In a landmark decision, the U.S. Supreme Court has upheld the constitutionality of the Mandatory Repatriation Tax (MRT), a key provision of the 2017 Tax Cuts and Jobs Act. The MRT, described as a “one-time, backward-looking” tax, targets the accumulated earnings of U.S.-controlled foreign corporations, attributing this income to U.S. shareholders for tax purposes.
Understanding the MRT and Its Implications
The taxpayers in Moore v. United States argued that the MRT was unconstitutional, contending that it did not qualify as an income tax and thus should be subject to direct apportionment among states. They posited that income should only be taxed when realized — when it comes into the taxpayer’s hands. However, the Supreme Court disagreed, emphasizing that Congress has the authority to attribute an entity’s realized and undistributed income to its shareholders and tax them accordingly.
Justice Brett Kavanaugh, writing for the majority, clarified that the MRT taxes realized income of foreign corporations by attributing it to U.S. shareholders. This approach aligns with longstanding practices of taxing partnerships and S corporations. The Court underscored that its decision was narrow, focusing solely on the taxation of shareholders on undistributed income realized by entities.
While the ruling affirms the MRT’s constitutionality, it leaves several questions unanswered. The Court did not address whether Congress can tax both entities and their shareholders on undistributed income or whether a gain must be realized to be considered income under the Constitution. Additionally, potential issues related to unapportioned taxes on holdings, wealth, net worth, or appreciation were not resolved.
Diverse Judicial Opinions
Justice Ketanji Brown Jackson concurred with the majority, praising the Court’s restrained approach and emphasizing Congress’ plenary power over taxation. She highlighted that the alleged realization requirement is absent from the Sixteenth Amendment’s text.
Conversely, Justice Amy Coney Barrett, joined by Justice Samuel Alito, concurred in judgment but maintained that gains must be realized to be taxed as income. Justice Clarence Thomas, joined by Justice Neil Gorsuch in dissent, argued that a tax on unrealized investment gains does not constitute an income tax under the Sixteenth Amendment.
Potential Implications for Future Taxation
The decision has sparked discussions about its implications for future taxation policies, particularly regarding a potential wealth tax. Although the Court did not address the constitutionality of a wealth tax, the ruling suggests that such a tax might face significant judicial scrutiny. The majority’s concern about fiscal calamity if vast swaths of the Internal Revenue Code were rendered unconstitutional played a crucial role in their reasoning.
Moreover, the Justices left open the possibility of due process challenges to the MRT’s attribution scheme. Courts may soon confront arguments that attributing income to certain taxpayers violates due process guarantees.
As businesses and legal experts digest this ruling, its impact on international taxation and future legislative efforts remains a topic of keen interest and ongoing debate.
