Unless you have been living under a rock—as we tax lawyers are wont to do—you have probably been following Moore v. United States, which we last discussed here. On December 5, the tax community stepped into the spotlight (symbolically, of course) to hear the oral arguments before the Supreme Court.
The question presented before the Supreme Court is "whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states."
Specifically, the Moores are challenging the one-time transition tax enacted under the Tax Cuts and Jobs Act ("TCJA") on earnings that have accumulated overseas.
The Moores argue that the Sixteenth Amendment allows Congress to tax income only after a realization event and that the Constitution also prohibits Congress from imposing direct taxes without apportionment.
The Supreme Court seemed to be skeptical of the Moores' argument from the outset, echoing the concerns of anxious tax lawyers and an explicit warning from the Solicitor General that invalidating the tax would "wreak havoc on the proper operation of the tax code."
Justice Alito immediately acknowledged the "far-reaching consequences" of invalidating the tax, plainly stating that he was "quite concerned by the potential implications of the [Moores'] argument."
Justice Kagan said that a decision for the Moores would put "very established taxation schemes at risk," and specifically mentioned Subpart F, S corporations, partnerships and taxing on an accrual basis. Counsel for the Moores conceded that Subpart F was constitutional, which the Solicitor General called an "incredibly significant concession" because the transition tax operates in the same way.
The Moores argue that Congress does not have the power to tax income that has not been realized to the taxpayer, but a few of the justices pointed out that the corporation unquestionably realized income. These justices seemed to suggest that the issue is whether it is fair to attribute such income to the Moores as minority shareholders.
Chief Justice Roberts began by stating that "there certainly is realization here by the corporation." Later, Justice Kavanaugh remarked that "there was realized income here to the entity." Justice Sotomayor asked why the attribution of income to partners is always permitted, but the attribution to shareholders is not.
Perhaps the nail in the coffin was when Chief Justice Roberts asked "what's left to defend" after the Solicitor General "stabbed Macomber," which is the primary case on which the Moores have relied. Chief Justice Roberts acknowledged that Macomber has "certainly narrowed" over time, although he and others asked how to uphold the tax and still maintain some limits on Congress's power to tax.
Further, the justices seemed to approve the Solicitor General's description of a direct tax as one that looks "to the total value of the asset . . . at a particular point in time," which is "totally different from an income tax where you are taxing the increment of gain over time and generally only doing it one time." The Solicitor General argued that, before the enactment of the one-time transition tax, these earnings were able to accumulate offshore tax-free, and the government should not lose the opportunity to tax these earnings as income merely because they had previously been subject to a period of tax deferral.
All in all, the tax community may finally have some relief as the Supreme Court seems likely to uphold the tax. Despite this cautious optimism, tax professionals and legal scholars alike eagerly await the resolution of this significant and closely watched case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
