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Supreme Court Upholds Trump-Era Offshore Earnings Tax

S.J. Steinhardt
Published Date:
Jun 20, 2024


The U.S. Supreme Court upheld a one-time tax on offshore earnings that helped fund the tax cuts enacted under the 2017 Tax Cuts and Jobs Act (TCJA), ruling that it was permitted under Congress’s limited powers of taxation, The New York TimesThe Wall Street JournalThe Washington Post and other news organizations reported.

Many experts had cautioned that the case could undercut the nation’s tax system.

Writing for the 7-2 majority, Justice Brett Kavanaugh said the tax aligned with longstanding precedents and congressional practices by attributing income realized by an India-based corporation to its shareholders, the same “pass-through” approach used since 1962 for American-controlled foreign companies, according to the Journal.

Kavanaugh’s opinion repeatedly described the court’s holding as narrowly applying to situations where an entity’s owners are taxed on income that hasn’t been taxed at the entity level, the Journal reported.

Justices Clarence Thomas and Samuel Alito dissented.

Tax lawyers and policymakers had been watching the case closely because the challengers’ arguments for why this piece of the tax code was unconstitutional could have applied to many longstanding features of the tax system, the Journal explained. A broad ruling for the government, meanwhile, could have opened the door to other progressive tax ideas, such as levies on unrealized capital gains and wealth.

An unusual political coalition defended the offshore-earnings tax at issue, the Post reported, worried that a ruling against one little-known provision could undermine a large number of existing taxes on investments, partnerships and foreign income, which together raise billions or even trillions in revenue.

“The Supreme Court heeded the warnings of a broad and bipartisan set of tax experts,” said Chye-Ching Huang, executive director of the Tax Law Center at NYU Law, in a statement reported by the Post. “Today’s decision will allow Congress to continue to exercise its power to tax income to fund the government and to make sure that all taxpayers—including multinational corporations and wealthy taxpayers—pay their fair share.”

Under the relevant TCJA provision, U.S. shareholders who own 10 percent or more of foreign corporations primarily owned or controlled by Americans must pay a one-time tax. Previously, they owed taxes only on profits that were brought into the United States, the Times reported.

The dispute involved a Washington State couple, Charles and Kathleen Moore, who challenged the law after they were required to pay nearly $15,000 in taxes stemming from their investment in a company in India supplying rural farmers, the Times explained. Supporting the couple was the Competitive Enterprise Institute (CEI), a free-market research organization in Washington. The issue was whether the Moores should be subject to the tax, even though they never received income from the investment in question.

In his dissent, Thomas wrote that realization is a requirement under the Constitution and that the Moores did not realize income from their investment.

The court’s decision “lets the government levy income taxes on foreign shareholders who have never received income,” Dan Greenberg, CEI’s general counsel, said in a statement reported by the Post. “We think that is unfair, because the Constitution authorizes Congress to tax people on their income, not the income of foreign businesses that they do not control.”

The ruling “leaves the government’s taxing power in a pretty strong place,” said John Brooks, a law professor at Fordham University, who co-wrote a brief asking the court to rule against the Moores, the Journal reported. “It’s as good a result as they could reasonably have hoped for.”