The Supreme Court rejected Thursday a challenge to a 2017 tax law passed by Congress.
The case, Moore v. United States, considers whether the 16th Amendment permits taxing unrealized gains. Kathleen and Charles Moore sued for a refund in 2019 after they were hit with a $14,729 tax bill for their investment in an overseas company, though they never received any payment in earnings from the company.
The bill followed Congress’ passage of the 2017 Tax Cuts and Jobs Act, which imposed a one-time tax on shareholders with a 10% stake in foreign companies that earned profits, regardless of whether or not those profits were received.
“The MRT—which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders, and then taxes the American shareholders on their portions of that income—does not exceed Congress’s constitutional authority,” the majority held.
Justice Brett Kavanaugh wrote that the ruling was limited to “(i) taxation of the shareholders of an entity, (ii) on the undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income.”
“In other words, our holding applies when Congress treats the entity as a pass-through,” he continued.
The Ninth Circuit previously ruled against the Moores in 2022, though the dissenting judges wrote the decision made them “the first court in the country to state that an ‘income tax’ doesn’t require that a ‘taxpayer has realized income.’”
The Moores argued that the lower court ruling upsets “long-settled expectations undergirding practically all capital investment across the economy,” saying the tax “does great violence to constitutional structure, virtually eviscerating Article I’s apportionment requirement.”
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