The Moore Case: Section 965 Tax on Foreign Earnings

calendar iconSeptember 13, 2023

Earlier this summer, the US Supreme Court announced that it will review the decision in Moore v. United States to determine the constitutionality of Internal Revenue Code (IRC) Section 965, the transition tax on the earnings and profits of foreign subsidiaries. This review hinges on whether such a tax aligns with the Sixteenth Amendment to the US Constitution.

Evolution of Taxation

The original Constitutional provision, as outlined in Article 1, limited Congress’ ability to levy tax because taxes were to be apportioned among the states based on population. The Sixteenth Amendment eliminated the apportionment requirement, but only for taxes on income. Other types of taxes, such as a wealth tax or a property tax, are widely believed to remain subject to the apportionment limitations of Article 1.

Transition Tax Classification

The Moore case seeks to clarify whether the Transition Tax is an income tax permitted under the Sixteenth Amendment or a wealth tax constrained by the apportionment requirement of Article 1. Another way to look at this is to consider if the Transition Tax is a levy on income or is a wealth tax limited by the apportionment requirement of Article 1. It is widely believed the Supreme Court should determine when wealth transforms into income. For example, should there be an agreed upon definition of income, such as the receipt of an economic benefit or realization event before wealth becomes income? Or will the Supreme Court give Congress wide latitude in deciding when wealth should be classified as income?

Ripple Effects in the Tax Code

The Supreme Court’s resolution of the income question in Moore could potentially have far-reaching implications across sections of the Tax Code beyond the 965 Transition Tax. The decision is expected in June 2024 and carries far-reaching implications. Corporate taxpayers may consider a 2023 distribution of earnings and profits that were taxed under IRC Section 965.  If Moore is reversed, Congress could act quickly to make such distributions taxable in 2024 and beyond.

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