The Supreme Court case involves retirees Charles and Kathleen Moore, minority stakeholders in an Indian business classified as Controlled Foreign Corporation (CFC). The Washington state residents are fighting a $14,729 tax bill as a result of their minority stake in the Company. The Moores and their lawyer believe the mandatory repatriation tax, part of the Tax Cuts and Jobs Act, improperly taxed them on corporate income that they never received. Early reactions from the oral arguments is that the Court will issue a narrow ruling on this case that applies specifically to the Moores versus a broad ruling that may affect other taxes.
The Moores’ argument
Charles and Kathleen Moore and their legal defense have argued that the tax on unrealized income violates the Constitution’s Sixteenth Amendment, which allows Congress to levy income taxes, and the principle of clear realization. The principle of clear realization states that income should not be taxed until it is realized, that is, until the underlying asset is sold or otherwise disposed of, thus converting any increase in value into an actual gain. The Moores’ case, which was rejected in a lower court, challenges the U.S. Supreme Court to determine an interpretation of the Sixteenth Amendment, and their final decision could have far-reaching implications for the U.S. tax system.
What’s at stake?
The final ruling could have practical consequences for taxpayers and the U.S. government.
Should the Court rule in favor of the Moores, it could lead to significant changes in how unrealized income from foreign investments is taxed for U.S. citizens. This would potentially alter the tax obligations for Americans with international business interests, potentially reducing their tax burden and changing investment strategies and decisions.
The same ruling could lead to a reevaluation of certain aspects of the U.S. tax code, such as the taxation of partners’ and S corporation shareholders’ on their share of entity income or anti-abuse rules like mark-to-market rules. The Moores contend that these other tax rules are separate and distinct and would not be affected by their ruling.
A verdict against the current tax provision could impact government revenue, particularly from the taxation of foreign income. It would also encourage debates about fair and equitable taxation, especially in the context of globalization and the increasingly international nature of business and investment.
Government officials and U.S. taxpayers will be watching closely as this case is set to reach a decision by late June.
Have a Question?
Fill out the form to speak with one of our tax professionals.