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Supreme Court to Hear Tax Case Concerning Unrealized Gains. The Supreme Court granted a writ of certiorari on June 26 to hear a case regarding the constitutionality of a tax enacted in the Tax Cuts and Jobs Act (TCJA, Pub. L. 115-97). The case, Moore v. United States, concerns the section 965 mandatory repatriation tax (MRT), which requires taxpayers to recognize the deferred tax on certain foreign income. The provision was intended to impose a one-time tax (which taxpayers can elect to pay over an eight-year period) on the accumulated earnings of foreign corporations with U.S. shareholders in the transition to TCJA’s quasi-territorial tax system that excludes many sources of foreign-earned income from U.S. taxation.
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The plaintiffs, Charles and Kathleen Moore, assert that the MRT violates the Constitution’s Apportionment Clause, which requires that any “direct taxes” must be applied so that each state pays a portion commensurate with its population. While the Sixteenth Amendment allows for an exception with respect to direct taxes on income, the plaintiffs argue that the MRT is instead an unapportioned direct tax on unrealized gains that does not qualify under the exemption. The Moores contend that because they did not receive a distribution with respect to the corporation’s foreign earnings subject to the MRT, they did not realize such income directly, which they assert is required under the direct-taxes exemption. Furthermore, the Moores claim that the tax is applied retroactively, violating the Fifth Amendment’s Due Process Clause.
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The District Court for the Western District of Washington previously granted the federal government’s motion to dismiss the case in 2020, and on appeal, the Ninth Circuit affirmed the lower court’s ruling. In the opinion, the court held that “realization of income is not a constitutional requirement” for taxation. Moreover, the court upheld the broad authority of the federal government to tax unrealized gains, finding that “there [is] no set definition of income under the Sixteenth Amendment,” and accordingly, “[w]hat constitutes a taxable gain is broadly construed.”
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In arguments before the Supreme Court, both parties, as well as others submitting amicus briefs, are likely to question the constitutionality of taxes on unrealized gains beyond the context of the MRT. Depending on how narrowly or broadly the court rules, the decision could have broad ramifications for the tax code, potentially calling into question current-law tax rules that impute the realization of income by a business entity, such as a partnership or S corporation, to its owners. Additionally, the decision could affect existing rules that mark certain gains and losses to market (so-called “mark-to-market” regimes) if the court applies a strict realization standard. A strict standard could also question the viability of wealth-tax proposals, for example, that would mark-to-market unrealized gains of wealthy Americans... (Want to learn more?)
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Our thanks to Brownstein Hyatt Farber Schreck, LLP.
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About Brownstein Hyatt Farber Schreck, LLP
Brownstein Hyatt Farber Schreck is a unique law firm. Walk into any of our offices and you’ll immediately recognize a different type of energy. Complacency doesn’t have a place here. Flexibility and inspiration do. Our culture and enthusiasm allow our attorneys, policy consultants and legal staff to stay ahead of our clients’ needs and provide them with the resources they require to meet their business objectives.
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Upcoming Events
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July 11: University of Toledo, Virtual
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July 21: Breakfast event, University of Cincinnati
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July 26: HR and related topics webcast, Mack International, Virtual
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August 9: FEUSA/PATG luncheon event, Denver, CO
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August 10: Family Office Presentation, Chattanooga, TN
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September 11-12: University of Cincinnati Annual Gala, Cincinnati, OH
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Sign-Up For New Podcast: "Voice of Family Business on Capitol Hill" with host Pat Soldano.
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Join our growing family of podcast listeners by clicking on the links below to our new podcast, "The Voice of Family Business on Capitol," where each episode delves into the major issues facing family businesses and family business centers today. Subscribe by clicking on these links, or wherever you get your podcasts.
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We hope you’ve enjoyed this article. While you’re here, we have a small favor to ask…
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As we prepare for what promises to be a pivotal year for America, we’re asking you to consider becoming a supporter.
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The need for fact-based reporting of issues important to multi generational businesses and protecting a lifetime of savings has never been greater. Now more than ever, multi generational businesses and family businesses are under fire. That’s why Policy and Taxation Group is passionately working to increase the awareness of issues important to generationally-owned family businesses built on hard work, while continuing to strengthen our presence on Capitol Hill.
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About Policy and Taxation Group
Policy and Taxation Group is your voice in Washington on economic freedom. We advocate for policies that allow American families to fully enjoy the economic liberties and benefits of a robust free market unique to our nation. For over 25 years, we have been the loudest voice in the nation’s capital on eliminating the death tax. This ill-conceived tax has a destructive impact on families, family businesses, job creation, and the national economy.
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Have questions or would like more information about becoming a Supporter or donating? Please contact John Marino at [email protected].
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