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St. Thomas Law Review

First Page

181

Document Type

Comment

Abstract

Despite the significance of the term “income,” both the United States Supreme Court and the Internal Revenue Code do not provide an explicit definition of the term. This ambiguity causes the constitutionality of income taxation to remain a contested issue. Central to this ongoing debate is the issue of realization as a prerequisite for income taxation, exemplified by the case of Moore v. United States. In a landmark decision, the Ninth Circuit ruled that realization is not a constitutional requirement for Congress to impose a tax exempt from apportionment under the Sixteenth Amendment. This decision marked a pivotal departure from the longstanding judicial consensus that income must be realized before it becomes taxable. Charles and Kathleen Moore, a retired couple from Redmond, Washington, found themselves at the center of this constitutional debate following their minority investment in KisanKraft, a controlled foreign corporation (“CFC”) based in India. In 2006, the Moores invested $40,000 in KisanKraft, acquiring an 13% minority stake in the company. Since its inception, KisanKraft consistently turned a profit but never distributed any earnings to its shareholders, opting instead to reinvest all profits into the business. The Moores’ tax predicament originated from the passage of the Tax Cuts and Jobs Act (“TCJA”) of 2017, which introduced the Mandatory Repatriation Tax (“MRT”). This provision requires certain U.S. shareholders to include their pro-rata share of the CFC’s accumulated earnings in their taxable income, regardless of whether the earnings had been distributed. Thus, the Moores declared $132,512 in income under the MRT based on their pro-rata ownership of KisanKraft’s earnings, and in 2018, the Moores were subject to a $14,729 tax liability. The Moores paid the tax and then sued for a refund, challenging the constitutionality of the MRT. The case was first heard in the Western District of Washington, which found for the commissioner and was then appealed to the Ninth Circuit, which affirmed the lower court’s ruling. The Ninth Circuit de-livered a landmark decision, wherein it ruled that the realization of income is not a constitutional requirement for Congress to impose a tax exempt from apportionment under the Sixteenth Amendment. The Moores argued that this decision diverged from the constitutionally recognized understanding that in-come must be realized before it is subject to federal taxation. On June 20, 2024, the Supreme Court issued its decision affirming the tax finding the MRT does not exceed Congress’s constitutional authority. How-ever, the Supreme Court did not attempt to resolve the party’s disagreement over whether realization is a constitutional requirement for an income tax. This ambiguity leaves open the potential for expansive interpretations of what constitutes taxable income. As such, this article proposes that, in light of the holding in Moore, the Supreme Court provide Congress and taxpayers with a concrete definition of in-come consistent with the recognition of a realization requirement. Part II intro-duces the concept of realization in defining taxable income; the current statutory provisions regarding income; and the purpose and provisions of the MRT. Part III analyses the Supreme Court’s interpretation of income in Moore, discusses the implicit realization principle in well-established tax law doctrines, and high-lights some concerns associated with taxing unrealized gains. Part IV concludes with a framework for defining taxable income that aligns with historical precedents and constitutional principles, aiming to protect constitutional constraints and ensure fair taxation.

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