Supreme Court Ruling in Moore Could Affect Asset Management and Financial Products Taxation

On December 5, 2023, the Supreme Court heard oral arguments in Moore v. United States, a case involving a constitutional challenge to the Section 965 repatriation tax enacted in 2017. If the Supreme Court finds in favor of the Moores, it could potentially upend long-standing tax provisions that subject asset managers and their investors to current tax on unrealized income.

The question presented to the Court in Moore is whether the Section 965 mandatory transition tax is constitutional. The Moores argue that the tax is imposed on unrealized income, which is unconstitutional because income realization is a requirement under the 16th Amendment to the U.S. Constitution, and because long-standing jurisprudence requires that income be realized before it can be taxed. For additional discussion of the broader tax implications of Moore, see BDO’s Insight “The Challenge to the Section 965 Transition Tax: What a Supreme Court Ruling Could Mean for Taxpayers.”   

Specific tax provisions affecting the asset management industry that could be impacted by a decision in favor of the Moores include Section 1256, Section 475, and Section 1272.

Section 1256

Unrealized gains on certain contracts – such as regulated futures contracts, non-equity options, and certain foreign currency contracts – are marked to market and subject to tax under Section 1256. Taxpayers are required to treat Section 1256 contracts as if they were sold at fair market value on the last day of the tax year, and the resulting gain or loss is treated as 60% long-term and 40% short-term.

Section 475

Under Section 475, dealers in securities are required to mark to market their securities portfolios at year end. Traders in securities and traders and dealers in commodities may elect to mark their portfolios to market. Because the application of Section 475 to such taxpayers is elective (and not mandatory), the Moore case is unlikely to impact these taxpayers.

Section 1272

Original issue discount (OID) is treated as interest under Section 1272. OID is the excess of a debt instrument’s stated redemption price at maturity over its issue price. Zero coupon bond and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Generally, a taxpayer includes OID in taxable income as it accrues each year, regardless of whether the taxpayer receives any payments under the debt instrument.