U.S. Government Argued Repatriation Tax Is Constitutional!

The U.S. government urged the Ninth Circuit to not revive a couple's challenge against the 2017 federal tax overhaul's repatriation provision, arguing the pair has mischaracterized the levy on foreign income as an unconstitutional direct tax on property. (Charles G. Moore et al. v. U.S., case number 20-36122, in the U.S. Court of Appeals for the Ninth Circuit).

Government attorneys asked the appellate court to uphold a Washington federal judge's November order that dismissed a tax refund suit brought by Charles and Kathleen Moore, who had contended that the Tax Cuts and Jobs Act 's repatriation provision violated the U.S. Constitution. The Moores argued that the measure was a direct tax on personal property, specifically, their shares in a foreign corporation,  that violated the U.S. Constitution's Sixteenth Amendment, which requires direct taxes to be apportioned based on state population.

In asking the Ninth Circuit to uphold the Washington court's order, the government said the measure is not a tax on property but a tax on U.S. shareholders' income from their controlled foreign corporations, or CFCs. The apportionment requirement under the 16th Amendment does not apply to income taxes, the government said.

"A Tax On A Deemed Repatriation of CFC Income To U.S. Shareholders Is A Tax on Income From Property That Is, Because of The Sixteenth Amendment, Not Subject To The Apportionment Requirement," The Government Said.

As part of the TCJA's shift to a quasi-territorial system, which exempts some worldwide profits of U.S. corporations, Congress enacted a repatriation provision under Internal Revenue Code Section 965. Under this measure, companies would pay a one-time mandatory transition tax on deferred earnings held abroad.

According to the Moores' complaint, filed in September 2019, the Seattle-area couple paid about $15,000 in taxes under Section 965 based on their small stake in a CFC, KisanKraft Ltd., that provides affordable equipment to India's small-scale farmers. In seeking a refund, the Moores said the tax bill was based on earnings retained and invested by KisanKraft, earnings they never received.

The couple cited a U.S. Supreme Court case from 1920 called Eisner v. Macomber, that said a stock dividend was not taxable income because it didn't involve an actual gain realized by the shareholder. According to the Moores, the repatriation tax is "no different from an unapportioned tax on capital itself and equally beyond Congress' power to enact."

In dismissing the couple's case, U.S. District Judge John Coughenour in November found that "subsequent decisions dealing with foreign income have routinely departed from Macomber's realization standard."

The government told the Ninth Circuit the notion that the Constitution requires income to be "clearly realized" before it can be taxed conflicts with court decisions upholding related measures "against similar constitutional attack."

The government added, "the Constitution does not bar Congress from attributing U.S. taxpayers' foreign corporate earnings to them and taxing them on those earnings."  

The government also asked the Ninth Circuit to not revive the Moores' claim that the repatriation provision was the retroactive application of a new tax in violation of the due process clause in the Constitution's Fifth Amendment.

It was reasonable for Congress to apply Section 965 to offshore profits that accumulated after 1986, according to the government's attorneys. They noted that Judge Coughenour also found it was reasonable due to "the shift in international tax law and of the result, which would occur without a transition tax, of allowing previously undistributed CFC earnings to 'escape the imposition of U.S. taxation.'"

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