The author of this article suggests that the outcome of the Moore case could have significant implications for estate planning. Currently, capital gains tax is not levied on assets held until death. These assets are included in the estate at market value and subject to estate tax, but the underlying capital gains are not taxed. A ruling might change this.

FWR regular contributor Matthew Erskine, managing partner at Erskine & Erskine, weighs in on an important tax case going through the courts. The editors are pleased to share these thoughts, and invite replies. The usual disclaimers apply. Please email tom.burroughes@wealthbriefing.com if you wish to respond.

The implications of the case brought by Charles and Kathleen Moore (1) on the existing tax framework concerning unrealized gains and its potential influence on estate planning. This case challenges the prevailing norms and understands its far-reaching consequences. This Supreme Court case has sparked debates on tax law fairness and liquidity, with far-reaching consequences in sight.

Understanding the Moore case
At its core, the Moore case questions the fairness of taxing unrealized gains – the paper value increase of an asset not yet realized through a sale. Charles and Kathleen Moore argue that this form of taxation contradicts fairness and liquidity principles, burdening inaccessible wealth. The case highlights the need for a nuanced approach to taxation that considers the timing and accessibility of wealth creation, especially those new taxes proposed by Bernie Sanders and Elizabeth Warren, among others, in the recent past.

Legal context and precedents
The Moore v. United States case primarily concerns the constitutionality of a provision in the 2017 Tax Cuts and Jobs Act (TCJA) that imposes a transition tax on undistributed profits accrued by US Controlled Foreign Corporations (CFCs) between 1986 and the end of 2017, also known as the mandatory repatriation tax (MRT). However, the broader implications of the case have led to discussions about the taxation of unrealized capital gains and the potential impact on estate planning.

Proponents of taxing unrealized capital gains argue that it could help address wealth inequality and ensure that the wealthy pay their fair share of taxes. They contend that the current tax system allows the wealthy to accumulate significant wealth through unrealized capital gains, which are not taxed until they are "realized" or sold. This allows the wealthy to defer taxation, sometimes indefinitely, particularly if assets are held until death.

Traditionally, however, the US tax system adheres to the realization principle, where income is taxed upon asset sale or disposition of an asset. The repatriation tax, which the Moores are contesting, is a tax on the unrealized gain on appreciated assets held outside of the United States that is in unrealized gain. This is based on the language of the 16th amendment “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The US Chamber of Commerce, in its amicus brief, argued that "income" has a plain meaning and "realization has been the defining event that turns something from an asset holding value to income subject to federal tax under the Sixteenth Amendment." They argue that allowing unrealized gains to be taxed would mean that companies wouldn’t control their realization decisions.

Implications for estate planning
The outcome of the Moore case could have significant implications for estate planning. Currently, the capital gains tax is not levied on assets held until death. These assets are included in the estate at market value and subject to estate tax, but the underlying capital gains are not taxed. If the Supreme Court were to rule in favor of taxing unrealized capital gains, it could change this treatment and potentially lead to higher tax liabilities for estates with significant unrealized capital gains.

Estate planners would need to consider:
1. Valuation challenges: Estate planners would face the complexities of continuously assessing unrealized asset values, a subjective and intricate task. Appropriate valuation methodologies and expert opinions would play a crucial role in determining tax liabilities; 

2. Liquidity concerns: Taxing unrealized gains may lead to liquidity issues, especially for estates with illiquid assets such as real estate or family businesses. Estate planners would need to explore options for generating liquidity while minimizing the tax burden; 

3. Shift in asset allocation: Individuals may be incentivized to adjust their portfolios, favoring less volatile or appreciating assets to minimize the tax burden associated with unrealized gains. Estate planners would need to guide clients in optimizing their asset allocation strategies; and 

4. New planning instruments: The estate planning industry would likely introduce innovative financial instruments and strategies to mitigate the potential impact of this tax policy shift. Estate planners would need to stay updated on emerging options and adapt their approaches accordingly.

Conclusion
However, based on the oral arguments, it appears unlikely that the Supreme Court is poised to issue a decision that will bring about significant changes to the current federal tax rules. The Court’s decision could affect the viability of future tax legislation governing both domestic and global capital markets, such as legislation relating to a wealth tax or a tax on unrealized capital gains that could be on the agenda after the next election. 

The Moore case has sparked a significant debate about the taxation of unrealized capital gains and its potential implications for estate planning. The outcome of the case could have far-reaching implications for the tax treatment of unrealized capital gains and the broader US tax code.

Footnote

1, Charles G. Moore et ux v. United States