Moore Petitioners Make Strongest Case to Toss Repatriation Tax

The latest filing in the closely watched tax case Moore v. United States has made a stronger case for the US Supreme Court to invalidate the mandatory repatriation tax, which observers say could lead to billions of tax refunds to US multinationals.

Taxpayers Charles and Kathleen Moore’s Nov. 15 reply brief also provided the high court with a detailed explanation of their view that such a decision would be limited to the mandatory repatriation tax, offering a clearer response to those who say a more broadly worded opinion could lead to budgetary chaos.

The Moores are seeking a $14,729 tax refund on the undistributed earnings from their investment in a machine-tool company in India. The taxes were imposed under the transition tax, and the justices must decide whether the IRS can tax the shareholders of a foreign corporation on the company’s income without a cash dividend or other distribution.

Until now, the taxpayers and the government have been engaged in an almost semantic debate over the word “realization” in cases decided over the last 100 years. Without an actual cash distribution, the Moores say, the shareholders haven’t “realized” any income that can be properly taxed under the 16th Amendment.

The government disagrees, arguing there’s no realization requirement in the Constitution—only the requirement for economic gain or profit— and that the shareholder’s economic gain is a share of the company’s income, even if not yet distributed.

The Moores’ reply brief breaks out of that semantic debate and challenges the way the government (and the U.S. Court of Appeals for the Ninth Circuit) have interpreted the seminal tax case from 1920, Eisner v. Macomber. That shift in tactics could be decisive.

The taxpayers forcefully explain their view that Macomber applies directly to invalidate the mandatory repatriation tax, for the same reasons Macomber held it was unconstitutional in the 1920 case to impute a corporation’s income to its shareholders without an actual distribution. They argue Macomber is a binding, constitutional law that makes the mandatory repatriation tax unconstitutional.

Replying to the argument that Macomber applies only where stock dividends are involved, taxpayers say that “disregards that the Macomber Court was compelled to confront the constitutional question, as to both stock dividends and the attribution of corporate earnings to shareholders.”

The 1920 court’s decision was a holding on both issues, they say, on both the stock dividend and the imputation issue. The court held it was unconstitutional in that case to impute the corporate income of Standard Oil to its shareholders without an actual dividend, the Moores argue. That is exactly what the mandatory repatriation tax does, they say.

They ask what sense it would make if Macomber only applied where a valueless stock dividend was involved.

“If Congress cannot income-tax recipients of such dividends because they realized nothing, then what basis does it have on income-tax shareholders who haven’t received even a piece of paper? The Government has no explanation.”

Perhaps most importantly, responding to the government’s assertion that attribution is constitutionally permissible in a corporation the same way it is allowed in a partnership, the brief explains that “Macomber rejected the same argument, refusing to ‘look upon stockholders as partners, when they are not such.’”

The brief also challenges the government to show where these holdings of Macomber have been “abrogated” by the Supreme Court.

The Moores also address, succinctly, the government’s argument that invalidating the mandatory repatriation tax would lead to budgetary chaos. They explain briefly, but in detail, why their view of Macomber (and its realization rule or concept as applied there and in later cases) wouldn’t invalidate any tax law provisions other than the mandatory repatriation tax.

The justices may or may not agree, but the Moores gave a clear statement of their analysis of why Subpart F, partnership taxation, accrual accounting, original issue discount, and various anti-abuse rules wouldn’t be affected by their view of Macomber (or later decisions) as applied to the mandatory repatriation tax.

The case is Moore v. United States, U.S., No. 22-800, reply brief filed 11/15/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Donald B. Susswein is a principal at RSM US, leading the pass-through tax consulting practice and its practice advising on tax treatment of legal controversies, costs, and settlements.

Ramon Camacho is a principal at RSM US and leads the firm’s international tax practice.

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