Introduction

On June 20th, the Supreme Court was tasked with determining whether or not to blow the U.S. tax code in the case Moore vs. United States. In a 7-2 majority ruling, the court ruled against a Washington couple’s challenge to federal taxation on income generated from their foreign investments. Writing for the majority, Justice Brett Kavanaugh stated, “The MRT [Mandatory Repatriation Act] — which attributes the realized and undistributed income of an American-controlled foreign corporation to the entity’s American shareholders, and then taxes the American shareholders on their portions of that income — “does not exceed Congress’s constitutional authority.”

Justice Brett Kavanaugh Struck Down Couple’s Tax Challenge Photo illustration by Slate. Photo by cei.org/YouTube and Shawn Thew /Pool/AFP via Getty Images.

Understanding the MRT Provision

Before the Tax Cuts and Jobs Act (TCJA) — a comprehensive tax reform package signed into law by former President Donald Trump in 2017 — U.S. taxpayers with ownership stakes in foreign companies were exempt from paying taxes until the company profits were distributed to them. However, the passage of TCJA, particularly the MRT provision, implemented a one-time tax requirement for American shareholders of profitable foreign corporations, regardless of whether those profits were repatriated back to the U.S. The act intended to offset revenue losses projected from the significant tax cuts included as another key component of TCJA and address the trillions of dollars of undistributed income that was being held by mega-corporations such as Apple, Google, and Facebook without tax consequences to American shareholders.

A key component of TCJA was the MRT Provision (Mandatory Repatriation Tax) (Photo illustration by Freed Maxick https://blog.freedmaxick.com/summing-it-up/mandatory-repatriation-toll-tax-of-income-earned-by-controlled-foreign-entities) 

The Prosecution’s Argument

According to the Moores, the MRT provision went beyond congressional authority by placing taxes on unrealized income and essentially directly taxing their wealth, which according to the Sixteenth Amendment, must be apportioned among the States. Kavanaugh rejected this assertion in a footnote of his opinion, where he drew a distinction between direct taxes “imposed on persons or property” and indirect taxes such as MRT, a consumption tax “imposed on activities and transactions.” Thus, the Court’s decision upheld the Sixteenth Amendment’s provision on indirect taxes as part of income, affirming Congress’s power to “collect taxes on all incomes, from whatever source derived.”

Victory For the Status Quo

Before the case ruling, there appeared to be a nervous stir among corporate America that a decision in favor of the Moore’s would send shock waves through the U.S economy by upending the tax code. A victory for the plaintiffs would have cost Washington trillions of dollars in tax revenue by rendering existing tax provisions that target unrealized income such as the CAMT, GILTI, and subpart F income unconstitutional. Additionally, a proposed global minimum tax deal named “Pillar Two,” which aims to impose a 15% tax on multinational corporations’ foreign income, would be constitutionally cumbersome to implement in the U.S. with an opposite ruling. Moreover, this decision will likely bode well for corporate taxpayers seeking certainty in how their business pays taxes. Had the ruling gone differently and MRT was deemed unconstitutional, taxpayers who filed state corporate or personal income taxes under MRT may have been eligible for protective refund claims subject to limitation periods and state policies. Ultimately, the decision in Moore has preserved the status quo and calmed a storm that threatened to dismantle the tax code.

https://www.crfb.org/blogs/moore-v-us-ruling-could-widen-deficits-upend-tax-law

Good News For the Moore Wealthy

That is not to say the decision does not have immediate implications, however, as progressives committed to enacting an Elizabeth Warren style wealth tax may have been dealt a final nail in the coffin when reading Kavanaugh’s opinion that makes slight suggestions on the unconstitutionality of such legislation. Based on his definition of a direct tax being applied on the wealth or “property” of an individual and an indirect tax on income derived from that wealth, a wealth tax would likely fall under the domain of a direct tax that would fail to abide by the Sixteenth Amendment’s apportionment requirement.

Sources/Citations

1. IRS to begin processing some employee retention tax credit claims this summer. (2024, July 12). JD Supra.
https://www.jdsupra.com/legalnews/irs-to-begin-processing-some-employee-3952838/

2. Bloomberg Television. (2023, December 11). Consequences of Moore v. United States
https://www.youtube.com/watch?v=jkujn3s2fsg

3. (N.d.). Congress.gov. Retrieved August 2, 2024, from
https://constitution.congress.gov/browse/amendment-16/

4. Hulehan, K. (2024, May 20). Why we’re closely watching Moore v. U.s. Tax Foundation
https://taxfoundation.org/blog/moore-case/

5. Moore v United States. (2024, February 1). Barnes Dennig.
https://www.barnesdennig.com/moore-case-refunds/

6. Millhiser, I. (2024, June 20). The Supreme Court’s new tax decision is great news for billionaires. Vox.
https://www.vox.com/scotus/355969/supreme-court-moore-us-wealth-tax-billionaires

Written by Veer Agarwal
Veer Agarwal studies at Livingston High School in the United States.

Check out our website: www.occamsadvisory.com or Schedule a free consultation : Click here

This blog is intended for informational purposes only and should not be considered as any professional advice. Please consult with the respective professional for any specific advice related to your situation.

Location: United States Of America
Media Contact: Harsh Golani
Contact Details: marketing@occamsadvisory.com