The Supreme Court recently upheld the constitutionality of a tax provision referred to as the mandatory repatriation tax, which was enacted through the Tax Cut and Jobs Act in 2017. The tax targets U.S. taxpayers who hold shares in certain foreign corporations. The court ruled 7-2 in favor of the tax, with Justice Brett Kavanaugh writing the majority opinion. Justices Clarence Thomas and Neil Gorsuch dissented, arguing that the tax was unconstitutional. The decision was narrow, focusing on the specific issue of attributing an entity’s income to its shareholders for tax purposes.
The case, Moore v. U.S., involved a couple, Charles and Kathleen Moore, who were hit with a nearly $15,000 tax bill as a result of the mandatory repatriation tax. The Moores challenged the tax, arguing that it violated the Constitution. They invested in an India-based company and were taxed on their share of the company’s earnings, even though they did not receive any distributions. The lower courts ruled in favor of the government, stating that the tax was permitted under the 16th Amendment. The Supreme Court upheld this decision, citing prior rulings that established the government’s authority to tax shareholders on a corporation’s income.
The ruling is expected to prevent significant disruptions to the tax code and avoid potential revenue losses for the government. Justice Kavanaugh emphasized that striking down the tax could have far-reaching consequences for other tax provisions, potentially leading to drastic cuts in essential programs or increased taxes on ordinary Americans. While the decision focused solely on the constitutionality of the mandatory repatriation tax, it did not address issues related to taxation of holdings, wealth, or appreciation, leaving the door open for future challenges on those grounds.
Justice Amy Coney Barrett issued a concurring opinion, agreeing with the outcome of the case but diverging in her reasoning from the majority. Justices Thomas and Gorsuch dissented, arguing that the tax was unconstitutional because it targeted unrealized gains not received by the taxpayers. Thomas criticized the majority for its concerns about potential impacts on other taxes and questioned the court’s ability to limit Congress’s taxing power in the future. The justices had previously expressed concerns during oral arguments about the implications of a broad ruling on the tax system.
Despite some calls for recusal, Justice Samuel Alito participated in the case and declined to step down. The decision by the Supreme Court to uphold the mandatory repatriation tax provides clarity on the government’s authority to tax shareholders on a corporation’s income. While the ruling addresses a specific tax provision, it also raises broader questions about Congress’s power to levy taxes on various forms of income and assets. The decision underscores the complex and evolving nature of tax law and the constitutional principles that govern taxation in the United States.
