Mandatory Repatriation Tax | Supreme Court Ruling | OH IN KY

Moore Means More Taxes – For Some: U.S. Supreme Court Upholds Repatriation Tax

Published on by Lauren Huster, Michael O'Hara, in Tax Services

Moore Means More Taxes – For Some: U.S. Supreme Court Upholds Repatriation Tax

In a highly anticipated decision on June 20, 2024, the U.S. Supreme Court upheld the constitutionality of the Tax Cuts and Jobs Act’s Mandatory Repatriation Tax (MRT) by a vote of 7-2, ruling that Congress can tax entities on their shareholders and partners and confirming the MRT as a constitutional tax on income. This has significant implications for U.S. taxpayers who own substantial shares in controlled foreign corporations (CFCs).

Washington couple Charles and Kathleen Moore brought the suit after being taxed an additional $15,000 on their 2017 tax bill due to their 13% stake in Indian corporation KisanKraft. The Moores claimed this was a violation of the Sixteenth Amendment, as an unconstitutional tax on unrealized income.

For ease of reference, the Sixteenth Amendment states that “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The Supreme Court, however, upheld the 9th Circuit Court of Appeals’ decision, asserting the Congress’s power to tax an entity or its shareholders or partners. The Court rules that the transition tax was imposed on KisanKraft’s realized income, thereby allowing the taxation of the Moores’ pro-rata share, noting that the attribution of the corporation’s realized and undistributed income to its shareholders is similar to the constitutionally accepted passthrough tax regimes for partnerships, S corporations, and subpart F income.

Sparking debate

While the ruling was widely expected, it’s sparked a debate on the taxation of unrealized income and its potential influence on future tax reforms and constitutional challenges, though the Court’s decision was limited to taxing shareholders on an entity’s realized and undistributed income that has been attributed to the shareholders.

Despite the Moores’ argument that the transition tax was different from other forms of passthrough taxation, the Supreme Court held that the transition tax is constitutional, thereby continuing the current taxation on certain income of the CFC.

What the ruling doesn’t include…and future implications

The justices did not provide a unanimous view on the requirement of income realization for unapportioned income taxes. The majority opinion, written by Justice Kavanaugh, declined to rule on the constitutional issue of income realization, leaving room for debates and potential future challenges.

The Moore case decision is a significant precedent in US taxation law, emphasizing Congress’s authority to levy taxes, and it could shape future debates and legislation concerning the taxation of unrealized income and wealth, and could lead to challenges on various tax provisions and influence the constitutionality of a proposed “wealth tax.” Additionally, the decision could impact the taxation of unrealized gains or income and serve as a basis for similar taxes on shareholders and other business owners.

If you have questions about the Moore ruling and how it might impact your tax burden, contact us for a free consultation with one of our top international tax professionals. As always, we’re here to help you build a better, brighter future.


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