Supreme Court upholds Trump-era tax on foreign earnings

Washington – The Supreme Court on Thursday left intact an obscure tax enacted as part of Republicans’ sweeping 2017 reform package that targets US taxpayers with shares of certain foreign companies.

The court ruled 7-2 that the so-called mandatory repatriation tax is constitutional under Article I and the 16th Amendment. Justice Brett Kavanaugh wrote the majority opinion.

“[T]The precise and narrow question the Court addresses today is whether Congress can attribute the realized and undistributed income of an entity to the entity’s shareholders or partners and then tax the shareholders or partners on their shares of that income,” Kavanaugh wrote. . precedents, reflected and reinforced by long-standing Congressional practice, establish that the answer is yes.”

Moore v. USA

The tax at the center of the case, known as Moore v. USA, is charged once to US taxpayers who hold shares in certain foreign companies. A Washington state couple, Charles and Kathleen Moore, challenged the measure after they were hit with a nearly $15,000 tax bill in 2017 as a result of the law, which required them to pay taxes on their share of lifetime income. reinvested from an India-based company. company called KisanKraft Tools.

The Moores invested $40,000 in the company in 2006 in exchange for a 13% stake and have not received any distributions, dividends or other payments from it. But the mandatory repatriation tax, enacted through the Tax Cuts and Jobs Act that was signed into law by former President Donald Trump, taxed U.S. taxpayers who owned at least 10% of a foreign company on their proportionate share of profits. of this company after 1986. tax was designed to generate about $340 billion in revenue over 10 years.

Although KisanKraft reinvested its profits in the years following its founding rather than distributing dividends to shareholders, the tax still applied to the Moores.

The Moores paid, but filed suit against the federal government to obtain a refund and challenge the constitutionality of the mandatory repatriation tax.

A federal district court ruled in favor of the government and dismissed the case, concluding that the mandatory repatriation tax is permitted under the 16th Amendment, which grants Congress the authority to tax “income, from whatever source derived.”

The U.S. Court of Appeals for the 9th Circuit upheld the lower court’s decision, ruling that nothing in the Constitution prohibits Congress from “allocating the income of a corporation proportionately to its shareholders.” The court noted that courts have consistently upheld other similar taxes and warned that finding the measure unconstitutional would call into question many other long-standing tax provisions.

During oral arguments in December, the justices appeared sympathetic to concerns about how a sweeping ruling would ripple throughout the U.S. tax system and threaten existing tax laws.

But some of the justices sought clarity about the limits of Congress’s taxing power. Lawyers for the Moores warned the court that allowing a tax on income that has not yet been realized or received would open the way for lawmakers to tax all sorts of things, like retirement accounts or earnings in actual value. State.

Justice Samuel Alito faced pressure from some congressional Democrats to recuse himself from the case because of interviews he participated in with a Wall Street Journal editor and David Rivkin, a lawyer who represented the Moores.

The Justice refused to move away of the case, arguing that there was “no valid reason” for him to do so.