Supreme Court Upholds One-Time Tax on Overseas Income Under Trump-Era Law
The U.S. Supreme Court recently affirmed a controversial tax provision from the 2017 Tax Cuts and Jobs Act, known as the Mandatory Repatriation Tax (MRT), in a decisive 7-2 ruling on June 20, 2024. This tax targets “unrealized” income derived from overseas investments, imposing a one-time tax obligation on investors’ share of profits that have not yet been received.
Justice Brett Kavanaugh authored the majority opinion, underscoring the constitutionality of the MRT under the 16th Amendment, which allows Congress to levy income taxes without the requirement of apportionment among states. Justices Neil Gorsuch and Clarence Thomas dissented from the majority decision.
The MRT, a significant component of the Tax Cuts and Jobs Act signed into law by President Donald Trump, aims to reform the taxation of foreign earnings by U.S. corporations. It addresses concerns that substantial profits earned abroad were not being repatriated to the U.S., thereby bypassing domestic tax obligations.
The legal challenge against the MRT was brought by Charles and Kathleen Moore of Washington state, who argued that the tax violated constitutional provisions on direct taxation and retroactive application. Their lawsuit traversed through lower courts, culminating in the Supreme Court’s affirmation of the tax’s legality.
In response to concerns raised during the legal proceedings, the Supreme Court clarified that while the MRT attributes corporate income to individual shareholders for tax purposes, it does not violate constitutional principles governing direct taxation. This distinction allows Congress to impose taxes on undistributed corporate earnings, aligning with established tax practices for partnerships and S corporations.
Supporters of the MRT argue that it prevents tax avoidance strategies where corporations indefinitely defer U.S. tax liabilities on foreign profits. Critics, however, contend that such taxes unfairly penalize investors who have not received income distributions or realized capital gains from their investments.
Looking ahead, the Supreme Court’s decision sets a precedent regarding the taxation of international earnings under U.S. law.
