Supreme Court to Hear Moore v. U.S.

The Case Targets Tax on Unrealized Gains

 By Bill Stromsem, J.D., CPA, and John Kelleher, CPA-Dallas
June 30, 2023

The U.S. Supreme Court granted certiorari to the case of Moore v. United States related to Section 965 that was enacted by the Tax Cuts and Jobs Act of 2017 (TCJA). The plaintiffs claim that the Constitution does not allow taxing income that has not yet been received as a dividend from a foreign subsidiary.

 Prior to the TCJA, a parent company generally would not be taxed on a foreign subsidiary’s earnings until they were “repatriated” to the U.S. as dividends. The TCJA moved the U.S. tax system to a quasi-territorial system and Section 965 was implemented to ensure the accumulated earnings of foreign subsidiaries would not go untaxed. In addition, the TCJA sought to encourage companies to return capital to the U.S. parent rather than reinvesting the profits overseas by requiring that even if a dividend was not actually paid, it was deemed to have been paid. While Section 965 caused an immediate inclusion of the net unremitted earnings, the earnings were taxed at favorable rates that were provided (15.5% for cash payments and 8% for illiquid asset distributions) and that this would allow greater flexibility for the parent to use these funds rather than limiting them to foreign reinvestment.

Section 965 that is being contested required the deemed repatriation of the net earnings of foreign subsidiaries accumulated since 1986. Taxpayers could elect to pay the tax liability (the transition tax) over eight years. This tax applied to U.S. shareholders who owned 10% or more of a “controlled foreign corporation,” a foreign corporation that had over 50% U.S. ownership by U.S. shareholders.

 The plaintiffs are claiming that under the Constitution, the U.S. cannot tax an increase in value of the subsidiary, absent a dividend paid. In general, the Constitution requires that taxes must be “apportioned among the several States,”, which is not the case here. The exception is the Sixteenth Amendment, which simply states that Congress has the authority “to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States….” The plaintiffs contend that a tax on the increased net worth of the subsidiary is not a tax on realized income and is not an income tax under the Sixteenth Amendment.

 While the plaintiffs are seeking a refund of approximately $15,000, the risk to the government is $340 billion in estimated tax revenues, creating a windfall for corporations as the affected earnings would never be subject to U.S. tax. Additionally, this case is important because it has the potential to impact certain wealth tax proposals that have been initiated by the President and other Democratic lawmakers.

 Although it is difficult to envision such an earth-shaking change in U.S. taxation of U.S. multinationals, the approach the Supreme Court takes with respect to this case could have a significant impact on whether or not income is not required to be realized to be subject to tax as noted by the Ninth Circuit. Note, the plaintiffs lost in the District and circuit court;, the Supreme Court has granted certiorari and has been difficult to read recently. While U.S. shareholders who were subject to the transition tax should watch this case and consider a protective claim for refund in case the decision goes against the government, all taxpayers should be interested in the outcome.

 Read more: Supreme Court Will Hear Case Targeting Tax On Unrealized Gains (forbes.com)