The Case That Had Tax Lawyers Holding Their Breath-Supreme Court Upholds Mandatory Repatriation Tax

Moore v. United States delivers a cautious victory for the government while leaving broader questions about income taxation unanswered

On June 20, 2024, the Supreme Court delivered its highly anticipated decision in Moore v. United States, upholding the constitutionality of the Mandatory Repatriation Tax (MRT) by a 7-2 margin. While the government secured a victory, the Court's deliberately narrow ruling left many fundamental questions about income taxation and realization requirements for another day.

The Case That Had Tax Lawyers Holding Their Breath

Charles and Kathleen Moore found themselves at the center of a constitutional battle that could have reshaped American tax law. In 2006, the couple invested $40,000 in KisanKraft, an American-controlled Indian company that supplies farming equipment to rural communities. Their 13% stake seemed like a straightforward investment—until the 2017 Tax Cuts and Jobs Act came along.

The problem: KisanKraft had generated substantial profits over the years but never distributed any money to its American shareholders. Under normal circumstances, the Moores wouldn't owe U.S. taxes on income they never received. But the MRT changed that calculus entirely.

The MRT imposed a one-time, retroactive tax on American shareholders of foreign corporations, targeting the trillions of dollars in undistributed earnings that had accumulated overseas. For the Moores, this meant a tax bill of $14,729 on their share of KisanKraft's accumulated profits from 2006-2017—money they had never actually received.

The Constitutional Challenge

The Moores argued that the MRT violated the Constitution's Direct Tax Clause because it taxed unrealized gains without apportionment among the states. Their central contention was simple but potentially revolutionary: income requires realization.

Under this theory, you can't have taxable "income" under the Sixteenth Amendment unless you actually receive something—wages, dividends, proceeds from a sale, or other tangible benefits. Since the Moores never received any distributions from KisanKraft, they argued the tax was really a direct tax on property (their stock ownership) that required apportionment.

The stakes were enormous. If the Court had accepted this broad realization requirement, it could have invalidated vast swaths of the current tax code, including:

• Partnership taxation (where partners pay taxes on undistributed partnership income)

• S-corporation pass-through taxation

• Subpart F rules for controlled foreign corporations

• Various anti-avoidance provisions

• Potentially even mark-to-market accounting rules

The Court's Cautious Response

Writing for the majority, Justice Kavanaugh took a notably restrained approach. Rather than grappling with the fundamental question of whether realization is constitutionally required for income taxation, the Court reframed the issue entirely.

The Court's key insight: The MRT doesn't tax unrealized income—it taxes realized income. KisanKraft actually earned and realized the income; the MRT simply attributes that realized income to the shareholders and taxes them on it.

This "attribution" approach allowed the Court to rely on longstanding precedent without breaking new constitutional ground. For over a century, Congress has used pass-through taxation for partnerships, S-corporations, and controlled foreign corporations. The Court saw the MRT as simply another example of Congress choosing to tax shareholders on an entity's undistributed income rather than taxing the entity itself.

A Deliberately Narrow Victory

The majority was careful to limit its holding to four specific conditions:

1. Taxation of shareholders of an entity

2. On undistributed income realized by the entity

3. Which has been attributed to the shareholders

4. When the entity itself has not been taxed on that income

Justice Kavanaugh emphasized that "nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income." The Court also explicitly reserved judgment on wealth taxes, taxes on appreciation, and the broader realization question.

The Concurring Voices

Justice Jackson's concurrence provided historical context, noting how the Court's 1895 Pollock decision had been widely criticized for restricting Congress's taxing power—leading directly to the Sixteenth Amendment. She emphasized that courts should be hesitant to strike down "lawfully enacted" taxes and that Congress has "plenary power" over taxation.

Justice Barrett's concurrence (joined by Justice Alito) was more skeptical. While concurring in the judgment, she questioned whether the Court's attribution precedents were as "clear and definitive" as the majority suggested. Importantly, she noted that the decision applies specifically to "American shareholders of a closely held foreign corporation" and that "a different tax—for example, a tax on shareholders of a widely held or domestic corporation—would present a different case."

The Dissent's Warning

Justice Thomas, joined by Justice Gorsuch, delivered a scathing 33-page dissent arguing that the majority had dodged the central constitutional question. Thomas contended that the Sixteenth Amendment requires realization and that "Charles and Kathleen Moore paid $14,729 in taxes on an investment that never yielded them a penny."

The dissenters argued that the majority's "attribution" doctrine was "an unsupported invention" and warned that the decision ceded too much ground to Congress. Thomas criticized the majority for engaging in consequentialist reasoning, noting their concern about "trillions in lost tax revenue" if various tax provisions were invalidated.

What This Means Going Forward

For taxpayers: The MRT survives, and similar pass-through attribution schemes remain constitutionally sound. The decision doesn't create immediate new tax liabilities, but it does confirm Congress's broad authority in this area.

For tax policy: The narrow ruling preserves flexibility for future tax reform while avoiding the chaos that would have resulted from invalidating existing pass-through rules. However, the Court's careful limitations suggest skepticism about more aggressive taxation schemes.

For constitutional law: The Court declined to resolve fundamental questions about realization requirements, wealth taxes, and the scope of Congress's taxing power. These issues remain teed up for future litigation.

The Bigger Picture

Moore v. United States represents a masterclass in judicial restraint. Faced with a case that could have fundamentally reshaped American taxation, the Court chose the narrowest possible path to resolution. This approach preserved existing tax structures while avoiding sweeping constitutional pronouncements that could have unintended consequences.

The decision reflects the Court's awareness that tax law operates as an integrated system where seemingly small changes can have cascading effects. By limiting its holding to the specific facts and well-established precedent, the Court maintained stability while leaving room for future constitutional development.

The bottom line: While the government won this round, the war over the constitutional limits of federal taxation is far from over. The Court's careful reservations of key questions suggest that future cases involving wealth taxes, mark-to-market rules, or other novel taxation schemes may receive a less favorable reception.

For now, Congress retains broad authority to structure business taxation through attribution and pass-through mechanisms. But the Court's emphasis on limits and its skeptical concurring opinions suggest that this authority is not unlimited—and that the constitutional boundaries of taxation remain very much in play.