SC To Review Constitutionality Of IRC 965 Repatriation Tax

On June 9, 2020 to the we posted The 2017 TCJA's Repatriation Tax is Constitutional in the 9th Circ., where we discussed that the Ninth Circuit tossed a constitutional challenge to the 2017 federal tax overhaul's corporate repatriation tax, affirming a lower court's decision that the one-time levy passes muster under a clause limiting the federal government's authority to tax.

Now according to Law360, the U.S. Supreme Court said on June 26, 2023, that it would review a Ninth Circuit ruling rejecting a couple's challenge to the constitutionality of the repatriation tax that was passed in the Republicans' 2017 tax law.

The Justices Granted The Petition By Charles And Kathleen Moore, Who Challenged The Tax Cuts And Jobs Act's Repatriation Tax Under Internal Revenue Code Section 965,
A One-Time Mandatory Transition Tax On
Deferred Earnings Held Abroad.

The couple asked the court to review their case in February, arguing the Ninth Circuit wrongly concluded that reinvested profits from an Indian business in which they were shareholders could be taxed as income under the 16th Amendment without running afoul of a clause limiting the federal government's authority to tax.

The Moores argued the tax was unconstitutional because it was applied to earnings they never received. They said it is a direct tax that violates the U.S. Constitution's apportionment clause, which requires that such taxes be apportioned among the states in proportion to their population. The 16th Amendment, though, carves ot an exception for income taxes.

The couple first filed a complaint in 2019 in a Washington federal court, saying they paid about $15,000 in taxes under Section 965 based on their small stake in a controlled foreign corporation, KisanKraft Ltd., that provides equipment to small-scale farmers in India.

In seeking a refund, the Moores said the tax bill was based on earnings retained and invested by KisanKraft, earnings they never received and the levy is a direct tax that violates the constitution's apportionment clause.

The Washington court tossed the suit, and the Ninth Circuit upheld the decision in June 2022, agreeing with the lower court that the one-time repatriation tax served a legitimate purpose.

The repatriation tax also shares features with other levies that apply taxes without clear realization events, according to the government. For example, the government said, U.S. citizens who relinquish citizenship are taxed on the value of their assets as if they had sold them the day before expatriation, regardless of whether they had sold those assets or not.

Chye-Ching Huang, executive director of the Tax Law Center at New York University School of Law, said the case could encourage suits challenging other areas of settled tax law if the justices were to decide the case in favor of the couple.

"If the Supreme Court rules for the plaintiffs, that would invite litigation unsettling swaths of the tax code that have been enacted by both parties over many decades based on their shared, correct understanding of the constitution," Huang said in a statement.

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