Earlier in the summer, the Supreme Court announced a new case on its docket for the upcoming term, Moore v. United States, which we discussed here. The case has been set for argument on December 5.
The question presented before the Supreme Court is "whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states."
Specifically, the Moores are challenging the one-time transition tax enacted under the Tax Cuts and Jobs Act ("TCJA") on earnings that have accumulated overseas.
The Moores argue that the Sixteenth Amendment allows Congress to tax income only after a realization event and that the Constitution also prohibits Congress from imposing direct taxes without apportionment.
The response from the tax world has been nothing short of hysteria, but the cause for concern is not the potential loss of $340 billion in tax revenue if the tax is struck down. Instead, many warn that if the transition tax is declared an unconstitutional tax on unrealized income, then numerous provisions of the tax law could be called into question for (seemingly) imposing taxes on unrealized income.
The October 3 letter by the Joint Committee on Taxation ("JCT") to the House Ways and Means Committee reiterated this concern, highlighting how a win for the Moores would inevitably cast doubt on the validity of several other areas of the tax code. If the Supreme Court declares that Congress is not authorized to tax unrealized income—such as undistributed income—then this would call into question the taxation of all passthrough entities generally (including partnerships, S corporations, and real estate mortgage investment conduits ("REMICs")), whose owners are clearly taxed on undistributed income. Further, the JCT cautions that any so-called realization requirement would invalidate the original issue discount rules and certain mark-to-market rules.
The potential ramifications of the Moore case have brought on unlikely consensus within the political arena. Although some view the Moores' challenge as a way to "spike" recent proposals for wealth taxes, former House Speaker Paul Ryan called the challenge "misguided" and said it would "basically get rid of, I don't know, a third of the code." House Ways and Means Committee Ranking Member Richard Neal said that a ruling for the Moores would "wipe out" many well-settled provisions of the tax code.
In late October, a flood of amicus briefs were filed in support of the government. So, what hope is there to alleviate the concerns of anxious tax practitioners?
The government argues that the transition tax is an income tax authorized under the Sixteenth Amendment and, alternatively, is a constitutional excise tax. They maintain that petitioners improperly rely on dicta from the Macomber case, which held that a stock dividend was not considered taxable income to a shareholder, and that the determination of whether income has been realized is not dispositive in establishing the constitutionality of an income tax. Citing Glenshaw Glass, the government explains that the phrase "from whatever source derived" reveals that the Sixteenth Amendment was intended to bestow a broad power to tax income and that such power is not limited by any purported realization requirement.
Further, the government states that the opportunity to challenge the constitutionality of wealth taxes should be raised when Congress actually passes a wealth tax.
As tax practitioners and policy makers anxiously await the decision, most are undoubtedly hoping the Supreme Court finds that, when it comes to examining the constitutionality of a tax, less is Moore.
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