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Supreme Court upholds the 2017 mandatory repatriation tax

Justice Brett Kavanaugh (L) wrote the 7-2 majority Supreme Court opinion Thursday upholding the 2017 mandatory repatriation tax. It was a one-time tax on undistributed shareholder profits accumulated by American-owned foreign corporations. File Pool photo by Jacquelyn Martin/UPI
Justice Brett Kavanaugh (L) wrote the 7-2 majority Supreme Court opinion Thursday upholding the 2017 mandatory repatriation tax. It was a one-time tax on undistributed shareholder profits accumulated by American-owned foreign corporations. File Pool photo by Jacquelyn Martin/UPI | License Photo

June 20 (UPI) -- The U.S. Supreme Court Thursday upheld the 2017 mandatory repatriation tax on U.S. taxpayers holding investments in some foreign corporations in a 7-2 decision.

The one-time, backward-looking tax was imposed "on some American shareholders of American-controlled foreign corporations to address the trillions of dollars of undistributed income that had been accumulated by those foreign corporations over the years," according to the Supreme Court syllabus of the case.

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The MRT imposed a rate of 8-15.5%.

Charles and Kathleen Moore challenged the tax on their shares of American-controlled corporation KisanKraft. The couple had a $14,729 tax bill on their accumulated income from the corporation shares from 2006-2017.

The Moores had invested $40,000. By the end of the 2017 tax year their accumulated income from the corporation had reached about $508,000, according to the Supreme Court opinion.

They paid the tax but sued alleging that it violated the Direct Tax clause of the U.S. Constitution.

The Supreme Court found that the tax did not exceed Congress's constitutional authority. The court opinion said the Moore's maintained their income was not realized because the corporation had not distributed it.

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But the court held that the income was realized by KisanKraft.

"So 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," Justice Brett Kavanaugh wrote in the majority opinion. "This Court's longstanding precedents, reflected in and reinforced by Congress's longstanding practice, establish that the answer is yes."

In rejecting the Moore's legal arguments, Kavanaugh wrote that "the upshot is that the Moores' argument, taken to its logical conclusion, could render vast swaths of the Internal Revenue Code unconstitutional."

He added those tax provisions "if suddenly eliminated, would deprive the U. S. Government and the American people of trillions in lost tax revenue."

He concluded that the Constitution "does not require that fiscal calamity."

Kavanaugh's opinion said the Moores maintain that realization is a constitutional requirement while the government argues it is not.

"To decide this case, we need not resolve that disagreement over realization. Those are potential issues for another day, and we do not address or resolve any of those issues here," Kavanaugh wrote.

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He said the government has long taxed shareholders of an entity on the entity's undistributed income and it did the same with the MRT.

Justices Clarence Thomas and Neil Gorsuch dissented from the majority opinion.

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