IRS News

Supreme Court Hopes to Avoid Tax Code Upheaval in Moore Ruling

Regardless of whether the Supreme Court rules in favor of petitioners or the government in a constitutional challenge to the Tax Cuts and Jobs Act’s one-time mandatory repatriation tax—or “transition tax”—the justices voiced a lack of appetite for its decision to have broad consequences over the concept of income in the United States. On December 5, the Court heard oral arguments in Moore v. U.S. (Docket 22-800), a closely watched case revolving around the TCJA provision that applies to U.S. taxpayers who own at least 10% interest in a controlled foreign corporation. The tax was applied to Charles and Kathleen Moore, a Washington-based couple, whose 13% stake in an Indian company, KisanKraft, lead to an additional $15,000 on their 2017 taxes. The Moores’ suit at its core maintains that the tax violates the Sixteenth Amendment as an unconstitutional tax on unrealized income. They argued to the lower courts and in Supreme Court briefs that the company’s earnings were reinvested and not distributed to shareholders. Baker & Hostetler LLP partner Andrew Grossman represented the petitioners at oral arguments, where he reiterated the need for a realization requirement for a tax to be valid. “Without realization, there is no limiting principle,” Grossman said in his opening statement. “Accepting the government’s position on income would make a hash of the current law. … If the government’s position in this case is right, then current law already requires taxpayers to report and pay tax on appreciation in the value of all their assets on corporate earnings for any stocks that they own, and on any paper gains from their contracts in loans. That’s not how the income tax has ever worked going back to 1913. Again, the reason the law doesn’t work that way is the obvious one: unrealized gains are not income.” Justice Amy Coney Barrett asked Grossman if it would be 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 Sixteenth Amendment. “I think it ultimately comes down to a 16th amendment question for the same reason that the court thought so in [Eisner v. Macomber], which is that a shareholder’s interest in a corporation, including in its income, is a capital interest and therefore a property interest,” Grossman responded. “And so if there is some reason to look beyond that, and attribute income to the shareholder, that would necessarily raise a question of income, and why it is that this shareholder isn’t being taxed on what would otherwise be a property interest.” The government was represented by Solicitor General Elizabeth Prelogar of the Department of Justice. Throughout proceedings, the government’s position was that there is no realization requirement. Justices, as they were worried about what a ruling for the Moores would mean, also presented the same concerns to Prelogar.


First Direct Accounting Standard for Reporting Crypto Assets Published

On December 13, 2023, FASB issued its first direct accounting and disclosure standard on crypto assets to provide guidance that more accurately reflects the economics of Bitcoin and similar tokens in financial reports. The rules require crypto assets that meet six characteristics to be measured at fair value each reporting period with changes in fair value recognized in net income—enabling upswings of tokens to be captured. The assets must be presented separately from other intangible assets on the balance sheet as well as shown separately in the income statement when remeasured. Furthermore, businesses need to provide substantial disclosures so that investors can understand their crypto asset holdings, significant holdings, contractual sale restrictions, and changes during the reporting period, according to the rules. The standard is a welcome first step, covering tokens that hold up to about 75% of market capitalization, those in the crypto sector said moments after issuance. “It’s a big baby step in the right direction because when you think about this guidance it arguably covers a majority of the market capitalization of cryptocurrencies, because it’s going to hit the big stuff like Bitcoin and Ethereum which alone are upwards of 60, 75% of market capitalization for the crypto industry,” Matt Graham, senior manager at Moss Adams, said. “It’s good in terms of its broad coverage of value but it’s not great in terms of its low coverage of asset types,” he said. “That said, it’s better to take a step in the right direction than to not do anything at all or wait until we have a massively comprehensive framework that covers everything.”


New Board Member Botic Encourages All to Weigh in on Proposals

Newest PCAOB member George Botic emphasized the importance of getting feedback from every constituent as the board is pursuing an ambitious standards-setting agenda under Chair Erica Williams’ leadership. “I think it’s critically important that we are engaged and that we are hearing from the broad ecosystem whether it’s … investors, auditors, the audit profession, the academic community, preparers, that we’re open and willing to listen to all sides of the equation, all different views because some folks may bring things that we haven’t thought about, which is things we may not have thought about it, but it could be top of mind for someone else,” Botic said at the AICPA & CIMA Conference on Current SEC and PCAOB Developments in Washington, D.C., on December 4, 2023. Botic, a former veteran staffer, became the latest board member in late October, succeeding Duane DesParte. He discussed his priorities as a new board member at the conference. He was previously director of the PCAOB’s Division of Registration and Inspections (DRI). These ambitious plans come as the board still has many standards on the books that were originally written by the AICPA over two decades ago, before the PCAOB was established by the Sarbanes-Oxley Act of 2002. The AICPA’s GAAS were supposed to have been temporary—they are called interim standards—but 20 years have already passed by without significant updates for some of them. And nearly all standards on the board’s agendas are those interim standards. “The world has changed dramatically over the last 20 years,” Williams said at the same conference, where all five board members spoke. “To keep investors protected, we must keep up. And that’s exactly what we are working to do.”