Quick Overview

  • The U.S. Supreme Court ruled in Moore v. United States, rejecting some businesses' expectations of tax relief and affirming the constitutionality of the one-time mandatory repatriation tax (MRT) under the Tax Cuts and Jobs Act on accumulated undistributed earnings of U.S. shareholders in foreign company investments.
  • Justice Brett Kavanaugh wrote in the majority opinion: "In 2017, Congress enacted a new law that attributed more income of U.S.-controlled foreign corporations, including active business income, to their U.S. shareholders and taxed those shareholders on that income. The question is whether that 2017 tax, the mandatory repatriation tax, is consistent with Article I, Sections 8 and 9, and the Sixteenth Amendment. This Court's longstanding precedents indicate that the answer is yes." A link to Kavanaugh's opinion is availablehere。
  • According to Joshua Odintz, a partner at Holland & Knight, the ruling effectively renders any refund claims based on the unconstitutionality of the tax moot. Odintz was part of a legal team led by George A. Callas, a federal tax policy expert and former senior tax advisor to ex-House Speaker Paul Ryan, which filed an amicus brief supporting the government.

In-Depth Analysis

Odintz noted that while seven justices agreed on the constitutionality issue, the Court was divided on the analytical framework to use when assessing whether future tax provisions are constitutional. Justice Clarence Thomas filed a dissenting opinion, joined by Justice Neil Gorsuch; Justice Amy Coney Barrett filed a concurring opinion.

"This is a very narrow ruling, leaving room for future challenges," Odintz said. "That's a real issue for businesses: there may be other challenges to tax code provisions that affect them."

The opinion describes the MRT as a new, one-time pass-through tax on certain U.S. shareholders and U.S.-controlled foreign corporations, noting it was designed to address a loophole in the existing system where "U.S.-controlled foreign corporations earned and accumulated trillions of dollars in income overseas, and that income was almost entirely untaxed by the United States."

The lawsuit was originally filed by Charles and Kathleen Moore, who invested $40,000 in a U.S.-controlled foreign corporation in India, acquiring 13% ownership. From 2006 to 2017, the Moores' share of the company's accumulated income was $508,000, and after deductions, they reported $132,512 in income. They paid $14,729 in taxes on this and then sued for a refund, claiming the MRT was unconstitutional under the Direct Tax Clause and that its retroactive application to past income violated the Fifth Amendment.

The Moores were not alone in opposing the tax. In an amicus brief filed in the case, the U.S. Chamber of Commerce argued that earnings need to be realized to meet the income threshold. The Chamber wrote in its brief: "Just as a person who buys a plant and keeps it, a retirement account contributor still waiting to retire, or a baseball card collector who keeps cards under a childhood bed, the Moores have not seen or realized a penny since their initial investment. 'Income' has a clear and long-standing meaning: to be 'income,' it must in some way 'come in.'"

As previously reported by CFO Dive, in 2020, the IRS said it would consider requests for double taxation relief under the new repatriation rules, as covered in the report athere。