Having been called the most important tax case in decades, Moore v. United States is poised to leave a lasting legacy regarding the ability of Congress to levy taxes.
The case, on appeal to the Supreme Court from the Ninth Circuit, involves the Mandatory Repatriation Tax, a provision in the Tax Cuts and Jobs Act of 2017 that deemed the reinvested earnings of some foreign corporations going back 30 years to be 2017 income for U.S. taxpayers, meaning they would owe income tax on it. A Ninth Circuit panel denied a petition for a panel rehearing and denied on behalf of the court a petition for rehearing en banc. The panel affirmed the district court’s dismissal of an action seeking to invalidate the tax.
Judge Bumatay, joined by Judges Ikuta, Callahan, and VanDyke, dissented from the denial of rehearing en banc. Judge Bumatay stated that the panel erred in disregarding the realization requirement of the Sixteenth Amendment by allowing an unapportioned direct tax on unrealized income — undistributed earnings of a foreign corporation owned by a U.S. taxpayer — without offering any other limiting principle, and that the opinion opens the door to new federal taxes on other types of wealth and property being categorized as “income tax” without the constitutional requirement of apportionment.
“This could end up being one of the biggest cases in tax law in the past few years, or not,” said Tyler Martinez, senior attorney at the National Taxpayers Union Foundation. “Why is there all the fuss? People are worried over what might happen next. Conceivably, this could end up legitimizing a ‘wealth tax’ on unrealized income. That’s the possibility — the value of a stock portfolio goes up and down. There is the possibility that the court could decide the case narrowly, on limited grounds.”
Charles and Kathleen Moore became investors in KisanKraft, an overseas company formed to empower small-scale farmers in impoverished regions of India. They owned a 13% stake in Machine Tools Private Ltd., a small company headquartered in Bangalore, India. KisenKrtaft was formed in 2006 by their friend and co-worker Ravindra Kumar Agrawal, to import and distribute affordable farming equipment.
“As the Moores would find out, ‘No good deed goes unpunished,'” the court said. In 2018, they learned that under the Tax Cuts and Jobs Act, they were on the hook for their share of KisanKraft’s lifetime earnings, and would owe a one-time tax amounting to $14,729. Neither had ever received any income from the company, and did not expect to pay income taxes just for owning a minority interest in the company.
The Moores sued seeking a refund of their tax payment. Not only were they minority owners, but they were liable for income tax on income they had never earned.
The court affirmed the denial of the refund of their tax payment. It held that the Mandatory Repatriation Tax did not violate the apportionment requirement. According to the court, “Whether the taxpayer has realized income does not determine whether a tax is constitutional.”
Rather, the court held that the Supreme Court has made clear that realization of income is not a constitutional requirement. Based on the conclusion that unrealized gains qualify as income, the court held that taxing the Moores based on their pro-rata share of KisanKraft’s retained profits was constitutional. But instead of a rehearing en banc, the Moores will get their day before the Supreme Court.