Supreme Court Upholds Section 965 Mandatory Repatriation Tax

A 7-2 majority upheld the constitutionality of the mandatory repatriation tax (“MRT”) under section 965 of the Internal Revenue Code, which came into effect as part of the Tax Cuts and Jobs Act of 2017.

Delivering the Court’s majority opinion, Justice Kavanaugh found that the MRT was not a direct tax that needed to be apportioned under the Constitution. Kavanaugh argued that the appropriate question in this case was not whether realization is a constitutional requirement but whether the income in question could be attributed to the taxpayer. Kavanaugh looked to a long history of Congress permitting and the Court upholding the attribution of income earned by an entity to the entity’s owners. The taxpayers also conceded that such attribution in contexts other than the MRT was constitutional, including attribution required under Subpart F of the Internal Revenue Code, the subpart in which the MRT is found. Thus, a majority of the Court held the MRT to be constitutional.

Many believed the Supreme Court took on this case to preemptively shut down the potential for legislation that would impose taxes on the unrealized gains of high income or high net worth individuals. Instead, the majority opinion avoids entirely the question regarding a constitutional realization requirement. Accordingly, questions regarding the constitutionality of a federal “wealth tax” remain unanswered. However, given the concurring and dissenting opinions, it seems at least four Justices would be skeptical of any such tax.

While the decision favors the government, the Court's reasoning highlights some nuances. While the majority opinion recognized the long-standing practice of attributing realized income to shareholders for tax purposes, it notably avoided explicitly addressing the constitutionality of a realization requirement.

This avoidance leaves the question of a potential federal "wealth tax" unanswered, but the concurring and dissenting opinions offer insights. Four justices expressed skepticism toward such a tax, indicating a potential roadblock for future legislation seeking to impose taxes on unrealized gains.

The Moore decision underscores the complexity of U.S. taxation for businesses engaged in cross-border activities. Businesses need to navigate a web of regulations and precedents, often facing obstacles not present in purely domestic tax situations.

Key Takeaways for Businesses:

• Businesses operating internationally should be aware of the nuances of the MRT and its potential impact on their tax obligations.

• The Moore decision does not signal an open door for "wealth taxes." While the ruling clarifies the constitutionality of the MRT, it leaves open the possibility of legal challenges to future legislation seeking to tax unrealized gains.