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Is the Transition Tax Constitutional? Supreme Court to Decide

In a pivotal legal battle that has captured the attention of tax experts and multinational corporations alike, the United States Supreme Court has agreed to hear the case of Moore v. United States. At the heart of this case lies a constitutional challenge to the Transition Tax, which was enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA). This tax imposed a levy on over 2 trillion dollars held by foreign subsidiaries of U.S. multinationals. While the Transition Tax aimed to close tax loopholes and increase revenue, it has now come under scrutiny for its potential violation of the Constitution. The outcome of this case could redefine the boundaries of U.S. taxation policies and impact how global corporations conduct their business across international borders.

The Transition Tax was introduced as a response to concerns that U.S. multinational corporations were holding substantial profits offshore to avoid domestic taxation. The tax targeted these profits, seeking to bring them under the U.S. tax jurisdiction. However, the challenge arises from the fact that the Transition Tax was levied on money held in foreign corporations, even if there were no actual dividends paid to the shareholders.

Central to this legal battle are the plaintiffs, Mr. and Mrs. Moore, who are U.S. citizens and invested in a company in India that focused on aiding impoverished farmers. As 11% shareholders in the Indian company, the Moores never received any distributions on their investment. Despite this, they found themselves subject to the Transition Tax, requiring them to pay taxes on the company’s profits they never received.

The core question before the Supreme Court is whether the Transition Tax is, in fact, an income tax as outlined in the Sixteenth Amendment or if it constitutes a direct non-income tax that necessitates apportionment among states. The Moores contend that the Sixteenth Amendment’s application should be limited to taxes on income received by individuals. Their position implies that the Transition Tax should not apply to profits they did not realize as dividends.

On the other side of the courtroom, the government argues that the receipt of income is not a prerequisite for taxation under the Sixteenth Amendment. By embracing this view, the government maintains that the Transition Tax is constitutionally sound and essential for preventing tax abuse by large corporations. Accepting the Moores’ interpretation, the government fears, would undermine various tax laws aimed at curbing tax avoidance by multinational entities.

A ruling in favor of the Moores could have significant implications for the legality of taxes imposed under Subpart F of the Internal Revenue Code. Subpart F has been the main tool used by Congress to impose taxes on profits transferred overseas by multinational corporations to evade U.S. taxation. Such a ruling could weaken Congress’s ability to enforce tax laws, such as GILTI, and deter corporations from shifting profits to low-tax countries, potentially allowing for a surge in tax avoidance practices.

As the Supreme Court prepares to deliberate on Moore v. United States, the outcome holds significant implications for US tax policy and the global business landscape. The ruling will clarify the constitutional status of the Transition Tax and its potential impact on taxation practices affecting multinational corporations. If you have inquiries about how this ruling impacts your tax obligations, get in touch with our expert tax attorneys at Hone Maxwell LLP at 619-980-4476.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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