Supreme Court Hints at Limited Ruling in Defining Taxable Income

The US Supreme Court seems inclined to reach a narrow holding in Moore v. United States, based on justices’ questions during oral arguments Dec. 5, which would likely limit the broader impact of the case.

The case centers on a roughly $15,000 tax bill to Charles and Kathleen Moore, minority shareholders in an Indian corporation. The Moores were subjected to the mandatory repatriation tax under the 2017 Tax Cuts and Jobs Act even though the corporation retained all its earnings and profits and made no distributions to shareholders.

At issue in Moore is whether the mandatory repatriation tax is an income tax permissible by the 16th Amendment. The petitioners argue that unrealized gains aren’t income and equated the gains of the corporation to an appreciation in property value for the shareholder.

Solicitor General Elizabeth Prelogar, representing the US government, argued that the 16th Amendment permits income realized at the corporate level to be attributed to the taxpayer shareholders and subjected to the MRT.

Although the Supreme Court doesn’t often hear tax cases, the justices came prepared and dove into some technical portions of federal income tax law.

Justice Sonia Sotomayor quickly explained the test for treatment under Subpart F of Section 952 of the tax code. Justice Neil Gorsuch went so far as to reference the solicitor general’s briefs in tax cases from 1918.

Several justices—including Sotomayor, Elena Kagan, and Amy Coney Barrett—focused on potential impact on the accrual method, subchapters F and S of Title 26 of the US Code, mark-to-market, and partnership taxation to explore arguments about requirements for realization of income, and the contours of what constitutes realization under the 16th Amendment.

This focus mirrored much of the discussion among tax practitioners: How would a ruling in favor of the taxpayers not jeopardize the constitutionality of similar areas of the federal tax code where there is no explicit realization requirement?

The taxpayers’ counsel attempted to distinguish such systems, but such arguments didn’t seem to resonate with the justices.

Chief Justice John Roberts and Justices Clarence Thomas and Brett Kavanaugh seemed to agree with the government that there was a realization event to the foreign corporation.

Prelogar, who argued in favor of a narrow ruling, also argued forcefully that there was realization to the foreign corporation, and that the income the foreign corporation had received was rightly attributed to the taxpayers in line with historical taxing mechanisms, such as Subpart F.

The primary challenge to the government’s argument came in two forms: first, whether the government was asking the high court to explicitly overrule Eisner v. Macomber and the realization requirement, and what limitations, if any, exist on federal income taxation if there’s no realization requirement.

The government took the position that there’s no need to rule on the realization requirement because it wasn’t necessary for the case, but that if the justices felt the need to formally overrule Eisner v. Macomber, all the necessary elements were met.

On policy, several justices asked about taxes on increases in the value of real property. Gorsuch expressed concern about the government’s ability to tax unrealized gain in retirement accounts. The government did as much as possible to avoid staking a position, but indicated there’s an argument that both could be taxed as income taxes under the 16th Amendment, subject to due process considerations.

If the court takes a narrow ruling approach, it will be favored by some prominent commentators, including the American College of Tax Counsel in its amicus brief. A ruling in favor of the government would likely be narrow and leave open the question of whether a wealth tax or other forms of taxation without a clear realization event to the taxpayer being taxed are in fact constitutional.

If the court rules in favor of the taxpayers on 16th Amendment grounds, it’s challenging to see a scenario that doesn’t open the door for subsequent challenges of other areas of the tax code, in particular Subchapter F and Global Intangible Low-Tax Income. This could open the door for taxpayers to aggressively push income offshore.

The case is: Moore v. United States, U.S., No. 22-800, oral arguments 12/5/23

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

Diana Erbsen is tax partner at DLA Piper with experience in tax controversy, representing clients in sophisticated, challenging, and high-stakes tax disputes.

Victoria Gu is a tax associate with DLA Piper, focused on tax and tax controversy.

Joshua Lingerfelt is an associate in DLA Piper’s investment management and real estate capital markets practice.

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