Supreme Court Upholds Mandatory Repatriation Tax in Narrow Ruling, According to BakerHostetler
June 20 2024 - 7:07PM
Business Wire
The United States Supreme Court today upheld the
constitutionality of the so-called mandatory repatriation tax in a
narrow ruling, stating that the MRT taxes realized income — income
earned by the offshore corporation — and attributes that corporate
income to shareholders and taxes the shareholders on their portions
of that income, BakerHostetler reports.
A team of BakerHostetler attorneys, led by Partners Andrew
Grossman and Jeffrey Paravano, represented Charles and Kathleen
Moore at the Supreme Court, arguing that realization is required
for federal taxation of income pursuant to the Sixteenth Amendment
and that the MRT was a tax on property, not income. The Supreme
Court concluded that it “need not resolve” the parties’
disagreement over realization, leaving those “potential issues for
another day.”
The MRT, enacted as part of the Tax Cuts and Jobs Act of 2017,
raised more than $300 billion of revenue for the federal
government. The MRT deems undistributed earnings and profits
reinvested abroad by certain businesses going back to 1986 to be
“income” in 2017 of certain U.S. shareholders.
BakerHostetler clients, the Moores, in 2017 owned about 13% of
the stock of KisanKraft, a controlled foreign corporation operating
in India focused on manufacturing low-cost farm equipment. The
Ninth Circuit Court of Appeals previously held that an “income tax”
does not require that a “taxpayer has realized income under the
Sixteenth Amendment.”
The Moores asserted that income must be realized to be taxed
without apportionment under the Sixteenth Amendment and that the
MRT imposed on them as shareholders is an impermissible unportioned
tax on property. How could income earned 30 years ago by a foreign
corporation and reinvested abroad by that corporation in property
and equipment be “income” to a U.S. shareholder in 2017, asked the
Moores.
In a majority opinion, authored by Justice Kavanaugh, the Court
held that the Sixteenth Amendment authorizes Congress to attribute
income realized by an entity to its owners in certain
circumstances: “We emphasize that our holding today is narrow. It
is limited to (i) taxation of the shareholders of an entity, (ii)
on the undistributed income realized by the entity, (iii) which has
been attributed to the shareholders, (iv) when the entity itself
has not been taxed on that income. In other words, our holding
applies when Congress treats the entity as a pass-through.”
Paravano, counsel to the Moores and firmwide Chair of
BakerHostetler’s Tax Group and D.C. Office Managing Partner, said,
“Although the five-justice majority determined that it need not
resolve the issue of realization in Moore, it also specifically
noted that the Supreme Court in Macomber ‘stated that income
requires realization.’ Further, Justice Barrett’s concurrence in
the judgment, joined by Justice Alito, states that ‘[r]ealization
may take many forms, but our precedent uniformly holds that it is
required before the Government may tax financial gain without
apportionment,’ and Justice Thomas’s dissent, joined by Justice
Gorsuch, states that ‘Sixteenth Amendment “incomes” include only
income realized by the taxpayer.’ Thus, the majority opinion
recognizes that prior Supreme Court precedent requires realization,
and four Justices in Moore recognize that realization is a
requirement for federal taxation of income without apportionment.
The opinion also notes that nothing in the opinion should be read
to suggest that Congress could tax both an entity and its owners on
the same income, and that the Due Process Clause ‘proscribes
arbitrary attribution’ — which gives tax practitioners food for
thought on whether any current taxes might violate that
holding.”
Grossman, co-leader of BakerHostetler’s Appellate and Major
Motions team who argued the case before the Supreme Court, added,
“Divorcing income from realization seems to me to be off the table
when you read the opinion in its entirety. The court’s opinion is
best read to preserve the status quo and disapprove new kinds of
income-taxation, such as taxes on wealth, on appreciation of assets
or on ordinary share investments.”
The BakerHostetler team in the Moore case included Grossman,
Paravano, David B. Rivkin and Kristin A. Shapiro.
With more than 80 tax attorneys serving companies in every major
industry, BakerHostetler’s Tax Group is one of the legal
profession’s strongest. Members of the Tax Group have served in
senior positions at the Department of the Treasury, the IRS, the
Department of Justice and the Joint Committee on Taxation as well
as on Capitol Hill and with state taxing authorities, developing
experience and insights to help clients resolve significant tax
disputes, navigate complex tax planning issues and minimize global
tax costs. BakerHostetler’s tax attorneys are focused on driving
client innovation and growth, and the group is regularly named one
of the nation’s leading law firms by Chambers USA, Legal 500 and
BTI Consulting Group. For more information, visit
bakerlaw.com/services/tax. Connect with us on the social platform X
at @BakerHostetler or on LinkedIn at @BakerHostetler, @JeffParavano
and @AndrewGrossman.
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Courtney B. Smith +1-202-861-1514 cbsmith@bakerlaw.com