Supreme Court Declines to Decide Whether Sixteenth Amendment Requires “Realization” to Tax Income

Supreme Court Declines to Decide Whether Sixteenth Amendment Requires “Realization” to Tax Income

Legal Sidebari

Supreme Court Declines to Decide Whether
Sixteenth Amendment Requires “Realization”
to Tax Income
June 27, 2024
On June 20, 2024, the Supreme Court decided Moore v. United States, an appeal challenging a one-time
“Mandatory Repatriation Tax” (MRT) on U.S. shareholders of a foreign corporation for accumulated, but
undistributed, earnings of the corporation. The taxpayers had asked the Court to invalidate the MRT as a
tax on “unrealized” income because the Sixteenth Amendment, they argued, requires that the taxpayer
must receive or enjoy an economic gain for earnings to qualify as income. The government argued that
the Sixteenth Amendment contains no such realization requirement and that other taxes Congress has
enacted would be invalidated should the Court agree with the taxpayers’ interpretation.
In a narrow ruling, the Supreme Court decided that the MRT was a valid exercise of Congress’s taxing
power. The Court held that the MRT taxed realized income of the foreign corporation by permissibly
attributing it to the corporation’s American shareholders. The Court did not, however, resolve the broader
question of whether realization is a constitutional requirement for an income tax.
Justice Brett Kavanaugh authored the controlling opinion, joined by four other Justices. Justices Ketanji
Brown Jackson and Amy Coney Barrett each filed a concurring opinion. Justice Clarence Thomas, joined
by Justice Neil Gorsuch, filed a dissenting opinion. This Legal Sidebar discusses the opinions in the case.
Moore had attracted attention from Congress, tax law practitioners, and the general public over how a
broad ruling from the Court might expand or constrain Congress’s power to tax income under the
Sixteenth Amendment. For a discussion of those concerns, as well as an overview of the constitutional
jurisprudence at issue in Moore and the specific facts and arguments raised in the case, please refer to this
previous Legal Sidebar on the oral arguments before the Court.
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The Court’s Opinion
Attribution vs. Realization
The Court’s holding that the MRT is a tax on realized income—income of the corporation—was central to
the Court’s narrow ruling. Because the Court found that the MRT taxed realized income, the Court did not
need to decide the broader question of whether the Sixteenth Amendment requires realization to tax
income without apportionment among the states, so the Court declined to address it.
Instead, “the precise and narrow question that the Court [addressed] is whether Congress may attribute an
entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the
shareholders or partners on their portions of that income.” The Court held that the MRT permissibly
attributed such income to the shareholders.
In reaching that conclusion, the Court relied on “Congress’s longstanding practice,” upheld by the Court’s
case law, of “pass-through” taxation—taxing the shareholders or partners of a business entity on the
entity’s undistributed income. The Court’s opinion gives several examples of pass-through taxes Congress
has levied. The Court specifically emphasized subpart F, which, since 1962, “taxes American shareholders
of American-controlled foreign corporations on several kinds of undistributed corporate income, mostly
passive income.” Subpart F has routinely withstood constitutional challenges. Comparing the MRT to
subpart F, the Court explained that “[t]he MRT is integrated into subpart F’s framework, and it has the
same essential features as subpart F.” Accordingly, the Court rejected arguments by the Moores to
distinguish the MRT from subpart F and other pass-through taxes.
Judicial Restraint
The Court explained that “the Moores’ argument, taken to its logical conclusion, could render vast swaths
of the Internal Revenue Code unconstitutional,” and thus stressed
that our holding today is narrow. It is limited to: (i) taxation of the shareholders of an entity, (ii) on
the undistributed income realized by the entity, (iii) which has been attributed to the shareholders,
(iv) when the entity itself has not been taxed on that income. In other words, our holding applies
when Congress treats the entity as a pass-through.
The Court further explained that the ruling does not address some of the hypothetical taxes raised during
arguments and by third parties concerned about the implications of a broader ruling, such as “(i) an
attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed
income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.”
Concurring Opinions
Justice Jackson joined the Court’s opinion but wrote a separate concurrence in which she emphasized the
need for judicial restraint in tax cases. She explained that, because taxes are inevitably unpopular with one
group or another, the Court’s role in tax disputes should be limited, and “the remedy for such abuses is to
be found at the ballot-box.”
Justice Barrett, joined by Justice Samuel Alito, concurred only in the Court’s judgment upholding the
MRT, but did not join the Court’s opinion. Justice Barrett asserted that “[t]he Sixteenth Amendment’s
reference to income ‘derived’ from any source encompasses a requirement that income, to be taxed
without apportionment, must be realized.” Justice Barrett further concluded that the Moores had not
realized income in this case because they had not received a dividend from the corporation, a “profit from
selling their shares, or any other pecuniary benefit from their stock ownership.” Justice Barrett expressed

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concern that the majority opinion was “too quick to bless the attribution of corporate income to
shareholders,” and emphasized that the “Due Process Clause cabins that power by requiring income
attributions not to be ‘arbitrary.’” As such, Congress’s power to attribute corporate income “depends on
the relationship between the shareholder and the income.” Justice Barrett nonetheless concurred in the
judgment of the Court because the Moores had “conceded that subpart F is constitutional,” and Justice
Barrett “agree[d] with the Court that subpart F is not meaningfully different from the MRT in how it
attributes corporate income to shareholders.” Justice Barrett thus concluded that the Moores had failed to
carry their burden as taxpayers of showing that they were entitled to a refund.
Justice Thomas’s Dissent
Justice Thomas, joined by Justice Gorsuch, dissented. Justice Thomas agreed with the Moores that the
Sixteenth Amendment requires realization for income to be taxed. Justice Thomas asserted that,
“[b]ecause the Moores never actually received any of their investment gains, those unrealized gains could
not be taxed as ‘income’ under the Sixteenth Amendment.”
Analyzing the history and text of the Sixteenth Amendment, Justice Thomas argued that there must be a
distinction between “income” and the “source” from which that income is “derived,” and that a realization
requirement draws that distinction. Justice Thomas also implied the importance of a realization
requirement as a safeguard against unconstitutional taxes.
Justice Thomas criticized the majority opinion as “consequentialist,” because it “fashion[ed] an
emergency escape” to avoid unpalatable results of a realization requirement. Justice Thomas called the
majority’s “attribution” doctrine “an unsupported invention” created from selectively applying dicta.
In her concurrence, Justice Jackson disagreed with the dissent’s contention that the Sixteenth Amendment
requires realization, contesting the applicability of the authority on which the Moores relied as support for
that argument. Justice Jackson also suggested that, even if the MRT violated the Sixteenth Amendment, it
might still be constitutional as “an excise tax on the privilege of doing business through a controlled
foreign corporation,” and therefore would not be a direct tax requiring apportionment.
Considerations for Congress
The Court reaffirmed that, when dealing with an entity’s undistributed income, Congress may either tax
the entity directly or tax its shareholders or partners on a pass-through basis. The Court also stated that
either method taxes the entity’s realized income.
The Court cautioned that its opinion does not address any hypothetical congressional efforts to tax wealth
or appreciation.
While the Court declined to address whether the Sixteenth Amendment requires realization to tax income,
to avoid constitutional challenges based on this unresolved issue, Congress might consider amending
existing tax provisions or write future tax legislation so that taxes are based on realization.

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Author Information

Justin C. Chung

Legislative Attorney

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