The U.S. Supreme Court is currently considering a case with far-reaching implications for philanthropy: Moore v. United States. In this case, the court is considering whether the Mandatory Repatriation Tax (MRT) is constitutional. The MRT is a tax on undistributed corporate earnings held overseas, even if those earnings have not been realized.
Last month we filed an amicus brief before the Supreme Court, arguing that a tax on unrealized gains is unconstitutional under the 16th Amendment, which only authorizes Congress to tax income, not unrealized growth in assets. As we wrote in our brief, this case “concerns Philanthropy Roundtable because the American philanthropic movement strengthens our free society, but its effectiveness is highly dependent on the nature of the tax code. If the Mandatory Repatriation Tax is upheld, then it could open the door to a variety of taxes that are dangerous to effective philanthropy.”
Last week the government filed its brief to the Supreme Court arguing the MRT is an income tax and is therefore constitutional. The government made three main points:
- The 16th Amendment authorizes Congress to tax shareholders’ prorated shares of undistributed corporate earnings as income.
- Congress has repeatedly enacted income taxes of that nature, and the Supreme Court has upheld its power to do so.
- The MRT is materially indistinguishable from Subpart F, a tax on all undistributed corporate earnings held overseas, and numerous similar income taxes dating back to the 1860’s.
However, the government’s position that the MRT is constitutional is based on weak arguments.
First, the government contends a realization requirement is not needed when defining the term “income” or interpreting the phrase “from whatever source derived.” Later Supreme Court decisions, such as the 1955 case Commissioner v. Glenshaw Glass Co., made clear that income derived meant “an accession to wealth, clearly realized, over which the taxpayer has complete dominion.”
Second, the government relies on the fact that Congress has repeatedly enacted income taxes on undistributed corporate earnings. However, just because Congress has done something in the past does not make it constitutionally sound. The Supreme Court has struck down taxes before on the grounds that they were not authorized by the Constitution.
Third, the argument that the MRT is indistinguishable from Subpart F is not an apples for apples comparison. As we stated, Subpart F is a tax on income earned by foreign subsidiaries of U.S. corporations. If a foreign corporation is more than 50% owned by U.S. shareholders, its income will be considered Subpart F income. In this case, income is typically classified as dividends, interest, rent and royalties. The MRT, on the other hand, is a tax on all undistributed corporate earnings held overseas. What’s more, Subpart F has been in effect for over 50 years and has been interpreted by the courts on numerous occasions. The MRT, on the other hand, is a new tax that has not yet been interpreted by the courts.
Finally, the argument does not adequately address Moore’s primary concern, that the MRT is a tax on property, not income. MRT taxes shareholders on their investment in a foreign corporation, even if they have not realized any income from that investment. This argument is persuasive, and the government has not adequately addressed it.
The government’s argument that an “income tax” does not require realized income could pave the way for the imposition of federal taxes on wealth, including the assets of charitable foundations. This could have a profound effect on the charitable sector, particularly for individuals who contribute significant amounts to charitable foundations. To protect philanthropy and uphold the 16th Amendment, the Supreme Court should overrule the Ninth Circuit decision.
The Supreme Court is set to hear oral arguments on December 5, 2023 and Philanthropy Roundtable continues to monitor this case closely. Read our op-ed published in The Hill and our policy brief on this topic.