Moore v. United States: Tax Unrealized Income Case
In 2017, Congress made several permanent changes to the taxation of foreign earnings. These changes included an end to the unlimited deferral of foreign earnings from U.S. taxable income and the introduction of new anti-avoidance rules alongside a dividends-received deduction for corporations.
A major case pending before the U.S. Supreme Court (Moore v. United States) is calling into question one of those provisions. Depending on how the court rules, large portions of the U.S. tax base could quickly become legally uncertain, putting significant revenue at stake.
Background on the §965 Deemed Repatriation of Foreign Earnings
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, profits returning from a foreign jurisdiction to U.S. shareholders would face the 35 percent corporate tax rate (less any relevant foreign tax credits). This system had many downsides, including the fact that it encouraged U.S. companies to keep earnings offshore under a deferral regime to avoid the 35 percent toll charge on repatriated earnings, leading to the accumulation of more than $2 trillion in deferred foreign earnings. In the years leading up to 2017, many major U.S. corporations changed their legal residence to avoid the burden of U.S. tax, choosing instead to be incorporated elsewhere.
The system was uncompetitive, as the U.S. had the highest corporate tax rate in the OECD and was one of the only countries still taxing worldwide income without a dividends-received deduction for repatriated foreign earnings. The 2017 reforms addressed these problems by lowering the corporate tax rate and allowing a dividends-received deduction for repatriated foreign earnings.
To pay for these reforms, and avoid a windfall for companies that had deferred foreign income under the old system, the TCJA imposed a deemed repatriation (§965)—a one-time inclusion of accumulated foreign earnings from the past 30 years, which had previously benefited from deferral. This was achieved by adding these deferred earnings to U.S. taxable income, essentially treating the earnings as if they were repatriated.
The policy provided a deduction that depended on how the earnings were used offshore. The structure of the deduction led to two different tax rates on foreign earnings: 15.5 percent applied to foreign earnings held in cash and 8 percent to other earnings held in illiquid assets. At the time of passage, the Joint Committee on Taxation (JCT) estimated that this tax would increase federal revenues by $338 billion in the 10 fiscal years from 2018 to 2027.
Currently, a case is pending before the U.S. Supreme Court (Moore v. United States) regarding the constitutionality of this policy, which could have far-reaching implications. The plaintiffs in the case are individual shareholders with a controlling interest (greater than 10 percent) in a foreign company that became subject to the deemed repatriation. The plaintiffs’ main claim is that the tax is unconstitutional because it applies to “unrealized” income (in this case, foreign earnings that were not distributed to them) and that it applies retroactively to past earnings amounting to property, contravening the 16th Amendment and subsequent case law generally requiring that income be “clearly realized” before it is taxed.
There are many possible (and uncertain) outcomes, but we will explore the revenue implications of just three. In one scenario, the Court strikes down all or part of the deemed repatriation in isolation. A broader ruling could call into question various taxes that apply to foreign earnings, including global intangible low-taxed income (GILTI), Subpart F, and the new book minimum tax (or corporate alternative minimum tax). In an extreme scenario, the Court could strike down all business income taxes (corporate and pass-through) that apply to undistributed (retained) earnings.
Potential Revenue Effects of Moore v. United States
If the Supreme Court strikes down the entirety of the deemed repatriation for corporate and noncorporate taxpayers, we estimate this would reduce revenue by about $346 billion over the next 10 years, including a refund of tax payments made from 2018 to 2023 (see Table 1). If deferral on profits domiciled abroad were reinstated, we anticipate firms would adjust their behavior. However, our estimate does not account for this effect, which could further amplify the projected revenue loss below.
If the Supreme Court’s decision more narrowly strikes down the deemed repatriation tax for pass-through firms and individuals only, we estimate that this would reduce overall revenue collections by about $3.5 billion over the next 10 years inclusive of payments made since 2018. Pass-through firms and individuals account for a very small portion of deemed repatriation tax revenue, constituting only about 1 percent of the total tax owed according to Internal Revenue Service (IRS) data.
For certain pass-through firms and individuals, this scenario could result in higher taxes, since they do not get the dividends received deduction and therefore any foreign earnings actually brought back to the U.S. would be subject to tax in the absence of §965. This interaction is not included in our revenue estimates below but is worth noting as it may not be expected for the affected taxpayers.
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2024-2033 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pass-Through and Individual Portion of §965 Transition Tax Is Struck Down | -$2.7 | -$0.8 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$3.5 |
| Repeal of Entire § 965 Transition Tax | -$271.7 | -$74.3 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | $0.0 | -$346.0 |
|
Note: The 2024 revenue impact for both scenarios factors in refunds for firms’ deemed repatriation tax payments made between 2018 and 2023. Our model for §965 utilizes 2017 and 2018 IRS data on both net and deferred taxes due. The revenue estimate for pass-throughs and individuals under §965 represents a likely upper bound, and it could be lower if the mix of cash and illiquid assets abroad for pass-through entities varies from that of C corporations. Source: Tax Foundation General Equilibrium Model, August 2023. |
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The Supreme Court’s ruling may more broadly impact the constitutionality of major corporate tax provisions that apply to foreign income if the court decides that actual (rather than deemed) repatriation is a requirement for income to face U.S. tax. That broader decision would implicate the new 15 percent corporate alternative minimum tax (CAMT) on book income, the tax on GILTI established in 2017, and the Subpart F rules that date back to 1962.
If GILTI is struck down, it could cut federal revenue by about $352.3 billion over the next 10 years, while a repeal of the Subpart F regime would cost another $77.8 billion over that period (see Table 2).
While the Moore case’s direct effect on the CAMT remains uncertain, the inclusion of foreign unrealized income in the CAMT tax base could entangle it in the case. A broad ruling undermining the CAMT would lead to a $247.8 billion revenue drop over 10 years.
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2024-2033 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Repeal the Corporate Alternative Minimum Tax (CAMT) | -$23.8 | -$31.1 | -$27.0 | -$16.2 | -$14.8 | -$32.9 | -$29.9 | -$26.4 | -$27.0 | -$18.7 | -$247.8 |
| Repeal GILTI | -$19.1 | -$20.3 | -$34.0 | -$35.8 | -$37.0 | -$38.0 | -$40.1 | -$41.5 | -$43.1 | -$43.5 | -$352.3 |
| Repeal Subpart F Taxation | -$5.5 | -$5.8 | -$7.1 | -$7.6 | -$7.8 | -$8.0 | -$8.5 | -$8.9 | -$9.3 | -$9.4 | -$77.8 |
| Note: The revenue effect of each provision is independent of each other and does not include interaction effects if they are repealed together. Our CAMT estimate accounts for the influence of general business credits on tax liability but is marked by significant uncertainty due to financial statement data limitations and varying estimates of the cost of the Inflation Reduction Act’s green energy tax credits. | |||||||||||
| Source: Tax Foundation General Equilibrium Model, August 2023. | |||||||||||
The most extreme outcome would see the Supreme Court striking down taxes on all undistributed business earnings, whether earned domestically or from foreign sources. While this scenario seems unlikely, it illustrates a likely upper bound of revenue implications. By our estimate, eliminating the taxation of pass-through and corporate retained earnings would reduce federal revenue by nearly $5.7 trillion over 10 years.
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2024-2033 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Taxes on Pass-Through Retained Earnings Are repealed | -$263.6 | -$263.3 | -$271.4 | -$284.7 | -$298.4 | -$311.2 | -$324.6 | -$337.0 | -$349.8 | -$363.0 | -$3,066.7 |
| Taxation of Corporate Retained Earnings Is Repealed | -$216.2 | -$226.6 | -$236.3 | -$246.5 | -$255.9 | -$265.6 | -$275.7 | -$286.2 | -$297.0 | -$308.3 | -$2,614.4 |
| Total | -$379.5 | -$489.9 | -$507.8 | -$531.2 | -$554.3 | -$576.8 | -$600.3 | -$623.1 | -$646.8 | -$671.4 | -$5,681.1 |
| Source: Tax Foundation General Equilibrium Model, August 2023. | |||||||||||
Implications for U.S. Pillar Two Implementation
In addition to its potential impacts on revenues, a ruling for the plaintiffs in Moore may also have significant implications for the U.S.’s ability to comply with a new international tax agreement known as Pillar Two. A ruling that §965 does not comply with a realization requirement, expressed in broad terms applicable to other international provisions, would restrict the U.S. from implementing Pillar Two constitutionally.
Pillar Two is a 15 percent minimum tax on large multinational entities enforced via multiple backstops across multiple jurisdictions. One of these backstops, Pillar Two’s Income Inclusion Rule (IIR), allocates to parent entities a pro-rata share of tax on the income of their constituent entities, regardless of whether that income is distributed. The IIR is a top-up tax, calculated as the difference between the constituent entity’s effective rate and 15 percent.
The IIR, given its applicability to international profits that have arguably not met a narrow realization requirement, is the most likely element of Pillar Two to clash with a ruling in Moore.
A ruling for the government, or a narrow ruling for the plaintiffs applicable only to §965 (perhaps on the grounds of its relative retroactivity) would not necessarily cause any barriers to potential Pillar Two implementation. By contrast, a very broad ruling for the plaintiffs that all taxes on unrealized gains are unconstitutional would likely make Pillar Two implementation impossible.
In the middle ground lie a few possibilities that could complicate but not entirely foreclose Pillar Two implementation. If the Court rules that a constitutional realization requirement is met if income is passive (like Subpart F income), then it would be an open question whether the IIR fully meets that test. The IIR is roughly intended to capture passive income, with an exclusion for returns on substantive business activities—like, though not identical to, GILTI. This imputed return carveout method might not, in the Court’s view, fully remove active income from the base.
Additionally, the Court may rule that meeting a realization requirement depends on the level of control over the constituent entity. The IIR does not have the same minimum control threshold as Subpart F. Instead, it allocates income in proportion to ownership interest, regardless of control. It is therefore possible that a control requirement could create an outcome where Subpart F is constitutional but Pillar Two is not, complicating an effort to apply the IIR to minority ownership stakes.
Conclusion
The Moore v. United States case could have a substantial impact on U.S. tax policy and revenue. It could invalidate some current U.S. tax policies, and a broad ruling could stretch far beyond the provision contested by the plaintiffs. It could also proscribe potential future tax policies Congress may wish to adopt considering changing international tax norms. The size of the impact hinges on the scope of the Court’s ruling.
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