June 20, 2024

Supreme Court Decides Moore v. United States

On June 20, 2024, the U.S. Supreme Court decided Moore v. United States, No. 22-800, holding that the Mandatory Repatriation Tax (MRT) — a provision in a 2017 tax reform law — could constitutionally impose a one-time pass-through tax on certain American shareholders of American-controlled foreign corporations.

In 2017, Congress passed the Tax Cuts and Jobs Act, which imposed a one-time backward-looking pass-through tax of between 8% and 15.5% on the pro rata shares of American shareholders of American-controlled foreign corporations.

Charles and Kathleen Moore had invested $40,000 in KisanKraft, an American-controlled foreign corporation that generated income but did not distribute that income to its American shareholders. Following the passage of the tax reform law and the application of the MRT, the Moores paid their pro rata share of KisanKraft’s accumulated income between 2006 and 2017. The Moores then filed suit, arguing that the MRT violated the Direct Tax Clause of the Constitution as an unapportioned direct tax on their shares of KisanKraft stock. In short, the Moores asserted that the MRT is a tax on property rather than on income and that the tax is therefore unconstitutional because it is not apportioned.  

A federal district court dismissed the suit, and the Ninth Circuit affirmed. The Ninth Circuit held that the MRT constitutes a tax on income within the meaning of the Constitution because KisanKraft earned significant income, and the MRT assigns only a pro rata share of that income to the Moores.

The Supreme Court affirmed. It began by noting that the MRT does tax realized income — the income realized by the corporation. The Court then proceeded to decide the “precise and narrow question” of whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders, and then tax the shareholders on their portions of that income. The Court held it could.

In doing so, the Court specified that Congress may tax a business entity itself on the income it earns, or it can treat an entity as a pass-through and attribute the undistributed income to shareholders, and then tax the shareholders on that income. In either case, the Court explained, the tax remains a tax on income. While the Moores sought to differentiate the MRT from other taxes long imposed by Congress and upheld by the Supreme Court, the Court ultimately rejected those arguments, holding that the MRT operates the same as Congress’s longstanding taxation of partnerships, S corporations, and subpart F income.

The Court emphasized that its holding is limited to the following: (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.

Justice Kavanaugh delivered the opinion of the Court, in which Chief Justice Roberts and Justices Sotomayor, Kagan, and Jackson joined. Justice Jackson filed a concurring opinion; and Justice Barrett filed an opinion concurring in the judgment, in which Justice Alito joined. Justice Thomas filed a dissenting opinion, which Justice Gorsuch joined. 

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