Supreme Court Errs in Moore v. United States, 144 S. Ct. 1680 (2024)
Background
The Tax Cuts & Jobs Act (26 USCS § 965) was signed into law in 2017, but an issue with how it retroactively taxed controlled foreign companies (CFCs) arose. The issue can be uncovered by analyzing Moore’s story. In 2006, Kathlene and Charles Moore invested into Indian company, KisanKraft. From 2006 to 2017, they never received dividends or other monetary payments from the investment. The gain, however, was represented by an increase in value of their 11% share of KisanKraft. Moore never repatriated the increase in value of their shares into U.S. dollars from Indian Rupees, yet they received a tax bill of $14,729 as a result of the Tax Cuts & Jobs Act. Moore paid off the tax bill before bringing a lawsuit alleging the tax on retroactive unrepatriated earnings was a violation of the 5th Amendment and the 16th Amendment.
“No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
~5th Amendment to the United States Constitution
Moore’s claim that the tax is an unlawful confiscation of their property. They defined their property as shares in KisanKraft. The government claims that the growth in the shares is actually income, not property. Should the shares be qualified as property, the tax on their growth in value may be qualified as being taken for public use. Because the tax is a bill, there is no compensation in return outside of the abstract social contract between citizen and government that cannot hold up in court.
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
~16th Amendment to the United States Constitution
Prior to the passing of the 16th Amendment, the federal government was not constitutionally able to tax citizens directly without enumeration, meaning the tax bill paid to the federal government must be proportional to the population of the state. The 16th Amendment provides an exception specifically for federal income taxes. It only applies to incomes, not property.
Moore’s claim that the increase in share value is an increase in property value rather than income. If that is the case, then the direct taxation on citizens by the federal government on the shares is unconstitutional in violation of the 16th Amendment that only provides an exception for income. The government maintains that the increase in value is classified as income still, and it may be taxed directly without enumeration among the states.
The Supreme Court ruled in favor of the government that the Tax Cuts & Jobs Act did not violate the 5th Amendment nor the 16th Amendment in its tax bill sent to Moore in a 7-2 decision with Justice Kavanaugh authoring the majority opinion, and Justice Thomas and Justice Gorsuch dissenting.
Opinion of the Court
The court holds that American-controlled foreign corporations (CFCs) may be taxed by attributing its income to American shareholders in accordance with Subpart F. Taxes that treat these CFCs as pass-through entities are constitutional and tax its American shareholders rather than the foreign entity itself. American entities are no different. Entities such as partnerships are able to be taxed through their shareholders domestically rather than directly on its income, so it is established dividends and sales are taxed rightfully. The purpose is to close a loophole to avoid taxes by using an entity to store wealth that is realized into income but would not otherwise be taxable.
KisanKraft did not pay dividends to its American shareholders, including Moore, despite earning income in India. The court holds that Congress did not act unconstitutionally to tax Moore anyway. Article I of the Constitution grants Congress the power to establish and collect taxes, including direct taxes and indirect taxes. However, direct taxes must be apportioned among the states according to their respective populations. Indirect taxes, however, must be equal among the states. The 16th Amendment establishes income taxes as indirect taxes. Therefore, income taxes need not be apportioned among the states. Furthermore, it is established in Heiner v. Mellon, 304 U.S. 271 (1938) that it is Congress’ discretion to tax either the entity’s undistributed income or the individual even in cases when state laws prevent owners from receiving the income personally. Therefore, Congress has the power to levy a pro-rated income tax on owners of an entity’s undistributed income. It follows that KisanKraft’s undistributed earnings may be taxed through shareholder Moore because KisanKraft, as a CFC, is treated as a pass-through entity.
My Dissent
The real effect of the Mandatory Repatriation Tax (MRT) was to levy a large tax bill for an investment that did not generate realized income in U.S. dollars. Moore argues that the MRT did not tax income per the 16th Amendment. The Supreme Court erred in its ruling failing to distinguish between income from an investment and increase in value of an asset. Consider an investment in an American publicly traded company. When a citizen invests, the value of the stock is not taxable regardless of its increase in value. A citizen may have bought a significant share of Apple before its meteoric rise in value and enjoy a rich net worth as a result. However, it is not until the stock is sold, resulting in a realized income, that a tax may be levied. Consider a more real investment more familiar to the common man and woman. Consider a first-time homebuyer from 30 years ago. By the time the 30-year mortgage is paid off and the ownership is fully vested to the buyer, the value of the home would have increased dramatically. The Supreme Court’s inability to distinguish income from increase in value of an asset would interpret this hypothetical as the homeowner earning income along with the value of the home. If the home was bought for $100,000 and currently valued at $400,000, the Supreme Court finds no error in handing the homeowner a tax bill for income of $300,000. Clearly, that is not the purpose of an income tax. It is a reasonable assumption to say that is not realized income that should be eligible to be taxed. Purchasing a share in KisanKraft is akin to purchasing any asset, including a house. If KisanKraft increases in value, did Moore become wealthier in real, usable terms? No. Moore sees an increase in net worth, but he did not receive more money in his wallet or in his bank account. KisanKraft as an entity provided nothing as compensation other than offering a larger share of itself. It is thus not within the spirit of a tax on income to tax increases in value of an asset.
The Supreme Court also erred in the target of its discussion. It avoided answering the question that was originally posed to it when the court granted certiorari. The question was whether “realization of income is not a constitutional requirement” 36 F. 4th 930, 936 (2022) to an income tax per the 16th Amendment. First, income must be defined. Income is “a gain, or profit, [or] something of exchangeable value [that] is received or drawn by the recipient (taxpayer) for his separate use, benefit, and disposal” Eisner v. Macomber, 252 U.S. 189 (1920). Realization is the separate use, benefit, and disposal. A gain in value of a home is not of a separate use until it is liquidated in some form. The growth in value serves no purpose but to increase the possible resale amount in the future. It is not realized. Furthermore, an asset increasing in value is not received or drawn. It is already owned in the case of an asset increasing in value. Therefore, Moore’s stake in KisanKraft increasing in value was not realized income.
What Moore v. United States Means for the Future
The result of the Moore case exposes the United States to drastic taxation overreach beyond the confines of what was intended in the Constitution and in the 16th Amendment. The door to tax arbitrarily is wide open. Increases in value in investments before cashing out are now subject to taxation at the discretion of Congress in addition to capital gains taxes. From this extends a wealth tax rather than an income tax. If backdated growth in net worth, regardless of whether the underlying assets generate realized income, become eligible to be taxed, the federal government now has the power to eliminate the existence of wealth beyond permissibility. In other words, if you are too successful, your marginal success is capped. These types of taxes are not my original thoughts, but rather legitimate threats raised by sitting Congressmen. I, for one, hope for a future in which my success is not taxed into abolition.
