Wealth Tax Fight Marches On

Proponents and opponents of proposed “wealth tax” legislation alike watched the Supreme Court carefully as it heard oral arguments for, and subsequently decided Moore v. United States on June 20, 2024. The crux of the Moores’ argument was that the transition tax under I.R.C. Section 965¹ violates the Constitution because it is a direct tax on “unrealized income” (i.e., when the value of an asset, such as stock, has increased but has not yet been sold – a key component to various lawmakers’ wealth tax proposals).

A ruling in the Moores’ favor could have had monumental ramifications, including invalidating wide swathes of the Tax Code (e.g., provisions related to deemed stock distributions, accrual accounting, partnership taxation, subpart F/GILTI, and gift taxes, to name a few), leading to the loss of trillions of dollars in tax revenue – as noted by the Court, “fiscal calamity.” Instead, the Court issued a narrow opinion in which it declined to rule whether realization is a constitutional requirement of an income tax, but held that Congress may attribute a business entity’s realized and undistributed income to the shareholders or partners of that entity. In doing so, the Court emphasized that its holding “applies when Congress treats the entity as a pass-through” (as it does with U.S.-controlled foreign corporations, such as the one the Moores held ownership in).²

While the majority opinion left the question of realization unanswered, various justices expressed their (telling, albeit nonbinding) views in concurring and dissenting opinions. Specifically, four justices expressed a view that realization was a requirement for a tax on income, while one expressed the view that it was not. The other four justices were silent on the matter. By limiting the scope of its decision, the Court preserved the wealth tax fight (that is, a fight over the requirement of realization) for another day. But perhaps the battle lines have become slightly clearer.

 

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¹ Section 965 was implemented as part of the 2017 Tax Cuts and Jobs Act, and serves as a bridge from the United States’ previous worldwide tax system, to its new territorial system.  It is generally aimed at taxing U.S. shareholders on accumulated foreign earnings that were previously deferred from U.S. taxation.

² Thus, by reason of such permissible attribution, the Moores were subject to the transition tax, and the Court need not go any further with its analysis.