Supreme Court Upholds Mandatory Repatriation Tax’s Constitutionality

Supreme Court Upholds Mandatory Repatriation Tax’s Constitutionality

Charles G. Moore et al. v. United States; No. 20-36122; 36 F.4th 930; 2022-1 U.S. Tax Cas. (CCH) P50,16

June 21, 2024

On June 20, the Supreme Court ruled 7-2 and thereby granted the government a win in upholding the Mandatory Repatriation Tax’s (MRT) constitutionality. The MRT was signed into law in 2017 by former President Trump under the Tax Cuts and Jobs Act (TCJA), and the Court held that Congress has the power to tax either an entity or its shareholders, upholding a prior Ninth Circuit decision.

In 2005, the Moores invested in KisanKraft, a company which supplies modern tools to small farmers in India. The Moores held 11% of the common shares. KisanKraft is a controlled foreign corporation (CFC), which means that it is a foreign corporation whose ownership or voting rights are more than 50% owned by U.S. persons.

The TCJA created a new, one-time tax: the Mandatory Repatriation Tax (MRT). Under the MRT’s modified version of Subpart F, U.S. persons owning at least 10% of a CFC are taxed on the CFC’s profits, regardless of whether the earnings were distributed. The MRT was partly put in place to help collect the $2.6 trillion in earnings held by offshore companies that were not previously subject to U.S. taxation and generate $340 billion in tax revenue going forward.

The Moores challenged the constitutionality of Subpart F’s ability to permit taxation of a CFC’s income after 1986 through the MRT and filed for refund. The Moores raised two constitutional challenges to the MRT: (1) they contended that it violates the Apportionment Clause, and (2) they contended that it violates the Fifth Amendment’s Due Process Clause. The district court dismissed the action, and the taxpayer appealed.

The Ninth Circuit of Appeals subsequently affirmed the district court’s decision of dismissal for refund, finding that the lower court properly held that the MRT doesn’t violate the apportionment clause and doesn’t violate due process.

As stated in the decision, “The panel observed that courts have consistently upheld the constitutionality of taxes similar to the MRT” and that there is no constitutional ban on Congress disregarding the corporate form to facilitate taxation of shareholders’ income.

The decision settles one of the most closely watched cases of the year. It was expected that, had the Court ruled for the taxpayers, it could have had extraordinary consequences, potentially upsetting a myriad of tax provisions beyond the MRT. One such tax potentially impacted is the estate tax. In asserting that its decision was narrow, the Court noted that an estate tax might be considered a tax on property and not income. The constitutionality of an unapportioned tax on appreciation may depend on if realization is required, an issue the Court explicitly declined to address.