Supreme Court Upholds US Authority to Tax Citizens’ Foreign Investments

WASHINGTON — The Supreme Court on Thursday upheld a Trump-era tax on foreign income in a ruling critics say extends federal authority too far over international business.

Before Congress enacted the tax in 2017, wealthy individuals and corporations would put their investment income into foreign stock shares to avoid U.S. taxes.

The tax is called the mandatory repatriation tax, or MRT.

The ruling was based on a lawsuit that retired couple Charles and Kathleen Moore of Washington state filed against the Internal Revenue Services to avoid paying taxes on an investment they made into a company in India. They argued that taxes on foreign stock shares alone fell outside the constitutional authority of the U.S. government.

The Supreme Court disagreed, saying in its ruling that “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.”

Constitutional authority for the tax is derived from Article I and the 16th Amendment, the court’s ruling said.

Article 1 says that “All legislative powers herein granted shall be vested in a Congress of the United States…” The 16 Amendment says, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived…”

The consequences of eliminating the mandatory repatriation tax could be devastating for the U.S. economy, said the Supreme Court ruling written by Justice Brett Kavanaugh.

Eliminating the tax could make “vast swaths” of the IRS code unconstitutional, the ruling said.

“And those tax provisions, if suddenly eliminated, would deprive the U. S. government and the American people of trillions in lost tax revenue,” the ruling said. “The logical implications of the Moores’ theory would therefore require Congress to either drastically cut critical national programs or significantly increase taxes on the remaining sources available to it — including, of course, on ordinary Americans. The Constitution does not require that fiscal calamity.”

When Congress enacted the Tax Cut and Jobs Act, it was expected to generate about $340 billion for the government over 10 years.

The Moores were represented by the Competitive Enterprise Institute, a Washington, D.C.-based public policy foundation that advocates for regulatory reform.

“We think that is unfair, because the Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control,” Dan Greenberg, general counsel for the Competitive Enterprise Institute, said in a statement after the Supreme Court ruling.

The lawsuit was prompted by the Moores’ investment of $40,000 in 2006 for a 13% stake in a small company in India called KisanKraft. They received no distributions or other payments.

Nevertheless, the IRS required them to pay the mandatory repatriation tax on their share of the company’s earnings. It is levied on U.S. citizens who own at least 10% of a foreign company.

KisanKraft reinvested its earnings rather than paying any dividends to shareholders, meaning the Moores received no additional annual income from their shares.

They paid the tax but then sued the IRS for a refund.

The Moores lost in U.S. District Court and before the U.S. Court of Appeals for the 9th Circuit, which led to their appeal to the Supreme Court.

The mandatory repatriation tax is no different from any other lawful tax and “falls squarely within Congress’s constitutional authority to tax,” the Supreme Court said.

Conservative justices Neil Gorsuch and Clarence Thomas dissented in the 7-to-2 decision.

The Moores never received dividends or other gains on their investment, which meant they had no income that could be taxed under 16th Amendment authority, the dissent said. 

“Because the [mandatory repatriation tax] is imposed merely based on ownership of shares in a corporation, it does not operate as a tax on income,” the dissent written by Thomas says.

The case is Moore et al. v. U.S., case number 22-800, in the U.S. Supreme Court.

You can reach us at [email protected] and follow us on Facebook and Twitter