CBA Record January-February 2024


ers. Generally, undistributed earnings and profits from a CFC were not subjected to U.S. income tax until they were distrib uted. Thus, neither the Moores nor the company paid any U.S. tax on their earn ings and profits. In 2017, the Tax Cuts and Jobs Act enacted a one-time Mandatory Repatria tion Tax (MRT) that subjected any past CFC undistributed earnings and profits to U.S. taxation. Pub. L. No.115-97, 131 Stat. 2054, § 14103 (2017); 26 U.S.C. § 965. The purpose was to give incentives to U.S. taxpayers, such as the Moores, to repatriate their foreign earnings back into the United States to ensure that these earn ings do not escape taxation. The Moores amended their 2017 tax return to calculate their MRT; this resulted in a $15,130 tax liability, which the Moores paid. Subsequently, the Moores filed an action in the district court to recover their MRT tax liability. They argued that the MRT was a tax on their property, not their income, which violated the Con stitution’s Apportionment Clause. The Moores specifically argued their undis tributed foreign earnings and profits were not income because they never actually received any distributions to satisfy the realization requirement. The govern ment, on the other hand, argued that the Moores did not need to receive their undistributed foreign earnings and profits to be taxed as income. Additionally, the government argued that under the Con stitution, income does not have to be real ized to be taxed. The district court ruled in favor of the government, finding that the MRT on the Moore’s undistributed foreign earnings and profits was a tax on income, not on property, and therefore did not violate the Constitution’s Apportionment Clause. The Moores appealed the decision to

the United States Court of Appeals for the Ninth Circuit. The Ninth Circuit affirmed the district court’s decision in favor of the government, emphasizing that “realization of income is not a constitutional require ment” under the Sixteenth Amendment. Moore v. United States, 36 F.4th 930, 936 (9th Cir. 2022). Rather, the realization of income rule was only “founded on administrative convenience[.]” However, the dissent on the Moores’ petition for rehearing en banc cautioned that finding the MRT is an income tax on the basis that income does not have to be realized could “open the door to new federal taxes on all sorts of wealth[.]” Moore v. United States, 53 F.4th 507, 515 (9th Cir. 2022) (Bumatay, P., dissenting). Thereafter, the Moores filed a petition for a writ of certiorari with the Supreme Court to decide whether the Sixteenth Amendment allows the government to tax unrealized earnings. Three Potential Outcomes of Moore It is obvious this case has enormous impli cations for the U.S. tax code and the gov ernment’s ability to levy taxes. At least three possible outcomes could impact the prospect of a wealth tax. Broad ruling. The first potential outcome, and the most significant for setting the stage for a wealth tax, is if the Supreme Court broadly rules that the realization requirement does not need to be met for income to be subject to taxation under the Sixteenth Amendment. Thus, the govern ment could potentially categorize appre ciation of a taxpayer’s assets, whether sold or not, as income subject to tax under the Sixteenth Amendment.

come would be a finding that the Sixteenth Amendment has a realization requirement, and that earnings cannot be subject to tax ation without a realization event (i.e., sale, distribution, or conversion). However, this could upend significant areas of tax law that have departed from the realization requirement and that have been upheld as constitutional. For example, a partner’s share of partnership income is subject to taxation whether or not that income was distributed to the partner. Although this potential outcome could stifle the possibil ity of a wealth tax, it could also obstruct the government’s ability to tax activities such as partnerships. Narrow ruling: The third potential out come is that the Supreme Court could issue a narrow ruling that does not upend the tax code. The Court could try to limit the scope of their decision to address only the MRT at issue in this case to avoid broader implications on other areas of tax law. This potential outcome would not directly address the constitutionality of a wealth tax, but it could protect other areas of the U.S. tax code and the government’s ability to collect taxes. Oral arguments for Moore took place in December 2023. A decision is expected in the first half of 2024. Robert J. Hovey, CPA, is a law student at Univer sity of Illinois-Chicago, a member of the YLS Fed eral Taxation Committee, and a senior associate at FORVIS, where he pro vides tax compliance and planning services to clients focusing on privately held entities, trusts, and estates for high-net worth individuals.

Sixteenth Amendment’s realization requirement. The second potential out

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