Moore v. United States

On June 26, 2023, the Supreme Court agreed to hear the tax case Moore v. United States, which challenges the constitutionality of the mandatory repatriation tax (“MRT”) under IRC Sec. 965. The case is scheduled to be heard in the term beginning October 2023, which means the ruling will be issued by the end of June 2024. Depending on how the Justices rule, the case could have implications much broader than just the MRT at issue.

History of IRC Sec. 965

The MRT was created by the Tax Cuts and Jobs Act (“TCJA”) in 2017. Under IRC Sec. 965, deferred foreign income of certain foreign corporations, such as controlled foreign corporations, was deemed to be taxable in 2017 or 2018. The tax applies to all deferred foreign income post-1986, with the tax due in the current taxable year of the foreign corporations. Taxpayers could elect to pay the tax over an eight-year period beginning in 2017. The earnings were taxed at reduced rates.

Case Background

The taxpayers in Moore are part owners of a controlled foreign corporation (meaning 50% or more of the ownership is by U.S. shareholders) located in India. In 2017, the corporation had retained earnings of $508,000, which resulted in an increased tax liability of approximately $15,000. The taxpayers challenged the constitutionality of the tax, claiming it violates both the Apportionment Clause and the Fifth Amendment’s Due Process Clause because it is retroactive. 

The main argument made by the taxpayers is that they never realized the income. They argue that the MRT is a direct tax and therefore violates the Apportionment Clause. Although a direct tax, income taxes are excluded from the Apportionment Clause by the Sixteenth Amendment. According to the taxpayers, the MRT is not an income tax, as they have not realized the income. This is the issue before the Supreme Court.  

The Potential Outcomes

There are three potential outcomes to the case:

• The Court rules in favor of the government and holds that the MRT is constitutional as an indirect tax, similar to the holding in NFIB v. Sebelius;
• The Court rules in a narrow manner, either in favor of the government or the Moores to restrict the application to just the MRT; or
• The Court holds that a tax on income before a realization event is unconstitutional.  

Issues Facing Taxpayers Subject to the MRT

Generally, taxpayers have three years from the date the return was filed to file a refund claim, or two years from the date the tax was paid, whichever is later. Because the MRT was a one-time “transition tax” applicable to 2017 and 2018 taxpayers, the return would have been filed either for the 2017 or 2018 filing year, meaning for many taxpayers the three-year window closed before the Moore case. 

However, taxpayers who opted for the eight-year payment period may still have the ability to file for refunds in certain situations. Taxpayers who believe they could be impacted by the decision should reach out to a trusted tax advisor to determine what options are available to them.