In 2017, the Tax Cuts and Jobs Act (TCJA) introduced the Mandatory Repatriation Act. This act imposed a one-time transition tax on all offshore untaxed earnings and profits for U.S. taxpayers with a minimum ownership in certain foreign corporations. This tax under the Mandatory Repatriation Act was later codified under the Internal Revenue Code as Section 965. Under §965, these taxpayers affected by the Mandatory Repatriation Act would be taxed as if they had earned a dividend from the foreign corporation, even if earnings had never been distributed.
Charles and Kathleen Moore owned 13% of an Indian corporation starting in 2006 and never realized earnings from this investment. In 2017, they received a $15,000 tax bill for unrealized earnings going back to 2006. Believing this transition tax to be unconstitutional, the Moore family took their case to court arguing that because the tax was imposed on accumulated foreign earnings, it was not a tax on income and is therefore unconstitutional under the 16th Amendment. In June 2022, the Ninth Circuit Court of Appeals affirmed a district court’s decision rejecting the challenge. In its decision, the court held that whether income is realized is not a determinative factor regarding the validity of the transition tax.
Following this decision, the U.S. Supreme Court granted writ of certiorari and will now rule on the validity of the transition tax imposed under §965 with regard to any 16th Amendment concerns.
The petitioners argue that the court’s decision departs from a century of legal precedent set by earlier cases, which have held income realization is a necessary requirement under the U.S. Constitution. The results of the U.S. Supreme Court’s opinion carry significant implications since the transition tax under §965 builds on concepts imposed by the Subpart F regime under §951, a regime that has been long in place prior to enactment of the TCJA, as well as the current global intangible low-taxed income (GILTI) regime created by the TCJA.
A February 2020 estimate by the IRS Statistics of Income Division stated that the net §965 liability for 2017 was $141 billion, with $127 million being deferred. In the Justice Department Tax Division’s fiscal 2024 budget, the transition tax was estimated to raise $340 billion over a 10-year period.
The petitioners in Moore v. United States are hoping for the Supreme Court to rule that the §965 transition tax is unconstitutional under grounds that it violates the 16th Amendment. Although their case had been rejected previously, the Supreme Court granted certiorari on June 26. A taxpayer-favorable decision would be monumental, as the impact of the court’s decision would presumptively not be limited to the transition tax. A decision in the petitioners’ favor also could encourage litigation over long-standing fundamentals of the current U.S. tax system as it relates to U.S. inclusion regimes like GILTI and Subpart F.
We recommend that taxpayers affected by §965 and other inclusion regimes, like the current GILTI and Subpart F regimes, monitor for developments related to Moore. If you have any questions or need assistance, please reach out to a professional at FORVIS or use the Contact Us form below.