The Supreme Court is currently considering a case that could have a major impact on the way Individuals and corporations are taxed in the United States. The case is Moore v. United States (Docket Number: 22-800). and it challenges the constitutionality of the Mandatory Repatriation Tax (MRT), a tax that was enacted in 2017 as part of the Tax Cuts and Jobs Act.

The MRT is a tax that requires U.S. shareholders of certain foreign corporations to include in their income their share of the corporation’s accumulated earnings and profits that were not previously taxed in the U.S. The MRT applies to the last tax year of the foreign corporation that begins before January 1, 2018, and it allows the shareholders to pay the tax in installments over eight years.

The MRT was designed to encourage U.S. Persons and multinational corporations to repatriate their foreign earnings and to prevent them from shifting their profits to low or zero tax jurisdictions. However, the MRT has also been criticized for being unfair, retroactive, and unconstitutional.

The petitioners in the case, Charles and Kathleen Moore, represented by ANDREW M. GROSSMAN, ESQUIRE – are U.S. shareholders of a foreign corporation that was subject to the MRT. They argued that the MRT violates the Sixteenth Amendment, which grants Congress the power to tax income from whatever source derived, without apportionment among the states. They claimed that the MRT is a direct tax on property, because it taxes gains that have not been realized by the shareholders. They relied on the Supreme Court’s decision in Eisner v. Macomber, 252 U.S. 189 (1920), which held that stock dividends are not income for tax purposes unless they are realized. They also argued that the MRT violates due process because it is retroactive and lacks a legitimate purpose.

The respondent in the case, the United States of America, represented by Solicitor General of the United State – General Elizabeth B. Prelogar, argued that the MRT is a valid income tax under the Sixteenth Amendment. The government pointed to the numerous preratification income taxes that taxed undistributed corporate earnings, including the income taxes in 1864, 1865, 1867, and 1870. The government also argued that the MRT is similar to other pass-through taxes, such as taxes on partners in Partnerships, S Corporation shareholders, and foreign corporation shareholders under Subpart F. The government disagreed with the suggestion that Macomber involved a tax on appreciation, and argued that the MRT taxes income that was actually realized by the foreign corporations, and Congress permissibly attributed the tax on that realized income to U.S. shareholders. The government also argued, as an alternative argument, that the MRT could be upheld as an excise tax.

The oral arguments in the case were held on December 5, 2023, and the main question was whether the MRT violates the Sixteenth Amendment’s requirement of realization. Realization is the concept that a gain is not income unless and until it has been realized by the taxpayer, such as by selling or exchanging the property. The petitioners argued that realization is a necessary requirement for income under the Sixteenth Amendment, and that the MRT does not satisfy that requirement because it taxes unrealized gains. The government argued that realization is not a necessary requirement for income under the Sixteenth Amendment, and that the MRT taxes income that was actually realized by the foreign corporations which is then attributed to its U.S shareholders.

The justices asked a number of questions of both sides, and expressed a range of views on the case. Some of the key issues that were discussed include:

• Whether the Sixteenth Amendment requires realization of income before it can be taxed.
• If so, what is the definition of “realization”?
• What are the limits on Congress’s ability to attribute income?
• Whether the MRT is an income tax (Indirect tax ) or a direct tax under the Sixteenth Amendment.
• Whether the MRT is similar to or different from prior attribution rules, such as Subpart, partnerships and S Corporations.
• Whether the MRT violates due process because it is retroactive and lacks a legitimate purpose.
• Whether the MRT can be upheld as an excise tax.

How will the Court rule and what are the implications?

It is difficult to predict how the Court will rule in this case, as the justices seemed to have several opinions and concerns about the MRT. However, based on the oral arguments, it seems more likely that the Court will uphold the MRT as a valid income or indirect tax under the Sixteenth Amendment, rather than strike it down as a direct tax that might violate the Sixteenth Amendment.

The Court might find that the MRT is not fundamentally different from these prior rules, and that Congress has the authority to attribute income to the shareholders based on their ownership stake and influence over the corporation. Petitioners themselves conceded that the various pass-through taxation, attribution, and Subpart F regimes are constitutional.

Another reason why the Court might uphold the MRT is that invalidating the tax would have significant consequences for the current Tax Code and the federal revenue. According to the government, if the Court now extended Macomber’s discussion to invalidate all taxes on undistributed business earnings, it would cause a sea change in the operation of the Tax Code and cost several trillions of dollars in lost tax revenue. By that extension, Macomber may be struck down or be narrowed down to the specifics of that ruling. Invalidating the MRT would also likely affect other taxes that rely on attribution or passthrough taxation, such as Subpart F, S Corporations, partnerships, and taxing on an accrual basis, which Justice Kagan suggested do not hew to the realization line. The Court might be reluctant to disrupt the existing tax system and create uncertainty and confusion for taxpayers and the government.

The Court’s decision in this case could have significant implications for the future of Individual and corporate taxation in the United States. According to the petitioner, if the Court upholds the MRT, it could expand the scope of Congress’s power to tax income from whatever source derived, and potentially put all property at risk of taxation. On the other hand, if the Court strikes down the MRT, it could limit the scope of Congress’s power to tax income, and potentially invalidate other taxes that rely on attribution or constructive realization. The Court’s decision could also affect the tax planning and compliance of U.S. multinational corporations and their shareholders, as well as the revenue and fiscal policy of the federal government.

The oral arguments were lively and informative, with the justices asking several questions of both sides. If you want to learn more about the case, you can read the transcript of the oral arguments [here], or listen to the audio recording [here].