On June 20, 2024, the U.S. Supreme Court released its decision in the case of Moore v. U.S., No. 22-800, upholding the constitutionality of the Mandatory Repatriation Tax (MRT) that was enacted as part of the 2017 tax law commonly known as the Tax Cuts and Jobs Act. The case was closely followed as it could have had significant ramifications on the constitutionality of many foundational aspects of our current tax system, far beyond the MRT. Although the decision was narrowly tailored, the Supreme Court’s ruling could affect future tax policies and administration proposals such as the taxation of wealth accumulation.
In the Moore decision, the Court addressed the constitutionality of the MRT and specifically whether “Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.” The MRT imposes on shareholders of U.S. controlled foreign corporations (CFCs) a one-time tax on the accumulated and undistributed income of such CFCs. U.S. shareholders are taxed at a rate that ranges from 8% to 15.5% on their share of a CFC’s accumulated income. The taxpayers in this case were a shareholder of a CFC located in India that generated and accumulated income from the time the taxpayers became a shareholder from 2006 to 2017. Since no distributions were received from the CFC, the taxpayers contended that they did not realize any income as a result of their ownership in the CFC. The taxpayers also argued that the MRT is an unconstitutional direct tax because it is not subject to apportionment under the 16th Amendment of the U.S. Constitution.
The Court upheld the constitutionality of the MRT, citing a long line of precedent relating to the indirect nature of the MRT and Congress’s authority to tax shareholders and partners of business entities on the entities’ undistributed income. The opinion included an overview of U.S. constitutional history relating to taxation, including various longstanding cases and laws relating to the taxation of partnerships, S corporations and Subpart F income. Notably, the majority opinion refrained from addressing arguments pertaining to a requirement that income be realized by a taxpayer before it can be taxed, although those arguments were articulated in the dissenting opinion from Justices Thomas and Gorsuch. This was due, in part, to a finding by the majority that the “MRT applies to income that was realized and accumulated in the past by foreign corporations, but not taxed by the United States.”
Insight
The Court in the majority opinion narrowed the scope of its decision and recognized the potential implications on the broader U.S. tax system if the taxpayer’s arguments prevailed. The Court stated that the taxpayer’s argument, “taken to its logical conclusion, could render vast swaths of the Internal Revenue Code unconstitutional” and “deprive the American people of trillions in lost revenue.” The Court further emphasized that “[t]he Constitution does not require that fiscal calamity.”
These “vast swaths” of the Internal Revenue Code could have included those contained in Subchapter K (partnerships), Subchapter S (S corporations), Subpart F, Global Intangible Low-Taxed Income, personal holding companies, accrual accounting, mark-to-market accounting, deemed stock distributions, certain futures contracts, original issue discount instruments and gift taxes. The narrow ruling in Moore appears to have mitigated this risk of “fiscal calamity.”
The Court also recognized that certain tax policies may be influenced by the decision. These policies include administration proposals that include a minimum tax on unrealized capital for households with over $100 million of net worth. Another such proposal includes deemed realization on certain transfers of appreciated property at death, by gift or to or from a trust, partnership or other non-corporate entity. Addressing these concerns, the Court stated in a footnote that “our analysis today does not address the distinct issues that would be raised by (i) an attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.” These statements – together with more overt statements in the concurring and dissenting opinions from other justices – foretell dubious prospects for these other proposals.
For additional information regarding the Moore decision and its potential implications, please contact a member of the NTO Team.
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