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By Rhett Buttle
In early December, the U.S. Supreme Court heard oral arguments for Moore v. United States, which challenges the constitutionality of the mandatory repatriation tax (MRT) that was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA).
This case could have wide-reaching implications for our economy and Main Streets across America.
Here is what you need to know.
What is the MRT?
The 2017 TCJA changed the way the U.S. taxes profits earned outside the U.S. and moved the tax code towards one that generally exempts offshore earnings from taxation, when they are brought back – “repatriated” – to the U.S. To limit the windfall caused by shifting to the new system, lawmakers imposed a one-time transition tax – the MRT – on offshore profits earned prior to the enactment of the TCJA. This one-time tax applied to shareholders owning more than 10% of a controlled foreign corporation (CFC) and applied to profits earned since 1986. Prior to the MRT, U.S. shareholders of CFCs could defer paying taxes on their share of earnings of their CFCs indefinitely. Without the MRT, the TCJA would have allowed CFCs to repatriate past profits held offshore while avoiding taxes that would have been owed under prior law. The Joint Committee on Taxation estimates that the MRT will generate $340 billion in tax revenue between from 2017 to 2027 by taxing more than $2.6 trillion in offshore earnings at a lower rate than they would have paid under the prior system.
What Does Moore v. United States Argue?
Charles and Kathleen Moore, a couple from Redmond, Washington, have an investment of 13% in KisanKraft, an Indian company that reinvested its profits and did not distribute anything to shareholders. The Moores challenged the MRT in federal court in 2019, after they paid about $15,000 in taxes on their share of KisanKraft’s past profits.
The Moores argued that the MRT is not a constitutional income tax under the Sixteenth Amendment, which states: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” They claimed that they can only be taxed on economic gains that they have directly received. If they have not received their share of KisanKraft’s profits, the Moores argued that the MRT is an unconstitutional tax on personal property.
How Could This Case Impact Small Businesses?
If the Supreme Court rules in the Moores’ favor and strikes down the MRT, this could result in an unraveling of broad swaths of the tax code, enacted on a bipartisan basis over a number of years, making it easier for corporations to avoid paying taxes. It could upend longstanding practices crucial to small businesses, such as the taxation of partnerships and S corporations. Even former House Speaker Paul Ryan, the architect of the TCJA, said, “I think it’s a misguided challenge…you’re going to basically get rid of, I don’t know, a third of the tax code. Be careful what you ask for.”
“If someone is trying to climb the ladder of economic mobility, they need stability. Not only will a ruling in favor of the Moores move the goalposts for millions of Americans, it will further erode their trust in institutions like the Supreme Court by throwing our tax code into chaos,” said Jean Ross, a senior fellow at the Center for American Progress.
The concern is so high that Small Business for America’s Future Co-Chair and small business owner Anne Zimmerman, CPA, has signed an amicus brief calling on the Supreme Court to consider the far-reaching implications of their upcoming ruling. The brief reads in part, “When entrepreneurs know what their tax burden will be, they can confidently allocate scarce resources to the best strategic investments for their business. When tax burdens are unpredictable, however, small businesses will confront a range of difficult circumstances. They may be surprised by tax bills that they cannot afford to pay—forcing them to make painful financial decisions or even to close their doors. Or they may react to the uncertainty by conserving their capital and passing on critical investment opportunities, which would in turn stunt their growth.”
“Running a small business means juggling everything from finances to daily operations. We rely on a stable tax system to plan ahead and grow. Any major changes in taxes can throw off our balance, making it even tougher to succeed,” said Zimmerman. “Moreover, if the Court decides to support the plaintiffs, it could create an environment that favors the wealthy and further challenges the rest of us striving for a level playing field.”
A decision in favor of the Moores would create uncertainty and potentially undermine tax policies that are fundamental to the vitality of America’s small business. It would also result in windfall gains to the largest corporations and deprive the federal budget of revenues that support the investments that create a healthy economy.
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