by Greg Lambrecht, CPAOctober 4, 2024

Agreeing to Disagree: Barrett’s Dissenting Concurrence on Moore

In June 2024, the Supreme Court decided a seminal court case related to the 2017 Tax Cuts and Jobs Acts (TCJA) mandatory repatriation tax (MRT). In a 7-2 decision, the Court ruled in favor of the United States. However, the seven justices were anything but in agreement on the reason.

Setting the Stage

In 2005, Charles and Kathleen Moore paid $40,000 for an 11% interest in KisanKraft, Ltd., an Indian company classified as a CFC for U.S. tax purposes. The company was profitable but never paid a dividend. The Mooress were, therefore, never taxed on these earnings. The MRT required a deemed inclusion of their share of the earnings, and the Moores remitted MRT tax of $14,729. They filed to recover this tax.

The premise of their case was that the MRT violated the Apportionment Clause of Article I, Section 9 of the United States Constitution in that it imposed an “unapportioned direct tax, rather than an income tax.” In other words, the tax was not on realized income, but unrealized appreciation and a tax similar to a property tax, which requires apportionment. The District Court rejected the plaintiff’s argument.

The taxpayers appealed to the Ninth Circuit Court and did not prevail, ultimately appealing to the U.S. Supreme Court. Opening arguments began on December 5, 2023, and the ruling was issued on June 20, 2024. In the oral arguments, the petitioners argued that a realization event had never occurred because the Moores had never received any property (i.e., a cash dividend). This precluded the government from including this amount in income.

The Majority Opinion

Justice Kavanaugh wrote the majority opinion that three other justices joined. Besides Justice Barrett’s concurring opinion, Justice Jackson wrote a separate concurring opinion. It reasoned that, in certain instances, an entity treated as a corporation, as a CFC clearly is, can be considered a “pass-through entity” similar to an S Corporation or partnership. He stated, “In short, the Moores cannot meaningfully distinguish the MRT from similar taxes on partnership, on S corporations, and on Subpart F income.” He further noted that if such types of taxes were eliminated, trillions of dollars of taxes would be at stake. In my opinion, this logic had more to do with practicality than law. Barrett felt similarly.

I Agree, but Not Really

In what I would characterize as a blistering concurrence, Barrett wholly rejected Kavanaugh’s premise that a corporation can be treated as a pass-through. She noted that the Court granted its review based on “whether the Sixteenth Amendment authorized Congress to tax unrealized sums without apportionment among the states.” In other words, does the Internal Revenue Code allow such taxation?

Barrett determined that the Court had not established any realization event that had occurred, had not supported the levy of this tax, and that the taxpayers had not “derived” or realized any income. Her opinion went to great lengths to provide precedence for not taxing the undistributed earnings of corporations. I feel her concurrence is a road map for future challenges, although it seems unlikely any such challenges are forthcoming.

In the final paragraph of her opinion, Barrett summarizes that the Court never addressed the core question of attributing unrealized income to the Moores. She only concurred because the Moores agreed that Subpart F was constitutional. They, therefore, made no case that the MRT was not constitutional. She noted, “Taxpayers generally bear the burden to show they are entitled to a refund…they have not met that burden.”

In summary, Barrett politely said that the majority opinion was poorly reasoned but that the respondent’s logic was worse. She, therefore, concurred.

Reach out to McGuire Sponsel’s Global Business Services team with questions on the Moore case or any other international tax issue.

Greg Lambrecht, CPA is a Principal in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.

Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.

Recent Resources