Supreme Court Keeps Tax Status Quo but Leaves Path for Challenges

The US Supreme Court in Moore v. United States upheld the constitutionality of the mandatory repatriation tax, or MRT, and Congress’ ability to tax the undistributed income of non-US entities owned by US taxpayers.

The 7-2 decision should dispel the fears in the tax community—including numerous amici supporting the government—that longstanding tax frameworks such as Subpart F, the passive foreign investment company rules, and subchapters K and S could be upended. More broadly read, the opinion may arguably provide continued support for the use of tax rules such as mark-to-market and original issue discount. The opinion also provides insight into justices’ views on the constitutionality of so-called “wealth taxes.”

The narrowly tailored majority opinion, penned by Justice Brett Kavanaugh, undertakes a highly technical analysis of the relevant constitutional provisions and case precedents, including Brushaber v. Union Pac. R.R. and Estate of Whitlock v. Commissioner. However, the majority appears swayed (at least in part) by the significant public policy implications of siding with the plaintiffs—at one point in the opinion, Justice Kavanaugh refers to the potential “blast radius” of the plaintiffs’ legal theory.

The opinion notes that the MRT operates in the same manner as US federal income taxation of partnerships, S corporations, and subpart F income, which the plaintiffs in Moore were careful not to challenge. Further, the opinion applies only when Congress treats an entity as a pass-through, or, in other words, “is limited to: (i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income.”

The majority makes clear the court wouldn’t use this case to resolve the larger and more explosive question of whether realization is a constitutional requirement for an income tax. By doing so, it leaves open the question of whether wealth taxes are constitutional.

However, the majority may have sent a warning shot to Congress on any future enactment of a wealth tax by highlighting that the government, in its brief and at oral argument, “indicated that a hypothetical unapportioned tax on an individual’s holding or property (for example, on one’s wealth or net worth) might be considered a tax on property, not income.”

In her concurring opinion, Justice Ketanji Brown Jackson begins to lay the groundwork for an originalist argument that the Constitution doesn’t require income to be realized for Congress to tax it without apportionment. Justice Amy Coney Barrett, with whom Justice Samuel Alito joins, argues just the opposite in her concurrence.

Meanwhile, Justice Clarence Thomas’ sharply worded dissent, joined by Justice Neil Gorsuch, criticizes the majority opinion for its narrow ruling. The dissent cautions that the majority’s use of non-binding dicta in its opinion may not suffice to guard against what it says are unconstitutional taxes, such as a wealth tax, “if the Court is not willing to uphold limitations on the taxing power in expensive cases.”

Barrett’s concurring opinion and the dissent show that four of the nine judges appear to believe that “realization” is a constitutional requirement for a tax imposed on income. Future cases may confront the realization constitutional issue.

Although the Moore decision likely eliminates further constitutional challenges to the MRT, taxpayers will continue to challenge tax statutes and regulations before the IRS and in court. Given the Supreme Court’s decision not to take the realization issue head-on, if proponents of a wealth tax enact such a law, the opinion seems to suggest a path for future constitutional challenges. Wide coverage of Moore in non-tax media may apprise other taxpayers of the potential opportunity to challenge the validity of a wider array of tax legislation.

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

Carina C. Federico is partner in Crowell & Moring’s tax group and advises on complex tax issues such as transfer pricing, investment tax credits, research and experimentation credits, and energy credits.

Eric Homsi is senior counsel at Crowell & Moring and concentrates primarily on advising public and private companies.

Christine K. Lane is partner and co-chair of Crowell & Moring’s tax group, representing clients across a wide range of industry sectors.

David Steenburg, counsel at Crowell & Moring, contributed to this article.

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