Tax and the SCOTUS: Could fifteen thousand dollars of tax upend the United States tax system?

Written By: Kathy Martin 

It’s not too often a tax issue reaches the Supreme Court of the United States (“SCOTUS”), which is why all eyes are on the case of Moore v. United States. Shockingly, only around fifteen thousand dollars of tax liability is in dispute, but the implications of this potential blockbuster decision could mean big changes for the United States (“US”) tax system. Unless SCOTUS narrows its ruling, many Internal Revenue Code (“IRC”) sections may need to be revamped, either costing or raising the government significant dollars in tax revenue depending on which way the decision falls.

Issue Challenged

The issue being challenged is the one-time mandatory repatriation tax (“MRT”) under § 965 implemented by the 2017 Tax Cuts and Jobs Act (“TCJA”). The MRT imposed a tax on certain US shareholders of controlled foreign corporations (“CFC”) or specified foreign corporations (“SFC”) on their proportionate share of untaxed accumulated foreign corporate earnings since 1986 regardless of when the US shareholder’s ownership in the company began.

The US shareholders impacted by the MRT are those owning ten percent or more of the shares or voting power in a CFC or SFC. The rules are complicated, but generally, prior to the TCJA, these same US shareholders were only taxed on foreign earnings when distributed unless subject to Subpart F rules. Subpart F rules prior to the TCJA excluded active business income of the foreign corporation and only taxed certain items such as dividends and interest under specific situations. TCJA changed the Subpart F rules to now include current active foreign earnings which is why the MRT was assessed. Otherwise, the accumulated foreign earnings would have gone untaxed. It was projected the MRT would raise over three hundred and forty billion dollars in a ten-year period.

The Moores

The Moores owned a little more than ten percent of shares in a CFC that was set up by a friend to help impoverished farmers in India gain resources, such as tools, to improve their livelihood. The CFC was profitable, but all earnings were reinvested to help grow the business and the Moores never received any form of distribution. Due to the TCJA, the Moores were assessed roughly fifteen thousand dollars of additional tax due to the MRT on about one hundred and thirty thousand dollars of deemed additional income on the reinvested earnings.

The Moores paid the tax but now want it refunded arguing the MRT is unconstitutional. The Moores argue the MRT is an unapportioned direct tax on property since the tax is on accumulated income and not current income, violating the Sixteenth Amendment of the US Constitution (“Sixteenth Amendment”). As only minority shareholders in the CFC, the Moores also claim they did not have control to force the company to distribute any such earnings and therefore cannot be deemed to have realized any income.

Current Precedent

The Sixteenth Amendment states “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” The Sixteenth Amendment applies to income tax which does not require apportionment like direct taxes, such as those applied to ownership of property which is apportioned among the states and falls under Article I of the US Constitution. Congress has great latitude when imposing a tax on income and generally, courts construe any exclusions from income narrowly. But a long history of precedents has given rise to a general understanding of the limitations of Congress’s taxing power. Although a universal definition of income has not been given by SCOTUS, at the core of all cases is that income must be realized.

Starting with the 1890 case of Gibbons v. Mahon, SCOTUS determined that a corporation’s accumulated earnings are considered capital to its shareholders and not income. Then came along in 1920 Eisner v. Macomber, where SCOTUS held income must be realized and since has been relied upon. In this case, the Court determined income derived from stock dividends funded by undistributed accumulated earnings and profits not to be taxable income if the stock dividend is the same stock as presently held by taxpayer (i.e. not common stock on preferred stock). For income to be realized and taxed in accordance with the Sixteenth Amendment, it must be “received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal.” It must be clear the income derived is separate property of the shareholder to be subject to taxation.

Then came the 1940 decision by SCOTUS for Helvering v. Horst where the Court held that one who has the right to income and can direct payment of such to another is assigned the income regardless of actual receipt since constructively received. The Court further reiterated these core ideas in the 1955 case Comm’r v. Glenshaw Glass where three elements were determined to be necessary for income to be taxable: an undeniable accession to wealth, clearly realized, and complete dominion. Further, Comm’r v. Indianapolis Power & Light Co. in 1990 reiterated complete dominion when refundable customer utility deposits were determined to not be taxable to the utility company.

For the Moore v. United States case, it was the realization requirement that was determined by the Ninth Circuit Court of Appeals to not be a constitutional requirement for income to be taxed without apportionment among the states, becoming the first court to rule this way. The court distinguished prior cases by narrowly construing the rulings and stating there is not one universal definition of income. This has opened the doors to even more broadening of Congress’s power, hence the importance of the SCOTUS decision in this case.


The decision could have numerous implications on the United States tax system including a segway to wealth taxes if realization is not considered a requirement to taxing income. It could open doors to taxation being allowed on anything, including unrealized income. Meaning you could have to pay annual tax on the appreciation of stock held without having had to sell it.

On the other hand, if realization is found to be a requirement under the Sixteenth Amendment, there is a long list of current IRC sections where income is being taxed when it hasn’t been realized or distributed that would have to be reanalyzed to distinguish from the ruling in this case. For example, partners or shareholders of flow-through entities, such as partnerships and S corporations, are taxed on income from the entity even if not distributed. While it could be argued that the entities aren’t truly separate in existence from the shareholders or partners due to the nature of the structure, income is still being taxed when there is no true realization event if the income is not distributed. Would this argument be enough to survive a realization requirement?

Below are other current IRC sections where income is taxed when not truly realized, some of which have been challenged and upheld. However, each would need to be readdressed if a realization requirement is found by SCOTUS in the current case.

• The recognition of original issue discount under § 1272.
• The mark-to-market rules for futures contracts under § 1256, which was challenged in 1993 in Murphy v. United States where it was found realization was met because the taxpayer had the ability to withdraw the cash even if unexercised.
• The Subpart F and GILTI rules. Prior to TCJA, Subpart F has been challenged in the various lower courts and found to be constitutional based on the idea of control.

While realization is the primary focus of the Moore case that SCOTUS will hear, it also appears that control and complete dominion could be at issue. The MRT is built upon the Subpart F rules that were in existence prior to the TCJA since the reason for the MRT is based on the change in the Subpart F rules to include current active earnings of the foreign corporation and the government wanted a way to tax the prior accumulated undistributed earnings.

Although lower courts prior to TCJA have found a ten percent or greater owner or voting power by a taxpayer in the foreign corporation sufficient to support taxation under the old Subpart F rules, it’s never been analyzed by SCOTUS. How can the taxpayer truly be in control if not related to any of the other parties and a minority shareholder?

A minority shareholder can’t demand a distribution of earnings, so therefore how could they have control and complete dominion over income if not distributed? So it appears that even if SCOTUS were to find that realization is not a requirement, the Subpart F rules could be challenged on a control issue. If a control issue were to be found under Subpart F, then the MRT should really only apply to those US shareholders with 50% or greater ownership or voting power. This appears to be a fairer assessment of the MRT without upending the entire US tax system.

In the end, most likely SCOTUS will give a narrow ruling and limit it by specifically excluding already existing IRC sections where realization may be at issue. The implications would just be too great if SCOTUS were to give a broad ruling on a realization requirement.


Andrew Velarde, Supreme Court to Hear Transition Tax Cases with Vast Implications, TaxNotes (June 27, 2023).

Comm’r v. Glenshaw Glass Co., 348 U.S. 426 (1955).

Comm’r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990).

Eisner v. Macomber, 252 U.S. 189 (1920).

Gibbons v. Mahon, 136 U.S. 549 (1890).

Helvering v. Horst, 311 U.S. 112 (1940).

Moore v. U.S., No. 20-36122 (9th Cir. 2022), cert granted, (No. 22-800).

Murphy v. U.S., 992 F.2d 929.

U.S. Const. Amend. XVI.