The recent Supreme Court ruling on Moore v. United States has drawn significant attention to the Mandatory Repatriation Tax (MRT) under the Tax Cuts and Jobs Act (TCJA). This decision upholds the IRS's stance on taxing certain foreign corporations' accumulated earnings and underscores the need to understand and comply with these intricate tax laws. Navigating international tax regulations can be daunting. Discover the implications of this ruling and what it means for U.S. investors with foreign holdings.
UNDERSTANDING THE MANDATORY REPATRIATION TAX (MRT)
As part of the Tax Cuts and Jobs Act (TCJA) in 2017, Internal Revenue Code (IRC) section 965 was enacted to impose a one-time mandatory repatriation tax (MRT), also commonly known as the Transition Tax, on certain American-owned foreign corporations’ accumulated earnings. A U.S. taxpayer who owned at least 10 percent of a “specified foreign corporation” was subject to U.S. federal income tax in tax years 2017 or 2018 on their pro rata share of accumulated earnings from any controlled foreign corporation (CFC) and any foreign corporation at least 10-percent owned by a U.S. corporation.
THE MOORE V. UNITED STATES CASE: BACKGROUND AND SIGNIFICANCE
In late 2023, a court case (Moore v. United States, 36 F.4th 930 (9th Cir. 2022)) caught the attention of many tax practitioners and U.S. investors with foreign holdings that had been subject to the MRT. In the Moore case, the IRS had assessed MRT on a married couple’s pro rata share of the accumulated earnings and profits of an Indian company which was a CFC in 2017. The taxpayers paid the tax due and sued for a refund, arguing that the MRT was assessed on unrealized income since the earnings were never distributed to the shareholders. The taxpayers appealed to the U.S. Supreme Court after the case had been dismissed by the 9th Circuit Court of Appeals. Many taxpayers and tax practitioners have followed the case closely as a taxpayer-favorable decision in this case would have had potentially broad implications on a number of rules dealing with the taxation of unrealized earnings in the Internal Revenue Code, as well as potentially leading to refunds of the MRT that the IRS has already collected over the past seven years.
RECENT SUPREME COURT RULING: KEY TAKEAWAYS
On June 20, 2024, the U.S. Supreme Court upheld the 9th Circuit’s decision and ruled that Congress had authority to impose the MRT (Moore v. United States, No. 22-800., 2024 BL 210700 (U.S. June 20, 2024)). The Court based its decision on the fact that Congress enacted laws that tax either the entity or the shareholders and treats certain entities as “pass-through” where the partners or shareholders are taxed. Congress has chosen to treat corporations as “pass-through” in certain cases, such as various anti-deferral regimes (Subpart F, GILTI and MRT). In the decision for the majority, the Court stated many times that this decision is intended to apply narrowly to the issue raised by the taxpayers – strictly whether Section 965 is constitutional.
IMPLICATIONS FOR TAXPAYERS AND TAX PRACTITIONERS
The Court did not address whether the concept of “realization” of income is a requirement and also indicated that this decision does not extend to other types of taxes on property such as a wealth tax. For taxpayers who have already properly reported their MRT liability on their 2017 or 2018 income tax returns and have paid the tax liability, this case does not change anything. However, for those who did not calculate their MRT correctly in 2017 or 2018, or who did not know that they were subject to the MRT, it is important to consult with an experienced international tax advisor to correct any prior year filings. Please note that the statute of limitations on the assessment of the MRT does not expire until six years after the tax return in which MRT is reported has been filed.
If you need help determining whether you were subject to MRT in 2017 or 2018, please contact GHJ’s International Tax Services Practice for advice.
