Supreme Court Decision in Moore v. United States: Implications for Taxation of Unrealized Gains

Supreme Court Rejects Challenge to Tax on Unrealized Gains in Landmark Case

In a highly anticipated decision, the Supreme Court ruled in Charles G. Moore v. United States that Congress has the authority to tax unrealized gains under the Sixteenth Amendment. The case centered around the Mandatory Repatriation Tax (MRT), a one-time tax on accumulated but undistributed foreign earnings included in the Tax Cuts and Jobs Act of 2017.

Petitioners argued that the Sixteenth Amendment required a realization event, such as a sale or payment of wages, to distinguish a tax on income from a tax on property. They contended that the MRT and other provisions of the Internal Revenue Code that tax unrealized income were unconstitutional.

The Supreme Court, in a 7-2 decision, rejected the challenge to the MRT. Justice Kavanaugh, writing for the majority, emphasized that the MRT taxes shareholders on income that is realized by a foreign corporation, thus falling within Congress’s authority to tax incomes. The majority’s decision was narrow, focusing solely on the MRT and not addressing the broader issue of a constitutional realization requirement.

However, four justices, including Justice Barrett and Justice Thomas, endorsed the existence of a realization requirement in their separate opinions. They raised concerns about the potential implications of allowing Congress to tax unrealized gains and invited future challenges to the taxing authority.

Andrew Weiner, counsel at Kostelanetz LLP, Washington D.C., noted that this case is likely not the last word on the matter. Taxpayers may continue to challenge Congress’s taxing authority in the future, potentially leading to further Supreme Court decisions on the issue.

The ruling in Moore v. United States has significant implications for partnership taxation, S corporation taxation, and other areas of the tax code that involve taxing unrealized income. The decision sets a precedent for how Congress can tax incomes, but the debate over the constitutionality of taxing unrealized gains is far from over.