Moore v. United States: The Supreme Court Case That Could Reach Far Beyond Section 965

What the case is about

Charles and Kathleen Moore invested in an India-based corporation that supplies tools and equipment to small farmers. The company was profitable, but it reinvested its earnings and never paid the Moores a dividend. The Moores never received cash from the investment.

Under the transition tax enacted by the Tax Cuts and Jobs Act, the Moores were nonetheless taxed on their share of the company's accumulated, undistributed foreign earnings. They paid approximately $14,729 and sued for a refund, arguing that the tax is unconstitutional because they never realized the income — it remained inside the corporation.

The case is Moore v. United States, No. 22-800. The Supreme Court granted certiorari on June 26, 2023, and oral argument is scheduled for December 5, 2023. As of this writing, the case is pending and no decision has issued.

The tax at the center of it

The provision being challenged is the § 965 transition tax, sometimes called the mandatory repatriation tax. Enacted in § 14103 of the Tax Cuts and Jobs Act, Pub. L. 115-97, it imposed a one-time tax on United States shareholders who own at least 10 percent of certain foreign corporations, reaching their pro rata share of the corporation's accumulated post-1986 deferred foreign earnings. The tax applied for the corporation's last tax year beginning before January 1, 2018 — generally 2017 for affected shareholders — and taxed those earnings as if they had been repatriated, even though they had not been.

That last feature is the constitutional pressure point. The tax reached earnings the shareholder never received.

The constitutional question

The question the Court will decide is whether the Sixteenth Amendment permits Congress to tax unrealized sums without apportioning the tax among the states — in other words, whether "income," for constitutional purposes, requires realization.

The Moores rely on Eisner v. Macomber, 252 U.S. 189 (1920), in which the Court held that a stock dividend was not realized income. The government's position is that later decisions narrowed Macomber and that there is no constitutional realization requirement, and that in any event the corporation's income was realized at the entity level. The Ninth Circuit ruled for the government, holding that realization is not a constitutional requirement; it cited Moore v. United States, 36 F.4th 930 (9th Cir. 2022), and denied rehearing en banc on November 22, 2022.

Why the case matters beyond the Moores

A narrow ruling — that the § 965 transition tax is or is not valid on its particular facts — would have limited reach. A broad ruling holding that the Constitution requires realization before income may be taxed would be another matter entirely.

Large portions of the tax code reach income that has not been realized in the ordinary sense. The Subpart F and global intangible low-taxed income regimes tax United States shareholders on a foreign corporation's earnings before distribution. Mark-to-market regimes tax unrealized appreciation. Partnership taxation attributes income to partners regardless of distribution. A constitutional realization requirement could call aspects of these regimes into question.

The case also bears on a live policy debate. Several proposals for federal wealth taxation, and for taxing the unrealized gains of the very wealthy, depend on the premise that unrealized amounts can be taxed as income. A ruling requiring realization could foreclose that premise. Commentators have noted these systemic stakes, which is why a case about one couple's $14,729 has drawn attention far out of proportion to the dollars at issue.

The planning question for Section 965 payers

For taxpayers who paid the § 965 transition tax, the pendency of the case raises a specific and time-sensitive consideration: the protective refund claim.

If the Court were to rule in a way that undermines the tax, refunds could become available — but only to taxpayers who preserved their right to claim them. A refund claim must generally be filed within the period set by IRC § 6511, the later of three years from filing the return or two years from paying the tax. For a 2017 liability, that window has largely closed or is closing. A protective refund claim filed before the statute of limitations expires preserves the taxpayer's position pending the outcome, without predicting it.

This is not a recommendation to assume the tax will be struck down. It is a recognition that the cost of preserving a claim is low and the cost of letting the window close is the loss of a refund that may never be recoverable otherwise. For affected taxpayers, the analysis should be done now, while the option remains open.

What this means in practice

The defensible posture is to watch the case closely and act only where action is both low-cost and time-sensitive. For most taxpayers, Moore is a development to monitor, not to plan around — the law is what it is until the Court rules. For taxpayers who paid the § 965 transition tax and whose refund window is closing, a protective claim is worth evaluating before the statute of limitations runs. We will revisit the case when the Court issues its decision, expected by the end of the term in 2024.

Key takeaways

• The Supreme Court granted certiorari in Moore v. United States, No. 22-800, on June 26, 2023, to decide whether the Sixteenth Amendment permits taxing unrealized income; oral argument is scheduled for December 5, 2023, and the case is pending.
• The case challenges the § 965 transition tax (TCJA § 14103), which taxed United States shareholders on a foreign corporation's accumulated undistributed earnings the shareholders never received.
• The Ninth Circuit upheld the tax in Moore v. United States, 36 F.4th 930 (9th Cir. 2022), holding that realization is not a constitutional requirement.
• A broad ruling requiring realization could affect Subpart F, GILTI, mark-to-market regimes, and partnership taxation, and could bear on proposals for federal wealth taxes.
• Taxpayers who paid the § 965 transition tax should consider whether a protective refund claim under IRC § 6511 is warranted before the limitations period closes.

Frequently asked questions

What is the Supreme Court deciding in Moore v. United States?

Whether the Sixteenth Amendment allows Congress to tax income that has not been realized — that is, whether income must be received or realized before it can be taxed without apportionment among the states.

Has the case been decided?

No. As of this writing, certiorari has been granted and oral argument is scheduled for December 5, 2023. The case is pending and no decision has issued.

Why does a case about one couple matter so broadly?

Because a broad ruling that the Constitution requires realization could affect many provisions that tax unrealized or undistributed income — including Subpart F, GILTI, mark-to-market rules, and partnership taxation — and could bear on proposed federal wealth taxes.

Should taxpayers who paid the Section 965 transition tax do anything now?

They should evaluate whether to file a protective refund claim under IRC § 6511 before the limitations period closes. A protective claim preserves the right to a refund if the tax is later invalidated, without assuming that outcome.