Supreme Court Affirms US Authority to Tax Foreign Investments

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In a landmark decision on June 20, 2024, the Supreme Court upheld a controversial tax on foreign income – the mandatory repatriation tax (MRT), reinforcing federal authority over international business dealings. Critics argue that this ruling overreaches, extending federal influence too far.

The MRT, also known as the “transition tax,” was introduced in the Tax Cuts and Jobs Act (TCJA) of 2017 in the United States. This tax required US corporations to pay a one-time tax on overseas profits.

The primary goal was to encourage US multinational corporations to bring back (repatriate) their foreign earnings to the United States. Before this, companies could defer paying US taxes on foreign profits until those profits were returned to the US.

Before the enactment of this tax in 2017, affluent individuals and corporations often diverted their investment income into foreign stocks to sidestep US taxes. The MRT sought to close that loophole.

On June 20, 2024, the United States Supreme Court released its opinion in Moore v. United States. The case stemmed from a lawsuit filed by Charles and Kathleen Moore, a retired couple from Washington state, who challenged the Internal Revenue Service (IRS) to avoid paying taxes on their investment in an Indian company. The Moores contended that taxing foreign stock shares exceeded the constitutional limits of US authority.

However, the Supreme Court disagreed. In their ruling, the justices noted, “Congress has long taxed shareholders of an entity on the entity’s undistributed income, and it did the same with the MRT. This court has long upheld taxes of that kind, and we do the same today with the MRT.” The Court cited Article I and the 16th Amendment as the constitutional foundation for this tax.

Article I grants legislative powers to Congress, while the 16th Amendment empowers Congress to collect taxes on incomes “from whatever source derived.” Justice Brett Kavanaugh, writing for the majority, emphasized the economic repercussions of eliminating the MRT, stating that such a move could render significant portions of the IRS code unconstitutional and result in a severe loss of tax revenue.

The Tax Cut and Jobs Act, which includes the MRT, was projected to generate approximately $340 billion over a decade. According to Justice Kavanaugh, eliminating this tax could force Congress to either drastically cut essential national programs or impose higher taxes on ordinary Americans.

Represented by the Competitive Enterprise Institute, the Moores argued that the tax was unfair. “The Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control,” said Dan Greenberg, the institute’s general counsel, in a statement following the ruling.

The Moores had invested $40,000 in 2006 for a 13% stake in KisanKraft, an Indian company. Despite receiving no distributions or payments, the IRS required them to pay the MRT on their share of the company’s earnings. This tax applies to US citizens owning at least 10% of a foreign company. Having paid the tax, the Moores sought a refund through legal action, which the Supreme Court ultimately rejected.

In a 7-to-2 decision, the Court upheld the MRT, with conservative Justices Neil Gorsuch and Clarence Thomas dissenting. They argued that the Moores’ lack of actual income from their investment meant the tax did not fall within the scope of the 16th Amendment.

The case, Moore et al. v. U.S., underscores the contentious nature of US taxation on foreign investments and the broad interpretation of congressional tax authority.

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