On June 20, 2024, the U.S. Supreme Court (Court) upheld the Section 965 tax, also known as the mandatory repatriation tax (MRT), as constitutional under the 16th Amendment. The Court held that Congress, by means of implementing through Treasury regulations, has the right to tax either the entity or its owners and still classify it as a tax on income.
Background
Charles and Kathleen Moore owned 13% of an Indian corporation, KisanKraft, which they acquired in 2006 and never realized earnings from this investment. In 2017, they received a $14,729 tax bill for accumulated income from 2006 to 2017. Believing this transition tax to be unconstitutional, the Moore family took their case to court. They argued that because the tax was imposed on accumulated foreign earnings, it was not a tax on income and is, therefore, unconstitutional under the 16th Amendment. In June 2022, the Ninth Circuit Court of Appeals affirmed a district court’s decision rejecting the challenge. In its decision, the court held that whether income is realized is not a determinative factor regarding the validity of the transition tax. For further details, please see our FORsights™ article, “Moore v. United States – What You Need to Know.”
Supreme Court Decision
While many expected to see commentary on the requirement of realization of income, specifically as noted in Eisner v. Macomber, the Court appeared to focus on the ability to attribute the earnings of the controlled foreign corporations to its shareholders. Even though now the Moores only held 11% of the entity, the Court found that 10% was enough to allow for the attribution of KisanKraft’s income to its shareholders. Further, the arguments said the MRT followed the attribution rules of Subpart F, and the Moores explicitly considered Subpart F taxes to be income taxes, which are constitutional and need not be apportioned.
In a 7-to-2 decision, the Court did emphasize their holding as a narrow one, noting that the attribution still must be reasonable. The Court noted, “To be clear, as we indicated earlier, the Due Process Clause proscribes arbitrary attribution … And nothing in this opinion should be read to authorize any hypothetical congressional effort to tax both an entity and its shareholders or partners on the same undistributed income realized by the entity. In such a scenario, the entity would not simply be a traditional passthrough.”
Conclusion
While many taxpayers were hoping for a more robust discussion on realization—or, rather, a Hail Mary creating large tax refunds—the Court’s decision to uphold the §965 as constitutional was expected and conforms with the Subpart F regime that has been around since 1962. If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.