The Supreme Court Strengthens Congress’s Taxing Power in Upholding the Mandatory Repatriation Tax

Moore v. United States, No. 22-800 (June 20, 2024), involved the constitutionality of the Trump administration’s one-time Mandatory Repatriation Tax (MRT), which aimed to recover increases in the value of certain assets held overseas.

KEY TAKEAWAYS

• The Mandatory Repatriation Tax, a one-time tax on unrealized corporate earnings with a 30-year lookback period, is a constitutional passthrough tax on U.S. shareholders of controlled foreign corporations.
• When Congress treats an entity as a passthrough, Congress may attribute income to either the entity or the owners.
• In refusing to consider whether the Constitution imposes a realization requirement on Congress’s taxing power, the Supreme Court avoided upending the broader federal tax structure.

SUMMARY

Subpart F and the Mandatory Repatriation Tax.

The Moore case involved the constitutionality of the Trump administration’s one-time Mandatory Repatriation Tax (MRT), which aimed to recover increases in the value of certain assets held overseas.

In 1962, Congress introduced subpart F of the tax code to prevent the erosion of the tax base caused by overseas sheltering of foreign assets in foreign corporations controlled by U.S. persons (controlled foreign corporations or CFCs). Under the subpart F regime, the United States can tax U.S. shareholders of CFCs without waiting for a “realization event” whereby the CFCs distribute earnings to their U.S. shareholders or U.S. shareholders sell their shares in the CFCs. Subpart F accelerates taxation of earnings through a laundry list of items it defines as taxable “income” attributable directly to the shareholder, transforming CFCs into passthrough entities similar to domestic S corporations or partnerships.

In 2017, against this backdrop, Congress levied the one-time MRT as part of the Trump administration’s landmark tax bill, the Tax Cuts and Jobs Act. The MRT calculated CFCs’ long-accumulated undistributed income with a 30-year lookback period, and then taxed shareholders on their pro rata share of that income. In a way, the MRT augmented subpart F, forcing the U.S. shareholder to pay tax on a paper gain without a realization event.

The Moores argued the Constitution imposes a realization requirement before Congress can tax income.

In Eisner v. Macomber, the Supreme Court suggested in dicta that income is “a gain, a profit, something of exchangeable value” that is “received or drawn by the recipient (the taxpayer) for [their] separate use, benefit, and disposal.” 252 U.S. 189, 207 (1920). Relying on Macomber, the Moores argued that they never received any money, so there was no “income” for Congress to tax, as required by the Sixteenth Amendment. The Ninth Circuit disagreed, explaining that the Constitution does not impose a realization requirement on Congress’s power to tax income. The Moores sought certiorari on the realization question, and the Supreme Court took the case.

Notably, the Moores did not challenge the constitutionality of subpart F itself. Given subpart F’s purpose is to create taxable income of a shareholder without realization by that shareholder, the Moores’ MRT arguments would have applied equally to that provision.

For passthrough entities, Congress may attribute income to the entity or the owners.

In upholding the MRT, the majority sidestepped the Moores’ arguments by reframing the question presented as one of attribution. Refusing to decide whether income requires realization, the majority reasoned the MRT taxes the CFC’s realized income but attributes it to the shareholder. The real question was whether Congress’s act of attribution was constitutional. Multiple Supreme Court opinions that post-dated Macomber permitted Congress to attribute income to partnerships or their partners, and corporations or their shareholders. And Macomber concerned stock grants that did not change the value of individual shareholders’ positions. A transaction of no value, therefore, yielded no income to attribute in any event.

Controlled foreign corporations are passthrough entities under subpart F.

The Moores’ subpart F concession proved fatal to their case. The majority stated that “[l]ike the MRT, subpart F treats certain foreign corporations as pass-throughs by attributing undistributed income of foreign corporations to their American shareholders, and then taxing the American shareholders on their pro rata shares of the income.” The Moores’ arguments also applied to subpart F, and lower court cases suggest that subpart F is constitutional.

Ultimately, though, even with the Moores’ concession about subpart F, the majority felt it could not overturn the MRT without greater fallout. The Moores’ arguments “could render vast swaths of the Internal Revenue Code unconstitutional. … And those tax provisions, if suddenly eliminated, would deprive the U.S. Government and the American people of trillions in lost tax revenue.”

WHAT THIS MEANS

Many commentators suggested that Moore would show how the Supreme Court might rule if Congress ever passed a wealth tax on taxpayers’ unrealized gains. But the majority did not address the Moores’ realization argument, giving little—if any—indication of what the future has in store. The Supreme Court left the constitutionality of a wealth tax for another day.

Winston & Strawn filed a brief in support of the Moores on behalf of amici curiae individual taxpayers. Our clients dutifully comply with the United States’ tax requirements for their CFCs, including subpart F. The MRT was an unexpected addition to an already burdensome process. Without realization, our clients had to find other sources of funds to pay the tax. Under Moore, Congress may be able to continue to expand subpart F income definitions to tax shareholders of CFCs without a realization requirement.