The Supreme Court released its eagerly awaited opinion in Moore v. United States yesterday. The majority opinion is carefully uncontroversial. The Court held that Congress may tax an entity’s undistributed income to either the entity or its shareholders or partners. For partners in partnerships and shareholders in S corporations, this holding does not come as a surprise, but merely reflects a well-known and well-established truth about those entities’ taxable existence. However, the dissenting and concurring opinions reveal that the majority’s holding, as applied to corporate entities, may be more controversial than it appears at first glance.

For a brief background: American shareholders of American-controlled foreign corporations (“CFCs”) are required to include their pro rata share of the CFCs “subpart F income” in their gross income. Section 951. The subpart F income definition under Section 952 taxes a variety of undistributed corporate income, but is primarily designed to target a CFCs passive income from foreign investments. According to the opinion, by 2017, American CFCs had earned and accumulated trillions in income abroad that went largely untaxed because only subpart F, limited to mostly passive income, operated to attribute income to the American shareholders so it may be taxed. The Mandatory Repatriation Tax under Section 965, enacted as part of the Tax Cuts and Jobs Act, attributed all undistributed income of CFCs to its American shareholders. This is commonly referred to as the Section 965 transition tax. The transition tax imposed a one-time tax on all untaxed foreign incomes at either an 8% or 15.5% rate. The tax is imposed on U.S. persons owning at least 10% of a CFC and treated all undistributed earnings post-1986 as if they were distributed in 2017.

With the legal framework in mind, we can turn to the Moores. The Moores invested $40,000 in a CFC in India called KisanKraft. That corporation generated significant income from 2006 to 2017, but had not made distributions to its shareholders. The transition tax attributed $508,000 of that income to the Moores who paid the tax and sued for a refund. The Moores argued this was a tax on unrealized investment gains, and therefore was not a tax on “income” within the meaning of the Sixteenth Amendment.

For the tax nerds who have been following the case as well as the many articles about its potential implications, the so-called “wealth tax” case (very intentionally) broke no new ground. The majority continually emphasized the narrowness of its holding, saved the question of whether realization is required for an income tax “for another day,” and was careful to pacify concerns that its holding would allow double taxation of corporations and their shareholders. The holding was precise and limited to: (i) taxation of shareholders of an entity (ii) on undistributed income realized by the entity, (iii) which has been attributed to the shareholders, (iv) when the entity itself has not been taxed on that income.

The dissent by Justices Thomas and Gorsuch and the concurrence by Justices Barrett and Alito are worth noting. Those opinions call into question not only the constitutionality of the MRT, but the entirety of subpart F. The lengthy dissenting opinion largely adopts the Moores’ position, and accuses the majority of “changing the subject” by not addressing the Government’s argument that realization is not a requirement to constitute taxable income.  The dissent also emphatically disagrees with the majority’s attribution doctrine, which it labels an “unsupported invention.”

The questions raised (but unanswered) by the concurrence are particularly interesting. That opinion begins by answering the question on which the Court granted review – that is, “whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states,” writing that “[t]he answer is straightforward: No.”  The concurrence is also clear in stating that the Moores have not realized income as shareholders, but they agree with the majority that Congress can tax them on the corporation’s realized income (by way of attribution). However, the concurrence disagrees with the majority’s interpretation of its precedent to the extent that interpretation permits Congress to disregard the corporate form. Instead, the concurrence believes the precedent suggests Congress has a limited power to attribute corporate income to shareholders “depending on the relationship between the shareholder and the income.” However, according to the concurrence, this question was not addressed in briefing, so the question is again left for another day.

With several provisions of the TCJA set to expire at the end of 2025, and the political discourse about a wealth tax, it will be interesting to see how the questions raised by the concurring and dissenting opinions will play out.