In a recent Supreme Court case, the constitutionality of a corporate tax reform provision from 2017 has been put into question. A SCOTUS blog post by Amy Howe detailed the arguments from both sides of this issue. The provision in question imposes a tax on the undistributed profits from U.S. shares of foreign corporations that are majority American owned.
The challenge was brought forward by a Washington state couple, Charles and Kathleen Moore, who experienced a one-time increase of $15,000 in their tax bill as a result of this law. The Moore’s have sought a refund and argue that this mandatory repatriation tax violates the Constitution’s apportionment clause. In response, the federal government’s lead attorney informed the justices that if ruled in the Moore’s favor, this could lead to a major transformation in the operation of the tax code and potential trillions of dollars lost in revenue.
The mandatory repatriation tax being disputed forces a tax on earnings post-1986 of foreign corporations where U.S. shareholders own at least 50% of the stock. This applies whether or not the earnings have been distributed to shareholders or if shareholders owned the shares when the profits were made by the corporation. The Moore’s invested in an Indian corporation in 2005 with no distributions or dividends received from the company, yet still received the significant tax bill due to the 2017 tax law.
Thier argument lies within the interpretation of what “income” classifies as according to taxation laws. They state the Indian corporation’s profits do not qualify as their income as they never received it. The U.S. Solicitor General representing the administration countered this argument, supporting the 16th amendment and the understanding of the term “income” by reassuring justices that the mandatory repatriation tax targets income received by foreign corporations but attributed to U.S. shareholders by Congress.
As justices delved into the interpretation of the 16th amendment and historic taxation of unrealized income, it was apparent several were persuaded by the administration’s reliance on the amendment’s text and history. However, fears over broader implications of the court’s ruling emerged during these discussions, worrying many that a ruling in favor of the government would open the door to unbounded taxation.
Despite this, a few justices dismissed these broader possibilities, characterizing them as improbable due to Congress’s tendency to rely on received income for taxation from an administrative perspective. These perspectives along with a focus for a more narrow ruling from Justices Amy Coney Barrett and Brett Kavanaugh appear to suggest the government may receive a narrow ruling in its favor. The broader questions arising from this case may be left for others to address in the future.
This information is a brief overview of a complex ongoing legal case, for more details visit Amy Howe’s more comprehensive explainer here.