This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Even Moore.

While the dispute in Moore v. United States involves a relatively small amount of money, it has wide-ranging implications for both existing and future tax policy. We've covered it before in an episode that we'll link to in the show notes, but now the arguments have been heard in front of the Supreme Court.

So what did we learn from the questions posed by the justices? Tax Notes managing legal reporter Andrew Velarde will be here to discuss those arguments and some additional reporting he has done on the case in just a moment.

Later in the episode, we'll hear from Tax Notes International author Błażej Kuźniacki about his article on pillar 2 and international investment agreements.

But first, Andrew, welcome back to the podcast.

Andrew Velarde: Hi, Dave. It's good to be here again.

David D. Stewart: Now, before we get into the oral arguments, could you give listeners an overview of this dispute and how we got where we are?

Andrew Velarde: Certainly, yes. It's been long-running, so let's take it from the top. Charles and Kathleen Moore are seeking a refund of $15,000 in taxes that they paid on undistributed earnings from an Indian controlled foreign corporation of which they were minority owners.

They have challenged the section 965 transition tax, which is also known as the mandatory repatriation tax or MRT, that's imposed on a taxpayer's post-1986 accumulated foreign earnings, arguing that it is a direct tax and therefore unconstitutional because it is not subject to apportionment.

In June 2022 the Ninth Circuit affirmed a district court's decision to reject the challenge. It also rejected the Moores' due process challenge. In its decision, the Ninth Circuit said that the courts have consistently held that taxes like the transition tax are constitutional and that whether income is realized is not determinative.

Now, real quickly, before we get further into this dispute, just a little constitutional background. Generally under the Constitution, direct taxes must be apportioned among states by population. There is some debate as to what a direct tax is. Apportionment, however, would be so impractical or impossible in many cases [that this issue] effectively kills a tax. Under the 16th Amendment, however, income taxes can be collected without apportionment. So then the question becomes, what is required for something to be income?

Throughout litigation, the Moores have argued that income has a realization requirement. The transition tax is not a tax on income, they argued, but rather is one on property, and thus must be apportioned. They argue the transition tax is unique because it doesn't rely on constructive realization of income — more on that term in a bit — by those being taxed, and instead relates back to ownership of a specified asset at a specified point in time.

When a rehearing by the Ninth Circuit was denied, four judges dissented, and I want to quote from their language here; I think it's important. They argued, "We opened the door to expansion of the federal taxing power beyond the limits placed by the Constitution. Indeed, without a realization requirement, it is hard to see what's left of the constitutional apportionment requirement. Now I fear any tax on property or other interests can be categorized as an 'income tax' and elude the requirement of apportionment. While the 16th Amendment expanded the federal government's taxing power, it did not dissolve other constitutional restrictions."

Now, this case is potentially worth far more than the $15,000 the Moores were seeking in their refund. Just in that provision alone, the transition tax is primarily targeting large corporations, and the Joint Committee on Taxation has estimated it will bring in $340 billion in 10 years. During oral arguments, and before, the Moores have leaned heavily on a case: Eisner v. Macomber, a Supreme Court case from over 100 years ago they argue establishes a realization standard. In that case, the Supreme Court held a stock dividend was not subject to tax under the 16th Amendment.

Now, during oral arguments, Andrew Grossman of BakerHostetler, who's counsel for the Moores, argued that following that precedent "makes easy work of this case." The government, however, countered that the case has been narrowed so as to only apply to its facts.

Before we get into the oral arguments, I just want to point out that when the Moores appealed to the Supreme Court on the income realization issue, they did not appeal the due process issue.

The Supreme Court granted cert in June. Now, the tax community had already started to pay attention to this case, but once cert was granted, that's when interest really skyrocketed. We've had dozens of amicus briefs filed in this case coming down on either side of the argument.

David D. Stewart: Now, before we get into the oral arguments, another issue I would like to talk about is some reporting you've done about this case and some facts that came to light that were not discussed in the lower courts.

Andrew Velarde: Yes, thanks Dave. So the Moores, as I said earlier, they were minority shareholders in an Indian farming supply CFC called KisanKraft. In Charles Moore's declaration to the district court, and in later briefings, the Moores have presented a picture of themselves as small-time shareholders with no control in how the company distributes their earnings.

However, reporting done by Tax Notes based on Indian public filings from the company reveal that Charles Moore was far more involved in the company than he divulged in those court documents. To run down the list here, we've discovered that Moore was a director at the company for five years from 2012 to 2017; he received travel reimbursements for his trips to India; he provided share application money, which essentially in his case ended up being a high-interest short-term loan to the company; he made subsequent purchases of the company stock, and in 2019 he sold some of his interest for many times more than what he had paid for it, mostly to insiders. These revelations generated a lot of interest in the tax community, but not during Supreme Court oral argument.

David D. Stewart: Well, then, let's turn to the oral arguments. What sort of issues did they focus on?

Andrew Velarde: Sure. Besides Eisner v. Macomber, which I mentioned earlier, it was primarily focused on the bigger picture of what this case could mean for the tax system. Justices seemed concerned about potential ramifications, both if they ruled broadly for the government or broadly for the taxpayer. There was a lot of talk about how other provisions may or may not be differentiated from the transition tax.

Some have argued that given the reach of the income realization requirement, trillions — that's trillions — might be at stake in this case. Now, all justices seemed to be extraordinarily engaged, especially for a tax case, which is not always the case. We had multiple questions asked by each and every justice, and both sides were peppered with questions.

The oral arguments had been scheduled for an hour, but they went more than twice that long. Based on questioning, it's also possible the decision in this case does not split down traditional ideological lines. The Court — several of the justices, anyway — appear to be looking for a narrow way out of this case, possibly not addressing to what extent realization applies to income more broadly.

That there is realization by the corporation was emphasized by several justices; Chief Justice Roberts, for one, kept coming back to that point. That may be a way to narrow the decision. They kept emphasizing this case was one of attribution from the corporation to the shareholder.

David D. Stewart: Now, you're mentioning that this implicates much broader issues. So what sort of tax provisions does the Court seem concerned about being caught up in a potential ruling in this case?

Andrew Velarde: That's a great question. In particular, the Court seemed to be worried about subpart F provisions, as they could not be meaningfully differentiated from the transition tax. Partnership taxation, subchapter S were also targeted as having the same issues with realization by some of the justices.

Solicitor General Prelogar also brought up concerns with mark-to-market taxation. Andrew Grossman argued that the Court has long recognized the distinction between a corporation and a partnership with the doctrine of corporate personhood, and in the case of S corporation shareholders, they elect that type of taxation. Mark-to-market taxes are excise taxes, he argued. So that's how he tried to distinguish those provisions.

Subpart F was the regime that they kept coming back to the most, the justices. Regarding that, he argued that it works on categories of incomes on a current basis, which Congress said could be viewed as being earned by shareholders because of the nature of the categories. Subpart F deals with income shifting, also, he argued.

Justice Sotomayor, however, was caught on the similarities between subpart F and the transition tax, and Justice Barrett also wondered whether this was really about attribution. Let's listen to that exchange.

Justice Sonia Sotomayor: I — I'm sorry. There's no question that you meet the definition of subpart F. You need in subpart F at least 10 percent of the company's share, and the company has to be owned more than 50 percent by U.S. owners. So it's identical in terms of the percentage of ownership or the percentage of shares.

Andrew Grossman: That's right, but subpart F, unlike the MRT, aligns the control and the ability to redirect income with the year that it is applicable to. The MRT takes account —

Justice Sonia Sotomayor: It sounds to me that what you're attacking is only a due process issue of how long the tax is for, not the ability to tax.

Andrew Grossman: I don't think that's right, for the reason that — I think whether you owned a particular piece of property on a given date, which is the question that the MRT asks, is sort of the sine qua non of a tax on property, whereas subpart F looks at income as it comes in while the controlling shareholder has the ability to redirect that stream of income.

Justice Amy Coney Barrett: But isn't that then just a question of whether it's fair to attribute — fair from a due process point of view, as Justice Sotomayor was saying — whether it's fair to attribute the income generated by KisanKraft to the Moores, which is a distinct question of whether there was income within the meaning of the 16th Amendment, right?

Andrew Velarde: If there was realization by the corporation, Prelogar argued that the Court needed to examine Congress's ability to attribute income realization by one taxpayer to another. Justice Alito asked if that was a due process question, to which Prelogar agreed, which only required the Court to determine that it was rational for Congress to do what it did. Now that's a rather low bar to clear.

David D. Stewart: All right. Now, you mentioned earlier this term "constructive realization." So what is that?

Andrew Velarde: Yes, that's a term used by Moore in their briefs, and it came up in oral arguments several times as well, used to distinguished the transition tax from other provisions like subpart F and passthrough taxation.

According to Grossman during oral arguments, constructive realization is a blanket term that would espouse that income should be taxed by the person who earns it and enjoys its benefits.

David D. Stewart: Now, some people have discussed that this case might reach out toward future potential wealth taxes. Did the Court discuss that at all?

Andrew Velarde: Yes, I'd say it's probably the thing they discussed the second most, after the actual provisions that are in the code right now that might be affected. Justice Thomas and Alito kept asking about wealth taxes and whether increases in the value of securities and property would be taxable.

We heard admissions by the government that it would be a more difficult question, at least in part because there's no tradition of taxing something like that. But they did not flat-out concede it would be unconstitutional. Let's give a listen to questioning from Alito on that issue.

Justice Samuel Alito: Well, I — I understand you want to talk about this case, and ultimately we have to talk about this case, but I just want to understand how far your argument goes, how far does it logically go. So under your argument, does the 16th Amendment allow the taxation — it allows the taxation of income, and you define income as an increase in — an economic gain between two points in time. So let's say that somebody graduates from school and starts up a little business in his garage, and 20 years later, 30 years later, the person is a billionaire. Can Congress — under your argument, can Congress tax all of that on the ground that it's income?

Solicitor General Elizabeth B. Prelogar: So if that has already been taxed, as I imagine it would through annual income taxes, then it sounds to me like the hypothetical is actually functioning as a property tax insofar as looking at the total value of the assets —

Justice Samuel Alito: The appreciation in stock value over 20 or 30 years, could Congress say, "We want to reach back and tax all of that"?

Solicitor General Elizabeth B. Prelogar: So, I think that's a hard —

Justice Samuel Alito: That's an economic gain between two periods of time, between two points in time.

Solicitor General Elizabeth B. Prelogar: I think that's a harder question, and here's why: I do think that that would fit within an ordinary conception of income as covering economic gain between two points of time and focusing on the increment of gain, but we don't have the same tradition to support Congress levying income taxes in that manner.

Andrew Velarde: Now, Justice Gorsuch also wondered whether, if realization was only a question of administrability, if that did not pose a risk on taxation, reaching beyond what is traditionally thought of as a wealth tax to potentially affecting American retirement funds. That was an interesting exchange, so let's listen to that as well.

Justice Neil Gorsuch: But if the only bar to Congress from enacting attacks on millions of Americans' retirement accounts and mutual funds is administrability, they're pretty clever over there, aren't they?

Solicitor General Elizabeth B. Prelogar: Well, Justice Gorsuch, I think that this goes to the point —

Justice Neil Gorsuch: They know how to get around administration concerns pretty well, don't they?

Solicitor General Elizabeth B. Prelogar: I think that there would be good reasons for them to avoid the administrative complexities that would open up —

Justice Neil Gorsuch: Oh sure, as a policy matter, but — but, you know, isn't it — isn't it the case that would open a big door?

Solicitor General Elizabeth B. Prelogar: They — that door is already open. Congress can enact that tax.

David D. Stewart: Now, you mentioned earlier that the Supreme Court justices seem to be interested in maybe a more narrow ruling in this case. Were there any particular moments where that came through, and what they were asking?

Andrew Velarde: Yes, I think one of the key ones was from Justice Kavanaugh, in particular, who seemed keen potentially on a way out of a broader ruling. He asked Prelogar about the facets of a potential ruling, questioning her on why she doesn't want to use the phrase "constructive realization." Let's listen to that exchange, too.

Justice Brett Kavanaugh: You don't want us to use the phrase "constructive realization"?

Solicitor General Elizabeth B. Prelogar: Yes. I think that that phrase is inherently amorphous. It doesn't appear in the code; it appears to be a phrase that petitioners have invented for purposes of trying to save these other taxes. And I think it would open up immediate disputes about what exactly it encompasses.

Justice Brett Kavanaugh: Right. And on the proverbial open door for Congress, members of Congress want to get reelected.

David D. Stewart: All right, so now that you have followed this case as it progressed through the court system, you've listened to the oral arguments, you've listened to all the outside discussion of this case, would you care to offer us an idea of what you think is going to happen?

Andrew Velarde: Sure. I'm going to give two caveats first. One, I've been very bad at predicting how this case is going to go; I did not think cert would be granted in the first place, and it was. Secondly, I think just generally it's often dicey to try and predict how the Court is going to rule based on questions in the oral arguments.

All that said, based on what I heard, I think the Court will issue a narrow ruling in favor of the government, finding that because the CFC KisanKraft unquestionably realized income which can be attributed to the Moores, it does not need to decide the broader question of whether income requires realization.

We may also get some concurrences or dissents, I think, that might specifically address wealth taxes, even though that's not the issue in front of the Court.

David D. Stewart: Now, when should we expect to see an answer to this case?

Andrew Velarde: I don't have a crystal ball. I would think probably not until early summer, towards the end of the term.

David D. Stewart: Well, all right. Well, we'll keep an eye out for that, and we'll see if your prediction is true. But thank you for being here. Thank you for bringing us the clips so we could hear for ourselves what the justices had to say.

Andrew Velarde: Thank you, Dave. It's been fun.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Rafael Kariyev and Samuel Krawiecz explore some common federal tax issues that arise in continuation fund transactions. Matthew Wochok examines the questions and concerns that arise in F reorganizations involving S corporations.

In Tax Notes State, Will Ault and Kendall Phillips consider the rising hidden costs of state environmental fees and taxes. Andrew Wilford analyzes the status of the Maryland digital advertising tax.

In Tax Notes International, Carol Wang examines how GILTI, CAMT, and pillar 2 affect the use of disregarded entities for international tax planning. Marty Sullivan examines an innovative method for estimating multinationals' profits, and how it could affect outlooks on pillar 2 revenue.

In Featured Analysis, Bob Goulder examines the unlikely connection between a popular weight loss drug, taxes, and interest rates in Denmark.

And now for a look at what's new and noteworthy in our magazines, here is Tax Notes International Editor in Chief Jéanne Rauch-Zender.

Jéanne Rauch-Zender: Thank you, Paige. I'm here with Błażej Kuźniacki, a senior manager at the International Tax Services of PwC Netherlands and an adviser in the PwC global tax policy team. Welcome to the podcast, Błażej Kuźniacki.

Błażej Kuźniacki: Hello, it's nice to have me here. Thank you for it.

Jéanne Rauch-Zender: My pleasure. I'd love to discuss your Tax Notes International article, "Pillar 2 and International Investment Agreements: 'QDMTT Payable' Seals an Internationally Wrongful Act." Why don't we start with you telling us a bit about your article?

Błażej Kuźniacki: Yes, so I think that the article is quite unusual in the sense that it bridges towards, on the one hand, obviously tax world with one of the, maybe not most expected by everybody, but at least for some global reform regarding global minimum taxation, and on the other hand, global investment regime.

So the main major purpose of the article was to show to tax audience that investment treaty regime is of relevance in respect of implementation and application of pillar 2. By doing so, I go back to the foundations of the OECD, the main purposes of the foundation treaties, in order to show that there may be some tensions with the very foundational principles of the OECD in the way how pillar 2 is processed by the OECD and the way, first of all, how it is communicated or how it is not communicated — that there may be a clash between investment treaty protection, under investment treaties, usually bilateral investment treaties on the one hand, and on the other implementation and application of pillar 2.

And I would say that the trigger for writing that article was the OECD's most recent guidance on pillar 2 released in July 2023. And in that guidance, OECD, I would say partly, but at the same time implicitly, addresses the issue that may arise out of interactions between pillar 2 and investment treaties.

But the way how they did it, it was, at least to me, somewhat surprising, because the OECD simply and very briefly stated that any challenge against QDMTT — qualified domestic minimum top-up tax, you may call it primary rule — will mean that immediately any MNE which decides to challenge that will be subject to income inclusion rule or UTPR.

So there will be not even the period in which you will await to the judgment or to arbitral hours, immediately just challenging that will mean that you will be subject to tax somewhere under secondary rules, under pillar 2.

So then I thought that maybe it is worth to zoom in into that part of the guidance and juxtapose it with investment treaty protection. And that's how the article goes through investment treaty protection standards like for inequitable treatment, umbrella clause, non-expropriation, and also general principles of law like principle of proportionality, principle of nondiscrimination, international custom, the rule which prohibits states to expropriate investments without prompt and adequate compensation.

Jéanne Rauch-Zender: Absolutely. I find the article very interesting. Now, I know you've also recently considered the approaches of the United Nations and the OECD to the interplay between pillar 2 and IIAs. Would you share your thoughts on this?

Błażej Kuźniacki: That's quite interesting dynamics because we are currently at quite, I would say, mature to not say late stage to reconsider anything related to implementation. We have almost mid-December 2023, so some states have already processed legislation domestically through domestic legislative procedures.

But, at the same time, we haven't seen anything which could even look like an analysis from the side of the OECD, analysis regarding interplay between investment treaties on the one side and pillar 2 model rules on the other. We have only one report from October 2022 released by the OECD.

The report is about tax incentives and pillar 2. So the report of the OECD is not explicitly about investment treaty protection, although you may think that, of course, the interaction between tax incentives and pillar 2 is indirectly of relevance for investment treaty protection, which is correct. But in that report, which consists of 140 paragraphs, only two paragraphs are devoted by the OECD to investment treaty protection.

And those paragraphs are not of analytical nature; they are purely descriptive. They just meant to show that the OECD acknowledges the existence of investment treaties, that they are mainly in the form of bilateral investment treaties and that they include investment protection standards that may be of relevance and utilization by MNEs in scope of pillar 2. Nothing more.

Actually, the OECD concluded those two paragraphs with a sentence saying that more analysis is needed. And bear in mind it was more than a year ago, so there was time to conclude analysis on the side of OECD, but it was not done. At the same time — or in the meantime, maybe, to say it more precisely — United Nations released the paper in late November 2023 about global minimum taxation and international investment agreements in which you can read, I would say quite robust analytical piece. There is analysis according to which the vast majority of international investment agreements, although they include tax carveouts, those carveouts are not relevant to carve out pillar 2 tax measures.

And one of the main observations of the U.N. is that it's unlikely that multinationals in scope of pillar 2 will arbitrate against states for various reasons. But it is likely that they will rely on investment agreements to at least engage states into a discussion regarding the consequences stemming from pillar 2. How and to how successful they become, is [a] question mark. There is also a question mark, I would say, whether there will be no arbitration at all. It really depends. It is very sensitive, very circumstantial, but it cannot be excluded upfront.

So long story short, when you compare the approach of the OECD and approach of the U.N. to that subject matter — to intersections between investment treaty protection and pillar 2 — the OECD decided to not produce any robust paper, any follow-up to tax incentives and pillar 2 report from October 2022, whereas U.N. used that time, last 12 months more or less, to produce quite robust paper to show states, to show other stakeholders like MNEs in scope, that there is actually something of high value to look at, to consider, and maybe in order to avoid arbitration and disputes, maybe to look closer how investment treaties can be leveraged by multinationals in scope of pillar 2 to address the issue of collateral benefit.

So those questions are just touched upon. I would say that just surface is scratched by U.N., for good reason, because it is quite sensitive to go any deeper into that direction. But there is interesting difference between U.N. and OECD: The OECD decided to be tacit about that potential clash, while U.N. decided to be more open and share with the stakeholders what the subject matter is about, how it can be leveraged by MNEs, how states may react to it, what are policy options.

So, in my opinion, when you match two views, perhaps the approach of U.N. is more something that we would expect that should be also addressed by the OECD a bit earlier. And it's uncertain how the U.N. approach is related to the OECD approach. It's likely that those international organizations speak with each other about that topic and that the report of U.N. is to a large extent consulted by the OECD.

Jéanne Rauch-Zender: Absolutely. Very insightful. Well, before I let you go, where can listeners find you online?

Błażej Kuźniacki: Well, they can just, which is challenging already, write my name and surname into Google. They will find me on SSRN with articles that are with open access, like that one in Tax Notes for which I am very grateful to you, as well. And on LinkedIn, I am quite active there to publish my personal opinions on certain topics.

Mainly those two sources. I would say LinkedIn and SSRN. Quite often I'm quite active academically, so they will also find me in various medias. It's easy enough actually just to write my name and surname to Google, and if they look for more tax insights, they can add word "tax"; if more investment treaty, they can add word "investment treaty."

Jéanne Rauch-Zender: Absolutely. Well, thank you so much for sharing your insight and for joining us today on the podcast, Błażej. It's been a pleasure.

Błażej Kuźniacki: Thank you very much. It was, indeed, very nice to speak with you. Hope to have another occasion for this discussion.

Jéanne Rauch-Zender: Absolutely. I will certainly have you back. You can find Błażej's article online at taxnotes.com. And be sure to subscribe to our YouTube channel Tax Notes for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you Dave.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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