Supreme Court Upholds Trump-Era Foreign Earnings TAX

On Thursday, the US Supreme Court upheld an obscure tax established as part of Trump’s big 2017 reform package that targets U.S. taxpayers who own shares in certain foreign firms.

The Supreme Court concluded 7-2 that the so-called mandatory repatriation tax, or MRT, is constitutional under Article I and the 16th Amendment, rejecting a lawsuit by a Washington couple, Charles and Kathleen Moore, who claimed the provision violated the Constitution. Justice Brett Kavanaugh authored the majority opinion. Justices Clarence Thomas and Neil Gorsuch dissented.

The Supreme Court’s decision was narrow, but by declining to overturn the tax, the justices avoided closing the door on Democrats’ proposals to levy taxes on the nation’s richest earnings. Kavanaugh emphasized that the court’s analysis ignores the difficulties created by holdings, wealth, or net worth taxes, as well as appreciation taxes.

“Those are potential issues for another day, and we do not address or resolve any of those issues here,” the Supreme Court judge’s counsel wrote. “In the Moores’ instance, Congress has long taxed an entity’s shareholders on its undistributed revenue, as it did with the MRT. This Court has long sustained such taxes, and we continue to do so with the MRT.

The high court opinion is also expected to allay fears about the impact of a sweeping decision rejecting the required repatriation tax on other elements of the tax legislation. Kavanaugh acknowledged the potential repercussions of such a finding, stating that if the Moores’ argument is adopted, “vast swaths” of the Internal Revenue Code may be declared unconstitutional.

“And those tax provisions, if suddenly eliminated, would deprive the U. S. government and the American people of trillions in lost tax revenue,” he wrote on behalf of the coalition. “The logical ramifications of the Moores’ thesis would thus oblige Congress to either dramatically slash important national programs or significantly increase taxes on the remaining sources available to it—including, of course, ordinary Americans. The Constitution does not need such a fiscal disaster.”

Dan Greenberg, general counsel of the Competitive Enterprise Institute, which represented the Moores, expressed disappointment with the verdict, which allows the government to collect income taxes on overseas stockholders who have never earned income.

“We think that is unfair, because the Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control,” according to a press release.

Supreme Court Moore v. U.S.

The tax at the center of the case, known as Moore v. U.S., is imposed one time on U.S. taxpayers who hold shares of certain foreign corporations. The Moores challenged the measure after they were hit with a nearly $15,000 tax bill for 2017 as a result of the law, which required them to pay levies on their share of reinvested lifetime earnings from an India-based company called KisanKraft Tools.

The Moores had invested $40,000 in the company in 2006 in exchange for a 13% stake, and did not receive any distributions, dividends or other payments from it.

But the mandatory repatriation tax, enacted through the Tax Cut 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 that company’s earnings after 1986. The tax was projected to generate roughly $340 billion in revenue over 10 years.

Though KisanKraft reinvested its earnings in the years after its founding, rather than distributing dividends to shareholders, the tax still applied to the Moores.

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

A federal district court ruled for the government and dismissed the case, finding that the mandatory repatriation tax is permitted under the 16th Amendment, which grants Congress the authority to tax “incomes, 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 “attributing a corporation’s income pro-rata to its shareholders.” The 9th Circuit 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.

The Supreme Court affirmed the 9th Circuit’s ruling and found that by 1938, its precedents had established a rule that contradicted the Moores’ argument in their case. That line of prior decisions, Kavanaugh wrote for the court, “remains good law to this day.”

Citing those earlier rulings and the similarities between the mandatory repatriation tax and other tax provisions, the court concluded that the measure “falls squarely within Congress’s constitutional authority to tax.”

Justice Amy Coney Barrett issued a concurring opinion, joined by Justice Samuel Alito, in which she agreed with the outcome of the case, but split with the majority’s reasoning. Addressing the question that was before the court, Barrett said that the 16th Amendment does not authorize Congress to tax unrealized sums without apportionment to the states.

In a dissenting opinion joined by Gorsuch, Thomas said the Moores were correct in challenging the mandatory repatriation tax as unconstitutional. Because the couple never actually received gains from their investment, those unrealized gains couldn’t be taxed as income under the 16th Amendment, he wrote.

“The fact that the MRT has novel features does not mean that it is unconstitutional. But, the MRT is undeniably novel when compared to older income taxes, and many of those differences are constitutionally relevant,” he wrote. “Because the MRT is imposed merely based on ownership of shares in a corporation, it does not operate as a tax on income.”

Thomas criticized the majority over its concerns about the impact a broad decision would have on other longstanding taxes, writing that “if Congress invites calamity by building the tax base on constitutional quicksand, ‘the judicial power’ afforded to this court does not include the power to fashion an emergency escape.”

He also rebuffed the majority’s contention that its ruling does not speak to the constitutionality of other taxes that may be passed by Congress, such as a wealth tax.

“Sensing that upholding the MRT cedes additional ground to Congress, the majority arms itself with dicta to tell Congress ‘no’ in the future,” Thomas wrote. “But, if the court is not willing to uphold limitations on the taxing power in expensive cases, cheap dicta will make no difference.”

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

But some of the justices sought clarity on the limits of Congress’ taxing power. Lawyers for the Moores had warned the court that allowing a tax on income that has not yet been realized, or received, would pave the way for lawmakers to levy taxes on all manner of things, such as retirement accounts or gains in the value of real estate.

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

The justice declined to step aside from the case, arguing there was “no valid reason” for him to do so.

Source: CBS News