The Supreme Court’s decision to grant certiorari in Moore v. United States has placed one of the most fundamental questions in federal tax law before the nation’s highest court: does the Sixteenth Amendment require that income be realized before it can be taxed? The answer has implications that extend far beyond the specific provision at issue—the mandatory repatriation tax enacted as part of the Tax Cuts and Jobs Act of 2017—and could affect the constitutional viability of a range of existing and proposed tax provisions.^[1]

The Mandatory Repatriation Tax

Section 965 of the Internal Revenue Code, as amended by the TCJA, imposed a one-time tax on the accumulated earnings of certain foreign corporations that had not previously been subject to U.S. tax. Before the TCJA, the United States taxed the worldwide income of domestic corporations but generally deferred taxation of income earned by their controlled foreign corporations (CFCs) until that income was repatriated to the United States as a dividend. This deferral regime allowed U.S. multinationals to accumulate enormous pools of offshore earnings—estimated at more than $2.6 trillion—without paying U.S. tax.

The TCJA replaced the worldwide taxation system with a quasi-territorial system and, as a transition measure, required U.S. shareholders of CFCs to include their pro rata share of the CFC’s accumulated post-1986 deferred foreign income in their income for the last taxable year beginning before January 1, 2018. The tax was imposed at reduced rates—15.5% for earnings held in cash or cash equivalents and 8% for earnings invested in other assets—and could be paid in installments over eight years.^[2]

The Moores’ Challenge

Charles and Kathleen Moore invested $40,000 in KisanKraft Machine Tools Private Limited, an Indian corporation that manufactures and sells farm equipment in India. KisanKraft reinvested its earnings in its business and never paid a dividend to the Moores. Under the mandatory repatriation tax, the Moores were required to include approximately $132,000 of KisanKraft’s accumulated earnings in their 2017 income, resulting in a tax liability of approximately $14,729.

The Moores paid the tax and filed a refund claim, arguing that the mandatory repatriation tax violates the Sixteenth Amendment because it taxes unrealized income. The Moores contend that they never received any money from KisanKraft—no dividends, no distributions, no redemptions—and therefore had no “income” within the meaning of the Sixteenth Amendment. Their argument rests on the proposition that the Sixteenth Amendment authorizes Congress to tax “incomes,” and that income, as understood at the time of ratification and as interpreted by the Supreme Court, requires a realization event—a transaction that converts an economic gain into cash or other property received by the taxpayer.

The Ninth Circuit rejected the Moores’ argument, holding that the mandatory repatriation tax is constitutional because Congress has long taxed shareholders on the undistributed income of certain entities—Subchapter S corporations, partnerships, and controlled foreign corporations under Subpart F—without requiring a realization event at the shareholder level. The court concluded that realization is not a constitutional requirement but rather an administrative convenience that Congress may choose to apply or not as it sees fit.^[3]

What Is at Stake

The stakes in Moore are difficult to overstate. If the Supreme Court holds that the Sixteenth Amendment requires realization as a prerequisite to taxation, the decision would call into question not only the mandatory repatriation tax but also a number of long-standing provisions that tax shareholders on income they have not received. Subpart F, which taxes U.S. shareholders on certain categories of CFC income regardless of whether the income is distributed, has been part of the tax code since 1962. The GILTI regime, enacted alongside the mandatory repatriation tax in 2017, similarly taxes U.S. shareholders on their pro rata share of a CFC’s income without requiring distribution. Partnership taxation, which treats partners as having earned their distributive share of partnership income regardless of whether the partnership makes a distribution, is an even more fundamental feature of the tax system.

Beyond existing provisions, a broad ruling requiring realization could foreclose future legislative proposals that tax unrealized economic gains. Wealth tax proposals, mark-to-market taxation of publicly traded assets, and lookback interest charges on deferred gains would all face constitutional challenges under a strict realization requirement. The implications for federal revenue policy are substantial.

Conversely, if the Court affirms the Ninth Circuit and holds that realization is not constitutionally required, the decision would confirm Congress’s broad power to define the tax base and would remove a potential constitutional barrier to taxation of unrealized appreciation. This outcome would preserve the constitutional foundation of the existing tax system but could also open the door to more aggressive forms of taxation that have historically been considered constitutionally doubtful.

The Middle Path

Many tax scholars and practitioners expect the Court to seek a narrower resolution that addresses the mandatory repatriation tax without reaching the broader question of whether realization is constitutionally required in all circumstances. Several such narrower paths are available.

The Court could hold that the mandatory repatriation tax is an excise or duty rather than a tax on income, and therefore need not satisfy the Sixteenth Amendment at all. The Court could distinguish between taxation of a shareholder on entity-level income (which has a long historical pedigree) and direct taxation of unrealized appreciation in personally held assets (which does not). The Court could also hold that the mandatory repatriation tax is constitutional because the income was realized at the corporate level, even if it was not distributed to the shareholders—a theory that would preserve the constitutionality of pass-through taxation without necessarily blessing a wealth tax or mark-to-market regime.

The oral arguments, scheduled for the Court’s current term, will provide important signals about which of these approaches the justices find most persuasive. Whatever the outcome, the decision will be one of the most consequential tax cases in a generation.^[4]

Practical Implications

For taxpayers who paid the mandatory repatriation tax, the Moore case presents a potential refund opportunity. Taxpayers who filed protective refund claims may be entitled to a refund if the Court strikes down § 965. Taxpayers who did not file protective claims should consult with their tax advisors about whether the statute of limitations on their 2017 returns has expired and, if not, whether a protective claim is appropriate.

For business owners and investors more broadly, the case is a reminder that the constitutional boundaries of the federal taxing power are not fixed. The tax system operates within a framework of constitutional constraints, and changes to that framework—whether through judicial decision or constitutional amendment—can create both risks and opportunities for taxpayers. Monitoring the Moore decision and its aftermath should be a priority for anyone engaged in tax planning at a significant level.