Taxation has been an ongoing storm of debate in the United States for centuries. Under the Sixteenth Amendment of the U.S. Constitution, Congress holds an enumerated power to “lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States.”[i] This definition of income has been reinforced by the Internal Revenue Code, with the supplementation of statutory interpretation that helps decipher examples and ensure the applicability of taxation to the ever-changing financial landscapes of the United States.[ii]

However, a wrinkle in this definition was introduced in part to the enactment of the 2017 Tax Cuts and Jobs Act (TCJA).[iii] The Mandatory Repatriation Tax (MRT) was introduced by this Act as a one-time tax that addressed the issue of accumulated foreign earnings held by controlled foreign corporations (CFC) and incentivized the repatriation of those earnings back to the United States.[iv] This allowed the United States to tax the CFC’s earnings after 1986 as income taxable in 2017 without the need for such earnings to have been distributed to the shareholders who owned at least 10% of the corporation.[v] This tax was mainly undisturbed from contentions until the appellate hearing of Moore v. United States by the Ninth Circuit Court of Appeals, affirming the validity of the MRT and inadvertently shifting the meaning of income.

In 2006, Charles and Kathleen Moore embarked on a philanthropic journey, investing $40,000 to support the launch of KisanKraft Machine Tools Private Limited, an overseas company with a mission to uplift India’s underserved rural farmers. Founded by Charles’s friend Ravi Agrawal, KisanKraft aimed to provide affordable farming equipment to improve the livelihoods of impoverished farmers. The Moores, moved by Ravi’s vision, became minority shareholders and witnessed KisanKraft’s remarkable growth, serving farmers across India by reinvesting all earnings to expand its noble cause. However, their altruistic venture took an unexpected turn in 2018 when the “Mandatory Repatriation Tax” surfaced, demanding income tax on KisanKraft’s reinvested earnings since 2006. Despite never receiving dividends or distributions, the Moores found themselves facing an additional $14,729 tax bill, challenging the very essence of their philanthropic endeavor.

Advocates of the MRT argue that the plain meaning of the Sixteenth Amendment does not purport to limit and distinguish between one kind of income tax over another and that the whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment.[vi] Moreover, the definition of gross income, as the Supreme Court of the United States has previously interpreted, was left as such intentionally to “extend broadly to all economic gains not otherwise exempted by the U.S. Constitution.”[vii]

Supporters also contend that even before the introduction of the MRT, these same U.S. shareholders were already obligated to fulfill tax obligations on their proportionate share of a CFC’s annual subpart F income.[viii] This obligation persisted even when such income remained undistributed to the shareholders.[ix]  Thus, the MRT represented a modification in the tax landscape for U.S. shareholders of existing Income tax laws.

Opponents of the MRT assert that the Ninth Circuit’s decision in Moore contradicted previously held interpretations of the realization requirement.[x] Historically, the Supreme Court of the United States had made it clear that the Sixteenth Amendment’s exemption from apportionment pertains specifically to taxes on realized gains.[xi] This interpretation aligns with Eisner v. Macomber, a pivotal case where the Court defined income as the gain derived from capital or labor, emphasizing the necessity for the recipient to receive, draw, and dispose of a gain or profit.

Furthermore, opponents contend that income entails receiving an economic gain that was firmly established during the drafting and ratification of the Sixteenth Amendment. Legal authorities of the time emphasized a settled meaning of income as the actual receipt of cash, distinct from anticipated revenue.[xii] Moreso, the Supreme Court of the United States historically stipulated that income is realized upon payment and not merely when due.[xiii] Finally, income must be synonymous with money received, disallowing an interpretation based on expectations or deferred payments.[xiv] This historical legal context solidifies the interpretation that income, as intended by the Sixteenth Amendment, involves the tangible receipt of economic gains.

The Ninth Circuit’s ruling challenged traditional notions of income realization and highlighted the adaptability of tax laws to address contemporary challenges. The court’s interpretation challenged established ideas about income realization and retroactive taxation, inviting a reevaluation of current tax norms. By allowing taxation on unrealized income, the decision could set a precedent for future cases, potentially influencing broader tax reform discussions.[xv]

This redefinition of income prompts lawmakers to revisit existing tax frameworks and consider adjustments to better align with modern economic practices. Furthermore, businesses and investors will need to reassess their financial strategies, anticipating tax implications on previously untaxed or deferred income. While this case currently awaits certiorari in front of the Supreme Court of the United States, it becomes increasingly apparent that definitions can be subject to change.

[i] See U.S. Const. Amend. XVI.

[ii] See I.R.C. §61(a)(3) (“Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including . . . [g]ains derived from dealings in property.”).

[iii] See Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (providing that the “TCJA” was a major tax reform instituted by the Trump Administration in order to promote domestic business and investment development by reducing certain tax rates for corporations and investment activities).

[iv] See I.R.C. §965(a)(2) (“In the case of the last taxable year of a deferred foreign income corporation which begins before January 1, 2018, the subpart F income of such foreign corporation shall be increased by the greater of the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017.”).

[v] See Caroline Rule, The Supreme Court Will Determine Constitutionality of the Mandatory Repatriation Tax, A.B.A. (Sept. 21, 2023), https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/23sum/23sum-ac-rule-mandatory-repatriation/ (“Both corporate and individual U.S. shareholders who owned more than 10% of a CFC were subject to a one-time income tax in 2017 on their proportional share of that income.”).

[vi] See Brushaber v. Union Pac. R. Co., 240 U.S. 1, 17-18 (1916) (“It is clear on the face of this text that it does not purport to confer power to levy income taxes in a generic sense . . . or to limit and distinguish between one kind of income taxes and another . . . .”).

[vii] Comm’r v. Banks, 543 U.S. 426, 433 (2005) (quoting Comm’r v. Glenshaw Glass Co. 348 U.S. 426, 431 (1955))

[viii] See I.R.C. §951(a)(1)(A) (“[E]very person who is a United States shareholder . . . of such corporation . . . shall include in his gross income . . . his pro rata share . . . of the corporation’s subpart F income for such year.”).

[ix] See id.

[x] See Eisner v. Macomber, 252 U.S. 189, 207 (1920) (“Income may be defined as the gain derived from capital, from labor, or from both combined,’ provided it be understood to include profit gained through a sale or conversion of capital assets.”).

[xi] See id.

[xii] See Maryland Cas. Co. v. United States, 52 Ct. Cl. 201, 209 (Ct. Cl. 1917) (“The word ‘income’… has a settled legal meaning and was uniformly construed by courts…to include only the receipt of actual cash as opposed to contemplated revenue due but unpaid.”).

[xiii] See id.

[xiv] See United States v. Schillinger, 27 F. Cas. 973, 973 (C.C.S.D.N.Y. 1876) (“[I]ncome…means what has actually been received, and not that which, although due, has not been received, but its payment for some reason deferred or postponed.”).

[xv] Moore v. United States, 53 F.4th 507, 515 (9th Cir. 2022) (Mem. Op., Butamay, J., dissenting from denial of hearing en banc, joined by Ikuta, Callahan and Vandyke, JJ.) (“Divorcing income from realization opens the door to new federal taxes on all sorts of wealth and property without the constitutional requirement of apportionment.”).