Supreme Court Upholds 2017 Tax on Foreign Profits, Impacting Leases

23 June 2024

The US Supreme Court upheld a 2017 tax on American-owned businesses’ foreign profits, rejecting an appeal that could have saved companies hundreds of billions of dollars. Voting 7-2, the justices affirmed Congress’s constitutional power to tax people and companies on their share of undistributed corporate income, particularly for pass-through businesses. Justice Brett Kavanaugh, writing for the court, emphasized that the disputed tax wasn’t fundamentally different from other levies imposed by Congress over the years.

The case was closely watched for its potential implications on Democratic proposals to impose a wealth tax. However, Kavanaugh clarified that the court did not need to rule on hypothetical taxes, casting the decision as a “narrow” one. “Those are potential issues for another day, and we do not address or resolve any of those issues here,” Kavanaugh wrote for five justices in the majority. “Congress has long taxed shareholders of an entity on the entity’s undistributed income, and it did the same” with the 2017 tax.

Lease and Tax Implications

The provision, known as the mandatory repatriation tax, was designed to offset other parts of a Republican-backed tax cut passed during Donald Trump’s presidency. The government estimated that the tax would bring in $340 billion over 10 years, much of it from multinational companies like Apple Inc and Pfizer Inc. A ruling striking the tax down might have required the Internal Revenue Service to refund sums companies have already paid. It also could have upended other parts of the federal tax code, including rules governing partnerships and bonds, and have spinoff effects on the states.

The case marked a rare test of the Constitution’s 16th Amendment, ratified in 1913 to let Congress levy an income tax. That amendment authorizes Congress “to lay and collect taxes on incomes, from whatever source derived” without having to divide the bill among the states according to their population, as is required for other types of taxes.

Two Washington state residents, Charles and Kathleen Moore, contended the 2017 provision improperly taxes them on corporate income that was never distributed to them. The Moores were fighting a $14,729 tax bill stemming from a minority stake in an Indian company. The left-leaning Institute on Taxation and Economic Policy previously estimated that a ruling striking down the tax would have meant $271 billion in tax relief for almost 400 multinational corporations.

Conservative Divide

Justices Clarence Thomas and Neil Gorsuch dissented, arguing that the 16th Amendment doesn’t authorize taxation unless income is realized. “Realization is what distinguishes income from property,” Thomas wrote for the pair. Two other conservative justices, Amy Coney Barrett and Samuel Alito, were in the majority but didn’t join Kavanaugh’s reasoning. Writing for the pair, Barrett noted that a tax on shareholders of a domestic or widely held corporation “would present a different case.”

Kavanaugh hinted he didn’t share that view. “We do not agree that the court’s precedents draw such a line,” he wrote in a footnote, referring to Barrett’s comment. “Nor does our opinion today draw such a line.” Alito had faced calls to recuse in the case due to connections with one of the lawyers challenging the tax.

Chief Justice John Roberts and Justices Sonia Sotomayor, Elena Kagan, and Ketanji Brown Jackson joined Kavanaugh’s opinion. “Americans can take a sigh of relief that the Supreme Court in Moore chose not to run roughshod over the Constitution in deciding tax policy by ‘judicial say-so,’ as Franklin D Roosevelt once put it,” said Niko Lusiani, director of the corporate power program at the progressive Roosevelt Institute.

Democratic calls to tax assets in addition to income have grown since Senator Elizabeth Warren ran for the White House on the issue in 2020, with President Joe Biden’s 2024 budget requesting a “billionaire minimum tax” to ease the federal deficit. “Those who hoped for a green light on a wealth tax, and those like myself who wanted the court to slam that door shut, will both be disappointed with this decision,” said Ilya Shapiro, senior fellow constitutional studies at the conservative Manhattan Institute. “But at the end of the day it doesn’t mean much for anyone not affected by a somewhat obscure tax on foreign profits.”

The case is Moore v United States, 22-800.

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What was the US Supreme Courts decision on the 2017 tax for foreign profits of American companies?

The US Supreme Court upheld the 2017 tax on foreign profits of American companies, affirming its constitutionality. This decision supports the Tax Cuts and Jobs Acts provision, which imposes a one-time tax on overseas earnings, aiming to repatriate funds and stimulate domestic investment.

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