What is the Moore v. United States case about?
Charles and Kathleen Moore (the “Moores”) were subject to Internal Revenue Code Section 965 with respect to a controlled foreign corporation (“CFC”) in which they held a minority interest (11%) from 2006 to 2017. As a result, they paid $14,729 of additional income taxes with their 2017 tax return.
The Moores paid the tax and then sued for a refund, claiming that the Mandatory Repatriation Tax was unconstitutional.
- Background: Enacted by the 2017 Tax Cuts and Jobs Act (TCJA), IRC Section 965 effectively imposes an 8% – 15.5% one-time income tax on a US person’s share of undistributed earned income of a specified foreign corporation (“SFC*”) as of the end of 2017, which accumulated post-1986 during the time the entity qualifies as an SFC. This tax is commonly known as the Mandatory Repatriation Tax (“MRT”).
What transpired?
The Supreme Court ruled that the MRT is constitutional, leaving the MRT intact. Without getting into the weeds of each party’s argument, the Moores argued that the MRT violated the Constitution because the tax was an “unapportioned direct tax” on their CFC shares, i.e., a tax on property and not an income tax since, in their view, they did not realize any income. Generally, under the Constitution, direct taxes must be apportioned among states by population; meanwhile, under the 16th Amendment, however, income taxes can be collected without apportionment.
The Supreme Court noted that income was indeed realized by the foreign corporation, and thus, “the precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.”
Relying on the fact that Congress has historically treated CFCs and other entity types as passthrough entities for U.S. tax purposes, the Supreme Court sided with the United States.
What would have been the potential repercussions if the Moores had won the case?
If the Moores had won, the repercussions could have been significant. The MRT would have been invalidated, and the IRS would have faced a variety of complex procedural issues related to taxpayers’ ability to seek refunds from the MRT paid. CPAs and taxpayers would have faced turmoil trying to seek refunds from the IRS and determine the impact on subsequent taxable years since distributions out of earnings subject to the MRT are generally tax-free. Annulling IRC Section 965 could have resulted in additional income, and taxes, to US owners of SFCs (and CFCs) for tax years after the tax year in which the MRT was applicable (2017 and/or 2018).
Takeaway
Taxpayers subject to MRT should no longer hope to get their money back from the IRS for the MRT tax bill. Taxpayers who were subject to MRT but failed to report and pay the tax should consider getting into compliance, considering that the statute of limitation (“SOL”) for the MRT is 6 years under section 965(k), not the standard 3-year period provided by IRC Section 6501. In addition, the IRS may extend the SOL indefinitely if Form 5471 was required and not filed with the applicable tax return.
* An SFC is a CFC within the meaning of IRC Section 957 and any foreign corporation with respect to which one or more domestic corporations is a “US Shareholder” within the meaning of IRC Section 951(b).
If you have any questions or need assistance, please contact your WG advisor immediately.
