The Supreme Court is expected to release an opinion on a landmark case, Moore v. United States, which could have significant implications for tax policy. The case revolves around the concept of ‘unrealized income’ and when it should be subject to income tax.
Charles and Kathleen Moore, the plaintiffs, owned a significant stake in an Indian business called KisanKraft. Despite the company’s profitability, pre-2017 law did not tax the income of businesses like KisanKraft until the income was repatriated. However, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced a new tax on certain foreign earnings, known as global intangible low-taxed income (GILTI), that would apply immediately, rather than upon repatriation. Income unrepatriated as of 2017 was taxed under a provision called the Section 965 transition tax.
The Moores have challenged this transition tax as unconstitutional, arguing that income under the Sixteenth Amendment must be realized. The Supreme Court heard oral arguments in December and is expected to release an opinion soon.
If the court rules in favor of the Moores, some current tax provisions could be rendered unconstitutional, reducing federal tax revenues. The Moores argue that Section 965 is unconstitutional, at least as applied to their type of business. If they succeed, the court may strike down the tax for other taxpayers similar to the Moores, resulting in a loss of roughly $3.5 billion in tax revenue. However, if the court rules that Section 965 is unconstitutional for all businesses, it could result in up to $350 billion of effective tax cuts.
Furthermore, the Supreme Court’s ruling may question the constitutionality of other tax provisions, including the new corporate alternative minimum tax (CAMT), the TCJA’s GILTI, or even longstanding provisions like Subpart F. Each of these has an impact on arguably unrealized income, or income realized only abroad. A loss of these provisions would cost the Treasury roughly $250 billion, $350 billion, and $78 billion in revenue, respectively, over the next 10 years.
In conclusion, the outcome of the Moore case could have a significant impact on tax policy, potentially reducing revenues, presenting an obstacle to the implementation of the global minimum tax deal, compelling Congress to restructure the timing of taxes, or even preemptively striking down some wealth tax proposals. As such, tax professionals and individuals alike should keep a close eye on this case.