Highlights
- In Moore v. United States, the U.S. Supreme Court recently ruled 7-2 that the repatriation tax under Section 965 of the Internal Revenue Code is constitutional.
- The issue presented to the Court was narrow, focusing on whether the 16th Amendment gives Congress authority to tax unrealized sums without apportionment among the states.
- This Holland & Knight alert examines the ruling and what the opinions of the justices could mean for similar future cases.
The U.S. Supreme Court on June 20, 2024, ruled 7-2 that Section 965 of the Internal Revenue Code, as revised by the law known as the Tax Cuts and Jobs Act, is constitutional. The issue presented to the Court in Moore v. United States was narrow: whether the 16th Amendment authorizes Congress to tax unrealized sums without apportionment among the states. The Moores did not preserve their due process claim after losing in the U.S. Court of Appeals for the Ninth Circuit.
Revised Section 965 imposed a deemed repatriation tax on previously untaxed earnings and profits (E&P) of a controlled foreign corporation (CFC). U.S. shareholders, those with a 10 percent or greater interest in the CFC, included their share of previously untaxed E&P and paid a reduced income tax rate on such earnings.
Case Background
The Moores challenged the constitutionality of Section 965, claiming the 16th Amendment requires a taxpayer to realize income before they can be subject to income tax. The opinion of the Court, written by Justice Brett Kavanaugh, dodged the question whether the Constitution requires realization of income as a precondition to tax. Instead, the opinion of the Court noted the CFC realized the income, and the real question is whether Congress may attribute the CFC's realized and undistributed income to the shareholders. Under the theory of attribution, the Supreme Court and other courts have upheld Congress' ability to attribute and tax income at the shareholder/partner level or the entity level.
The Moores were in a pickle – they conceded other provisions of the Code that function like Section 965 are constitutional. For example, the Moores conceded Subpart F (and perhaps the global intangible low taxed income regime), Subchapter K and Subchapter S are all constitutional. The majority was unpersuaded that Section 965 could be distinguished from these other regimes, as, for example, Section 965 and Subpart F require the same level of control.
Finally, the opinion of the court recognized that if Section 965 is unconstitutional under the 16th Amendment, other similar provisions of the Code would also be unconstitutional, reducing tax revenue by several trillion dollars. The opinion of the Court is an incremental and cautious effort to prevent unwinding 100-plus years of legislation and related jurisprudence.
Is Subpart F safe (and other similar provisions of the Code) when seven of the nine justices hold in favor of the government? Justice Amy Coney Barrett's concurrence (joined by Justice Samuel Alito), is really a dissent and preserves the issue for future litigation. She noted the Moores themselves have not realized income from the shares they held – the CFC realized the income. The Moores did not receive a dividend or sell their stock. Under Justice Barrett's reading of case law, the 16th Amendment contains a realization requirement, as stated in Eisner v. Macomber.
After a review of the case law, Justice Barrett concluded that "Congress has a limited power to do so [attribute income from a corporation to a shareholder] that depends on the relationship between the shareholder and the income." Congress likely lacks the power to attribute a publicly traded domestic corporation's income to its shareholders.
Justice Barrett would have preferred extensive briefing on the extent to which Congress can attribute the income of closely held corporations to their shareholders. It is unclear whether Section 965 and Subpart F are constitutional attributions of closely held foreign corporations' income to their shareholders. But because the Moores conceded the constitutionality of Subpart F and Section 965 is not different from Subpart F, the Moores lost.
Justice Ketanji Brown Jackson's concurrence addresses realization and concludes there is a realization requirement that has been significantly narrowed. In their dissent, Justices Clarence Thomas and Neil Gorsuch stated they believe Eisner v. Macomber has a robust realization requirement.
Conclusion
What can we divine from these opinions? In the short term, the current system is safe, for now. If there is a change in the composition of the Court, the main issues are still on the table. Does the 16th Amendment require realization of income, and has that standard been met? The lack of clarity leaves open future challenges to Subpart F, Global Intangible Low-Taxed Income (GILTI) and mark-to-market under Sections 475, 877A and 1256.
Presumably, the next taxpayer will not concede the similarities between the provision under consideration and other parts of the Code. And the majority's Theory of Attribution will be put to the test. Because the opinion of the Court is narrow, the Court has not provided guidance on a wealth tax, which may have been the real purpose of the Moores and their amici in bringing this 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.