On June 20, 2024, the United States Supreme Court decided a tax case – Moore v. United States (Docket No. 22-800). The Moore case is important for what it decided, but it may be even more important for what it did not decide.

The specific issue in the Moore case was the constitutionality of what is known as the “Mandatory Repatriation Tax” (the “MRT”). Enacted in 2017 as part of the Tax Cuts and Jobs Act, the MRT imposed a one-time “pass-through” tax on certain U.S. shareholders of U.S.-controlled foreign corporations. Specifically, the MRT attributed certain accumulated and undistributed income of U.S.-controlled foreign corporations to U.S. shareholders and then taxed these U.S. shareholders on their pro rata shares of such income at a rate from 8 to 15.5 percent.

Based on their investment in a U.S.-controlled foreign corporation, taxpayers Charles and Kathleen Moore declared $132,512 in income under the MRT and owed $14,729 of tax liability on such income. The Moores paid this tax liability and then sued for a refund, claiming that the MRT was unconstitutional.

The United States Supreme Court disagreed. In a 7-2 decision, the Supreme Court upheld the constitutionality of the MRT. The majority opinion in the Moore case, written by Justice Brett Kavanaugh (joined in by Chief Justice John Roberts, Justice Sonia Sotomayor, Justice Elena Kagan, and Justice Ketanji Brown Jackson, with a concurring opinion written by Justice Jackson, a concurring opinion written by Justice Amy Coney Barrett (joined in by Justice Samuel Alito), and a dissenting opinion written by Justice Clarence Thomas (joined in by Justice Neil Gorsuch)), states:

“So the precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income. This Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes. . . . So by 1938, this Court’s precedents had established a clear rule that directly contradicts the Moores’ argument in this case. That line of precedent remains good law to this day. Indeed, since then, it has gone without serious question in both Congress and the federal courts that Congress can attribute the undistributed income of an entity to the entity’s shareholders or partners, and tax the shareholders or partners on their pro rata share of the entity’s undistributed income. . . . To sum up: The Court’s longstanding precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may tax either (i) the entity or (ii) the shareholders or partners. . . . Consistent with this Court’s case law, Congress has long taxed the shareholders and partners of business entities on the entities’ undistributed income. That longstanding congressional practice reflects and reinforces this Court’s precedents upholding those kinds of taxes.”

In making this last point, Justice Kavanaugh’s opinion cites such examples as the “pass-through” taxation of partners on the undistributed income of partnerships and of shareholders on the undistributed income of S corporations and rejects the arguments of the Moores to distinguish the MRT from these other taxes.

Much of the discussion about the Moore decision concerns its implications for a different form of taxation than the MRT – wealth taxation. Income taxation in a taxable year is typically based on the income received in such taxable year. To the extent that the MRT is assessed on accumulated income, it can be based on income (undistributed “pass-through” income) over a prior period of years. As such, the MRT has been compared to a wealth tax – a tax not on current income, but on some measure of accumulated income (which results in accumulated wealth). The difference between an income tax and a wealth tax can be evidenced with a parcel of real estate. For income tax purposes, you can pay income tax liability when you sell the parcel of real estate; you do not pay income tax liability merely for ownership of the parcel of real estate. On the other hand, you could pay wealth tax liability merely for ownership of the parcel of real estate; ownership (even without sale) increases your wealth.

Before the Moore decision was issued, some commentators thought that the United States Supreme Court would rule in the Moore case on whether wealth taxation was constitutional. However, the Moore decision was limited just to the constitutionality of the MRT. Justice Kavanaugh’s majority opinion states:

“[O]ur analysis today does not address the distinct issues that would be raised by (i) an attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.”

Various European countries have enacted certain forms of wealth taxation. There have been various proposals for wealth taxation in the United States, including Senator Elizabeth Warren’s proposed 2 percent tax on all accumulated wealth held by U.S. taxpayers worth more than $50 million. Politically, it is unclear if there would ever be sufficient support in Congress for it to enact some form of wealth taxation. Nevertheless, by not deciding the issue of constitutionality of wealth taxation (and thereby by not ruling wealth taxation to be unconstitutional), the Moore case keeps open the possibility of a wealth tax in the United States in the future.

If you have any questions concerning the Moore case, please discuss this issue with your advisers.

Note – IRS Announcement Regarding ERC Claims

The Moore decision was not the only important tax development on June 20, 2024. In addition, the Internal Revenue Service issued a June 20 announcement regarding the current status of Employee Retention Credit (“ERC”) claims. The ERC is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. IRS Commissioner Danny Werfel stated, “The completion of . . . review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims . . . We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims”. While the announcement states that “legitimate claims” will be processed (subject to the “processing moratorium” described below), it also identifies as much as 90 percent of ERC claims as either in “the highest-risk group” or showing “an unacceptable level of risk”, and thereby may be disallowed. The announcement also states that the “processing moratorium” established last year for ERC claims submitted after September 14, 2023 will remain in effect.  For taxpayers who are concerned that they may have submitted improper ERC claims, the announcement reminds taxpayers about the ”special IRS ERC Withdrawal Program”; if taxpayers withdraw their ERC claims pursuant to this “Program”, they will not be subject to interest or penalties.

If you have any questions concerning any ERC matter, please discuss this issue with your advisers.

If you wish to discuss any of the above, find Pen Pal Gary’s contact info here.

Disclaimer: please note that nothing in this article is intended to be, or should be relied on as, legal advice of any kind. Neither LHBR Consulting, LLC nor Gary Stern provides legal services of any kind.

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