Moore v. United States: 3 Key Details You Need to Know

December 18, 2023

At a glance

The main takeaway: The Supreme Court heard oral arguments on the Moore v. United States case, which questions the constitutionality of the foreign deemed repatriation transition tax enacted by the Tax Cuts and Jobs Act of 2017.
Impact on taxpayers: If the Supreme Court delivers a ruling in favor of the Moores, it could have significant implications on the future of the U.S. tax regime, not only pertaining to taxation of foreign activities but also the taxation of pass-through entities such as partnerships, LLCs and S corporations.
Next steps: Aprio’s Tax advisors are closely monitoring this case and can help you navigate complex rules and regulations in the ever-changing tax world.

Are you ready to learn more? Schedule a consultation with our team.

The full story:

The Moore v. United States case has been closely scrutinized and debated for months from every angle by government officials, tax experts and practitioners. On Tuesday, December 5, the case finally made its way to the United States Supreme Court. If the Court issues a broad ruling in favor of the Moores, it could have a significantly profound impact on tax revenue and Congress’ ability to levy taxes on businesses and individuals.

Given the significant amount of coverage the case has received, we think it useful to break down three of the most important aspects of the case you need to know..

Who are the Moores?

Charles and Kathleen Moore are a Washington-based retired couple who own a minority stake in a foreign company that sells farming equipment. The Moores paid a one-time “deemed repatriation tax” under the provisions of Internal Revenue Code Section 965. However, they subsequently challenged the constitutionality of the provision of the law that required recognition of taxable income before the taxpayer actually received the amounts being taxed. The Moores are seeking a refund of nearly $15,000 in taxes they paid on earnings from their foreign-based company, after a lower court’s decision rejected their challenge and upheld the transition tax on foreign company earnings.

In a rare constitutional challenge, the Supreme Court agreed to hear the Moore case, with the justices slated to consider whether the transition tax is a tax on income within the meaning of the 16^th Amendment, or a direct non-income tax that must be apportioned among the states.

What is transition tax and how does it apply to Moore v. United States?

Enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, the transition tax subjected post-1986 accumulated earnings and profits of certain foreign corporations to a one-time, mandatory tax under Subpart F at the level of 10% for U.S. shareholders.

Under section 965, the transition tax applied if U.S. shareholders had income or income appreciation, even if that appreciation was never actually realized. As a result of the transition tax, the Moores, who made a 13% investment in an India-based company, had an income inclusion with respect to their shares of the foreign company’s accumulated earnings and profits, which resulted in a tax due of nearly $15,000.

The Moores, backed by a number of advocacy groups, argue that since they did not receive or realize income, taxing them on their foreign investment would be a direct tax and thus unconstitutional because it should not be subject to apportionment. In addition, the Moores have argued that the 16^th Amendment exemption from state apportionment is limited to taxes on realized gains, partially based on the landmark cases Eisner v. Macomber and Glenshaw Glass.

In June of 2022, the lower court ruled that whether a taxpayer has realized income does not determine constitutionality and what constitutes a taxable gain is broadly construed. The court’s brief also acknowledge that the Moores’ position would “call into question the constitutionality of many other tax provisions that have long been on the books.”

Which way will the Supreme Court lean?

While it is unclear how the Supreme Court may rule, during oral arguments several justices signaled trepidation regarding the impact a decision in favor of the taxpayers could have on the future of the U.S. income tax system. A broad ruling in favor of the Moores could have massive implications throughout the tax law by calling into question the constitutionality of many other areas of taxation not related to foreign income recognition, including the treatment of domestic pass-through entity tax, and could potentially open the door for a wealth tax.

The bottom line

While we cannot say for certain which way the Supreme Court will rule, it’s clear that the justices have an understanding of the significant implications this case could bring, particularly if the Court rules in favor of the Moores.

Aprio’s Tax advisors are closely monitoring this case and how it could impact you and your business. We will provide updates to this article should any significant changes arise.

Schedule a consultation to discover how Aprio can help you navigate complex rules and regulations in the ever-changing tax world.