Could a Supreme Court of the United States (SCOTUS) case significantly change US tax law? We are closely watching the developments in Moore v United States as it carries significant issues regarding “realized” versus “unrealized” income, and the repatriation of accumulated foreign earnings. The stakes could not be higher.

Realized or Unrealized Income?

A substantial portion of the US tax code requires income to be realized in order to be taxable. Generally speaking, the taxpayer with realized income has converted (sold) an asset and (in theory) has cash in hand from the proceeds and therefore has the money with which to pay applicable taxes on any resulting gains (earnings).

However, Congress has attempted to tax many forms of unrealized income or gains from investments (such as bonds and/or stocks) and property which a US taxpayer might hold but have yet to cash out or transact. In effect, the owner of the asset has not recovered the value of these investments and therefore does not have the actual money to pay the taxes that have been generated.

Taxation of Deferred Offshore Corporate Income and the Tax Cuts and Jobs Act or TCJA of 2017

Another piece of the puzzle involved the taxation of repatriated income by US corporations after a substantial change in the tax code (Tax Cuts and Jobs Act or TCJA) in 2017. Prior to 2017 if a US corporation made money offshore and then tried to bring that money back into the United States (repatriation) the corporation would face high 35% US corporate tax rate as well as a toll charge on those repatriated earnings. The US only taxed offshore earnings when they were paid out to shareholders as a dividend. So, offshore corporate (foreign) earnings were often “deferred” and remained offshore in the foreign corporation. Deferred income in this example is unrealized income.

The passage of TCJA would significantly change US tax law by lowering the US corporate tax rate and creating a “deemed repatriation” process to allow a “one-time inclusion of accumulated foreign earnings from the previous 30 years that had been deferred.

The new policy added deferred income to US taxable income which, in effect, repatriated more than $2 Trillion in offshore deferred income generating an estimated federal tax of hundreds of millions of dollars for the US Treasury. It also changed the nature of how deferred offshore earnings, unrealized earnings, were taxed in the United States.

The Arguments and Potential Impact(s) of Moore v United States

Moore v United States challenges the constitutionality of the policy of adding deferred earnings to US taxable income. The argument of the plaintiffs in this case is rooted in the concept that this policy taxes unrealized income that has yet to be distributed to US shareholders.

How broadly will SCOTUS interpret the US tax code and how might the decision in Moore v United States significantly change US tax law? Will SCOTUS strike down “deemed repatriation” in its entirety for corporate and noncorporate US taxpayers? Or, will the Court tailor its decision to strike down the “deemed repatriation” tax in a more limited way, such as for individuals and pass-through entities. In this latter scenario, US taxpayers may lose the deduction for received dividends resulting in increased taxation of repatriated foreign earnings.

Will the SCOTUS decision in Moore v United States significantly change US tax law? Will the Court’s ruling affect the constitutionality of substantial existing corporate tax law as it applies to offshore or foreign income? Will deferred offshore income need to be actually repatriated (brought back to the US) and realized in order to generate a taxable event? What impact could Moore v United States have upon the US corporate alternative minimum tax and foreign unrealized income? What impact will the case have upon US international tax agreements under “Pillar Two,” which establishes a “minimum effective tax rate of 15% to the foreign corporate profits of large multi-national corporations throughout the world?

The case is scheduled to be argued Next Tuesday, December 5, 2023 with the US Solicitor General, Elizabeth Prelogar, presenting defending arguments before the Court.