The Supreme Court ruled 7-2 in favor of the mandatory repatriation tax (MRT), a component of the 2017 tax reform law, dismissing a challenge posed by Charles and Kathleen Moore.
According to CBS News, the MRT, instituted under the Tax Cuts and Jobs Act of 2017, mandates that U.S. taxpayers with at least a 10% stake in certain foreign corporations pay taxes on those companies' earnings from 1986. The Moores, who had invested $40,000 in KisanKraft Tools in 2006, faced a tax bill nearing $15,000 despite not receiving any distributions from the company. Their challenge to the MRT argued that the tax exceeded Congress's constitutional authority.
Justice Brett Kavanaugh authored the majority opinion, which was supported by a 7-2 vote. The decision upheld the constitutionality of the MRT under Article I and the 16th Amendment, stating that Congress has the authority to tax shareholders on their portions of an entity's undistributed income. This affirmation by the highest court ensures that the MRT, projected to generate approximately $340 billion over ten years, remains intact.
Kavanaugh wrote that the Court's longstanding precedents and Congress's established practices justified the MRT's constitutionality. He emphasized that eliminating such tax provisions would have severe financial implications for the U.S. government and could necessitate drastic cuts to national programs or significant tax increases on other sources, including ordinary Americans.
Justice Kavanaugh said:
[T]he precise and narrow question that the Court addresses today is 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. This Court's longstanding precedents, reflected in and reinforced by Congress's longstanding practice, establish that the answer is yes.
Justices Clarence Thomas and Neil Gorsuch dissented from the majority opinion. Thomas argued that the MRT's novel features did not align with traditional income taxes and raised constitutional concerns. He criticized the majority for not upholding limitations on Congress's taxing power in significant cases, warning of potential fiscal instability.
Justice Thomas expressed his concerns in his dissent:
The fact that the MRT has novel features does not mean that it is unconstitutional. But, the MRT is undeniably novel when compared to older income taxes, and many of those differences are constitutionally relevant. Because the MRT is imposed merely based on ownership of shares in a corporation, it does not operate as a tax on income.
In addition to the dissent, Justice Amy Coney Barrett, joined by Justice Samuel Alito, issued a concurring opinion supporting the majority's stance. Justice Alito faced and declined recusal pressure due to prior interviews with a lawyer representing the Moores, asserting that there was "no valid reason" for his recusal.
The ruling avoided addressing potential issues related to taxes on holdings, wealth, net worth, or appreciation, focusing specifically on the MRT's constitutionality. By doing so, the Court alleviated concerns about invalidating other tax provisions and maintained the stability of the U.S. tax system. However, the case highlighted the ongoing debate over the constitutional scope of Congress's taxing power.
During oral arguments, some justices sought clarity on the limits of Congress's taxing authority, reflecting broader concerns about the potential implications of the ruling. The decision underscores the importance of maintaining a balanced approach to taxation while ensuring that critical national programs remain funded.
Charles and Kathleen Moore's legal challenge began after they paid the MRT and sought a refund, arguing that the tax was unconstitutional. Their case progressed through the federal district court and the 9th Circuit Court of Appeals, both of which ruled in favor of the government. The Supreme Court's affirmation of the 9th Circuit's decision marks the final chapter in the Moores' legal battle.
The Moores' investment in KisanKraft Tools and their subsequent tax bill exemplifies the real-world impact of the MRT on U.S. taxpayers with foreign corporation shares. While the Court's ruling supports the government's stance, it also highlights the complexities and challenges faced by taxpayers navigating the international tax landscape.
The Supreme Court's ruling upholding the mandatory repatriation tax reaffirms Congress's authority to tax shareholders on undistributed income from foreign corporations. The decision, delivered in a 7-2 vote, concludes the legal challenge brought by Charles and Kathleen Moore, who argued that the tax exceeded constitutional limits. With the MRT projected to generate significant revenue, the ruling underscores the importance of maintaining critical national programs while navigating the complexities of international taxation. Dissenting opinions from Justices Thomas and Gorsuch highlight ongoing debates about the constitutional scope of Congress's taxing power, reflecting broader concerns.
