Supreme Court Upholds the Mandatory Repatriation Tax

Supreme Court Upholds the Mandatory Repatriation Tax in Moore v. United States

The U.S. Supreme Court has affirmed the Ninth Circuit's decision in Moore v. United States, upholding the constitutionality of the mandatory repatriation tax enacted in 2017.

On June 20, 2024, the U.S. Supreme Court held in Moore v. United States that the mandatory repatriation tax (the "MRT") under section 965 of the Internal Revenue Code (the "Code") is constitutional in a narrowly tailored decision.

  • The MRT imposed a one-time tax on certain U.S. shareholders of foreign corporations based on these shareholders' pro rata share of the foreign corporation's realized but undistributed earnings accumulated since 1986. The MRT was enacted as part of the 2017 tax legislation commonly known as the Tax Cuts and Jobs Act.
  • The Court reviewed the Moores' challenge to the MRT under the Sixteenth Amendment, that is, whether the MRT was an unapportioned direct tax on property.
  • The Court affirmed the Ninth Circuit on the narrow grounds that the MRT is constitutional based on the Court's longstanding precedents, which establish a clear rule that Congress may constitutionally attribute undistributed (and untaxed) income realized by an entity to its equity holders and tax those equity holders on their pro rata share of the income.

Moore presented one of the first major constitutional tax cases that the Court has addressed in many years. Commentators posited that the Court's decision could upend many tax regimes in the Code (including subpart F, GILTI, PFIC, and partnership taxation) if the Court found an affirmative realization requirement. The Court did not go so far. Its "precise and narrow" decision concluded that it was enough that the MRT attributed realized income of one entity (a foreign corporation) to another person (certain of its U.S. shareholders).

The Court, however, did not address two other important issues: (i) whether the constitution would allow a wealth tax on unrealized income, and (ii) whether a U.S. company's realized income that is already subject to U.S. corporate taxation could be attributed to shareholders for purposes of their individual taxation. The decision, thus, leaves open questions, including the question of whether a tax that does not require realization (such as a wealth tax) would survive the Court's scrutiny. The concurring and dissenting opinions indicate that at least four Justices would require a realization event for an income tax to be considered constitutional under the Sixteenth Amendment.

While the Court's decision did not "render vast swaths" of the Code unconstitutional as some had anticipated, the Court's opinion, and those of the concurring and dissenting Justices, may still have broader implications for future challenges to certain areas of tax law and policy. These areas remain susceptible to review and, possibly, challenges. Taxpayers should stay tuned because Moore is unlikely to be the final word.

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