Supreme Court Upholds Section 965 Mandatory Repatriation 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.

On June 20, 2024, the U.S. Supreme Court issued its long-anticipated decision in Moore v. United States, in which a 7-2 majority upheld the constitutionality of the mandatory repatriation tax (“MRT”) under section 965 of the Internal Revenue Code, which came into effect as part of the Tax Cuts and Jobs Act of 2017.

As discussed previously here and he96re, the MRT is a one-time tax on U.S. shareholders of a controlled foreign corporation (“CFC”) based on the CFC’s post-1986 accumulated deferred foreign income.

The taxpayers in this case were a U.S. couple that invested in an Indian company that was a CFC. As a result, they were assessed the MRT. The taxpayers challenged the MRT on the grounds that it was a direct tax that was not apportioned as required under the Article I, Section 9, Clause 4 of the U.S. Constitution. Part of their argument was that the MRT did not meet the requirements of an income tax under the Sixteenth Amendment because there had been no realization event that would have caused the Indian CFC’s retained earnings to be taxed as income to the taxpayers. In this, the taxpayers relied on the Court’s 1920 decision in Eisner v. Macomber, which we’ve discussed here.

Delivering the Court’s majority opinion, Justice Kavanaugh found that the MRT was not a direct tax that needed to be apportioned under the Constitution. Kavanaugh argued that the appropriate question in this case was not whether realization is a constitutional requirement but whether the income in question could be attributed to the taxpayer (although he found that a realization event did occur when the Indian CFC earned that income). Kavanaugh looked to a long history of Congress permitting and the Court upholding the attribution of income earned by an entity to the entity’s owners. The taxpayers also conceded that such attribution in contexts other than the MRT was constitutional, including attribution required under Subpart F of the Internal Revenue Code, the subpart in which the MRT is found. Thus, a majority of the Court held the MRT to be constitutional.

In a concurring opinion, Justice Jackson agreed with the result reached by the majority but questioned whether realization is a constitutional requirement under the federal income tax and whether the MRT is in fact a direct tax.

Justice Barrett also issued a concurring opinion, joined by Justice Alito, in which she agreed with the result reached by the majority on the grounds that the taxpayers had conceded the constitutionality of Subpart F, which Barrett found to be not meaningfully different from the MRT. However, Barrett questioned the majority’s analysis of whether realization is a constitutional requirement and how much scope Congress has in determining whether income can be attributed from entities to their owners.

In a dissenting opinion, Justice Thomas, joined by Justice Gorsuch, questioned why the Court didn’t resolve whether realization was a constitutional requirement, which was the issue on which the Court granted certiorari, and disputed the majority’s interpretation of the Court’s case law on attribution of income.