At the end of 2017, Congress passed a once-off Mandatory Repatriation Tax (the “MRT”) of 8 to 15.5 percent of the undistributed total accumulated income of American-controlled foreign corporations over the past thirty years (since 1987).[1] This accumulated income, if distributed, would be taxed in the hands of the American shareholders. However, because Congress cannot force a foreign corporation to repatriate income, Congress instead imposed the tax by imputing pro rata the accumulated income to American shareholders who owned at least 10 percent of a foreign corporation’s shares.
A couple filing jointly as married taxpayers, Charles and Kathleen Moore (the “taxpayer”), invested in the American-controlled foreign (India) corporation KisanKraft. From 2006 to 2017, KisanKraft earned profits supplying farm equipment to customers in India but did not distribute any of it to its American shareholders. The taxpayer paid the tax and then sued for a refund, alleging that the MRT violated the Direct Tax Clause of the Constitution because it was an unapportioned direct tax on their property (the shares of KisanKraft stock). The taxpayer also argued that income should be ‘realized’ to be taxed. The Federal District Court dismissed the suit, and the Ninth Circuit Court of Appeals affirmed that dismissal.
In Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711 (S.Ct. June 20, 2024) (slip opinion from Court’s website here), in a five to two decision, the five Justice majority held the MRT was an indirect tax on income and thus constitutional.[2] Justice Kavanaugh authored the 24-page majority opinion, joined by Chief Justice Roberts and the Court’s three liberal Justices (Sotomayor, Kagan, and Jackson). Justice Jackson also wrote an ancillary concurring opinion.
The Court found that the MRT taxed the ‘realized’ income of the underlying foreign corporation KisanKraft, which the MRT attributed pro rata to the American shareholders. The five-judge majority stated that the Court’s longstanding precedents confirm that Congress may attribute an entity’s realized but undistributed income to its shareholders and then tax the shareholders on their portions of that undistributed income. In an interesting historical anecdote, the Court cited that Congress passed an 1864 income-tax law that taxed shareholders on “the gains and profits of all companies.”[3]
Also very interesting is what the Court did not decide upon. The Supreme Court limited its holding only to entities treated as pass-throughs. Specifically, the Court stated that the opinion does not authorize a hypothetical congressional effort to tax an entity and its shareholders on the same undistributed income realized by the entity. Also, the Court cautioned that its decision does not address the parties’ disagreement over whether realization is a constitutional requirement for an income tax.
Justice Barrett, joined by Justice Alito, authored a 17-page concurring nonconcurrence that concurs only because the taxpayer did not challenge the constitutionality of Subpart F. Justice Thomas wrote a 33-page dissenting opinion joined by Justice Gorsuch. Had the taxpayer challenged the constitutionality of Subpart F, this may well have been a 5 to 4 split decision that set up a future constitutional challenge of Subpart F imputation of income wherein the taxpayer prevails.
Justice Barrett’s concurrence presented contrarian arguments that will certainly be the focus of many tax professors’ wrath and scowls: “Subpart F and the MRT may or may not be constitutional, nonarbitrary attributions of closely held foreign corporations’ income to their shareholders.”[4] The Justice first parsed “derived” and “realized”.[5] Then she diverged to set up the contrarian arguments.
She states that the government conceded “…that a tax on the “total value of” the shares “at a particular point [in] time” is a “quintessential tax on property” that must be apportioned.” She continued with the government’s approach: “… looking at property value across two points in time makes a difference, … because then the tax targets appreciation rather than the asset’s value. As the Government sees it, Congress may tax without apportionment “all economic gains” measured “‘between two points in time.’” And the increase in value between Time A and Time B is “income.””
At this point, Justice Barrett delivers the punch line: “The Government is unable to cite a single decision upholding an unapportioned tax on appreciation. … That is no surprise, because our precedent forecloses the Government’s argument.” Then she lays out the contrarian argument:[6]
In upholding the tax, the Ninth Circuit opined that “[w]hether the taxpayer has realized income does not determine whether a tax is constitutional.” 36 F. 4th 930, 935 (2022). In its view, the “Supreme Court has made clear that realization of income is not a constitutional requirement.” Id., at 936. The Ninth Circuit misread our cases. Contrary to its assertion, this Court has “never abandoned the core requirement that income must be realized to be taxable without apportionment.”
Justice Barrett concludes: “In sum, realization may take many forms, but our precedent uniformly holds that it is required before the Government may tax financial gain without apportionment. … None of these cases contradicts Macomber’s admonition that Congress cannot “look upon stockholders as partners . . . when they are not”; Congress may not “indulge the fiction that they have received and realized a share of the profits of the company” when they have not.”[7] Justice Thomas, as the author of the 33-page dissent, is more pointed: “…the majority’s “attribution” doctrine is an unsupported invention.”[8] He analyzes attempts to pass federal tax laws and their constitutionality from the nation’s founding through the Sixteenth Amendment, finding that Sixteenth Amendment “income” is only realized income. He states in pertinent part: “The Court strains to uphold the Mandatory Repatriation Tax without addressing whether the Sixteenth Amendment includes a realization requirement, the question we agreed to answer in this case. The majority starts by surveying a scattered sampling of precedents—mostly about tax avoidance—to invent an “attribution” doctrine that sustains the MRT.”
[1] I.R.C. §§965(a)(1), (c), (d).
[2] U.S. Const. §8, cl. 1 and 16th Am.
[3] Rev. Act of 1864, § 117, 13 Stat. 282.
[4] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *66-67 (June 20, 2024).
[5] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *49 (June 20, 2024).
[6] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *52-53 (June 20, 2024).
[7] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *60-61 (June 20, 2024).
[8] Moore v. United States, No. 22-800, 2024 U.S. LEXIS 2711, at *69 (June 20, 2024).
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