Attention taxpayers…the mandatory repatriation tax, or MRT, is here to stay. Read up on the decision in Moore vs. United States case.

Background- Moore vs. United States

Charles and Kathleen Moore invested $40,000 in an agricultural equipment company in India called KisanKraft in 2006 for a 13% ownership stake but did not receive any distributions, dividends, or other payments.

Prior to 2017’s Tax Cuts and Jobs Act (TCJA), foreign business profits were not taxable until those profits were brought back to the U.S. The TCJA introduced several provisions aimed at preventing companies from deferring foreign earnings to avoid paying taxes in the U.S.

In addition to the tax on Global Intangible Low Taxed Income (“GILTI”) under section 951A, (which requires U.S. shareholders to include in their income the GILTI of their controlled foreign corporations (CFCs) in the year in which it is earned), Section 965 required that any earnings and profits that were accumulated overseas and undistributed as of 2017 were to be taxed under a one-time “transition tax”, also known as the Mandatory Repatriation Tax (MRT).

U.S. taxpayers who owned at least 10% of a foreign company at the time would be taxed on their share of the company's earnings since 1986. Despite KisanKraft reinvesting its earnings rather than distributing dividends, the Moores were still required to pay roughly $15,000 in taxes on overseas earnings attributed to them.

The couple filed a lawsuit, arguing that the MRT was unconstitutional on the basis that income under the 16^th amendment (authorizes Congress "to lay and collect taxes on incomes, from whatever source derived") must be realized before it can be taxed.

What did the court decide?

On June 20, 2024, in a 7-2 decision, the Supreme Court rejected the appeal, stating that Congress has the constitutional power to tax people and companies on their share of undistributed corporate income.

What impact will this decision have?

Many taxpayers and practitioners looked at the Moore case as having potentially enormous stakes for what the federal government is constitutionally permitted to tax. Beyond the relatively straightforward question of whether the MRT can apply to the Moores, the Supreme Court’s decision in that case could have affected the Sixteenth Amendment, which gives Congress the power to impose an income tax on individuals and businesses in the United States.

If the Court in Moore had taken a narrow view of the Sixteenth Amendment, finding that it does not expressly provide Congress with the ability to tax unrealized income, such a ruling would have threatened to upend the U.S. tax system as we have known it for decades – invalidating not just the MRT and likely the Subpart F and GILTI regimes, but also potentially the longstanding practice of taxing the undistributed profits of pass-through entities such as partnerships and S-corporations. Such a ruling would also have significant implications for proposals for a wealth tax on billionaires.

In the end, however, the Court issued a narrow decision, finding that KisanKraft did indeed have realized income, and Congress could tax the Moores on that income as shareholders of the company. The majority opinion expressly declined to address the issues that made the case of interest to so many tax practitioners.

With respect to the MRT, taxpayers who had been following the case in the hopes that the TCJA provision would be invalidated, opening an avenue for potential refund claims, the decision forecloses that possibility.