United States Supreme Court Upholds Mandatory Repatriation Tax

On June 20, 2024, the United States Supreme Court decision was released in the Moore¹ case, affirming the constitutionality of the mandatory repatriation tax (MRT) imposed by Internal Revenue Code Section 965. Enacted under the Tax Cuts and Jobs Act in 2017, Section 965 requires a one-time tax on U.S. shareholders owning 10% or more of a controlled foreign corporation (CFC). All accumulated post-1986 deferred foreign income of the CFC was classified as taxable income in 2017, requiring shareholders to include their pro-rata share as taxable income in 2017.

The taxpayers in Moore owned 13% of an Indian CFC. They never received a distribution from the CFC and claimed that Section 965 acted as a wealth tax on unrealized income. The Moores challenged the law, contending that the tax violates the Sixteenth Amendment of the Constitution. The Constitution only permits the federal government to tax income. 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 plaintiffs argued that Section 965 should be seen as a tax on property, not income. The position depended on what the term “realization of income” means under the Sixteenth Amendment. The petitioner argued that “derived” implies a level of realization, under a common meaning interpretation despite the fact that the Sixteenth Amendment does not specifically require it.

Court’s Reasoning 

What distinguishes income from property? The Moores argued that income requires realization, which occurs when gains come into the taxpayer’s coffers—for example, through wages, sales, or dividends, as distinct from appreciation in the value of a home, stock investment, or other property. The Moores also contended that the MRT did not tax any income that they have realized. Critically, however, the MRT does tax realized income—namely, income realized by the corporation. The MRT attributes the income of the corporation to the shareholders and then taxes the shareholders on their share of that undistributed corporate income. The narrow question that the Court addressed was 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 Court responded with an emphatic “yes” based on longstanding precedents.

The Court’s longstanding precedents plainly establish that, when dealing with an entity’s undistributed income, Congress may either tax the entity or tax its shareholders or partners. Whichever method Congress chooses, the Court has held that the tax remains a tax on income. Section 965 does not impose a tax on property, as the Moores contend; therefore, it is not unconstitutionally lacking apportionment.²

Having upheld Section 965, states that adopted that provision are presumably safe from challenges under the reasons raised by the Moores. Furthermore, the reasoning in the Moore decision likely extends easily enough to global intangible low-taxed income (GILTI). Interestingly, the opinion authored by Justice Kavanaugh indicated that treatment of the CFCs pursuant to Section 965 was tantamount to treating the CFCs as pass-through entities. Query whether that opens the door to statutory-based claims to apportionment relief under aggregate theories relative to various states’ treatment of pass-through entities.

Ian Boccaccio, Principal and Practice Leader in Ryan’s Income Tax practice, commented: “Now that Moore has been settled, we are focused on the constitutionality of the IRS treatment of tax overpayments in concert with the statutory eight-year installment plan on IRC 965 liability. The IRS effectively applied any overpayments from 2017 against taxpayer 965 liability even when a valid eight-year election was made.” 

Ryan’s experts have developed many unique statutory positions to relieve taxpayers of this unwarranted burden. Please contact the individuals listed below for assistance in reducing the state income tax impact of the taxation of foreign income.

¹ Moore v. U.S., No. 22-800.

² Article I of the Constitution affords Congress broad power to lay and collect taxes. That power includes direct taxes—those imposed on persons or property—and indirect taxes—those imposed on activities or transactions. Direct taxes must be apportioned among the states according to each state’s population, while indirect taxes are permitted without apportionment but must “be uniform throughout the United States.” Taxes on income are indirect taxes, and the Sixteenth Amendment confirms that taxes on income need not be apportioned.

TECHNICAL INFORMATION CONTACTS:

Ian Boccaccio
Principal
Ryan
469.399.4545
ian.boccaccio@ryan.com

Samuel Tae
Principal
Ryan
404.365.0922
samuel.tae@ryan.com

Joseph Schmidt
Director
Ryan
704.552.0722
joseph.schmidt@ryan.com

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