On June 20, 2024, the Supreme Court issued its decision in Moore v. U.S., 602 U. S. ____ (2024), and put to bed a taxpayer challenge directed at the transition tax. The transition tax was an 8% or 15.5% tax levied on U.S. persons owning at least 10% (“U.S. Shareholders”) of controlled foreign corporations (“C.F.C.’s”) at the time the U.S. eliminated the indirect foreign tax credit as the primary means of avoiding double taxation of intercompany dividends. In its place, a dividends received deduction was enacted to eliminate double taxation. The dividends received deduction can be claimed only by a U.S. corporation that owns at least 10% of the shares of a specified foreign corporation.

The transition tax was adopted in order to levy at least one U.S. Federal income tax on untaxed earnings of C.F.C.’s, prior to the effective date of the dividends received deduction. It was a one-time tax imposed on corporations and individuals who were U.S. Shareholders on the last day of a C.F.C.’s taxable year beginning prior to 2018. The tax base was the U.S. Shareholder’s share of the post-1986 undistributed foreign earnings of a C.F.C.

Mr. & Mrs. Moore were investors in an Indian corporation. They owned at least 10% of its shares on the effective date of the tax. They paid transition tax in the amount of $14,729, then sued for a refund. In their view, the transition tax was unconstitutional. They contended that it was a direct tax on property rather than an income tax. A direct tax must generally meet certain constitutional hurdles regarding its apportionment to each state based on the state’s share of the total population of the nation. They further argued that the retroactive nature of the tax violated due process. Retained earnings as far back as 2006 were taxed.

Part of the reason for the attention surrounding the case was its potential implications. The transition tax raised a significant amount of revenue. But the challenge also had the possibility of upending the entire C.F.C. regime, which depends on taxing U.S. shareholders of C.F.C. regardless of whether income is distributed to them.

While the transition tax was introduced relatively recently, the C.F.C. regime was enacted in 1962, and survived repeated court challenges. The Supreme Court cited these precedents in ruling against Mr. & Mrs. Moore. It found that the tax was an income tax because income was realized at some point. Congress has the power to determine whether the corporation generating the income should be taxed or that its shareholders should be taxed, instead. The Supreme Court looked to general principles of partnership taxation, S corporation taxation, and the rest of the C.F.C. regime, and found the transition tax to be comparable.

The case drew attention from political commentators who analogized the transition tax to a wealth tax in that it seemed to determine tax liability based on the ownership of property. But according to the Supreme Court, the transition tax is an income tax rather than a wealth tax. The Supreme Court specified that its holding is limited to instances when “Congress treats [an] entity as a pass-through.” Moore does not make the enactment of a wealth tax any easier or likelier.

For more information on Moore v. U.S., contact Stanley C. Ruchelman or Wooyoung Lee.