said nothing that casts doubt on that regime.

What it does not decide

The proponents of a federal wealth tax wanted Moore to be a vehicle for a broad holding that realization is not a constitutional prerequisite. The opponents wanted the opposite. Neither side got what they asked for. The majority wrote around the question. Barrett's concurrence suggests she would not vote to uphold a tax on unrealized appreciation of, say, a publicly traded stock portfolio. Thomas and Gorsuch would strike such a tax down. Jackson would uphold it. The rest of the majority did not tip their hands.

What Moore does supply to wealth-tax opponents is dicta. The majority went out of its way to note that its holding does not authorize taxes on "holdings, wealth, or net worth." Barrett's concurrence says the same thing more forcefully. Any future wealth-tax statute will be litigated against a backdrop in which four Justices have already signaled, in print, that they are skeptical of the underlying theory, and in which the majority opinion carefully preserved the realization question rather than resolving it in the government's favor.

That matters for statutory design. A tax keyed to actually-realized corporate income, attributed to shareholders on a look-through basis, sits comfortably within Moore. A tax keyed to mark-to-market appreciation of a non-traded asset, imposed on an individual taxpayer who has neither sold the asset nor received any cash, does not. Whether that second regime is constitutional remains an open question, and Moore has made the question slightly harder for the government, not easier.

What practitioners should do differently

For U.S. shareholders of foreign corporations, nothing changes. MRT liability is owed on the original schedule. The eight-year installment election under IRC § 965(h) continues to run for those who elected it. Refund claims filed in reliance on a favorable Moore outcome will be denied. Treasury regulations implementing §965, including the anti-avoidance rules at Treas. Reg. § 1.965-1 through § 1.965-9, remain in force.

For closely held businesses with foreign operations, the GILTI and subpart F analyses a practitioner would have run before Moore are the analyses to run after Moore. The Court did not narrow those regimes. The high-tax exception under Treas. Reg. § 1.951A-2(c)(7) is unchanged. The §962 election for individual U.S. shareholders, which lets an individual be taxed at corporate rates on subpart F and GILTI inclusions in exchange for the indirect foreign tax credit, remains available and, for some taxpayers, remains the right answer.

For estate planners and family-office advisers watching the wealth-tax conversation, the signal is: the constitutional ceiling on direct taxation of net worth is still being litigated, and Moore did not settle it. The current majority has four Justices who appear skeptical of unrealized-gain taxation and five who declined to reach the question. That is a moving target for statutory drafters and a moving target for the planners who will have to respond to whatever Congress eventually writes.

The quieter consequence of Moore is about the Sixteenth Amendment's text. The government argued, and Justice Jackson wrote separately to agree, that "incomes, from whatever source derived" does not by its terms require realization and that the Macomber line of cases has been narrowed into irrelevance by later decisions. The majority did not adopt that view. It also did not reject it. The doctrinal question of whether realization is a Sixteenth Amendment requirement or merely an administrative convention will be relitigated, on better facts, the next time Congress tries something more ambitious than §965.

Sources

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