Client Advisory: Repatriation Tax on Shareholders | Moore v. U.S.

June 24, 2024


By: Evelyn A. Haralampu, Partner, Burns Levinson LLP

The Tax Cuts and Jobs Act of 2017 amended the law to introduce a new, one-time, mandatory repatriation tax on trillions of dollars of accumulations held abroad by American-controlled foreign entities. The tax is imposed on shareholders with at least 10% of the voting power in a controlled foreign corporation.

The Moores owned shares in a controlled foreign corporation and were subject to the repatriation tax. The Moores, who had not received any income associated with the repatriation, argued that the tax was unconstitutional under the Direct Tax Clause of the Constitution because they were being taxed on their property (i.e., their shares), not income. Under the Constitution, direct taxes must be apportioned among the states. The government argued that the repatriation tax is constitutional as an indirect tax on income and, therefore, is constitutional under the Sixteenth Amendment. The district court dismissed their case, and the Ninth Circuit Court of Appeals affirmed that decision.  

The U.S. Supreme Court sided with the government, holding that realized, undistributed income of a controlled foreign corporation can be appropriately attributed to American shareholders and taxed as income under the Sixteenth Amendment. However, the majority refused to decide whether the shareholders needed to realize income themselves for the tax to be constitutional.

While the holding avoids disrupting many other provisions of the federal tax code, it is narrowly tailored. It is also silent as to whether a taxpayer must realize income for it to be taxed constitutionally. Instead, the majority opinion left to another day whether unrealized appreciation of wealth could be taxed. However, four justices stated in separate concurring and dissenting opinions that income must be realized to be taxed constitutionally under the Sixteenth Amendment, an indication that they would likely find a proposed wealth tax unconstitutional.  

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