The US Supreme Court upheld the Mandatory Repatriation Tax on 20 June 2024. In Moore v. United States, the Court held by seven votes to two that the tax, which attributes the realised and undistributed income of an American-controlled foreign corporation to its American shareholders and taxes them on their share, does not exceed Congress's constitutional authority.
Corporate INTL Newsroom · Tax
Moore v. United States: Supreme Court Upholds the Mandatory Repatriation Tax
By The Corporate INTL Newsroom · 24 June 2024
The opinion of the Court was written by Justice Kavanaugh and joined by the Chief Justice and Justices Sotomayor, Kagan and Jackson. Justice Jackson also concurred, Justice Barrett, joined by Justice Alito, concurred in the judgment, and Justice Thomas, joined by Justice Gorsuch, dissented.
The background
The Mandatory Repatriation Tax was enacted in the Tax Cuts and Jobs Act of 2017 as a one-time, backward-looking tax on certain American shareholders of American-controlled foreign corporations, at rates of 8% to 15.5%, aimed at the large amounts of income those corporations had accumulated without distributing. The petitioners had invested in such a corporation, which generated income from 2006 to 2017 but distributed none. They paid a tax bill of $14,729 and sued for a refund, arguing that the tax was an unapportioned direct tax on their shares because they had not realised any income.
What the Court held
The Court noted that direct taxes must be apportioned among the States by population, while taxes on income need not be. It held that the Mandatory Repatriation Tax does tax realised income, namely the income realised by the foreign corporation, which Congress attributed to the shareholders. Relying on a long line of precedent and congressional practice, it confirmed that Congress may tax either an entity or its shareholders or partners on the entity's undistributed income, a principle lower courts have repeatedly invoked in upholding subpart F.
The Court described its holding as narrow. It is limited to entities treated as pass-throughs, does not authorise taxing both an entity and its owners on the same undistributed income, and does not resolve whether realisation is a constitutional requirement for an income tax.
What it means
The ruling leaves the Mandatory Repatriation Tax and the wider system of taxing shareholders on foreign corporate income in place, including the subpart F rules. Because the Court declined to decide the realisation question, debate about whether Congress could tax unrealised gains, such as increases in the value of assets, remains open. The case papers are available on the Supreme Court docket.
Sources
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