Supreme Court Upholds Tax on Overseas Investments in Landmark Decision

The Supreme Court recently upheld the 2017 Tax Cuts and Jobs Act, specifically the Mandatory Repatriation Tax (MRT), which imposes a one-time tax on unrealized income from overseas investments. Unrealized income refers to theoretical profits that exist on paper but have not been realized until the asset is sold. The court’s majority opinion, written by Justice Brett Kavanaugh, affirmed that the MRT does not violate the 16th Amendment to the U.S. Constitution, which allows the federal government to levy an income tax.

The case before the Supreme Court involved Charles and Kathleen Moore, a married couple from Washington state, who argued that the MRT violated the Constitution’s requirement that direct federal taxes must be apportioned among the states and its prohibition against retroactive taxation. However, the court ruled against them, stating that Congress has the power to attribute a corporation’s income to its shareholders and tax them accordingly.

Conservative constitutionalists had expressed concerns that ruling against the MRT could set a legal precedent that would prevent Congress from enacting legislation to tax wealth. However, Justice Kavanaugh emphasized in the majority opinion that the court’s decision should not be interpreted as authorizing Congress to tax both an entity and its shareholders on the same undistributed income realized by the entity. He also highlighted that the MRT operates similarly to other existing taxes on partnerships, S corporations, and subpart F income.

Wealth tax proposals are frequently discussed in Congress, with Senator Elizabeth Warren and House Democrats reintroducing the Ultra-Millionaire Tax Act earlier this year. This proposed legislation would require the top 0.05 percent of American households to pay 2 cents for every dollar of wealth over $50 million. Additionally, Senator Ron Wyden introduced a plan in November 2023 to tax the unrealized capital gains of high earners.

The MRT was implemented as part of the 2017 Tax Cuts and Jobs Act to change the way foreign income of U.S. corporations was taxed. Previously, much of that income was only taxed when it was repatriated to the United States. To transition to the new system, Congress imposed a one-time tax on outstanding unrepatriated foreign earnings of U.S. corporations. The Congressional Budget Office estimated that this law would result in a one-time tax liability of $347 billion for corporations.

In the case brought before the Supreme Court, the Moores had invested in an India-based company called KisanKraft but had never received any income from their shares. However, after the MRT was enacted, they received a bill from the IRS for additional income tax. The MRT attempts to tax funds that are not traditionally considered income by declaring them as taxable income. The Competitive Enterprise Institute, which is representing the Moores, argues that this is a legal fiction.

Justice Amy Coney Barrett filed a concurring opinion, agreeing with the outcome of the case but not all the reasoning behind the majority opinion. She argued that the issues involved in the case were not as straightforward as stated by Justice Kavanaugh. Justice Samuel Alito joined her opinion.

Justice Thomas wrote a dissenting opinion, joined by Justice Gorsuch, stating that the MRT violated the 16th Amendment’s requirement for apportionment among the states. He argued that a tax on incomes cannot be imposed without apportionment and that the amendment distinguishes between income and its source.

In conclusion, although the Supreme Court upheld the constitutionality of the Mandatory Repatriation Tax, it is important to note that this decision does not open the door to a wealth tax. The court’s ruling was specific to the one-time international tax challenged in this case and does not set a precedent for taxing wealth as a whole. The debate surrounding wealth tax proposals continues, with lawmakers considering various approaches to address income inequality and revenue generation.