Couple takes case all the way to U.S. Supreme Court to challenge IRS tax on unrealized gains

With a petition that has the “potential to be the most important tax case of the twenty-first century,” two Washington State residents, Charles and Kathleen Moore, have taken their fight against one kind of taxation all the way to the U.S. Supreme Court.

That opening hype was from Dan Greenberg, general counsel at the Competitive Enterprise Institute, who held a virtual event Wednesday in Washington, DC to help raise awareness for the Moores petition with the Supreme Court.

When the Moores were approached by their friend Ravindra “Ravi” Kumar Agrawal, who was starting a business making affordable farm implements for disadvantaged farmers in rural India, they wanted to help.

The idea for the business was to manufacture affordable powered tools for rural farmers, increasing their food output and raising their standard of living by removing the need to do all of the work with hand tools.

Ravi thought the best chance at success was to reinvest all of the profits back into the business, rather than disbursing any to shareholders.

This meant the Moores wouldn’t see a dime until the company was sold, or had an Initial Public Offering, which could be years or never.

Even considering that substantial risk, the Moores still chose to invest $40,000 into Ravi’s company, KisanKraft, because they saw it as a worthwhile cause.

In return for that 2005 investment they received about 11% of the company's shares, according to their petition filed with the Supreme Court.

This represented a significant sum to the Moores, and to date, they haven’t received a dime of dividends or income from said investment.

Despite that, because of a change in the US Tax Code enacted in 2017, the Moores were hit with a nearly $15,000 income tax bill from the IRS.

The law, known as the Mandatory Repatriation Tax, created a 30 year retroactive window between January 1, 1987 and December 31, 2017, where shareholders of foreign companies can be taxed on the company's retained profit, even if that profit is not controlled by or disbursed to the shareholders.

That suddenly turned their unrealized investment into “income,” at least according to the Ninth Circuit Court of Appeals.

Seattle-based lawyer Andrew Grossman, lead counsel for the Moores, acknowledges the complexity and intent of the law when it comes to tax code.

“You get into these really complex hairy arguments. Because many times Congress enacts these provisions that are meant to prevent tax avoidance, and so they have to operate in circumstances where there may be some ambiguity or lack of clarity,” Grossman said during the event.

But when speaking of the Moores’ investment, he was unequivocal, saying, “Here it really is just a pure legal question. It’s undisputed that there really was no realization,” meaning the Moores never profited from or controlled the profits of the investment they made, even though the value had gone up.

This is something even the Ninth Circuit Court of Appeals agreed with in its ruling.

Despite that, the Ninth Circuit ruled that the Moores owed the tax anyway.

“What makes this case different, as well as interesting and significant, is unlike all those other taxes, there is no realization here. There really is that bare constitution[al] question,” continued Grossman. "Do you need realization [for taxation] or not?’”

“And if the answer to that is ‘no’ then it’s open season,” he answered himself.