Taxation without Realization? Why Moore v. United States Matters to Taxpayers

Could a $14,000 tax bill turn into a multi-billion-dollar headache for the government?

It’s starting to look that way. In June, the Supreme Court agreed to hear Moore v. United States, which, depending on how the Court rules, could have profound impact on tax revenue and important implications for Congress’s ability to levy certain taxes. The ruling may also affect both individuals and corporations with overseas investments.

Following is a quick overview of the case and its implications.

Background of Moore v. United States

In 2005, Charles and Charles and Kathleen Moore obtained a controlling interest in an Indian business named KisanKraft when they invested $40,000 in exchange for 11% of the company’s equity. Since then, the company has reinvested all its profits rather than distributing them to shareholders.

In 2017, the Tax Cuts and Jobs Act (TCJA) created a one-time “deemed repatriation” (Section 965), which taxed deferred foreign earnings from the past 30 years as if they had been repatriated, even if the shareholders never actually received any money. Section 965 taxes cash holdings at of 15.5% and illiquid assets at 8%.

As a result, the Moores were hit with a tax bill of $14,729, even though that had never received any income from their investment. They are now challenging Section 965 in court, claiming that it is a tax on unrealized gains, violating the Sixteenth Amendment’s requirement that income be realized before it can be taxed.

Argument for the case is now set for December 5, 2023.

What’s at Stake

Depending on how it is decided, the case could have major implications for future tax policies. Section 965 was projected to raise $338 billion in taxes from 2018-2027, money which could now be at stake. The Joint Committee on Taxation issued a memo warning that “If the Court were to strike down the tax as applied to individuals, a question might arise as to whether Congress would be constitutionally permitted to apply the MRT to corporate shareholders of controlled foreign corporations,” adding that partnership taxes, taxation of shareholders of S corporations, taxes on mark-to-market valuations, and income of real estate mortgage investment conduits (REMICs) could all be impacted.

Potential Outcomes of Moore v. United States

The outcome will depend on how the Court decides. According to the Tax Foundation’s estimates, if the Court strikes down deemed repatriation for corporate and noncorporate taxpayers alike, it could reduce tax revenue by about $346 billion over the next 10 years. If it more narrowly strikes down the deemed repatriation tax for pass-through firms and individuals only, the government would lose about $3.5 billion over the next 10 years. In the most extreme—and unlikely—event, the Court could choose to strike down taxes on all undistributed business earnings, both domestically earned and from foreign sources, which would incur revenue losses of up to $5.7 trillion over 10 years.

How Tonneson Can Help

While nothing has been decided yet, Moore v. United States could have significant implications for our clients with foreign investments. Here at Tonneson, we will be keeping a close eye on the case and its outcome. If you have foreign-earned income or investments, we urge you to contact us today. Regardless of the case’s outcome, we are here to ensure that you maximize your earnings while still meeting your tax obligations.

Contact us at Tonneson + Co today to learn how we can help.