Supreme Court Upholds Mandatory Repatriation Tax in Narrow Moore Opinion

The Supreme Court released its highly anticipated decision in the international tax case Moore v. United States on June 20, 2024. In a narrowly-tailored decision, the Court ruled overall in favor of the government 7-2, holding the IRC Sec. 965 Mandatory Repatriation Tax (“MRT”) created by the 2017 Tax Cuts and Jobs Act (“TCJA”) is constitutional. 

Background of Moore v. United States

The TCJA created a one-time MRT on United States shareholders of certain foreign corporations, regardless of whether the shareholders had actually received distributions. The Moores paid nearly $15,000 in additional tax as a result of the MRT. After payment, they sued the government for a refund, arguing that the MRT was unconstitutional because the Sixteenth Amendment required realization. The Moores contended the MRT amounted to a direct tax, which must be apportioned among the states. The government argued the tax was constitutional and cited to a long history of case law allowing other taxes on unrealized income to stand, including many provisions of Subchapter F of the Internal Revenue Code.

The Supreme Court’s Opinion 

Justice Kavanaugh wrote the majority opinion, which held that Congress has the power to tax the entity’s shareholders or partners as the income has been realized by the entity, which the “MRT attributes to the shareholders.” The majority opinion notes a long history of precedential tax cases that allow Congress to “attribute an entity’s realized and undistributed income to the entity’s shareholders or partners” and then impose an income tax on those shareholders or partners. 

Although the decision was in favor of the government 7-2, the seven Justices took different viewpoints to come to that decision. In addition to the majority opinion, Justice Jackson wrote a concurring opinion that explicitly rejects the argument that the Sixteenth Amendment restricts taxation only to realized gains. In contrast, Justice Barrett’s concurring opinion (with which Justice Alito joined) explicitly accepts that the Sixteenth Amendment requires realization; however, the Moores “did not meet their burden” of proving the MRT is unconstitutional, particularly as they conceded that Subchapter F is constitutional. Justice Thomas dissented, joined by Justice Gorsuch, and would have held that realization is required for income taxes under the Sixteenth Amendment. 

Many believed the Supreme Court took on this case to preemptively shut down the potential for legislation that would impose taxes on the unrealized gains of high income or high net worth individuals. Instead, the majority opinion avoids entirely the question regarding a constitutional realization requirement. Accordingly, questions regarding the constitutionality of a federal “wealth tax” remain unanswered. However, given the concurring and dissenting opinions, it seems at least four Justices would be skeptical of any such tax. 

As the Moore decision highlights, the U.S. taxation of individuals and entities engaged in cross-border activities is complex and rife with obstacles that are not present in a purely domestic tax context. Taxpayers with concerns about their international activities should engage a trusted tax advisor to assist in navigating the complexities.