Moore IS Actually More…But Once Again, There May Still Be More to Come

In December 2023, we wrote a blog about an important court case that was granted certiorari by the Supreme Court (Moore v. United States, No. 22-800). In the blog, we discussed the case and its potential outcomes. The case revolved around the constitutionality of the Transition Tax, also known as the Mandatory Repatriation Tax (MRT), which was enacted with the Tax Cuts and Jobs Act (TCJA) under Internal Revenue Code Section 965. On June 20, in a 7-2 decision, the Court ruled in favor of the government, asserting that Congress acted within its authority when passing Section 965 into law.

Moore (Re)Introductions

In 2005, Charles and Kathleen Moore invested $40,000 in an Indian company for a greater than 10% shareholding. Other U.S. persons owned enough shares in the company to classify it as a controlled foreign corporation, or CFC.  From 2005 to 2017, the company was quite profitable but never distributed its earnings. Accordingly, the Moores never had any income inclusions for U.S. tax purposes. The 2017 TCJA imposed a deemed inclusion (i.e., the MRT) on their portion of the untaxed earnings.

The Moores eventually remitted around $15,000 in taxes and filed a suit. The District Court and then the Ninth Circuit rejected their arguments, and the Moores appealed to the Supreme Court.

Moore Tax is OK

The Supreme Court ruled in favor of Congress, asserting that the MRT is constitutional. In their opinion, Justice Kavanaugh, writing for the majority, noted that taxes are imposed in one of two ways, relating to corporations and partnerships. The first method is a pass-through basis, such as S-Corporations and partnerships. In lieu of paying taxes themselves, such entities attribute their income to shareholders, who then pay taxes on that income. The second method is to tax them directly, such as through a C-Corporation. In these instances, the shareholders do not pay tax until profits are distributed.

The Court noted that under “more nuanced rules,” CFCs are treated as pass-through entities, specifically noting the Subpart F rules, enacted in 1962 to tax the shareholders of CFCs on certain types of passive and “tainted” operating income. The Court noted that, contrary to the assertion of the Moores, the amounts accumulated by a CFC are actually earned by the CFC and, similar to S-Corporations and partnerships, may be attributed to their shareholders, even though undistributed currently.

Moore to Come?

As expected, the Court wanted to ensure that the Moore case would not be taken too broadly. Justice Kavanaugh made this very clear in his written opinion. He stated, “The precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income…the answer is yes.”

So, there may still be more to come as taxpayers challenge taxes on amounts they have yet to receive.

McGuire Sponsel will continue to monitor this case and provide updates when available. Contact our Global Business Services team with questions on the Moore case or any other international tax issue.