Court Arguments in Moore Case Ease Concerns Over Ripple Effects

The message from Supreme Court justices Tuesday to those worried that a crucial case on foreign-income taxes could upend big chunks of the tax code was: We hear you.

Several justices suggested that they want to avoid the kind of dire ripple effects that some have feared could stem from a broad ruling in the case, Moore v. United States. The case challenges a tax on companies’ foreign income, but many tax-world observers are concerned that a high-court ruling striking down the tax also could jeopardize a host of other taxes based on similar principles, such as partnership taxes and other taxes on foreign earnings.

“So give me why it is that you think we can decide for you without putting any of those kinds of very established taxation schemes at risk?” Justice Elena Kagan asked during oral arguments in questioning Andrew Grossman, the attorney for a Washington state couple who are challenging the mandatory repatriation tax, the levy at issue in the case.

Her statement, echoed by other justices, encouraged some tax observers who have voiced concerns. The plaintiffs themselves have indicated they don’t think that a ruling in their favor should affect other tax-code provisions.

“I was comforted by the fact that all of the parties want to avoid blowing up the tax code. That’s good,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

Justices also suggested they want to avoid sweeping ripple effects in the other direction: If they ultimately uphold the tax, they don’t want that to be seen as giving their blessing to a potential future tax on wealth.

While the justices may be inclined to preserve the status quo, “it would not be surprising if some opinions make some strong statements about a yellow light or just being very, very cautious” regarding any attempts to impose a tax on capital appreciation, said Donald Susswein, a principal at RSM US LLP and leader of its pass-through consulting practice.

The justices didn’t seem inclined to simply allow Congress to impose whatever kind of tax it wants, said Thomas Berry, a research fellow at the Cato Institute, which filed an amicus brief in the case supporting the Moores. The court “seems likely to draw a line past which Congress may not go,” he said, though it’s uncertain exactly where that line will be.

Unrealized Income

The mandatory repatriation tax was imposed by the 2017 tax-law overhaul, aimed at taxing companies’ accumulated foreign income. Charles and Kathleen Moore, a retired couple from Washington state, argue that the provision improperly forced them to pay a $14,729 tax bill on the earnings of an Indian company in which they’d invested, even though the earnings were never distributed to them.

The Moores contend that “unrealized” income shouldn’t be taxable under the 16th Amendment, the basis for the US income tax. But other existing taxes also are imposed on unrealized income—such as Subpart F taxes, in which shareholders of US corporations must pay taxes on the passive income of the corporations’ foreign affiliates, even if it isn’t paid to the parent company.

The court’s decision to hear the Moores’ case galvanized many in the tax world to try to alert the justices to the possibility that those taxes could be called into question if they ruled in the Moores’ favor. Tuesday’s arguments brought “clear, well-grounded skepticism” about the Moores’ legal theories from both liberal and conservative justices, said Chye-Ching Huang, executive director of the Tax Law Center at the New York University School of Law.

“The court does seem inclined to want to have some limitations on this whole thing, whichever way it goes,” said Peter Blessing, associate chief counsel (international) at the IRS, speaking Tuesday at a conference of the International Fiscal Association’s US branch.

Many of the justices are “clearly worried” about how a broad decision in favor of the Moores might call other tax provisions into question, said Erik Jensen, a Case Western Reserve University professor emeritus of law, who was involved in a conservative group’s brief that urged the Supreme Court to hear the case.

On the other hand, he said, there’s also concern about the potential that the court could reach a broad conclusion that realization doesn’t matter at all, and that Congress can impose whatever kind of tax it wishes.

“I would expect a narrow decision, one way or the other,” Jensen said.

The case, which the court will decide by next June, is Moore v. United States, 22-800.

—With assistance from Danielle Muoio Dunn.