In this episode of the Tax Section Odyssey podcast, the focus is on the landmark Supreme Court case, Moore v. United States, which examined the constitutionality of the mandatory repatriation tax under Sec. 965 of the Tax Cuts and Jobs Act (TCJA). The Court upheld the tax with a 7–2 majority.

The case opens up further discussion on the taxation of unrealized gains and the constitutionality of a wealth tax. Tony Nitti highlights the significance of the Supreme Court’s decisions on taxation and encourages a thorough reading of the opinions for their educational value.

Also, revisit previous episode from Nov. 22, 2023 — All eyes on Moore v. U.S. plus a history lesson on tax cases.

Transcript

April Walker: Hello everyone and welcome to the Tax Section Odyssey podcast, where we offer thought leadership on all things tax facing the profession and today we have a really quick turnaround podcast that I'm excited about with Tony Nitti, he is a partner at EY National Tax, he is a frequent guest on the show and we recorded late last fall on this topic, the Moore vs. the United States and the podcast was published on November 22nd.

Dare I say riveting podcast or at least it was riveting to me. Hopefully, you listened to it. I will put a link to it on the facts and arguments in the Moore case being heard by the Supreme Court. There was a history lesson, several references to Hamilton, my favorite musical and just an all around fun time.

Here we are Tony, the court took their sweet time I feel like but they dropped the decision last Thursday and here we are first thing Monday morning to record. We are here for the people, so welcome, Tony.

Tony Nitti: Thanks for having me April. Good to be back with you. I'm excited for two reasons. One, you and I and Damian Martin that is also at EY, we did talk about the Moore case back in, I guess it was late November. I know it was right before the oral arguments in our podcasts. Then Damien and I had done a presentation on it at national tax and so I'm excited to come back just to talk about Moore in general.

But I'm also excited because I did get a little jealous when I saw you did a separate podcast with Damien last week and I knew that I had to do something to knock him off the top line of the list of AICPA podcasts. Damien, as soon as this publishes you are relegated to number two. All is right with the world now April.

April Walker: I'm happy to be part of the competition between two greats such as yourselves. The prior podcast did an amazing job, in my opinion, going through all the details but for those who might not want to take a deep dive, that one probably runs 45, 50 minutes, something like that.

For those who don't want to go back and listen, I don't know why you wouldn't but if you don't, Tony, I'd love for you to give us a quick background to set the stage for us on the Moore case.

Tony Nitti: I'll do it as quick as possible and I don't want to bury the lead. Let's talk about the ruling before we even get into the facts but Supreme Court did rule by a 7:2 majority in favor of the government. Effectively saying that section 965 of the code that was added as part of the Tax Cuts and Jobs Act, what we call the mandatory repatriation tax, that it is in fact constitutional and yes, this was a victory for the government.

But let's backup now, let's go through the facts and then talk about why was everybody hanging on that the Supreme Court's decision here, why was this such a eagerly anticipated opinion in the tax community? The facts in Moore, very basic. We've got a retired couple up in the state of Washington and in 2006 they invested some money in an Indian corporation.

They took back more than 10% of the stock, the corporation was owned more than 50% by US shareholders, thereby making it a controlled foreign corporation or CFC. Then from 2006 all the way to the end of 2017, the CFC made money but it never actually repatriated any amounts back to the Moores in the form of a dividend. Under the laws in place at that time, the Moores had no income to recognize at the individual level because they hadn't received any dividends from their CFC.

Now we know that since 1962, part F has imposed a deemed dividend on shareholders of a CFC when that CFC is earning certain types of passive income but that's not what we're talking about here. The corporation CFC in India, it was earning regular operating income, so there was nothing to attribute back to the Moores in the form of a deemed dividend, until December 22nd, 2017 because that's when Congress passed the Tax Cuts and Jobs Act.

As part of that Republican tax bill. One of the things we did was shift from what we call a worldwide system of international taxation to a territorial system of international taxation. With that shift, what was going to happen and what did happen is that income held in a CFC post-2017, when it was repatriated to the US in the form of a dividend would not be subject to tax at the individual level.

But you can't just flip a switch and make that move April because if that income has been stashed in a CFC prior to 2017 and has never been subject to US tax. If you suddenly opened the flood gates and allow what was rumored to be anywhere from 1.5 to $2 trillion that had been stashed in CFCs, never subject to US tax. If you allow that to come back post-2017, tax-free, that's a windfall. That money would have never been subject to US taxation.

To prevent that windfall, Congress enacted Section 965, this mandatory repatriation tax and what it did is it said, look certain shareholders of a CFC as of December 22nd, 2017, you have to pretend that you received a dividend equal to your pro rata share of the CFCs income from whatever came later 1986 or when you acquired the stock all the way through to the end of 2017.

Tony Nitti: By picking up this deemed pretend dividend and paying tax on it, now we can pave the way for this switch to a territorial regime where in the future that same money can actually be repatriated back to the US and not have to be subject to US tax.

Tony Nitti: The Moores dutiful taxpayers that they were, paid the 965 tax, I believe it was $14,729 and then they got around to thinking, what did I just pay tax on? I never received anything. I put money into a CFC and I sat on my hands and I enjoyed the fact that the company was doing well but I never took a penny out.

Tony Nitti: Why on earth am I cutting a check to the Internal Revenue Service? They sued in district court and the district court dismissed in favor of the government. They appealed up to the Ninth Circuit, the Ninth Circuit did the same and then over the summer last year, the Supreme Court decides that they will listen to this case and it certainly surprised a lot of people.

Tony Nitti: Why would the nation's highest court agree to hear an argument over $14,000 in tax? But the root of it was the fact that they were arguing, the Moores were that Section 965 was unconstitutional and that's a big deal. When you're saying something's unconstitutional and that goes beyond just your run-of-the-mill argument, you tend to see in Tax Court.

Tony Nitti: The reason they were saying it was unconstitutional, it was something that was certainly going to pique the interest of the Supreme Court and certainly in this day and age. What they said was, look.

Tony Nitti: The 16th Amendment to the Constitution grants Congress the power to lay and collect taxes on income from whatever source derived without having to apportion that tax among the states based on population. When the 16th Amendment says it can tax income by definition in the 16th Amendment has to be realized. There has to be what we call this realization requirement and we'll examine that further. Just for our purposes right now, it just means that I need to have something in my hands that makes me richer from an economic sense that I can do what I will with.

Now we know that tax law has expanded upon the concept of realization where you can have concepts of constructive realization, but we'll get into all that. The idea is something had to happen to lead me richer in an economic sense. They said, here in 965, I'm being taxed on amounts that clearly I never received. There has been no realization. If there's been no realization than whatever the taxing me on cannot be income. The only thing they could be taxing me on, is my ownership of stock and a CFC as of a specific date and time, December 22nd, 2017.

That type of tax, a tax on ownership of property, is a direct tax under the meaning of Article 1, Section 9 Clause 4 of the constitution, what we call the direct tax clause, and is required by that clause to be apportioned among the states based on population. Since 965, last time I checked it was directly assessed and not apportioned among the states based on population. The tax violated the Constitution.

A really fascinating argument, April, because what it looked like it was doing was setting