No “Moore” Realization Events?

Amanda Meyer

Associate Editor

Loyola University Chicago School of Law, JD 2025

 

In June 2024, the Supreme Court will decide on a case that may completely upend one third of the Internal Revenue Code (IRC). Moore v. United States calls into question whether the 16th Amendment authorizes Congress to tax unrealized gains without apportionment among the states. The Moores invested $40k into an international corporation called KisanKraft, and in return received around 13% of the shares in the company. KisanKraft is a “controlled foreign corporation” which means that over 50% of its shares belong to U.S. shareholders. The Moores owning over 10% of that KisanKraft’s shares triggered the new “mandatory repatriation tax” which was enacted as a part of the 2017 Tax Cuts and Jobs Act. The Moores never received the money from their investments, which had increased to well over a half million dollars so they sued under the belief that they were being unconstitutionally taxed on unrealized income. They claim that the mandatory repatriation tax violates the Constitution’s apportionment clause, which requires taxes to be imposed so that each state’s share in paying tax is proportional to its population. This is because personal property is being taxed, in this case the investor’s shares, rather than a corporation’s income. The Federal District Court in Washington State rejected Moores’ challenge to the constitutionality of the tax, and the U.S. Court of Appeals for the 9th Circuit upheld the District Court’s decision. Moore v. United States has now been appealed to the United States Supreme Court.

History of the 2017 Tax Cuts and Jobs Act

The mandatory repatriation tax is part of a larger set of tax laws enacted in late 2017. The 2017 Tax Cuts and Jobs Act altered certain parts of the IRC by disallowing certain taxes and deductions while allowing certain other taxes to be allowed as a deduction reducing certain taxes. These changes are in place until 2026. Some examples include;

  • Tax cuts for corporations
  • The inclusion of Section 199A, which allows a deduction of up to 20% of qualified business income. This is not in the same line as itemized deductions and should be analyzed separately.
  • The like-kind exchange of property only applies to certain exchanges of real property, narrowing the scope of IRC 1031.
  • You can only carry Net Operating Losses (NOL) forward now instead of being able to carry them back to the two tax years before the NOL year.
  • Businesses with $25M or less in gross receipts for the past three years must use the cash method of accounting instead of the accrual method.

What could be expected

The Supreme Court is expected to rule on Moore v. United States around the end of June, 2024. If the Supreme Court were to reverse the lower courts’ decisions and rule in favor of the Moores, then around one third of the IRC could be rendered unconstitutional, and would likely inhibit Congress’s ability to collect income taxes. Inhibiting the ability of Congress to collect income taxes would leave lawmakers scrambling to find an alternative solution and cause tax litigation to skyrocket. If Congress’s ability to determine when a realization event is disrupted, that disruption will expand to the entire tax code, not just income derived from overseas business. This will end up reducing the amount of taxable money by billions, and Congress will have less money for welfare such as social security, food stamps and education.

However, the Supreme Court could also take a different, less impactful approach to the issue and hold that KisanKraft realized income and therefore the Moores could be taxed on that realized income since they are significant investors. This could avoid the larger tax question on realized income while also providing a decision to the case at hand. Although this will not completely upend the current tax laws, it could provide a warning for taxes on wealth or unrealized capital gains in the future.

The Supreme Court could also avoid the main realization issue by stating that the tax is neither income controlled by the 16th Amendment nor a direct tax subject to apportionment. This would avoid the issue altogether and avoid a significant impact on the IRC.

Conclusion

The IRC has 9,834 sections, and many of them are based on Congress’s ability to determine when a realization event has occurred. If the Supreme Court is going to directly address the issue regarding the 16th Amendment, then they should uphold the previous courts’ rulings and declare it constitutional to allow Congress to continue the mandatory repatriation tax until 2026. Declaring a third of the IRC unconstitutional would throw the tax code in disarray and may pave the way for sections that are more convoluted and harder to understand. Although the Tax Cuts and Jobs Act leaves much to be desired, having to change a large section of the IRC is an extreme solution. As a law student, the decision of this case could significantly alter my understand of federal tax laws and how the IRC operates in practice.