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The Supreme Court in a recent ruling on June 20, 2024, in a 7-2 decision, upheld the constitutionality of the mandatory repatriation tax (MRT) under Article I and the 16th Amendment. This ruling rejected a challenge by Charles and Kathleen Moore (“the plaintiffs”), a couple from Washington, who argued that the provision was unconstitutional. Justice Brett Kavanaugh authored the majority opinion, while Justices Clarence Thomas and Neil Gorsuch dissented.

Moore v. United States case:

The Moore v. United States case, a case that could have significant implications for U.S. taxpayers with certain foreign investments, focused on whether they could be subjected to a one-time tax on those holdings. The plaintiffs, who had an ownership interest in an agricultural equipment company in India, despite not receiving any dividends or income from their investment over the years, were required to pay approximately $15,000 in taxes on earnings attributed to them as shareholders because of the mandatory repatriation tax (MRT).

The plaintiffs subsequently argued that the MRT was unconstitutional, asserting that income must be realized to be taxable under the 16th Amendment, which empowers Congress to impose a federal income tax. Their lawsuit contested the TCJA’s provision that imposed this one-time tax on U.S. taxpayers with substantial ownership in specific foreign corporations.

In Moore, the Supreme Court affirmed the constitutionality of the Mandatory Repatriation Tax, introduced in the Tax Cuts and Jobs Act of 2017. This tax mandates that U.S. shareholders of foreign corporations pay taxes on their proportional share of the corporation’s accumulated undistributed earnings.

By ruling in favor of the government, the Court upheld the decision of the Ninth Circuit Court of Appeals, which noted that the MRT was intended to close loopholes enabling shareholders to avoid taxes on offshore earnings. This Supreme Court decision essentially reinforced the government’s authority to tax foreign-held profits, at least in the specific circumstances of this case.

Conclusion:

Simply put, the decision reaffirms that Congress can attribute a foreign corporation’s distributed and undistributed income to its U.S. shareholders and tax them accordingly. The Supreme Court’s ruling supports the existing tax framework, providing stability and validation.