In a landmark decision, the Supreme Court has upheld the constitutionality of the Mandatory Repatriation Tax (MRT), a significant component of the 2017 Tax Cuts and Jobs Act. The case, Moore v. United States (Docket Number: 22-800), has profound implications for individual and corporate taxation in the United States. This ruling reinforces Congress’s authority to tax American shareholders on the undistributed income of American-controlled foreign corporations. Let’s dive into the details and ramifications of this pivotal case.

The Background of the Case

The MRT mandates that U.S. shareholders of certain foreign corporations include in their income their share of the corporation’s accumulated earnings and profits that were not previously taxed in the U.S. This tax applies to the last tax year of the foreign corporation that begins before January 1, 2018, and allows shareholders to pay the tax in installments over eight years. The goal was to encourage U.S. persons and multinational corporations to repatriate their foreign earnings and prevent profit shifting to low or zero tax jurisdictions.

Petitioners Charles and Kathleen Moore, represented by Andrew M. Grossman, Esquire, are U.S. shareholders of KisanKraft, an American-controlled foreign corporation subject to the MRT. They argued that the MRT violates the Sixteenth Amendment, which permits Congress to tax income from any source without apportionment. The Moores contended that the MRT is a direct tax on property, as it taxes gains not realized by the shareholders, referencing the Supreme Court’s decision in Eisner v. Macomber (1920).

The United States, represented by Solicitor General Elizabeth B. Prelogar, defended the MRT as a valid income tax under the Sixteenth Amendment. The government highlighted the historical precedent of preratification income taxes on undistributed corporate earnings and compared the MRT to other pass-through taxes on partnerships and S corporations.

The Supreme Court’s Decision

On June 20, 2024, the Supreme Court delivered its opinion, affirming the constitutionality of the MRT. Justice Kavanaugh, joined by Chief Justice Roberts and Justices Sotomayor, Kagan, and Jackson, authored the majority opinion. The Court concluded that the MRT, which attributes realized and undistributed income of American-controlled foreign corporations to their U.S. shareholders and taxes them accordingly, does not exceed Congress’s constitutional authority.

Key Issues and Court Analysis

• Attribution of Income: The Court upheld the principle that Congress can attribute an entity’s realized and undistributed income to its shareholders and tax them on their share of that income. This is consistent with longstanding precedents and congressional practices.
• Precedents: The decision cited several cases supporting this view, including Burk-Waggoner Oil Assn. v. Hopkins (1925), Burnet v. Leininger (1932), Heiner v. Mellon (1938), and Helvering v. National Grocery Co. (1938). These cases affirmed that Congress could tax either the entity or its shareholders on undistributed income
• Sixteenth Amendment and Realization Requirement: The Moores’ reliance on Eisner v. Macomber was deemed misplaced. The Court clarified that Eisner did not address the attribution of income and was not applicable to this case.
• Historical Context: The Court noted the historical practice of taxing shareholders on undistributed income, referencing laws such as the Revenue Act of 1913 and subpart F of the Internal Revenue Code, which taxes American shareholders of controlled foreign corporations.
• Direct vs. Indirect Taxes: The Court reiterated that the MRT is an indirect tax on income, not a direct tax on property, and thus does not require apportionment among the states.

Implications of the Decision

The Supreme Court’s ruling confirms that the MRT is a valid exercise of Congress’s taxing power under the Constitution. This decision has several critical implications:

• Validation of Pass-Through Taxation: The ruling reinforces Congress’s ability to tax American shareholders on the income of foreign corporations, similar to the taxation of partnerships and S corporations under §§61(a)(12), 701, and 1366(a)–(c).
• Fiscal Impact: The decision preserves the federal revenue generated by the MRT, preventing potential fiscal disruptions that could arise from invalidating the tax.
• Future Taxation: The ruling sets a precedent for the constitutionality of similar taxes on undistributed income and supports the broader framework of U.S. international tax policy, including provisions under §§951–952 and §§965(a)(1), (c), (d).
• Limitations: The Court’s holding is narrow and limited to entities treated as pass-throughs. It does not authorize hypothetical efforts to tax both an entity and its shareholders on the same undistributed income.

Analysis of Specific Provisions and Precedents

S Corporations and Partnerships

• 26 U.S.C. §§1361–1362: These sections define S corporations and outline the requirements for their tax treatment. S corporations are taxed on a pass-through basis, where the corporation’s income is attributed to its shareholders and taxed as their personal income. The MRT’s method of attributing foreign corporation income to U.S. shareholders parallels this approach, affirming its constitutionality.
• §§61(a)(12), 701, 1366(a)–(c): These provisions relate to the taxation of partnerships, where income is passed through to the partners and taxed as their personal income. The MRT follows a similar principle by attributing the undistributed income of foreign corporations to their U.S. shareholders.

Controlled Foreign Corporations and Subpart F

• §§951–952: Part of the Internal Revenue Code’s subpart F, these sections require U.S. shareholders of controlled foreign corporations to report and pay taxes on certain types of income, even if not distributed. The MRT extends this principle, reinforcing its alignment with established tax policies.

Specific Provisions of the MRT

• §965(a)(1), (c), (d): These sections outline the specifics of the MRT, including how it applies to the accumulated earnings of foreign corporations and the tax rates. The Supreme Court’s affirmation of these provisions underscores their consistency with constitutional tax principles.

Historical Context and Longstanding Practices

The Court’s decision emphasized the historical context of U.S. tax law, particularly the practice of taxing shareholders on undistributed income. This practice dates back to early income tax laws, such as the Revenue Act of 1913, which taxed shareholders on the income of corporations formed to evade taxes. The Court noted that this historical precedent supports the constitutionality of the MRT.

Court’s Reasoning and Conclusion

The Supreme Court concluded that the MRT does not exceed Congress’s constitutional authority. The decision highlighted several key points:

• Article I, §8, cl. 1: This clause grants Congress broad taxing power, which includes taxing income without apportionment. The MRT fits within this framework as it taxes income attributed to shareholders..
• Historical Practice: The Court emphasized the long-established practice of taxing undistributed income attributed to shareholders or partners, reinforcing the legitimacy of the MRT.
• Precedent: The Court’s analysis of cases like Burk-Waggoner Oil Assn. v. Hopkins, Heiner v. Mellon, and Helvering v. National Grocery Co. demonstrated that taxing shareholders on undistributed income has been consistently upheld.
• Misplaced Reliance on Eisner v. Macomber: The Moores’ interpretation of Eisner v. Macomber was rejected. The Court clarified that Eisner did not address the attribution of income from a corporation to its shareholders. Instead, the Court reaffirmed the principles established in Burk-Waggoner Oil Assn. v. Hopkins, Heiner v. Mellon, and Helvering v. National Grocery Co. which allow Congress to attribute undistributed income to shareholders and tax them accordingly.

The Supreme Court’s ruling in Moore v. United States is a definitive affirmation of Congress’s authority to tax American shareholders on the undistributed income of controlled foreign corporations. This decision reinforces the principles of U.S. tax law and provides a clear framework for future tax policies. By upholding the MRT, the Court has ensured the stability and predictability of the U.S. tax system, safeguarding a critical source of federal revenue and setting a precedent for the constitutionality of similar taxes.