Moore v. U.S.: How the U.S. Supreme Court Uses a Jedi Mind Trick to Resolve the Case

The U.S. Supreme Court (“the Court”) has finally issued its decision in Moore v. U.S., No. 22-800 (“Moore”).  The Moore case involved individual taxpayers who owned shares in a controlled foreign corporation (“CFC”) and were subject to the so-called “transition tax” of Internal Revenue Code Section (“IRC Sec.”) 965.  In the end, the Court upheld the constitutionality of IRC Sec. 965, stating that “Congress has long taxed shareholders of an entity on the entity’s undistributed income, and it did the same with [IRC Sec. 965]. This Court has long upheld taxes of that kind, and we do the same today with [IRC Sec. 965].”

As a reminder, IRC Sec. 965 was created as part of the Tax Cuts and Jobs Act of 2017 (PL 115-97) and applies generally to U.S. taxpayers (both corporate and individual) who own 10% or more of the stock of a CFC as of December 31, 2017. This one-time tax was designed to make these taxpayers pay tax on their pro rata share of a CFC’s accumulated (and otherwise properly tax-deferred) earnings, but at a reduced rate of tax (15.5% on cash and other liquid assets and 8% on non-liquid assets – rates that were drafted in terms of corporate taxation but were able to be computed for individuals).  

One key argument made by the taxpayers in Moore was that IRC Sec. 965 taxes property (stock) and not “income.”  The taxpayers argued that the concept of income requires realization, and [IRC Sec. 965] does not tax any income realized by them; however, The Force is strong with Justice Kavanaugh.  Simply put, the Court pointed out that the CFC did, in fact, realize income.  One can almost hear Justice Kavanaugh (in the voice of Sir Alec Guinness) having this conversation with the taxpayers:

Taxpayer: (to the IRS) Let me see the income.
Justice Kavanaugh: [with a small wave of his hand] You don't need to see the income.
Taxpayer: We don't need to see the income.
Justice Kavanaugh: This isn’t the issue you're looking for.
Taxpayer: This isn’t the issue we're looking for.
Justice Kavanaugh: We can go about our business.
Taxpayer: You can go about your business.
Justice Kavanaugh: Move along.
Taxpayer: Move along... move along.

Having dispatched with the issue of whether or not there was income (through realization at the entity level), the Court’s opinion was able to “move along” to whether or not such income can be attributed to the taxpayers.  Ultimately, the Court determined that Congress was within its powers to attribute the income of an entity to its owners, citing various authority and looking to long standing law relating to partnerships, “S” corporations and even other parts of the CFC rules.  

Importantly, the Court limited the scope of its opinion, stating that “[i]t is 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 had not been taxed on the income.” In other words, holding applies when Congress treats the entity as a pass-through.”  As the issue in the Moore case had been seen as one of a “wealth tax”, the limitations expressed by the Court is particularly important.  In this regard, the Court avoided answering the “wealth tax” question, leaving open the issue of whether or not certain proposed taxes on the ultra-high net worth individuals may or may not be constitutional (something many felt may have had to have been addressed by the Court in order to resolve the Moore case). 

What may be even more important is that the decision of the Court avoided the quagmire of issues that would have arisen if IRC Sec. 965 was found to be unconstitutional.  For example, there would likely have been significant tax issues raised with respect to taxpayers who paid the IRC Sec. 965 tax (e.g., statute of limitations issues, billions to trillions of dollars of refunds, taxing the repatriated funds that were bought back tax free after the imposition of the IRC Sec. 965 tax, etc.).  Furthermore, the decision avoided the potential arguments that such a holding could apply to other provisions of the IRC (possibly resulting in further litigation challenging the taxing authority of Congress in other “pass-through” situations).   

Although one can disagree with all, or part, of the opinion of the Court, and there were concurring and dissenting opinions that expressed differing levels of disagreement.  The opinion of the Court skillfully avoided many complexities and issues that would likely have arisen from finding IRC Sec. 965 to be unconstitutional. Just imagine how different a galaxy far, far away could have been if Justice Kavanaugh were the Jedi sent to negotiate the blockade on Naboo.  

Please contact us if you want to discuss IRC Sec. 965 as applicable to your situation.