Article | Tax alert

Supreme Court finds Mandatory Repatriation Tax constitutional and creates wealth tax concerns

June 20, 2024 · Authored by Benjamin Willis

Today the Supreme Court ruled seven to two in favor of the constitutionality of the Mandatory Repatriation Tax (MRT) as a valid exercise of Congress's power to tax shareholders on the undistributed income of corporations in Moore v. United States.

The MRT was part of the Tax Cuts and Jobs Act (TCJA) which was passed by Congress in 2017. The TCJA imposed a one-time tax on over three decades of earnings and profits attributed to certain U.S. shareholders of controlled foreign corporations and specified foreign corporations based on the current ownership of a corporation’s stock.

Charles and Kathleen Moore sought a refund on taxes they paid on undistributed earnings from an Indian-controlled foreign corporation of which they were minority owners. They argued that the MRT is an unconstitutional direct tax. In June 2022 the Ninth Circuit affirmed a district court’s decision to reject the challenge.

In finding the MRT constitutional consistent with the lower courts, the Court reasoned that (1) Congress has a longstanding practice of taxing shareholders or partners on the undistributed income of entities, which the Supreme Court's precedents have upheld, and (2) invalidating the MRT would have various negative consequences such as lost tax revenue and the need to cut national programs or increase other taxes.

The majority emphasized that its holding is “limited to entities treated as pass-throughs” and does not authorize taxing both an entity and its shareholders or partners on the same undistributed income, although the dissent viewed this as dicta offering little safeguards on future taxes, including a wealth tax.

Dissenting opinion

Justices Thomas and Gorsuch delivered a powerful dissenting opinion that warns the dicta provided by the majority opinion may not guard against unconstitutional taxes, including a wealth tax.

The dissenting opinion points out that “the Court upholds the MRT only by ignoring the question presented” by not addressing whether realization is required. Justices Thomas and Gorsuch go on to explain: “At most, the cases cited by the majority demonstrate that Congress may attribute income to the entity or individual who actually controlled it when necessary to defeat attempts to evade tax liability." The dissenting judges argue that the majority's holding is flawed and unsupported by relevant precedents.

The dissent aligns with the concerns of many that the TCJA’s MRT has increased the likelihood of a future wealth tax to also raise revenue, and the possibility of one with no limits on who can be attributed another taxpayer’s wealth.

We continue to analyze this decision and will follow with more detailed communications in due course. In the interim, please reach out to your Baker Tilly advisor with questions about how any of the above may impact your tax situation.

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