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Unrealized Gains Tax Upheld by Supreme Court

The U.S. Supreme Court’s 7-2 ruling in Moore v. U.S. on June 20 reaffirms how income is taxed in the United States.

By Kelley R. Taylor, Kiplinger Consumer News Service (TNS)

In a long-awaited ruling, the U.S. Supreme Court upheld a tax on unrealized gains, affirming the constitutionality of a mandatory repatriation tax introduced by the Tax Cuts and Jobs Act (TCJA). 

In upholding the tax, Justice Brett Kavanaugh, writing for the majority stated, “The MRT—which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders, and then taxes the American shareholders on their portions of that income—does not exceed Congress’s constitutional authority.”

The 7-2 decision, issued June 20, has implications for the taxation of wealth in the United States, particularly for U.S. taxpayers with substantial ownership in certain foreign corporations. Justice Amy Coney Barrett wrote a concurring opinion, joined by Justice Samuel Alito. Justice Clarence Thomas dissented.

Here’s more of what you need to know.

Supreme Court income tax case

As Kiplinger reported, the case, Moore v. United States, centered on whether U.S. taxpayers with specified foreign holdings could be subject to a one-time tax on those investments. The plaintiffs, Charles and Kathleen Moore, owned a stake in an agricultural equipment company in India. 

Despite not receiving dividends or income from their investment over the years, the Moores paid about $15,000 in taxes on earnings attributed to them as shareholders due to the mandatory repatriation tax (MRT).

  • The couple later argued that the MRT was unconstitutional, contending that income must be realized to be taxable under the 16th Amendment, which grants Congress the power to impose a federal income tax. 
  • Their lawsuit challenged the TCJA’s provision that levied this one-time tax on U.S. taxpayers with significant ownership in certain foreign corporations.

SCOTUS upholds wealth tax

The Supreme Court emphasized that its holding is a narrow one. As independent new analysis site, the SCOTUS blog, reported the holding is limited to taxes levied on shareholders of an entity on undistributed income realized by that entity. That income has to be attributed to the shareholders when the entity hasn’t been taxed on the income. 

In finding in favor of the government, the Court affirmed the Ninth Circuit Court of Appeals, which highlighted that the MRT was designed to close loopholes that allowed shareholders to evade taxes on offshore earnings. By upholding the tax, the U.S. Supreme Court essentially reinforced the government’s ability to tax foreign-held profits, even if those profits remain unrealized—at least in the circumstance described in this case.

As Kavanaugh wrote in the decision, “The Court’s longstanding precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may either tax the entity or tax its shareholders or partners. Whichever method Congress chooses, this Court has held that the tax remains a tax on income.” 


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