On June 20, 2024, the Supreme Court issued its ruling in Moore v. United States, holding that Congress can tax U.S. citizen-shareholders on the undistributed earnings of their foreign corporations. The case involved a couple who were required to pay taxes on their share of an Indian company’s earnings, even though they never received any money from the company and had no control over the company. This tax, known as the Mandatory Repatriation Tax (MRT), was part of the 2017 tax reform. In a 7-2 decision, the Court upheld the tax as constitutional.
The Court’s decision was narrowly focused on the specific circumstances of the MRT. It emphasized that Congress has long had the power to tax shareholders on a company’s earnings in certain situations, such as with partnerships and S corporations. The Court viewed the MRT as an extension of this principle to controlled foreign corporations.
While the Moore decision was primarily about the MRT, it has sparked discussion about potential wealth taxes. In recent years, some senior members of Congress have proposed a national wealth tax, which would tax individuals based on the total value of their assets, not just their income. Several even made it a significant portion of presidential campaigns that were well supported in primaries. The Court’s ruling in Moore provides some insights into how such a tax might be viewed.
Four justices, including two who agreed with the final decision, expressed views suggesting that taxable income must be “realized” – meaning actually received by the taxpayer. This perspective could pose a challenge for wealth tax proposals, as they would tax unrealized gains (increases in asset value that haven’t been sold or converted to cash). However, the majority opinion deliberately avoided ruling on whether unrealized gains can be taxed, leaving this question open for future cases and clearly stating that the opinion of the Court did not reach or contemplate such a tax.
The Court’s decision avoided definitively settling the debate on any potential wealth tax, but suggests that such a tax might face significant legal hurdles. Any wealth tax legislation would almost certainly be subjected to many court challenges, with an uncertain outcome. While wealth taxes are not currently part of the U.S. tax system, the debate over their constitutionality remains an active and very real one which may become more than a hypothetical in the future.
We will continue to monitor developments in this area and provide updates as needed.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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