The U.S. Supreme Court recently upheld a tax on foreign earnings, but it side-stepped a controversial tax question. While a lower court’s suggestion that income need not be realized to be directly taxed could have set the stage for a landmark ruling, the high court recognized the potential “blast radius” of the case and intentionally issued a narrow decision.  

At issue in Moore v. United States was a one-time mandatory repatriation tax imposed in 2017 on post-1986 earnings of foreign corporations in which U.S. shareholders own at least 50 percent of the stock. This caused Charles and Kathleeen Moore, who had invested in an Indian corporation supplying small farmers in India with modern tools, to find they owed the IRS an extra $15,000 even though they never received any distributions or dividends from their shares. Believing they were owed a refund, they challenged the 2017 tax and argued that it was unconstitutional. 

Seven justices were unconvinced by the Moore’s arguments, however. The majority ruling noted that their “constructive realization” theory could not “meaningfully distinguish” this tax from a number of others, which “could render vast swaths of the Internal Revenue Code unconstitutional.” 

“And those tax provisions, if suddenly eliminated, would deprive the U. S. Government and the American people of trillions in lost tax revenue,” wrote Justice Brett Kavanaugh for the majority. “The logical implications of the Moores’ theory would therefore require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it—including, of course, on ordinary Americans.” 

“The Constitution does not require that fiscal calamity,” Kavanaugh added.  

To uphold the government’s foreign earnings tax, the court notably did not address the debate about the necessity of realized income for a direct federal tax. Instead, it emphasized that the 2017 law does, in fact, tax realized income—income realized by the Indian company. While finding that the attribution of that foreign corporation’s untaxed income to the entity’s shareholders is permissible under the Constitution, the ruling goes out of its way to emphasize its narrowness. Specifically, it warns it is not a statement on double-taxation of a corporation’s undistributed income, wealth taxes, or taxes on appreciation.  

While Justices Amy Coney Barrett and Samuel Alito concurred only with the judgment of the majority rather than their reasoning, Justices Clarence Thomas and Neil Gorsuch dissented. They were unswayed by worries of “fiscal calamity,” suggesting “if Congress invites calamity by building the tax base on constitutional quicksand, ‘[t]he judicial Power’ afforded to this Court does not include the power to fashion an emergency escape.” Rather, they believed the majority upheld the repatriation tax “only by ignoring the question presented.” 

“Sixteenth Amendment ‘income’ is only realized income. We should not have hesitated to say so in this case,” they declared.