U.S. Supreme Court: Mandatory repatriation tax under section 965 held constitutional

The U.S. Supreme Court today affirmed a 2022 decision of the U.S. Court of Appeals for the Ninth Circuit upholding the constitutionality of the mandatory repatriation tax under section 965.

The case is: Moore v. United States, No. 22-800 (S. Ct. June 20, 2024). Read the Court’s opinion

Justice Kavanagh delivered the opinion of the Court, which was joined by Justices Roberts, Sotomayor, Kagan, and Jackson. Justice Jackson also filed a concurring opinion, and Justice Barrett filed an opinion concurring in the judgment, in which Justice Alito joined. Justice Thomas filed a dissenting opinion, in which Justice Gorsuch joined.

Summary

As previously reported in TaxNewsFlash:

• 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 on the grounds that it violates the Constitution’s Apportionment Clause and Fifth Amendment’s Due Process Clause.
• 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 Sixteenth Amendment exempts from the apportionment requirement taxes on “incomes, from whatever source derived . . . .”  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 the Ninth Circuit’s decision (June 7, 2022)
• The Ninth Circuit subsequently denied the taxpayer’s petition for a rehearing en banc of its decision on November 22, 2022. Four judges dissented from the denial of rehearing un banc based on the taxpayers’ Apportionment Clause claims. 
• The taxpayer then sought certiorari before the Supreme Court, which was granted on June 26, 2023.