Ninth Circuit: Rehearing en banc denied in section 965 case

Mandatory repatriation tax under section 965

Mandatory repatriation tax under section 965

The U.S. Court of Appeals for the Ninth Circuit today denied the taxpayer’s petition for a rehearing en banc of the Ninth Circuit’s decision [PDF 218 KB] affirming the federal district court’s dismissal of an action seeking to invalidate the mandatory repatriation tax under section 965 on the grounds that it violates the Constitution’s Apportionment Clause and Fifth Amendment’s Due Process Clause.

The case is: Moore v. United States, No. 20-36122.

Judge Bumatay, joined by Judges Ikuta, Callahan, and VanDyke, dissented from the denial of rehearing en banc. Judge Bumatay stated that the panel erred in disregarding the realization requirement of the Sixteenth Amendment, by allowing an unapportioned direct tax on unrealized income—undistributed earnings of a foreign corporation owned by a U.S. taxpayer—without offering any other limiting principle. Judge Bumatay further stated that the Ninth Circuit’s decision opens the door to new federal taxes on other types of wealth and property being categorized as an “income tax” without the constitutional requirement of apportionment. Read Judge Bumatay’s dissenting opinion [PDF 207 KB]


The taxpayers challenged the constitutionality of subpart F’s ability to permit taxation of the post-1986 income of a controlled foreign corporation (CFC) through the mandatory repatriation tax under section 965. The district court dismissed the action for failure to state a claim, denied the taxpayers’ cross-motion for summary judgment, and the taxpayers appealed.

The Ninth Circuit held that, given the background of the government’s power to lay and collect taxes, the mandatory repatriation tax under section 965 is consistent with the Apportionment Clause, which requires that a direct tax be apportioned so that each state pays in proportion to its population. The Ninth Circuit observed that courts have consistently upheld the constitutionality of taxes similar to the mandatory repatriation tax notwithstanding any difficulty in defining income, that the realization of income does not determine the tax’s constitutionality, and that there is no constitutional ban on Congress disregarding the corporate form to facilitate taxation of shareholders’ income. The court explained that subpart F only applies to U.S. persons owning at least 10% of a CFC, the mandatory repatriation tax builds upon a pre-existing liability attributing a CFC’s income to its shareholders, and the taxpayers were, and continue to be, treated as individuals who have some ability to control distribution.

The Ninth Circuit also held that, assuming without deciding that the mandatory repatriation tax is retroactive, the tax does not violate the Fifth Amendment’s Due Process Clause. The court explained that the mandatory repatriation tax serves the legitimate purpose of preventing CFC shareholders who have not yet received distributions from obtaining a windfall by never having to pay taxes on their offshore earnings that have not yet been distributed. The mandatory repatriation tax accomplishes this legitimate purpose by rational means by accelerating the effective repatriation date of undistributed CFC earnings to a date following passage of the 2017 legislation known as the “Tax Cuts and Jobs Act” (TCJA). Read TaxNewsFlash


The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.