Supreme Court hears oral arguments – Is the Transition tax constitutional. Read analysis

Supreme Court Hears Moore case. Is the Transition tax constitutional 

On December 5, the Supreme Court heard oral arguments in the case of Moore vs. IRS. The Supreme Court is asked to decide whether the Transition Tax is constitutional.  

The core question is whether it is constitutional to tax the shareholder for Transition tax “income”  that it did not “receive”. (did not “realize” in tax jargon.)

The court drilled the Moore lawyer on examples in the tax code where there exists “income without realization” between entity and person. Such examples include Partnerships, S-Corp, PFIC, etc. To it appears that there is a long history of “income without realization.”

 Two other major themes:

  1. The court has great deference to Congress when it comes to revenue.
  2. What is the impact of a ruling on favor of Moore.  This would immediately put many parts of the US tax code in jeoprady, parts that relate to tax abuse by major corporations and rich people, who are behind this case.  The court will not do that.  

The lawyer for Moore argued that “gain is not income unless and until it has been realized by the taxpayer.”  U.S. Solicitor General countered that the drafters of the 16th Amendment would have understood the Supreme Court’s cases to allow taxes like the Transition tax. 

Several of the justices appeared persuaded by Prelogar’s reliance on the amendment’s text and history. Justice Sonia Sotomayor noted that the concept of “realization” – the idea of receiving money, which the Moores insist is required before something can qualify as income – was “very well established” when the 16th Amendment was adopted. The drafters could have used the term in the amendment, but did not, she observed, and there are “examples of Congress taxing unrealized income.”

Grossman pushed back, contending that when the 16th Amendment was adopted, the term “income” was commonly understood to refer to gains that had actually been realized.

Justice Elena Kagan added that “there is quite the history in this country of Congress taxing American shareholders” on their gains from foreign corporations because the federal government can’t tax foreign corporations themselves.  but Congress wants to ensure that U.S. shareholders can’t “stash” their money overseas and watch it grow. Why, Kagan asked somewhat rhetorically, is this any different?

Another interesting tax issue was whether appreciation in value alone of a capital asset or real estate can itself be enough for taxation where there is no sale of the capital asset?  PFIC! What about pension plans when the employee does not take money out?  Is there no limit?  

Indeed, some of the court’s conservative justice s worried that the government wanted to “open the door to taxation of practically everything.”  

But the court followed the IRS in agreeing that there are “far-fetched hypotheticals that are unlikely ever to come to pass.”

For a copy of the transcript, see


Skip to content