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Kostelanetz Files SCOTUS Amicus Brief in Case Regarding Congress’s Taxing Authority Under the 16th Amendment on Behalf of Law Professors

Kostelanetz has filed an amicus brief on behalf of Professors Reuven Avi-Yonah, Clinton Wallace, and Bret Wells in the U.S. Supreme Court case of Charles G. Moore v. United States (No. 22-800). The case involves a constitutional challenge to the transition tax under Section 965 but the implications are far-reaching. The brief asks the Supreme Court to affirm the decision by the Ninth Circuit Court of Appeals upholding the statute.

Section 965 was enacted in the Tax Jobs and Jobs Act of 2017, which changed the treatment of transfers of foreign corporate earnings to U.S. corporate shareholders by making those transfers tax-free. In transition to this new system, Section 965 imposes a one-time tax on accumulated but undistributed foreign earnings under subpart F. Charles and Kathleen Moore challenge the Section 965 transition tax as beyond Congress’s authority under the 16th Amendment, which they argue limits the federal income tax to gains that have been realized. The Moores, as shareholders of a foreign corporation with undistributed earnings, did not realize gain by virtue of receiving a distribution, selling their stock, or other realization event. As a result, they contend Section 965 taxes them not on their income, but on their property, and that a direct tax on property is required to be apportioned among the states.

The amicus brief of Professors Avi-Yonah, Wallace and Wells argues that there is no constitutional realization requirement, and, to the contrary, exceptions to realization are essential to fulfilling the purpose of the 16th Amendment to allow Congress to tax income “from whatever source derived.” The brief discusses a host of examples, some of which go back many decades, where Congress enacted special rules in response to tax planning, financial products, or transaction structures that intentionally or unintentionally manipulate realization. The brief explains that such rules are necessary to maintain a fair and progressive income tax.

Moreover, the professors’ brief points out that a tax on income without realization is very different from a tax on property because, when income is taxed without realization, the law makes corresponding basis adjustments designed to ensure that unrealized income is taxed only once.

The brief was filed by Kostelanetz attorneys Andrew Weiner, Bryan C. Skarlatos, Caroline D. Ciraolo, and Heather Fincher, as counsel for the professors. According to Weiner, “all taxpayers and the federal government have a vested interest in a well-functioning income tax, which has long required flexibility to keep up with innovations in planning and the global economy. It’s important the Supreme Court is aware of the exceptions to realization throughout the Code and the vast consequences of disallowing them.” Professor Wallace added that “we firmly believe that the public interest should be in preserving tax policy decisions for Congress rather than constitutionalizing realization and moving it to the courts. The Kostelanetz team’s pro bono work on this effort has been invaluable, and we are hopeful that the Court takes notice.”

Further coverage of the brief is on TaxNotes and Law360.

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Our attorneys include a former Acting Assistant Attorney General of the Department of Justice (DOJ) Tax Division, immediate past Chief of the IRS Criminal Investigation Division, former DOJ Tax Division trial and appellate attorneys, and others with significant government experience. As a result, Kostelanetz LLP attorneys are particularly well-positioned to represent taxpayers that find themselves subject to these heightened enforcement efforts and are regularly called upon to handle the most challenging and sensitive cases and internal investigations.

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