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Editorial 6 MIN READ

Moore v. United States: the realization question reaches the Court's doorstep

A cert petition out of the Ninth Circuit is asking whether the Sixteenth Amendment still requires income to be realized

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What the Ninth Circuit decided
  2. What the cert petition argues
  3. The stakes if the Court reverses
  4. What founders with foreign subs should actually do now
  5. What remains unclear
  6. Sources

Washington state couple who paid roughly $15,000 in one-time tax on their share of an Indian farm-tools company's retained earnings is now asking the Supreme Court to decide whether the Sixteenth Amendment requires income to be realized before it can be taxed. The cert petition in Moore v. United States was filed February 21, 2023, and is awaiting conference.

If the Court takes it and rules for the Moores, the blast radius is unusually wide for a case about $15,000.

What the Ninth Circuit decided

Charles and Kathleen Moore invested in KisanKraft, a controlled foreign corporation incorporated in India that sells small farm equipment. Their stake was minority, passive, and carried no distributions. In 2017, Congress enacted the Tax Cuts and Jobs Act, which included § 965, the mandatory repatriation tax. Section 965 required U.S. shareholders of specified foreign corporations to include in income their pro-rata share of the corporation's post-1986 accumulated untaxed earnings, taxed at reduced rates of 8% or 15.5%, payable over up to eight years.

The Moores had never received a dollar from KisanKraft. They paid the § 965 bill, sued for a refund, and lost in the Western District of Washington. On appeal, the Ninth Circuit affirmed in Moore v. United States, 36 F.4th 930 (9th Cir. 2022), decided June 7, 2022. The panel held that realization is not a constitutional prerequisite to an income tax under the Sixteenth Amendment, reading Eisner v. Macomber, 252 U.S. 189 (1920) as effectively superseded by later decisions. The court also noted that even if some realization-adjacent concept survived, it was satisfied by the foreign corporation's own earnings at the entity level, attributed upward to its U.S. shareholders.

A rehearing-en-banc petition was denied in November 2022, over a pointed dissent from Judge Bumatay joined by three colleagues who argued that Macomber's realization requirement remains binding and that the panel had substituted a century of accreted policy preference for the constitutional text.

What the cert petition argues

The petition, filed by a team that includes former Solicitor General Paul Clement, frames a single question: whether the Sixteenth Amendment authorizes Congress to tax unrealized sums as income without apportionment. It leans on Macomber's holding that a stock dividend was not income because the shareholder had received nothing severable from the underlying investment, and on the textual point that the amendment ratified in 1913 spoke of "incomes, from whatever source derived," a word the petitioners argue carried a realization connotation at the time of ratification.

The government's response is due in April. The Court is likely to consider the petition at conference in late spring.

For a founder reading this in March 2023, the posture matters more than the likelihood. The case is one of a small number of cert petitions each term that asks the Court to reopen a constitutional question long thought settled at the political branches. Most of those petitions are denied. A few are granted, and when they are, the downstream consequences for tax planning are sweeping.

The stakes if the Court reverses

Three first-order consequences follow directly from a ruling that the Sixteenth Amendment requires realization.

The first is refunds. Section 965 raised an estimated $339 billion over its collection window, per Joint Committee on Taxation scoring at enactment. A ruling that § 965 is unconstitutional as applied to unrealized foreign earnings would open the refund gate for every U.S. shareholder of a specified foreign corporation who paid the transition tax and preserved a claim. That is billions of dollars of contingent Treasury liability sitting on balance sheets of multinationals and, at the small end, on the 1040s of founders with minority stakes in foreign operating subs.

The second is the Global Intangible Low-Taxed Income regime under IRC § 951A. GILTI operates on the same structural premise as § 965: attribute the foreign corporation's income upward to U.S. shareholders in the year earned, whether or not distributed. A realization-requiring reading of the Sixteenth Amendment does not automatically kill GILTI, because the government will argue that subpart F and its descendants rest on a long-accepted fiction of constructive distribution. But the doctrinal ground shifts. Every pass-through attribution regime that does not involve an actual cash movement is suddenly litigable on the same theory.

The third is the wealth-tax conversation in Congress. Senator Warren's Ultra-Millionaire Tax Act, reintroduced in 2021, and Senator Wyden's Billionaires Income Tax proposal both depend on some form of mark-to-market or accretion-based taxation of unrealized gains on appreciated assets. A Supreme Court opinion affirming that unrealized appreciation is not "income" within the Sixteenth Amendment would foreclose those designs at the federal level absent apportionment, which no one drafts toward because apportionment by state population is politically and arithmetically unworkable. The Tax Foundation and the Congressional Research Service have both flagged this linkage in analyses of the petition.

A narrower ruling is also possible, and probably more likely if cert is granted. The Court could hold that § 965 specifically exceeds congressional power because it reaches backward to pre-effective-date earnings a shareholder had no opportunity to realize under prior law, without deciding the broader realization question. That would give the Moores their refund and leave GILTI and wealth-tax proposals to fight another day.

What founders with foreign subs should actually do now

If you hold 10% or more of a controlled foreign corporation, you almost certainly paid § 965 tax in 2017 or 2018, on an eight-year installment plan if you elected it. Your protective refund-claim window under IRC § 6511 runs three years from the return-filing date or two years from payment, whichever is later. For a 2017 return filed in April 2018, that window has closed for the first installment unless you have been extending or have already filed a protective claim. For later installments paid under the § 965(h) election, the window is open on a rolling basis.

The move, if you are exposed and have not yet done it, is to talk to your CPA about filing a protective refund claim on Form 843 referencing the constitutional theory in Moore. The IRS will almost certainly deny it; the point is to preserve standing to recover if the Court rules for the Moores. Several large firms have been quietly queuing these claims for a year.

If you are a founder whose operating company is a domestic pass-through and whose only foreign exposure is a GILTI inclusion flowing through an S-corp or partnership, the immediate tax isn't going anywhere this year. But the medium-term planning question, how to structure foreign earnings when the constitutional status of anti-deferral rules is live, is worth raising before the Court grants or denies cert. A grant will move the market; a denial will not.

For context on how entity structuring intersects with the international attribution rules, the fact pattern in Delaware in April 2016: what the formation actually costs is the baseline most venture-backed holding companies still start from, and it is the structure most exposed to the § 951A inclusions that a Moore reversal would unsettle.

What remains unclear

Three things will not be answered by the time the Court decides whether to grant.

Whether the government argues the case on a realization-was-satisfied ground (KisanKraft realized the earnings; § 965 only changed who pays) or on a realization-is-not-required ground (the Sixteenth Amendment imposes no such constraint) will shape the opinion's reach. The Ninth Circuit used both rationales. The Supreme Court tends to pick one.

Whether any justice views Macomber as having been quietly overruled by later cases like Helvering v. Bruun, 309 U.S. 461 (1940) will matter more than the briefs. Macomber has been cited favorably in modern opinions but rarely as a binding realization rule. A decision explicitly reaffirming it would be the first in decades.

Whether the Court limits any ruling to § 965's retroactive reach or writes broadly enough to cast doubt on subpart F, GILTI, passive foreign investment company rules under IRC §§ 1291 to 1298, and the constructive-receipt framework of § 1256 contracts is the difference between a refund case and a tax-code earthquake.

The cert grant, if it comes in June, will be the first signal. Everything after that is briefing.

Sources

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