The Case of Moore v. United States—Potential Attack on Congress’s Taxing Power?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
September 21, 2023
“The power to tax involves the power to destroy,” Chief Justice John Marshall writing in McCulloch v. Maryland (1819)
“Taxes are the price we pay for civilization,” Associate Justice Oliver Wendell Holmes writing in Compania General de Tabacos de Filipinas v. Collector of Internal Revenue (1927)
These two quotations from major tax policy cases of the United States Supreme Court reflect divergent views on tax policy in America. The Supreme Court (SCOTUS) will commence its October 2023-2024 term on October 2, 2023 (the first Monday in October, as mandated by a Congressional law passed in 1916).
On the high court’s docket are cases involving legislative re-districting (South Carolina); criminal procedure; employee whistle-blowing in publicly-traded companies; maritime contracts; civil rights for persons with disabilities; constitutional funding formula of the Consumer Financial Protection Bureau (CFPB); and others.
A “sleeper” court case (Moore v. United States) which was recently added to the Court’s fall docket involves an interpretation of the so-called repatriation tax as it relates to the 16th Amendment to the Constitution (ratified in 1913) which established the current U.S. Federal income tax system. This case comes to the Supreme Court’s consideration from the 9th Circuit Court of Appeals (which covers the states of: California, Washington, Oregon, Idaho, Arizona, Montana and Nevada, Alaska and Hawaii, as well as the territories of Guam, Northern Marianas and American Samoa).
Tax repatriation refers to the process by which multi-national companies bring their overseas earnings back to their home country. Prior to 2017, the United States generally taxed its corporations and residents on their worldwide income. However, a United States corporation could defer foreign income by retaining earnings indefinitely through a foreign subsidiary. Thus, the U.S. corporation would pay the U.S. tax on the foreign earnings only when they were repatriated by a dividend from the foreign subsidiary.
Upon repatriation, these earnings would be subject to U.S. taxation at the then current rate of 35 percent, with a credit for foreign taxes paid. The repatriation typically resulted in a net U.S. tax obligation to the tax payer, as the U.S. corporate income tax rate was usually higher than a foreign nation’s tax rate.
All this changed in 2017 with the passage of the Tax Cuts and Jobs Act (TCJA) which was proposed by the Trump Administration. Now, under the TCJA, the Federal government generally exempts the earnings of a U.S. firm from active businesses of foreign subsidiaries, even if the earnings are repatriated.
However, as a transition to the new system and to avoid a potential windfall for corporations that had accumulated unrepatriated earnings abroad, the 2107 law taxes these earnings as if they were repatriated, but at a preferred lower rate. The new law also had the effect of ending the unlimited deferral of foreign earnings rom US taxable income.
Here are the basic facts of the Moore case:
The plaintiffs in this case, Charles and Kathleen Moore, of Washington State, had made a modest investment in a friend’s company—Kisan Kraft Machine Tools Private, Ltd.—an India-based corporation that provides affordable farming equipment to underserved rural farmers in India.
As a result of the change in the law, the Moores were required to include an additional amount of income in their tax return for 2017, which resulted in an increased income tax liability of approximately $15,000. The Moores paid the tax and then fielded an action for a tax refund in the lower U.S. District Court. The U.S. District Court ruled against them, and they appealed to the 9th Circuit Court of Appeals, which upheld the lower court’s decision.
The Moores then filed for review to the Supreme Court, which has now agreed to hear the case in the 2023-24 term.
The main legal issue revolves around whether the 16th Amendment, which confers upon Congress the power “to lay and collect taxes on incomes, from whatever source derived, without apportionment,” requires that income be “realized” for a tax imposed on it to fall within the scope of the amendment.
The Moore’s argument is that this particular tax is a tax on income that was not realized at the time the tax was imposed, since they had not actually received a dividend from Kisan Kraft (their friends’ company based in India), and is therefore not income within the 16th Amendment’s scope. The plaintiffs rely on a 1920 SCOTUS decision (Eisner v. Macomber) which introduced the concept of realization in the concept of income in the 16th Amendment. The U.S. government disagrees, basically disputing the ongoing vitality of the Macomber and the extent to which realization for an income tax falls under the 16th Amendment.
The outcome of this particular case has public policy and public finance implications for a well-established form of Federal taxation. If the Moore’s prevail, such a decision might cost the Federal government to lose anywhere from $248 to $352 billion in revenue over a ten year period. According to some experts, the Court might rule and disallow all taxes on unrealized pass-through income and corporate retained earnings; the price tag for which could be as high as $600 billion annually, or nearly $5.7 trillion over a ten year period.
This case will be watched closely for public finance and tax policy implications; how the court will ultimately rule may depend on how certain “swing justices” such as Chief Justice John Roberts and Associate Justice Brett Kavanaugh will vote.
A decision is not expected until later in the term, probably late spring 2024, or the decision may be carried over into the Fall 2024-25 term. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and was Senior National Council Representative. Currently an advisor to ASPA’s New York Metropolitan Chapter, Steve has also served on many other association boards in New York and Washington, DC. You can reach him at: [email protected] or [email protected] or at 914.441.3399 or 212.237.8000.
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The Case of Moore v. United States—Potential Attack on Congress’s Taxing Power?
The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Stephen R. Rolandi
September 21, 2023
“The power to tax involves the power to destroy,” Chief Justice John Marshall writing in McCulloch v. Maryland (1819)
“Taxes are the price we pay for civilization,” Associate Justice Oliver Wendell Holmes writing in Compania General de Tabacos de Filipinas v. Collector of Internal Revenue (1927)
These two quotations from major tax policy cases of the United States Supreme Court reflect divergent views on tax policy in America. The Supreme Court (SCOTUS) will commence its October 2023-2024 term on October 2, 2023 (the first Monday in October, as mandated by a Congressional law passed in 1916).
On the high court’s docket are cases involving legislative re-districting (South Carolina); criminal procedure; employee whistle-blowing in publicly-traded companies; maritime contracts; civil rights for persons with disabilities; constitutional funding formula of the Consumer Financial Protection Bureau (CFPB); and others.
A “sleeper” court case (Moore v. United States) which was recently added to the Court’s fall docket involves an interpretation of the so-called repatriation tax as it relates to the 16th Amendment to the Constitution (ratified in 1913) which established the current U.S. Federal income tax system. This case comes to the Supreme Court’s consideration from the 9th Circuit Court of Appeals (which covers the states of: California, Washington, Oregon, Idaho, Arizona, Montana and Nevada, Alaska and Hawaii, as well as the territories of Guam, Northern Marianas and American Samoa).
Tax repatriation refers to the process by which multi-national companies bring their overseas earnings back to their home country. Prior to 2017, the United States generally taxed its corporations and residents on their worldwide income. However, a United States corporation could defer foreign income by retaining earnings indefinitely through a foreign subsidiary. Thus, the U.S. corporation would pay the U.S. tax on the foreign earnings only when they were repatriated by a dividend from the foreign subsidiary.
Upon repatriation, these earnings would be subject to U.S. taxation at the then current rate of 35 percent, with a credit for foreign taxes paid. The repatriation typically resulted in a net U.S. tax obligation to the tax payer, as the U.S. corporate income tax rate was usually higher than a foreign nation’s tax rate.
All this changed in 2017 with the passage of the Tax Cuts and Jobs Act (TCJA) which was proposed by the Trump Administration. Now, under the TCJA, the Federal government generally exempts the earnings of a U.S. firm from active businesses of foreign subsidiaries, even if the earnings are repatriated.
However, as a transition to the new system and to avoid a potential windfall for corporations that had accumulated unrepatriated earnings abroad, the 2107 law taxes these earnings as if they were repatriated, but at a preferred lower rate. The new law also had the effect of ending the unlimited deferral of foreign earnings rom US taxable income.
Here are the basic facts of the Moore case:
The plaintiffs in this case, Charles and Kathleen Moore, of Washington State, had made a modest investment in a friend’s company—Kisan Kraft Machine Tools Private, Ltd.—an India-based corporation that provides affordable farming equipment to underserved rural farmers in India.
As a result of the change in the law, the Moores were required to include an additional amount of income in their tax return for 2017, which resulted in an increased income tax liability of approximately $15,000. The Moores paid the tax and then fielded an action for a tax refund in the lower U.S. District Court. The U.S. District Court ruled against them, and they appealed to the 9th Circuit Court of Appeals, which upheld the lower court’s decision.
The Moores then filed for review to the Supreme Court, which has now agreed to hear the case in the 2023-24 term.
The main legal issue revolves around whether the 16th Amendment, which confers upon Congress the power “to lay and collect taxes on incomes, from whatever source derived, without apportionment,” requires that income be “realized” for a tax imposed on it to fall within the scope of the amendment.
The Moore’s argument is that this particular tax is a tax on income that was not realized at the time the tax was imposed, since they had not actually received a dividend from Kisan Kraft (their friends’ company based in India), and is therefore not income within the 16th Amendment’s scope. The plaintiffs rely on a 1920 SCOTUS decision (Eisner v. Macomber) which introduced the concept of realization in the concept of income in the 16th Amendment. The U.S. government disagrees, basically disputing the ongoing vitality of the Macomber and the extent to which realization for an income tax falls under the 16th Amendment.
The outcome of this particular case has public policy and public finance implications for a well-established form of Federal taxation. If the Moore’s prevail, such a decision might cost the Federal government to lose anywhere from $248 to $352 billion in revenue over a ten year period. According to some experts, the Court might rule and disallow all taxes on unrealized pass-through income and corporate retained earnings; the price tag for which could be as high as $600 billion annually, or nearly $5.7 trillion over a ten year period.
This case will be watched closely for public finance and tax policy implications; how the court will ultimately rule may depend on how certain “swing justices” such as Chief Justice John Roberts and Associate Justice Brett Kavanaugh will vote.
A decision is not expected until later in the term, probably late spring 2024, or the decision may be carried over into the Fall 2024-25 term. Time will tell.
Author: Stephen R. Rolandi retired in 2015 after serving with the State and City of New York. He holds BA and MPA degrees from New York University, and studied law at Brooklyn Law School. He teaches public finance and management as an Adjunct Professor of Public Administration at John Jay College of Criminal Justice (CUNY) and Pace University. Professor Rolandi is a Trustee of NECoPA; President-emeritus of ASPA’s New York Metropolitan Chapter and was Senior National Council Representative. Currently an advisor to ASPA’s New York Metropolitan Chapter, Steve has also served on many other association boards in New York and Washington, DC. You can reach him at: [email protected] or [email protected] or at 914.441.3399 or 212.237.8000.
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