Transition Tax Case Will Head to Supreme Court

The Supreme Court will hear a case from Charles G. Moore and Kathleen F. Moore, who both owned shares in a controlled foreign corporation (CFC) and sued the government for a tax refund on the grounds that a controversial Trump-era tax is unconstitutional under the Sixteenth Amendment. Section 965, also known as the “Transition Tax”, was established by the Tax Cuts and Jobs Act of 2017 and applies to US taxpayers with 10% or more shares of a CFC as of December 31, 2017. The one-time tax was designed to make taxpayers pay their pro rata share of the CFC’s earnings on unrealized income.

The question before the Supreme Court now that it granted the Moores’ cert petition on June 26 is if the Transition Tax violates the Sixteenth Amendment as a tax on unrealized income. The Moores suffered losses in the US District Court for the Western District of Washington and the Ninth Circuit. The circuit court held that the Transition Tax does not violate the Apportionment Clause of the US Constitution nor the Fifth Amendment’s Due Process Clause.

The taxpayers sought review before the Supreme Court in their petition filed on February 21. There, they argued neither lower court explained how the CFC’s retained earnings were the couple’s income, calling the decisions “broadly declared.” The petition, penned by the taxpayers’ representation at Baker & Hostetler LLP, went on to say that the Ninth Circuit’s opinion creates a rift with past decisions of other circuits, “eviscerates” the Sixteenth Amendment’s apportionment requirement, and raises an “exceptionally important” question about Congress’ “power to tax unrealized ‘income’ without apportionment.”

In the government’s response filed May 16, 2023, Solicitor General Elizabeth Prelogar, Deputy Assistant Attorney General David Hubbert, and three US attorneys countered that “no other court of appeals has even considered the Transition Tax’s constitutionality. And because the Transition Tax is a one-time tax applicable only to pre-2018 income, the case lacks pressing prospective importance.” 

The government added that the Transition Tax “shares common features” with “several other income taxes,” like those relating to Sections 877A, 1256, and 475, as well as other areas of the Tax Code.

Please contact McGuire Sponsel if you have any questions regarding this Supreme Court case or any other areas of US international taxation.