The U.S. Supreme Court will hear another tax case in the upcoming 2023-2024 session. This one, Moore v. United States, 36 F.4th 930 (9th Cir. 2022) (cert. granted, June 26, 2023), is a doozy…
Remember years ago, in a tax policy galaxy far, far away, how we all learned black letter law that income had to be realized in order to be taxable in the U.S.? That simple but profound concept originated in Eisner v. Macomber, 252 U.S. 189 (1920), which addressed whether a stock dividend was income to the recipient shareholders. In holding “no,” the Supreme Court said: “gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming in, being ‘derived’—that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal—that is income derived from property. The same fundamental conception is clearly set forth in the Sixteenth Amendment: ‘incomes, from whatever source derived’—the essential thought being expressed;” 252 U.S. at 207 (emphasis in original).
We should understand the historical context of, but not be misled by, the arcane formulation of the question presented to, and accepted by, the Supreme Court when the Ninth Circuit decision in Moore was appealed: “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.”
This is a case that could lead the Court to reassess the “realization” requirement in all its glory, history, theory, and application.
Moore arises in the context of Section 965 (enacted by TCJA) which essentially treated prior untaxed foreign earnings and profits (otherwise properly deferred from earlier inclusion by U.S. shareholders) of controlled foreign corporations (CFCs) as being deemed included by them by the end of 2017. Various sources speculated that there was as much as $3 trillion in such previously untaxed CFC earnings, so this was a big revenue issue.
The taxpayers here are actually a husband and wife who owned a minority interest in a CFC. Section 965 caused them to report their prorata share of that company’s untaxed E&P even though they didn’t actually receive the cash. They contested the legitimacy of Section 965, which is the literal issue now before the Court.
But what is considerably more insidious is the implication of that issue for the entire underpinning of our CFC (and GILTI) international tax regime, plus other potentially connected tax reporting matters (including taxation of pass-through entities like partnerships and Subchapter S corporations).
All of those tax reporting and inclusion regimes essentially impose tax on the owners (U.S. shareholders, partners, etc.) even without them actually receiving cash or property distributions in hand—in other words, without them having “received or drawn by the recipient (the taxpayer) [income or property] for his separate use, benefit and disposal” in the immortal words of Eisner v. Macomber.
And what would happen at the state level? Would a Moore victory invalidate the states’ attempts to tax 965 income or GILTI? Or, as Alysse McLaughlin and Kathleen Quinn (Jones Walker) suggest in a recent Tax Notes article “Moore and Its Potential impact on Factor Representation,” would a government victory strengthen taxpayer arguments that if 965 income and GILTI are to be taxed by the states, then they must have factor representation in the taxpayers’ apportionment factors?
NOW DO YOU SEE WHY WE SAY YOU SHOULD “WATCH THIS ONE”?
Ken focuses on worldwide tax planning, transaction structuring and a number of tax issues related to mergers and acquisitions, IP licensing, employee relocation, and international franchising. He has extensive experience ...
Her experience includes resolving and litigating numerous types of tax disputes:
- State Corporate Income and Franchise Taxes: including nexus and Public Law 86-272, combination, business versus non-business income ...
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