Thomas A. Berry
The Supreme Court’s opinion in Moore v. United States is disappointing, but the Court’s narrow reasoning did not open the door to a future federal wealth tax. Justice Brett Kavanaugh’s majority opinion carefully avoided endorsing the government’s broad arguments, meaning the decision is unlikely to have serious negative effects beyond the realm of corporate tax law.
In 2017, Congress imposed an unusual one‐time‐only tax on certain Americans who owned shares of foreign corporations, a tax called the Mandatory Repatriation Tax (MRT). The MRT treated a corporation’s income for the previous 30 years as if it were the income of its shareholders, even if those shareholders never saw any dividends and even if those shareholders had only recently purchased their shares. Charles and Kathleen Moore were shareholders of a foreign corporation who received a tax bill under the MRT, and they sued to challenge the law as unconstitutional.
Under the Sixteenth Amendment, a federal tax like the MRT is only constitutional if it qualifies as a tax on “income.” The question presented in Moore was whether the MRT does qualify as an “income” tax.
In an opinion by Justice Kavanaugh for five justices (joined by two additional justices only in the judgment), the Supreme Court held that the MRT is a permissible tax on “income.” The Court reasoned that a corporation’s untaxed earnings may be treated as the income of its shareholders under a “pass‐through” theory. The Court noted that this theory had been endorsed in several previous Supreme Court and lower court cases. On that basis, the Court endorsed the MRT as a permissible tax on “pass‐through” corporate income because it qualified as “(i) taxation of the shareholders of an entity, (ii) on the 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.”
Crucially, Justice Kavanaugh’s opinion for the Court declined to endorse the far broader reasoning proposed by the government, which had argued that an income tax may be imposed even when no entity realizes income. As Justice Kavanaugh stressed, the Supreme Court’s analysis was limited to scenarios where a corporation has in fact realized income, and the Court did not address “the distinct issues that would be raised by … taxes on holdings, wealth, or net worth.” In a separate concurrence, Justice Ketanji Brown Jackson strongly suggested that she leaned toward the government’s view and that she likely would have held that realization is not required had the Court reached that question.
In the Cato Institute’s amicus brief supporting the Moores, we urged the Court to find that the MRT is unlike other “pass‐through” taxes because it applies to corporate earnings extending far into the past, well beyond the time when shareholders may have first purchased their shares. The Court treated that theory of retroactivity as a “due process” claim, which it considered the Moores to have waived and thus did not address. That means other shareholders subject to the MRT could still potentially challenge the MRT on a due process theory, especially if they first purchased their shares in 2017 or soon before.
But as Justice Clarence Thomas explained in his dissent (joined by Justice Neil Gorsuch), the extreme retroactivity of the MRT is also relevant to the Sixteenth Amendment question, not only the due process question. The MRT’s retroactivity undermines the theory that a corporation’s income in the 1980s can be treated as the income of all its shareholders, even those who may have first purchased shares in 2017. As Justice Thomas put it, the MRT “turns solely on the ownership of stock on a certain date.” It is gratifying that Justice Thomas’s dissent bolstered this reasoning by citing the scholarship of Fenwick & West attorney Sean McElroy, one of the principal authors of Cato’s brief, who first put this issue on the legal map.
Justice Thomas also rejected the majority’s broad rule that an entity’s untaxed, undistributed income can always be taxed as if it were the income of the entity’s shareholders. Thomas argued that the precedents cited by the majority supported only a narrower rule, that “Congress may attribute income to the entity or individual who actually controlled it when necessary to defeat attempts to evade tax liability.”
Justice Amy Coney Barrett concurred only in the judgment, joined by Justice Samuel Alito. Justice Barrett thought the majority went too far in endorsing pass‐through taxation for shareholders of all types of corporate entities. Barrett argued that the question is more case‐specific. Rather than holding Congress to have “carte blanche to attribute corporate income to a shareholder,” she argued that the permissibility of pass‐through taxation “depends on the relationship between the shareholder and the income.”
Justice Barrett declined to express a view on whether the income of a closely held foreign corporation can permissibly be attributed to its shareholders. But because the Moores chose not to focus on that question in their challenge to the MRT, Barrett concluded that they had not met their burden to show that the connection was too attenuated.
The majority opinion in Moore did not firmly close the door on a federal wealth tax, and that is unfortunate. But it is important to recognize that it has not opened that door either.
