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Supreme Court Defers Fundamental Constitutional Question in Upholding Tax on Foreign Business Income

In Charles G. Moore v. United States (No. 22-800), petitioners challenged Congress’s authority to tax unrealized gains under the Sixteenth Amendment. The tax at issue was the Mandatory Repatriation Tax (MRT), which is a one-time tax on accumulated but undistributed foreign earnings that was included in the Tax Cuts and Jobs Act of 2017. But the implications of petitioners’ argument extended far beyond the MRT to partnership taxation, S corporation taxation, the taxation of foreign corporations, the taxation of derivatives, mark-to-market rules, original issue discount, the accrual method, and other topics. Generally described, petitioners’ argument threatened aspects of the Internal Revenue Code that result in tax on unrealized income or tax on income not realized by the taxpayer subject to the tax—provisions that account for trillions of dollars in federal tax revenue. Accordingly, Moore was among the most closely watched Supreme Court tax cases in many years. The Supreme Court rejected petitioners’ challenge by a 7-2 margin, but that tally is deceptive. Petitioners scored a shocking result.

The Sixteenth Amendment grants Congress the “power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.” Petitioners read “from whatever source derived” as requiring a realization event, like a sale or payment of wages, to distinguish a tax on income from a tax on property, which must be apportioned. Petitioners were not shy about trying to head off talk of a wealth tax, but Congress had already enacted many income tax exceptions to realization. The Supreme Court’s majority, in an opinion written by Justice Kavanaugh, expressed skepticism that petitioners could “contain the blast radius of their legal theory.”

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