Tuesday, November 21, 2023

Justices Told Repatriation Tax Violates 16th Amendment

According to Law360, the U.S. Supreme Court should conclude that a one-time mandatory repatriation tax enacted under the 2017 Tax Cuts and Jobs Act is unconstitutional, a couple said Wednesday, urging the justices to reject the federal government's claims that the 16th Amendment allows a levy on unrealized gains.

The government's claims that Congress can impose a tax on any "gain" as income regardless of taxpayer realization throws out the key restriction on federal taxing authority set by the 16th Amendment in the U.S. Constitution, Charles and Kathleen Moore said in a reply brief.

Congress Understood That "These Enormous Pots of
Potential Revenue" Are Not Income And, Therefore,
Are Beyond The Reach Of Taxation, The Couple Said.

That argument, they said, also rejects the precedent the high court established in a 1920 landmark decision in Eisner v. Macomber, which affirmed that the realization of gain is the key attribute of income under the 16th Amendment.

In its own brief filed in October, the government said the Macomber decision has been watered down in subsequent rulings and should play no controlling role in the couple's case.

"That Dictum Was Poorly Reasoned And Has Been Abrogated By Many Later Decisions Limiting Macomber To The Stock-Dividend Context In Which It Arose," The Government Said.

The Moores' latest filing came just weeks before the Dec. 5 oral arguments from parties in the case. In June, the high court agreed to review the case. At issue is the mandatory repatriation tax under Internal Revenue Code Section 965, enacted as part of the 2017 tax reform

The Moores were hit with the levy on their investment in a controlled foreign corporation, KisanKraft Ltd., that provides equipment to small-scale farmers in India. They paid about $15,000 on their small stake, and the tax liability was based on earnings retained and invested by the company on earnings the Moores said they never received.

A Washington federal court tossed the Moores' first challenge, a decision that was later affirmed in 2022 by the Ninth Circuit, which said the one-time repatriation tax served a legitimate purpose.

The couple then asked the Supreme Court to review its challenge, filing a petition in February to reverse the Ninth Circuit decision. Since the justices agreed this summer to review the challenge, the case has drawn attention from several stakeholders, some in support of the couple, others in support of the government, and a few that were in support of neither party.

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1 comment:

  1. The U.S. Supreme Court has signaled the possibility of a narrow ruling that upholds the one-time mandatory repatriation provision, but justices could still undermine certain capital markets measures if they question the constitutionality of taxes on unrealized income.

    Many tax lawyers expect the justices to conclude that the repatriation provision taxes income that was realized by foreign corporations with U.S. shareholders and therefore sidestep the constitutional question to avoid destabilizing wide swaths of the federal tax code.

    However, they said the Supreme Court's opinion may include dicta, language that isn't legally binding, that casts doubt on taxes like the one cited at the committee hearing.