Foreign Tax Ruling Takes Pains to Limit Scope to Pass-Throughs

Tax and constitutional lawyers may argue for the next 100 years over what Justice Brett Kavanaugh’s opinion means in Moore v. United States.

Kavanaugh emphasized the holding was “narrow” and limited to taxation of the shareholders of an entity on its undistributed income that’s attributed to the shareholders—when the entity itself hasn’t been taxed on that income.

“In other words, our holding applies when Congress treats the entity as a pass-through,” he wrote.

What is the practical or possible political importance of that? For legislators who might like to tax certain billionaires on the undistributed income of their very well-known corporations, this could suggest that Congress must decide whether it’s going to tax the corporation on its undistributed income or impute that income to the shareholders. It could also suggest Congress can’t do both—at least according to this quote from the Moore opinion.

The justices reasoned this tax was permissible because a foreign company’s operating income was clearly “realized” by the company. Congress, the majority argued, was merely attributing or passing through that income to the US shareholders.

The court also stressed that the foreign corporation in this case hadn’t been subject to any US tax at the corporate level. The opinion takes pains to state that it wasn’t addressing the attribution or imputation issue for a domestic corporation or any other entity that itself is subject to entity level taxation on the same income.

Noting this distinction is important. Historically, some of the most important US Supreme Court tax cases began as footnotes or seemingly off-the-cuff statements about what the court wasn’t deciding.

At first blush, the majority opinion appears to drive a stake in Eisner v. Macomber, the 1920 case where the Supreme Court seemed to say that “realization” of income was a constitutional requirement for taxation. The Macomber court explained it couldn’t “ignore the substantial difference between corporation and stockholder, treat the entire organization as unreal, look upon stockholders as partners when they are not such.”

Even if Macomber has been “buried,” as Chief Justice John Roberts said in the oral argument, Kavanaugh’s opinion in Moore may give life to a point that some argued was a key part of that ruling—the idea that Congress must either decide to tax an entity as a corporation (and not its owners, absent a distribution) or tax the entity as a pass-through (which is really what a foreign corporation is, because Congress doesn’t tax foreign corporations directly).

Whether that is what Macomber meant, it may be what Kavanaugh, and the majority, is implying with their careful description of the foreign entity as a “traditional pass-through.”

The opinion opens the door, in later cases, to argue that Congress can’t tax the same corporate or entity income to the corporate entity, and to the owners, at the same time.

Congress could theoretically decide to treat a domestic corporation as a pass-through, bypassing the corporate tax and going directly to the shareholders. But the court may be saying or implying that a dollar of income can only be taxed to one person.

If that’s what Kavanaugh implies, if Congress decides the taxpayer is the corporation, it must seemingly wait until the corporation declares a dividend to the shareholder (or the shareholder sells their stock) to tax the shareholders.

The case is: Moore v. United States, U.S., 22-800, 6/20/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Donald B. Susswein is principal at RSM US, leading the pass-through tax consulting practice and advising on tax treatment of legal controversies, costs, and settlements.

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