The Supreme Court upheld the constitutionality of the mandatory repatriation tax (MRT), a provision from the 2017 tax reform targeting U.S. taxpayers with shares in certain foreign corporations. The court ruled 7-2 against a challenge by Charles and Kathleen Moore, who argued that the tax was unconstitutional. Justice Brett Kavanaugh authored the majority opinion, with Justices Clarence Thomas and Neil Gorsuch dissenting.
Kavanaugh clarified that the question addressed was whether Congress could attribute an entity’s realized and undistributed income to its shareholders and tax them accordingly. He cited longstanding precedents and practices that affirmed Congress’s authority to do so. The court’s decision avoided addressing broader issues related to taxing holdings, wealth, or net worth, focusing narrowly on the MRT.
The ruling prevents potential disruptions to the tax code, which could have occurred if the MRT had been invalidated. Kavanaugh noted that such a broad invalidation could render many tax provisions unconstitutional, leading to significant revenue losses and necessitating drastic fiscal changes. The court, he asserted, does not mandate such fiscal instability.
Supreme Court Affirms Constitutionality of Mandatory Repatriation Tax in Key Legal Ruling
The case, Moore v. U.S., involved the Moores being taxed nearly $15,000 for their share of reinvested earnings from KisanKraft Tools, an Indian company in which they had invested $40,000 for a 13% stake.
Although they received no distributions, the MRT required them to pay taxes on their share of the company’s earnings post-1986. This tax was part of the Tax Cut and Jobs Act, aimed at raising approximately $340 billion over a decade.
The Moores challenged the tax’s constitutionality but lost at both the federal district court and the U.S. Court of Appeals for the 9th Circuit, which upheld the tax under the 16th Amendment. The Supreme Court affirmed this ruling, referencing prior decisions supporting Congress’s authority to tax shareholders on undistributed corporate income.
Justice Amy Coney Barrett, joined by Justice Samuel Alito, concurred with the decision but disagreed with the majority’s reasoning, suggesting the 16th Amendment doesn’t authorize taxing unrealized sums without state apportionment. Justice Thomas, in his dissent joined by Gorsuch, argued the tax on unrealized gains was unconstitutional, as it wasn’t actual income.
Thomas also criticized the majority’s concerns about potential fiscal impacts, emphasizing that the judiciary should not avoid constitutional limits on taxing power due to such concerns.
During oral arguments, justices debated the broader implications of the MRT, with some warning that upholding it could lead to more extensive taxation of unrealized gains. Justice Alito, despite pressure to recuse himself due to past interviews, participated in the case, finding no valid reason to step aside.
