Ninth Circuit Rejects Constitutional Challenges to Section 965 Tax

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

In Moore v. United States, the U.S. Ninth Circuit Court of Appeals recently rejected arguments that the mandatory repatriation tax imposed under section 965 of the Internal Revenue Code violated the Constitution’s Apportionment Clause and Fifth Amendment Due Process Clause.[1]


The case involved a U.S. couple (“Taxpayers”) that invested in an Indian company that was a controlled foreign corporation (“CFC”) under subpart F of the Internal Revenue Code.[2]  Under subpart F, a CFC is a foreign corporation more than 50% of which is owned (directly, indirectly, or constructively) by U.S. shareholders.[3]  U.S. shareholders, in turn, are U.S. persons that own at least a 10% interest in a foreign corporation.[4]

Foreign corporations generally are not subject to federal income tax except on U.S. source income and income that is effectively connected to the conduct of a U.S. trade or business.[5]  Thus, foreign income earned by a foreign corporation that is not effectively connected to the conduct of a U.S. trade or business generally is deferred from taxation in the United States unless or until the foreign corporation distributes earnings to a U.S. person or such person sells an interest in that foreign corporation.

Subpart F changes this result in limited circumstances, causing U.S. shareholders of CFCs to include in gross income certain categories of income earned by the CFC within a given taxable year.[6] To the extent, however, that a CFC’s income doesn’t fall within these categories, it would remain untaxed in the United States until repatriation.

Then came section 965 as amended by the Tax Cuts and Jobs Act of 2017 (“TCJA”), which caused U.S. shareholders of a CFC to be subject to a one-time tax on accumulated deferred foreign income earned by the CFC after 1986 regardless of whether the CFC distributed such earnings. This was part of the TCJA’s broader goal of excluding from tax dividends received by certain domestic corporation from certain foreign subsidiaries (thereby moving the U.S. tax system from what amounts to more of a worldwide tax system to something that is slightly more of a territorial tax system).[7]

The Decision

As noted above, Taxpayers challenged the section 965 tax on the grounds that it violated the Apportionment Clause and the Fifth Amendment of the U.S. Constitution.[8]

The Apportionment Clause provides that “[n]o Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.”[9]  Per the Ninth Circuit, the Apportionment Clause typically has only applied to 1) taxes paid by every person, without regard to property, profession, or other circumstance; and 2) land taxes.[10]  The Court observed that although the Supreme Court in Pollock v. Farmers’ Loan & Tr. Co.[11] held that taxes on income from personal property were subject to the Apportionment Clause, this result was overruled by Sixteenth Amendment, which exempted from the apportionment requirement “incomes from whatever source derived.”[12]  The Ninth Circuit also noted that similar taxes—particularly those imposed under subpart F and predecessor statutes—had been upheld as constitutional by other courts.[13]

Nevertheless, Taxpayers argued that the section 965 tax was an unapportioned direct tax, relying on the definitions of income put forth by the Supreme Court in Eisner v. Macomber[14] and Commissioner v. Glenshaw Glass Co.[15] In particular, Taxpayers maintained that these decisions required that income be realized before it could be taxed.[16]

The Ninth Circuit disagreed, stating that realization wasn’t a constitutional requirement but rather—quoting the Supreme Court in Helvering v. Horst[17]—a matter of “administrative convenience.”[18] The Court also noted that a decision that the section 965 tax was unconstitutional on such grounds would call into question any number of other tax provisions, which it declined to do.[19] Thus, the Court held that the section 965 tax didn’t violate the Apportionment Clause.

The Ninth Circuit also went on to find that the section 965 tax did not violate the Fifth Amendment’s Due Process Clause by reason of being retroactive legislation because its retroactive application itself served a legitimate purpose by rational means.[20] The Court viewed the section 965 tax as an integral part of the TCJA’s shift to more of a territorial tax system.[21] In this light, the section 965 tax “served a legitimate purposes by preventing “CFC shareholders who had not yet received distributions from obtaining a windfall by never having to pay taxes on their offshore earnings that have not yet been distributed.”[22] Moreover, the Ninth Circuit found that the section 965 tax accomplished this purpose by rational means in that it “accelerates the effective repatriation date of undistributed CFC earnings to a date following passage of the TCJA,” which the Court found to be “a rational administrative solution.”[23]

[1] Moore v. U.S., No. 20-36122 (9th Cir. June 7, 2022).


[2] Id. at 4-5.


[3] 26 U.S.C. § 957(a).


[4] Id. § 951(b).


[5] See id. §§ 11, 881, 882; 26 C.F.R. §§ 1.11-1(a), 1.881-1(a), (b).


[6]See id. §§ 951(a), 952, 954.


[7] See id. § 245A.  A worldwide tax system is one in which the nationals of a country are taxed on worldwide income, while a territorial tax system is one which in which a country only taxes income derived within its physical borders.  See Cong. Res. Serv., U.S. International Corporation Taxation: Basic Concepts and Policy Issues at 1 (Dec. 21, 2016).


[8] Moore, supra note 1, at 7.


[9] U.S. Const. art. I, § 9, cl. 4.


[10] Moore, supra note 1, at 9 (quoting Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 571 (2012)).


[11] 158 U.S. 601, 618 (1895).


[12] Moore, supra note 1, at 9-10.


[13] Id. at 10-11.


[14] 252 U.S. 189 (1920).


[15] 348 U.S. 426 (1955).


[16] Moore, supra note 1, at 13.


[17] 311 U.S. 112, 116 (1940).


[18] Moore, supra note 1, at 14.


[19] Id. at 15.


[20] Id. at 16.


[21] Id.


[22] Id.


[23] Id.