US: Supreme Court Affirms Constitutionality of Mandatory Repatriation Tax in Moore v. United States

In a landmark decision, the Supreme Court upheld the constitutionality of the IRC Section 965 mandatory repatriation tax (MRT), asserting that Congress has the authority to attribute an entity's realized and undistributed income to its shareholders and partners. This ruling, in Moore v. United States, leaves unanswered the broader question of whether the 16th Amendment includes an income-realization requirement, thereby keeping the constitutionality of a potential wealth tax open for debate.

CASE BACKGROUND

Charles and Kathleen Moore invested in KisanKraft, an American-controlled foreign corporation, from 2006 to 2017. During this period, KisanKraft did not distribute any income to its American shareholders. The MRT, enacted in 2017 under the Tax Cuts and Jobs Act, imposed a one-time tax on certain US shareholders of controlled foreign corporations, with rates ranging from 8% to 15.5% on their pro-rata shares. This resulted in the Moores incurring a $14,729 tax liability for their share of KisanKraft's accumulated income. After paying the tax, the Moores sued for a refund, claiming that the MRT violated the Constitution's Direct Tax and Due Process clauses.

The district court dismissed their lawsuit, and the Ninth Circuit Court of Appeals affirmed this decision. The Moores then appealed to the Supreme Court, which granted certiorari to address the Direct Tax clause argument.

SUPREME COURT'S HOLDING

Article I of the Constitution allows Congress to impose both direct and indirect taxes. Direct taxes must be apportioned among the states, while indirect taxes, including income taxes, do not require apportionment. The Moores contended that the MRT is a direct tax on property, necessitating apportionment. The government, however, argued that the MRT is an income tax, exempt from apportionment.

Rejecting the Moores' arguments, the Court ruled that the MRT taxes the realized income of KisanKraft, noting that Congress has the authority to attribute an entity's realized and undistributed income to its shareholders or partners. This principle has been upheld in previous rulings related to Subpart F, which taxes US shareholders of foreign-controlled corporations on undistributed income.

Additionally, the Court dismissed the Moores' claim that the MRT differs from taxes on partnerships, S corporations, and closely held foreign corporations. The Court found that partnerships, although separate entities, were treated as such when the 16th Amendment was ratified. It also stated that S corporations exemplify Congress's authority to tax undistributed income attributed to shareholders.

The Court further rejected the Moores' use of "constructive realization" to distinguish the MRT from Subpart F, emphasizing that both taxes involve a sufficient degree of shareholder control.

BROADER IMPLICATIONS

The Court's decision in Moore is significant but stops short of addressing the broader issue of whether the 16th Amendment requires income to be "realized" before it can be taxed. The taxpayers had argued that the MRT was unconstitutional on this basis, which, if accepted, could have rendered numerous tax provisions unconstitutional. However, both the taxpayers and the government suggested narrower rulings during oral arguments, and the Court ultimately focused on Congress's established authority to attribute income.

The Court's ruling emphasized that the MRT taxes income realized by the corporation rather than the shareholders, aligning with precedent that allows taxing shareholders or partners on an entity's undistributed income. The decision did not address whether Congress could tax both the entity and its owners on the same undistributed income.

CONCURRING AND DISSENTING OPINIONS

The majority opinion left several questions unanswered, particularly regarding taxes on wealth and unrealized appreciation. Concurring and dissenting opinions reflected differing views on Congress's taxing power. Justice Jackson, concurring, stated that there is no constitutional requirement for income to be realized. Justices Barrett and Alito, consenting in judgment, believed a realization requirement exists. In dissent, Justices Thomas and Gorsuch criticized the Court for avoiding the realization argument, asserting that the 16th Amendment necessitates realization before taxation.

CONCLUSION

The Supreme Court's decision in Moore v. United States upholds the constitutionality of the MRT and reaffirms Congress's power to attribute an entity's income to its shareholders. The ruling maintains the status quo for Subpart F, Subchapter K, and Subchapter S, while leaving the broader issue of income realization and potential wealth taxes for future consideration.

SOURCES/ RECOMMENDED READ:

• 22-800 Moore v. United States (06/20/2024) (supremecourt.gov)
• U.S. Supreme Court holds mandatory repatriation tax is constitutional | EY - Global