Major Supreme Court Tax Cases and Their Rulings

The Supreme Court’s role in the United States tax system is powerful and selective. The Court hears a limited number of tax-related cases, but its rulings can have a profound impact, clarifying ambiguities in the tax code that affect millions of taxpayers and businesses. These decisions can ripple through the economy, influencing everything from individual financial planning to corporate tax strategies and the balance of power between federal and state governments. The cases often involve fundamental questions about the definition of “income” under the Sixteenth Amendment and the constitutional limits on Congress’s power to tax, establishing new precedents that guide tax law for decades.

The Moore v. United States Decision

The case of Moore v. United States centered on Charles and Kathleen Moore, who in 2005 invested in an Indian company, KisanKraft, receiving a minority stake. KisanKraft was profitable but reinvested its earnings back into the business instead of distributing them as dividends. For years, under established U.S. tax principles, the Moores were not required to pay U.S. income tax on their share of the company’s earnings until those profits were actually distributed.

This situation changed with the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). A provision of this reform was the Mandatory Repatriation Tax (MRT), codified in Internal Revenue Code Section 965. The MRT imposed a one-time tax on the accumulated and previously untaxed foreign earnings of certain foreign corporations, attributing that income to their U.S. shareholders. Consequently, the Moores received a tax bill for $14,729 on their share of KisanKraft’s retained earnings, even though they had never personally received any of that money.

The Moores’ legal challenge was grounded in the Sixteenth Amendment, which grants Congress the power to tax “incomes.” They argued the MRT was not a tax on “income” because the money was never realized—that is, received by the taxpayer for their separate use. The U.S. government countered that Congress has long been understood to have the authority to tax shareholders on their portion of a corporation’s income. The government warned that a ruling in favor of the Moores could have far-reaching consequences, potentially invalidating other parts of the tax code that tax individuals on undistributed entity-level income.

In a 7-2 decision, the Supreme Court upheld the MRT. Writing for the majority, Justice Kavanaugh framed the issue narrowly, focusing on whether Congress may attribute an entity’s realized income to its shareholders and tax them on it. The Court concluded its precedents permitted this, pointing to similar tax provisions governing partnerships. The majority opinion distinguished the MRT from a hypothetical wealth tax, emphasizing the tax was on income realized by the corporation. The narrowness of the holding means that while the MRT is secure, larger constitutional questions about realization and wealth taxation remain unanswered.

Key Rulings on State and Local Taxation

South Dakota v. Wayfair, Inc.

A case that reshaped state sales tax collection was South Dakota v. Wayfair, Inc. in 2018. For decades, the controlling precedent was Quill Corp. v. North Dakota, which required a business to have a physical presence, such as an office or warehouse, within a state to be required to collect sales tax. This “physical presence” rule became increasingly problematic with the rise of e-commerce, as online retailers could sell goods into a state without collecting sales tax.

The Wayfair decision explicitly overturned the Quill precedent. The Court recognized that the digital economy had rendered the physical presence rule obsolete and endorsed the concept of “economic nexus.” This holds that a state can require an out-of-state seller to collect sales tax if the seller has a significant economic connection to the state. South Dakota’s law, which triggered the requirement for sellers with more than $100,000 in sales or 200 separate transactions, was upheld as a constitutional example.

Following the ruling, nearly every state with a sales tax enacted its own economic nexus laws, generally modeling their thresholds on the South Dakota statute. The decision shifted the burden of sales tax collection, requiring remote sellers to navigate a complex web of state and local tax regulations.

Comptroller of the Treasury of Maryland v. Wynne

Another case defining the limits of state taxation is Comptroller of the Treasury of Maryland v. Wynne (2015). This case dealt with double taxation, as Maryland’s tax system allowed residents a credit for income taxes paid to other states, but not against the county-level portion of the income tax. The Wynnes, Maryland residents, owned shares in an S corporation operating in multiple states and were taxed on this income by other states and again by Maryland without receiving a full credit.

The Supreme Court ruled that Maryland’s tax scheme was unconstitutional because it violated the Commerce Clause. The Court reasoned that the system penalized Maryland residents for earning income outside the state and discouraged interstate commerce. The ruling affirmed the principle that states must provide a mechanism to prevent the double taxation of their residents’ income earned in other states.

Landmark Cases Defining Federal Income

Eisner v. Macomber

One of the earliest cases to tackle the meaning of “income” was Eisner v. Macomber, decided in 1920. The case involved a shareholder who received a stock dividend, meaning she was given additional shares in the company proportional to her existing holdings, but no cash. The government sought to tax the value of these new shares as income.

The Court ruled that a stock dividend was not income under the Sixteenth Amendment. It introduced the concept of “realization,” holding that for something to be taxed as income, it must be a gain that is derived from capital, severed from it, and received by the taxpayer. Since the stock dividend merely gave the shareholder more paper representing the same underlying ownership, the Court concluded no actual gain had been realized. This decision cemented the principle that an increase in property value is not taxable as income until it is sold.

Commissioner v. Glenshaw Glass Co.

This narrow view of income was broadened by the Court’s 1955 decision in Commissioner v. Glenshaw Glass Co. The case involved two companies that had received money from settlements in antitrust lawsuits. The companies argued that these payments, which were for punitive damages, did not constitute taxable income because they were not derived from capital or labor.

The Supreme Court disagreed and formulated a much more expansive definition of income. The Court declared that income includes any “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” This definition swept away the restrictive “source of income” requirements from Macomber. The Glenshaw Glass definition is now the foundational standard for what constitutes gross income, unless specifically excluded by law.

Cases Impacting Business and International Taxation

A case clarifying the procedural rights of businesses in challenging IRS regulations is CIC Services, LLC v. IRS, decided in 2021. The case revolved around an IRS notice that identified certain micro-captive insurance transactions as potentially abusive tax shelters and imposed stringent reporting requirements. Failure to comply with these reporting mandates carried substantial financial penalties.

The primary obstacle for CIC Services was the Anti-Injunction Act (AIA), a federal law that generally prohibits lawsuits intended to restrain the assessment or collection of any tax. The IRS argued that because the penalty for failing to report was itself a tax, any lawsuit seeking to invalidate the reporting rule was an attempt to stop the collection of that potential penalty. This interpretation would force taxpayers to either comply with a rule they believed was unlawful or violate it and pay the penalty before they could challenge it in court.

The Supreme Court, in a unanimous decision, ruled in favor of CIC Services. The Court reasoned that the lawsuit was not directly aimed at stopping the collection of a tax, but at challenging the legality of the underlying reporting mandate. Since the reporting obligation was separate from and preceded any potential tax penalty, the AIA did not bar a pre-enforcement challenge. This decision provides businesses with a clearer path to challenge IRS regulations without first having to incur penalties.