Moore v. United States
602 U.S. 572 (2024)
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Rule of Law:
Congress has the constitutional authority to impose pass-through taxes on American shareholders for the realized and undistributed income of American-controlled foreign corporations. Such taxes are considered taxes on 'income' under the Sixteenth Amendment and are therefore not subject to the apportionment requirement.
Facts:
- Congress generally taxes American business entities in one of two ways: pass-through taxation (where owners pay tax on entity income) or direct entity taxation (where the entity pays tax, and shareholders are taxed on distributions or stock sales).
- Since 1962, Subpart F of the Internal Revenue Code has treated American-controlled foreign corporations as pass-through entities for certain income, mostly passive, by attributing it to American shareholders and taxing them.
- For decades prior to 2017, American-controlled foreign corporations accumulated trillions of dollars in undistributed income abroad that remained largely untaxed by the United States.
- In 2017, Congress passed the Tax Cuts and Jobs Act, which included the Mandatory Repatriation Tax (MRT), a one-time, backward-looking pass-through tax designed to address this accumulated income.
- In 2006, Charles and Kathleen Moore invested $40,000 in KisanKraft, an American-controlled foreign corporation in India, acquiring a 13-percent ownership share.
- From 2006 to 2017, KisanKraft generated substantial income but did not distribute any of that income to its American shareholders, including the Moores.
- The MRT applied to the Moores' investment, resulting in a tax bill of $14,729 on their pro rata share (approximately $508,000) of KisanKraft's accumulated income from 2006 to 2017.
Procedural Posture:
- Charles and Kathleen Moore paid the $14,729 tax bill resulting from the MRT.
- The Moores then sued for a refund in the District Court, claiming the MRT violated the Direct Tax Clause of the Constitution and the Due Process Clause of the Fifth Amendment.
- The District Court dismissed the Moores' suit.
- The U.S. Court of Appeals for the Ninth Circuit affirmed the District Court's dismissal, holding that the MRT constituted a constitutional tax on income and rejected the Moores' due process claim regarding retroactivity.
- The Moores sought review in the Supreme Court, raising only their Direct Tax Clause argument, and certiorari was granted.
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Issue:
Does the Mandatory Repatriation Tax (MRT), which attributes the realized and undistributed income of an American-controlled foreign corporation to its American shareholders and taxes them on that income, exceed Congress's constitutional authority under Article I, §§ 8 and 9, and the Sixteenth Amendment, by imposing an unapportioned direct tax?
Opinions:
Majority - Kavanaugh, J.
Yes, the Mandatory Repatriation Tax (MRT) is constitutional and falls squarely within Congress's authority to tax. The MRT attributes the realized and undistributed income of an American-controlled foreign corporation to its American shareholders and then taxes them on that income. This is consistent with the Court's longstanding precedents, which establish that Congress may choose to tax either a business entity on its income or attribute that entity's undistributed income to its shareholders or partners and tax them on it. Cases such as Burk-Waggoner Oil Assn. v. Hopkins (1925), Burnet v. Leininger (1932), Heiner v. Mellon (1938), and Helvering v. National Grocery Co. (1938) confirm that such taxes are on 'income' and are indirect taxes, thus not subject to apportionment. The Court dismisses the Moores' reliance on Eisner v. Macomber (1920), clarifying that Eisner did not address the attribution of an entity's income to its shareholders. The Court also notes Congress's long history of taxing shareholders on undistributed entity income (e.g., partnerships, S corporations, Subpart F income). The Moores' attempts to distinguish the MRT from these established taxes are unconvincing. The Court stresses that its holding is narrow, applying only to the taxation of shareholders on undistributed income realized by an entity that is treated as a pass-through (i.e., the entity itself has not been taxed on that income). The Court explicitly declines to rule on whether 'realization' is a constitutional requirement for an income tax or on the constitutionality of taxes on wealth or unrealized appreciation.
Concurring - Jackson, J.
Justice Jackson concurred in the judgment, emphasizing the Court's wise restraint in not deciding the question of whether realization is a constitutional requirement for an income tax. She highlights that no such requirement is explicitly found in the Sixteenth Amendment's text and that Eisner v. Macomber's discussion of realization has been significantly limited or undermined by subsequent decisions. She also pointed out that the Government's argument that the MRT could be an excise tax on the privilege of doing business through a controlled foreign corporation would also need consideration if the tax were found unconstitutional on other grounds. She concluded by stressing that the Court's role in tax disputes should be limited, recalling the historical context of Pollock and the subsequent Sixteenth Amendment.
Concurring_in_judgment - Barrett, J.
Justice Barrett concurred in the judgment but disagreed with the majority's reasoning, arguing that the Sixteenth Amendment does not authorize Congress to tax unrealized sums without apportionment. She stated that income, to be taxed without apportionment, must be 'realized' or 'derived,' meaning a taxpayer must receive something new and valuable beyond the property she already owns, which the Moores had not. She contended that prior cases, including Eisner v. Macomber, imply limits on Congress's power to disregard the corporate form and attribute income, focusing instead on tax avoidance or the unique nature of partnerships. While acknowledging that the Due Process Clause or an implicit limit in the Sixteenth Amendment requires that income attribution not be arbitrary (depending on the taxpayer's relationship to the underlying income), she views the majority's interpretation of precedent as too broad. She ultimately concurred in the judgment because the Moores conceded the constitutionality of Subpart F, which she found not meaningfully different from the MRT in its attribution of corporate income, thus failing to meet their burden to prove unconstitutionality.
Dissenting - Thomas, J.
Justice Thomas dissented, arguing that the Sixteenth Amendment's definition of 'incomes' requires actual realization by the taxpayer. He asserted that the text and history of the Amendment, particularly its response to Pollock v. Farmers' Loan & Trust Co. (1895), demand a distinction between 'income' and its 'source,' and this distinction necessitates a realization requirement, as correctly outlined in Eisner v. Macomber (1920). He criticized the majority for inventing an 'attribution' doctrine that he believes is unsupported by the cited precedents, which he interprets as primarily addressing tax avoidance or the specific nature of partnerships, not a general power to attribute income. He further distinguished the MRT from other pass-through taxes (partnerships, S corporations, and other Subpart F provisions) by highlighting its lack of connection to the shareholder's control or any recognition event, effectively making it a tax on stock ownership. He concluded by rejecting the majority's consequentialist reasoning, arguing that the Court's role is to uphold constitutional limitations, not to prevent fiscal calamity by creating new legal doctrines.
Analysis:
This case significantly reinforces Congress's broad taxing power, particularly concerning pass-through entities and foreign income. By affirming the constitutionality of the MRT without definitively settling the 'realization' debate, the Court leaves open the question of whether unrealized gains can be taxed, though the narrowness of the holding prevents a sweeping redefinition of 'income' that could immediately enable a federal wealth tax. Future litigation will likely probe the 'arbitrary attribution' limit mentioned by the majority and concurring opinions, especially in contexts involving widely held corporations or purely individual appreciation. The decision signals the Court's reluctance to invalidate longstanding tax structures due to potentially far-reaching fiscal consequences.
