53 F.4th 507
9th Cir.2022Background
- Charles and Kathleen Moore (U.S. taxpayers) own a ~13% minority stake in KisanKraft, an Indian company that retained and reinvested earnings and never paid dividends to the Moores.
- Under the Tax Cuts and Jobs Act of 2017, 26 U.S.C. § 965 imposed a one‑time Mandatory Repatriation Tax treating undistributed foreign earnings as shareholders’ income and taxing shareholders pro rata; the Moores paid $14,729 and sued for a refund.
- The district court dismissed the Moores’ challenge; a Ninth Circuit panel affirmed, holding that the Sixteenth Amendment does not require realization of income for unapportioned taxation and upholding § 965 as constitutional as applied.
- The Moores argued § 965 taxes unrealized gains and therefore is a direct (non‑apportioned) tax beyond Congress’s power under the Sixteenth Amendment.
- The Government argued the Sixteenth Amendment authorizes taxation of “incomes, from whatever source derived” without apportionment and that realization is not a constitutional requirement.
- The full court denied rehearing en banc; Judge Bumatay dissented from that denial, arguing the panel erred by discarding the realization requirement and thereby enabling unapportioned taxes on unrealized wealth.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Sixteenth Amendment requires realization before income may be taxed without apportionment | Moore: "Income" requires realization; taxing undistributed corporate earnings is a direct (unapportioned) tax on property and unconstitutional | Government: Sixteenth Amendment permits taxation of "incomes, from whatever source derived" without apportionment; realization is not a constitutional requirement | Panel: Realization is not a constitutional requirement; § 965’s tax on undistributed foreign earnings is an income tax permissible without apportionment |
| Whether § 965 as applied to the Moores (minority shareholders who received no distributions and cannot compel dividends) violates apportionment principles | Moore: Taxing their pro rata share of retained earnings imposes an unapportioned direct tax on ownership/interests, not realized income | Government: § 965 legitimately treats undistributed foreign earnings as shareholders’ income for transition taxation | Panel: § 965 constitutional as applied; taxing shareholders’ pro rata share of retained earnings falls within Sixteenth Amendment authority |
Key Cases Cited
- Eisner v. Macomber, 252 U.S. 189 (establishes realization requirement for income under the Sixteenth Amendment)
- Helvering v. Horst, 311 U.S. 112 (discusses realization and enjoyment concepts in taxing income)
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (income defined as realized accessions to wealth over which taxpayer has dominion)
- James v. United States, 366 U.S. 213 (taxable income requires control/readily realizable economic value)
- Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110 (Congress cannot make a thing income that is not in fact income)
- Merchants' Loan & Trust Co. v. Smietanka, 255 U.S. 509 (use commonly understood meaning of terms at ratification)
- Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519 (background on limiting scope of "direct taxes")
- Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (prompted adoption of the Sixteenth Amendment)
- Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (recognizes Macomber as a landmark on realization)
- Comm'r v. Fender Sales, Inc., 338 F.2d 924 (9th Cir. case treating realization as required)
- Murphy v. United States, 992 F.2d 929 (9th Cir. decision applying marked‑to‑market as satisfying realization)