36 F.4th 930
9th Cir.2022Background
- Charles and Kathleen Moore bought an 11% stake in KisanKraft (an India-based controlled foreign corporation) in 2005; KisanKraft earned profits but never distributed them.
- Prior U.S. practice taxed foreign corporate earnings only on repatriation; Subpart F taxed certain categories but not active business income held offshore.
- The 2017 Tax Cuts and Jobs Act created a one-time Mandatory Repatriation Tax (MRT) (§965) treating post-1986 CFC earnings as 2017 taxable income for U.S. shareholders owning ≥10%, at 15.5% (cash) or 8% (noncash), regardless of distribution.
- The Moores’ pro rata share of KisanKraft’s retained earnings increased their 2017 tax by roughly $15,000, prompting this constitutional challenge.
- The district court dismissed the Moores’ suit; they appealed, advancing two constitutional challenges: (1) Apportionment Clause and (2) Fifth Amendment Due Process (retroactivity).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Apportionment Clause — is MRT an unapportioned direct tax? | MRT is an unapportioned direct tax because it taxes undistributed corporate income that was not "realized," invoking Macomber/Glenshaw Glass. | Congress has broad taxing power; the Sixteenth Amendment exempts incomes from apportionment and precedent allows attributing corporate income to shareholders (Subpart F lineage). MRT taxes income pro rata, not a direct capitation or land tax. | MRT does not violate the Apportionment Clause. |
| Due Process — is MRT unconstitutionally retroactive? | MRT’s retroactivity (taxing decades of accumulated earnings) violates due process and unduly burdens taxpayers who relied on deferral. | Retroactive tax statutes are permissible if they serve a legitimate purpose by rational means; MRT prevents windfalls from untaxed offshore earnings and rationally implements TCJA’s shift to a territorial system. | MRT survives the deferential Carlton standard; retroactivity is constitutional here. |
Key Cases Cited
- NFIB v. Sebelius, 567 U.S. 519 (Apportionment-clause background; scope of direct taxes)
- Eisner v. Macomber, 252 U.S. 189 (historic discussion of realization concept)
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (defining "gross income" language, not a universal realization test)
- Helvering v. Horst, 311 U.S. 112 (realization founded on administrative convenience)
- Heiner v. Mellon, 304 U.S. 271 (taxing partners’ distributive shares independent of distribution)
- United States v. Carlton, 512 U.S. 26 (deferential test for retroactive tax legislation)
- Landgraf v. USI Film Prods., 511 U.S. 244 (presumption against retroactivity)
- Eder v. Commissioner, 138 F.2d 27 (upholding inclusion of foreign corporate income)
- Garlock Inc. v. Commissioner, 489 F.2d 197 (affirming Tax Court attribution of CFC income to shareholders)