Accounting
Tax Strategy: Moore results in less
On July 20, 2024, in a 7-2 decision, the Supreme Court held that the Code Sec. 965 mandatory repatriation tax was constitutional under the Sixteenth Amendment to the Constitution. The majority opinion crafted a very narrow ruling preserving the status quo, but avoiding the principal issue presented to the court.
The Moores had invested in a controlled foreign corporation. They never received distributions from the CFC or paid any tax with respect to the CFC. Under the Subchapter F rules prior to the Tax Cuts and Jobs Act of 2017, shareholders were not taxed on the operating income of a CFC until distribution; however, 10%-or-more shareholders were currently taxed on movable income of the CFC, such as dividends, interest, rents and royalties.
The TCJA created a one-time Mandatory Repatriation Tax under Code Sec. 965 on a 10%-or-more shareholder’s share of the CFC’s post-1986 accumulated earnings, which consisted of the untaxed, undistributed operating income of the CFC.
Financed by groups seeking a ruling that taxation of unrealized sums was unconstitutional under the Sixteenth Amendment without apportionment among the states, since it was a tax on property and not a tax on “income,” the Moores challenged the constitutionality of Code Sec. 965 in court. They also argued that the MRT constituted a retroactive tax in violation of the Due Process Clause of the Fifth Amendment.
Andrew Harrer/Bloomberg
The federal district court held that the MRT was taxation of income within the terms of the Sixteenth Amendment. The Court of Appeals for the Ninth Circuit agreed, citing similar taxes that had been held constitutional over the years. The Ninth Circuit also held that the retroactivity of the tax did not violate the Due Process Clause because it served a legitimate purpose in accelerating the repatriation.
The Supreme Court granted certiorari in June of 2023 on the Sixteenth Amendment issue. The issue as framed by Moore was, “Whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states.” The government framed the issue as, “Whether the Mandatory Repatriation Tax is a tax … on incomes, from whatever source derived.”
Supreme Court decision
The Supreme Court held that the MRT was a tax on income and not a tax on property. The court framed the issue as whether Congress can attribute an entity’s realized and undistributed income to the entity’s shareholders or partners and then tax the shareholders or partners on their portion of the income.
The majority opinion looked to a long line of precedents that Congress can choose to tax either a business entity or its partners or shareholders, such as the taxation of partnerships and S corporations, and the taxation of Subpart F income. The majority opinion limited its decision to situations involving the taxation of shareholders of an entity on the undistributed income realized by the entity that has been attributed to the shareholders when the entity itself has not been taxed on the income.
By limiting its decision to this narrow issue, the court avoided addressing whether the Sixteenth Amendment includes a realization requirement.
Scope of the Moore decision
The court’s decision supports many longstanding taxes in the Internal Revenue Code, including the taxation of partnerships, S corporations, Subpart F income, global intangible low-taxed income (GILTI), real estate mortgage investment conduits (REMICs), passive foreign investment companies income, original initial discount rules for below-market and short-term loans, and mark-to-market rules for securities dealers, regulated futures contracts, imputed rental income, insurance companies, and the Code Sec. 877A exit tax.
The majority opinion does not address issues such as the constitutionality of proposed wealth taxes and the taxation of the appreciated but unrealized value of the assets of individual taxpayers. The opinion also does not address whether a U.S. entity’s realized income that is already subject to U.S. corporate income tax could be attributed to shareholders.
Concurring and dissenting opinions
The majority Supreme Court opinion was authored by Justice Kavanaugh and joined by Chief Justice Roberts, and Justices Sotomayor, Kagan and Jackson. A concurring opinion by Justice Jackson argued that the realization requirement was not constitutionally required under the Sixteenth Amendment. A concurring opinion authored by Justice Barrett and joined by Justice Alito argued that realization is constitutionally required under the Sixteenth Amendment; however, realization by an entity is sufficient to meet the requirement.
A dissenting opinion authored by Justice Thomas and joined by Justice Gorsuch also argued that the Sixteenth Amendment requires the realization of income. It criticized the majority for focusing on attribution and distinguished the MRT from other forms of pass-through taxation in that the other forms of Subpart F taxation related to the earnings of a U.S. shareholder on the earnings of a foreign corporation during the same year as the shareholder’s control.
Combining the concurring opinion of Justices Barrett and Alito and the dissenting opinion of Justices Thomas and Gorsuch, there were a total of four justices arguing that the Sixteenth Amendment includes a realization requirement. Only Justice Jackson’s concurring opinion argues directly that the Sixteenth Amendment does not include a realization requirement.
Wealth tax
A wealth tax has been proposed in the U.S. by some members of Congress and has been implemented in some European countries. Part of the impetus for financing the Moore case was to try to forestall a wealth tax in the U.S. by getting a ruling that a wealth tax would be a violation of the Sixteenth Amendment as a tax on unrealized income. The Supreme Court did not go that far in Moore; however, it appears that at least four of the current justices are prepared to do so.
President Biden has proposed an end to stepped-up basis at death for gains over $5 million per person and $10 million per married couple, with protections for gifts to charity and family for farms and businesses where the heirs will continue to run the business. Biden has also proposed a 25% income tax on those with wealth of more than $100 million.
Senator Elizabeth Warren has proposed a true wealth tax of a 2% annual surtax on the net worth of households and trusts between $50 million and $1 billion and a 6% annual surtax on the net worth of households and trusts above $1 billion.
Having failed to get the current Supreme Court to rule on the realization requirement in Moore, it may be difficult to find an appropriate case to bring the issue again to the Supreme Court until something similar to a wealth tax is enacted.
Should the realization issue come before the current Supreme Court again in the context of a wealth tax, it may be that Chief Justice Roberts and/or Justice Kavanaugh would join the four justices already indicating support for a realization requirement in the Sixteenth Amendment.
Impact
The Supreme Court’s decision preserves the status quo in protecting various provisions of the Internal Revenue Code, including the MRT specifically at issue in the case. It avoided, however, and left for another day, the issue presented by the Moores — whether the Sixteenth Amendment includes a realization requirement.
Pamela Au/wingedwolf – Fotolia
The Internal Revenue Service has released
An “automatic change” is a change in method of accounting for which the taxpayer is eligible under Section 5.01(1) of
The 430-plus pages of changes cover: gross income, commodity credit loans, trade or business expenses, bad debts, interest expense and amortizable bond premium, depreciation or amortization, research or experimental expenditures, elective expensing provisions, computer software expenditures, start-up expenditures and organizational fees, capital expenditures, and uniform capitalization methods.
Changes also cover losses, expenses and interest in transactions between related taxpayers; deferred compensation; cash-to-accrual methods of accounting; taxable years of inclusion; discounted obligations; prepaid subscription income; long-term contracts; taxable years incurred; rent; inventories (including LIFO inventories); mark-to-market accounting; bank reserves for bad debts; insurance companies; discounted unpaid losses; and REMICs.
Examples are given for many of the changes.
Rev. Proc. 2025-23 was slated to be in IRB 2025-24 dated June 9.
Many CPA firms struggle to raise pricing and remove problematic clients. It may get brushed off as “no big deal,” but ignoring pricing and client mix harms the firm in significant ways: less revenue equals less growth and lower ability to pay staff well, lower profits for partners or capital to reinvest in the business, and unwieldy clients who burn out staff and partners alike for a paltry financial return.
After helping many firms in this area during strategic planning and retreats, here’s what I’ve seen the successful ones do.
Don’t shock the system
When we talk about increasing prices, many partners imagine an abrupt, across-the-board 20% fee increase and clients pouring out the doors as a result. I’ve seen firms be very successful using an incremental and client-specific approach. Segment your client list by service line and total fees. Consider the 80/20 rule: how many clients do you need to generate 80% of your revenue? It’s likely not as many as you think. Then have each partner recommend appropriate pricing adjustments for each client. If there’s a big gap between current fees and market rates, it may take a few years to get there (unless you’re OK with the possibility of losing them, which sometimes is advisable). Some clients may need only a 5% bump to get to market; some may need 150%. Do what makes sense for each client and total firm revenue.
Communication is the key
Often, partners relax once they grasp the reasons why pricing or client acceptance criteria need to improve: staffing crisis, wage increases, tech costs going up, inflation, undercharged for years, not enough hours to serve all the clients well, etc. Pull a Wall Street Journal article on any given day about the accounting industry, and you’ll have another reason your firm needs to evolve. Then explain that to your clients with empathy and sincerity. Almost all of them will understand.
You can keep some personal favorite clients
Many partners get skittish about changing pricing and client acceptance because they have a stable of long-time clients who have been way under market for years but have strong sentimental value. Whoever they are for you, you are allowed to keep them on one condition: accept that they may not be 20% (or some other meaningful amount) of your total book of business. I have great hope for the accounting industry because of the great care I’ve seen partners take of their clients. We don’t want to diminish that. We do want to run a sustainable business.
You’re worth it and so is your staff
Firms have reported gleeful results when they let their staff give input on clients. The staff know who the ungrateful, late, messy clients are. They also know the appreciative, clean, fun-to-work-with clients. It’s uncanny how some of the lowest-profit clients often fall into the first category. Economics aside, when you protect your staff from problematic clients through higher pricing (enough budget to do quality work) or firing clients who can’t work well with the firm, you send a strong message that you care. The same goes for partners. Firms that have a lot of A and B clients and aren’t afraid to shape up or ship out their lowest clients seem to have much higher enjoyment and peace of mind at work. Your team works hard for your clients, and the reciprocity of fair fees and behavior from them is only right.
If you want to join the firms that are finding success in fees and client mix, here are four ways to start:
1. Grade your clients: Rank them A through F, based on criteria like total fees, realization, growth potential, and how fun or hard it is to work with them.
2. Segment the list: Analyze your now graded client list. Who needs more attention? Who needs to get off the bus?
3. Make an action plan that is specific to each client: Granularity is your friend. By partner, by client, make next steps to improve fees or client behavior to meet current standards.
4. Keep meeting about it regularly: This is the most important step! Just making a list doesn’t count. Partners who regularly meet and act on their lists make big progress.
I know the journey can be uncomfortable, but firms on the other side prove it’s well worth it. Good luck!
Senate Majority Leader John Thune said Republicans in his chamber expect to deliver on President Donald Trump’s campaign promises to exempt tips, overtime pay, Social Security and auto loan interest from taxes.
“I think that the president as you know campaigned hard on no tax on tips, no tax on overtime, Social Security, interest on car loans — those were all things that are priorities for the administration and they were addressed in the House bill and I expect they will be in the Senate as well,” Thune told reporters.
The House bill, in lieu of a direct tax cut on Social Security, which would violate Senate budget rules, provided a $4,000 bonus deduction for per taxpayer age 65 and older with incomes up to $75,000 for individuals and $150,000 for married couples. The House provisions on tips, overtime, the elderly and car loans would all expire in 2029.
Thune’s comments come as Senate negotiators tweak the House-passed version of Trump’s giant tax package ahead of a self-imposed deadline to pass the measure before the July 4th holiday, with Thune saying Tuesday the Senate is very close to finishing its draft of the legislation.
Earlier Tuesday, House Ways and Means Chair Jason Smith, whose committee is responsible for tax legislation, warned that any Senate version of the tax package that doesn’t include the tips and overtime breaks would be “dead on arrival” in the House.
Several Republican senators including Thom Tillis of North Carolina and Lindsey Graham of South Carolina have expressed skepticism about the cost and economic wisdom of including the tax exemptions on tips and overtime pay. Senators have instead called for funds to be used to make temporary business tax breaks permanent.
Such a change would be a “no go” for House Republicans, Smith told Bloomberg TV.
The Senate is now considering the massive tax and spending package after it passed the House by a single vote last month. If the Senate changes the legislation, the House must approve the revised version.
Senator Josh Hawley, a populist Republican, said Trump told him Tuesday morning that tax-exempt tips and overtime, as well as a tax cut for the elderly, are the most important provisions in the bill.
House Speaker Mike Johnson also has urged senators not to remove or scale back provisions in the legislation that exempt tips and overtime pay from income tax through 2028.
“This is an important promise for us to keep,” Johnson told reporters earlier Tuesday.
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