The U.S. Supreme Court recently agreed to hear a challenge to the constitutionality of a provision of the Trump-era Tax Cuts and Jobs Act (TCJA) in a case that experts say has major implications for America’s tax system.
At the end of June, the Supreme Court added a new case to its docket for the 2023–24 term that involves weighing whether a provision in the TCJA called the “mandatory repatriation tax” violates the 16th Amendment of the U.S. Constitution.
Some experts argue that if the Supreme Court rules that the provision is unconstitutional, this could have major consequences, including upending key parts the current U.S. tax system.
The case is called Moore v. United States, and here’s what you need to know about this potentially groundbreaking case, in which the Supreme Court recently gave both sides the green light to file briefs on the merits.
Mandatory Repatriation Tax Origin
When President Donald Trump signed the TCJA into law in 2017, the Act included a provision that introduced the mandatory repatriation tax as a way to obtain tax revenue from large earnings that corporations held abroad.
The tax was later codified into a revised Internal Revenue Code section 965, which requires some U.S. shareholders to pay a one-time tax on the offshore untaxed earnings and profits of certain foreign corporations as if those earnings had been repatriated to the United States.
Taxpayers affected by the mandatory repatriation tax, which is also known as the “transition tax,” are those who own 10 percent or more shares of a controlled foreign corporation (CFC) or a foreign corporation that has a U.S. shareholder that is a domestic corporation.
U.S. shareholders can include individuals, S corporations, partnerships, trusts, REITS, domestic corporations, cooperatives, estates, RICs, and tax-exempt organizations.
The transition tax also classifies a certain portion of a U.S. shareholder-controlled foreign corporation’s deferred foreign income as part of that corporation’s taxable income. This means that qualifying U.S. shareholders are required to pay the transition tax on their share of the foreign corporation’s retained earnings even if they didn’t actually receive any of that money, such as through dividends.
