The Economic Implications of Moore v. United States

The Economic Implications of Moore v. United States

November 20, 2023
The Economic Implications of Moore v. United States
Moore v. United States (henceforth referred to as Moore) is
Economic Implications
a legal case that challenges the constitutionality of the
If current tax rules are overturned by the decision, federal
“transition tax” imposed with the change in the
revenues would decline significantly. A recent study by
international tax system that was included in P.L. 115-97
Eric Toder of the Tax Policy Center (TPC) reported
(commonly called the Tax Cuts and Jobs Act or TCJA).
estimated revenues raised by some of these provisions for
The case is currently before the U.S. Supreme Court. The
2024 and 2028, some of which are cited below.
transition tax is levied on the undistributed profits accrued
by U.S. controlled foreign corporations (CFCs) between
International Tax Provisions
1986 and the end of 2017. The plaintiffs in the case argue
Three provisions that fall in the look-through category
that the taxation of unrealized income violates the Sixteenth
affect the international tax system and involve the tax
Amendment’s Apportionment Clause. This In Focus does
treatment of CFCs, which are foreign corporations that are
not discuss the constitutional issues presented in Moore, but
owned at least 50% by U.S. persons that each own 10%.
instead focuses on the economic implications presented by
Prior to the TCJA, owners of CFCs were taxed on income
the case.
when repatriated (paid as a dividend less a credit for income
taxes imposed by foreign countries). The TCJA eliminated
What Types of Income Could be
the tax on dividends and imposed a minimum tax aimed at
Affected by Moore?
income from intangibles, known as GILTI. The tax on
While the plaintiffs in Moore are asking for a narrow ruling
GILTI is estimated by the TPC to raise $15 billion in 2024
about a specific tax provision, several long-standing tax
and $27 billion in 2028 (as the tax rate increases).
provisions also tax unrealized income and could potentially
Even before the TCJA changes, the United States, as with
be affected depending on the wording of a decision in favor
most other countries, had anti-abuse provisions (Subpart F)
of the plaintiffs. According to a letter from the Joint
that taxed certain types of income that is easily shifted into
Committee on Taxation (JCT), the potentially affected
low-tax countries. This provision has been in the tax law
provisions could be grouped into two broad categories:
since 1962, and is estimated by the TPC to raise $8 billion
look-through realization and deemed realization.
in 2024 and $9 billion in 2028. The provisions before and
Look-through realization provisions are those where the
after TCJA are explained in more detail in CRS Report
taxpayer is taxed on income received by an entity that is
R45186, Issues in International Corporate Taxation: The
owned in full or in part by that taxpayer. The most common
2017 Revision (P.L. 115-97), by Jane G. Gravelle and
example is that partners are taxed on their share of
Donald J. Marples.
partnership earnings even if earnings are not distributed to
As part of the transition to the new system, there was a one-
partners. If the court rules that taxpayers must either
time tax at a lower rate on the accumulated unrepatriated
personally participate in a transaction or receive something
income, which is the tax at issue in Moore. This tax was
of value in the tax year for the income to be taxable, look-
originally estimated to raise $346 billion, and could be paid
through realizations provisions that could be impacted,
in installments over eight years.
according to the JCT, include Subpart F, Global Intangible
Low Taxed Income (GILTI), Subchapter K (Partnerships),
Passthrough Provisions: Partnership, Subchapter S,
Subchapter S, and Real Estate Mortgage Investment
and REMIC
Conduits (REMICs).
Passthrough businesses, unlike corporations, are not subject
Deemed realization provisions are those where income is
to tax at the entity level. Rather, all income is passed
recognized for tax purposes but has not been received. They
through and taxed to the owners. Passthrough businesses
could be affected if the court rules that a transaction must
include sole proprietors, partnerships, and Subchapter S
actually occur or the taxpayer must receive something of
corporations (corporations with a limited number of
value in the tax year for the income to be taxable.
shareholders that elect to be taxed as a passthrough). The
According to JCT, relevant deemed realization provisions
owners of partnerships and S corporations are taxed on
could include the original issue discount rule and below-
earnings even if all of the earnings are not distributed.
market and short-term loans, mark-to-market for securities
The TPC study estimated revenue from undistributed
dealers, mark-to-market for regulated futures contracts,
partnership and S corporation income at $37 billion in 2024
imputed rental income, and Subchapter L mark-to-market
and $57 billion in 2028. Some of this revenue would be
for life insurance companies. In addition, JCT also
recouped as capital gain on the sale of interests in the
identified the mark-to-market exit tax for expatriates as a
business, which would offset these loses and lead to a net
deemed realization provision for income accrued in prior
loss of $23 billion in 2024 and $39 billion in 2028. The
taxable years.
study states that this is a conservative estimate because it
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The Economic Implications of Moore v. United States
may understate the share of partnership income that is
Revenues and Behavioral Responses
retained.
The revenue losses associated with these provisions (around
$100 billion for those estimated) would likely increase after
REMICs are one of several ways of holding assets
considering behavioral responses. For example, there would
indirectly. Income from REMICs flows through to the
be an incentive to locate more profits in low-tax countries,
shareholder to be taxed even if some of it is retained and
to retain more earnings in partnerships and Subchapter S
reinvested. Other types of passthroughs, including
corporations. Partnerships in particular could be used to
Regulated Investment Companies (RICs, such as mutual
extend tax relief to individuals, since control and asset
funds) and Real Estate Investment Trusts (REITS)
ownership can easily be separated in a partnership.
generally distribute all of their income to shareholders.
The revenue and behavioral responses would also be
The TPC study did not provide estimates for REMICs. The
affected depending on whether control affects whether
Federal Reserve publishes data on the size of assets held by
deemed realization can occur. For example, a more than
issuers of asset-backed securities that indicates about $900
50% owned foreign subsidiary may be taxed to the
billion of mortgage-backed securities (Table L127).
shareholder on income earned abroad while a minority
Mortgage-backed securities are estimated to earn a rate of
shareholder may not. A control issue would also affect
around 5%, suggesting interest income of around $45
partnerships with a controlling partner and would
billion. All of that interest, however, does not go to taxable
presumably prevent sole proprietorships from taking on a
entities, as many of the assets are held in tax-exempt
minority partner to avoid the tax on retained earnings.
retirement accounts.
Based on data from the National Income and Product
Interaction with the Proposed Global
Accounts (Table 7.11), individuals received $629 billion in
Minimum Tax, Pillar 2
interest income ($1,510 trillion in total personal interest
Were GILTI and Subpart F invalided by a Moore decision,
income less $881 billion in imputed interest income),
the United States could not conform to the OECD/G20
compared with $194 billion reported on individual tax
global minimum tax and could not tax income of foreign
returns. Applying the Congressional Budget Office’s tax
subsidiaries. As a result, the profits of U.S. controlled
rate on interest of 27%, if all interest were retained, the cost
foreign subsidiaries could be taxed by other countries where
is around $4 billion. Using the 10% retention rate for
their related foreign subsidiaries are located. See CRS
Subchapter S in the TPC study, the cost would be around
Report R47174, The Pillar 2 Global Minimum Tax:
$0.4 billion to $0.6 billion; using the share retained by
Implications for U.S. Tax Policy, by Jane G. Gravelle and
corporations of about one-third of the cost would be $1.3
Mark P. Keightley for a discussion of Pillar 2.
billion, but even this amount would be offset by a lower
basis and increased capital gains.
Changes in the Tax Law
Some changes in the tax law might be used to recoup the
Deemed Realization Provisions
lost revenues from finding certain laws invalid. For
These provisions include the imputed interest on original
international operations, a return to the prior system where
discount (zero coupon bonds, OID), imputation of interest
dividends are taxed when they are paid from a CFC to its
for below-market rates, mark-to-market of assets for
U.S. parent is an option. The United States could also
securities deals, imputation of rent for prepaid or deferred
engage in more aggressive pursuit of profit shifting, for
rent, mark-to-market for certain futures contracts, and the
example, by limiting cost sharing as discussed in CRS In
exit tax on accrued income for individuals who renounce
Focus IF12524, Corporate Taxation: Profit Shifting,
their U.S. citizenship.
Transfer Pricing, and Cost Sharing, by Jane G. Gravelle.
Laws could also be enacted that disallow the deduction of
The TPC estimates that the OID provision increases
interest that is not commensurate with the worldwide share
revenue by $26 billion in 2024 and $39 billion in 2028. In
of profits. Such a proposal was included in the House-
present-value terms this amount is offset by the tax on
passed version of the Build Back Better Act (H.R. 5376,
redemption reducing the cost to $4 billion-$5 billion if
117th Congress).
taxed as ordinary income and $9 billion-$14 billion if taxed
as a capital gain.
Subchapter S provisions could be eliminated or the number
of shareholders allowed significantly reduced. Large
The JCT estimates that the cost of allowing 60% of the gain
partnerships could be treated as corporations and taxed at
on Section 1256 (regulated futures) contracts as long-term
the entity level. Alternatively, partnerships and Subchapter
gains is $2 billion. Assuming gains would otherwise be
S corporations, as well as REMICs could be modeled on the
short term, that estimate implies that 60% of the income
treatment of RICs (mutual funds) where all earnings could
times the capital gains/ordinary income differential (0.17 at
technically be distributed but partners and shareholders
top rates), and applying a top ordinary rate of 37% leads to
could agree to a reinvestment of part of earnings.
an estimated yield of $7.25 billion (0.37*2)/(0.6*0.17). This
amount would be smaller if gains were eventually realized.
The corporate alternative minimum tax could be modified
by imposing it on a broadened taxable income.
The new corporate alternative minimum tax might also be
affected since some of the differences in tax base reflect
timing and the base includes foreign source income.
Jane G. Gravelle, Senior Specialist in Economic Policy
Donald J. Marples, Specialist in Public Finance
IF12536
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The Economic Implications of Moore v. United States

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