Supreme Court’s Decision in Moore Leaves Door Open for Wealth Taxes and Other Income Redistribution Proposals

By William Stromsem, CPA, J.D., George Washington University School of Business, and John Kelleher, CPA-Dallas

 

Last fall, we alerted you that the Supreme Court would hear an important tax case in December, and last week the Court issued its opinion in the Moore v. United States. 

 

The Moores contested the constitutionality of the Mandatory Repatriation Tax that Congress enacted in 2017 for a tax with retroactive application since 1986 on U.S. shareholders of controlled foreign corporations under IRC Section 965. Section 965 was implemented as part of the United States’ transition to a quasi-territorial tax system and was part of an effort to “encourage” corporations to repatriate earnings of subsidiaries to the U.S. for capital and jobs formation through a participation exemption. The Moores had only a $14,729 tax bill, but the case affected trillions of dollars in earnings that multinational corporations had squirreled away in foreign countries. With a tax rate of 8% to 15.5%, this was a big deal, and some taxpayers had filed protective refund claims for mandatory repatriation tax previously paid. Still, possibly the bigger deal was the issue of whether a realization event was necessary to impose an income tax as it relates to various wealth redistribution proposals that are currently being floated.

 

The case turned on the Constitutional issue of whether this was an indirect tax like an income tax or a tax on property that the Constitution's Direct Tax Clause requires be apportioned among the states according to the census, something that would be too cumbersome to apply. The Court’s opinion and the concurring and dissenting opinions offer an interesting historical discussion of income recognition concepts. There is strong case law going back to Eisner v. Macomber (252 U.S. 189 (1920)) that distinguished a tax on income from a tax capital that would require apportionment. In this case, the Court distinguished between the tree or the land as capital and the fruit or the crop as income. The arguments are interesting to read, but in the end, Justice Brett Kavanaugh, writing for the majority, avoided the issue with a novel “attribution” approach to find that Congress had the Constitutional authority to attribute an entity’s realized income to shareholders, similar to the treatment of pass-through businesses. This seems to ignore the fact that the entity involved was a regular corporation. The majority opinion seems to stretch the tax concepts with a practical, although not particularly legal, observation that “…those tax provisions, if suddenly eliminated, would deprive the U.S. Government and the American people of trillions in lost tax revenue.”

 

The Court’s holding is narrow and limited to “(i) taxation of shareholders of an entity, (ii) on undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity has not been taxed on that income.” The majority opinion states the Court is not attempting to determine whether realization is a constitutional requirement for an income tax. However, the Court’s new “attribution doctrine” might provide a basis for various Democratic proposals for wealth redistribution, such as a tax on property appreciation with a mark-to-market approach and a tax on net worth like President Joe Biden’s proposed “billionaire’s minimum tax.” It might be important to challenges to the 15% corporate alternative minimum on book income of large corporations. On these, the majority opinion says, “Those are potential issues for another day, and we do not address or resolve any of those issues here.”

 

Court upholds Trump-era corporate tax on foreign earnings - SCOTUSblog