A Washington State couple challenged as unconstitutional a part of the 2017 tax reform law known as the Mandatory Repatriation Tax. This provision taxes U.S. citizens on certain accumulated foreign earnings of foreign corporations going back 30 years, even if the earnings have not been distributed. The husband and wife taxpayers, Charles and Kathleen Moore, argue that the tax violates the Constitution’s requirement that direct federal taxes must be apportioned among the states, as well as the Constitution’s prohibition on harsh retroactive taxation.
At issue are the Moores’ shares in a foreign company founded by a friend that provides agricultural equipment to underserved small farmers in India. The couple has owned the shares for over a decade. They have never received any income from the shares, because the company reinvested all its profits in its business. Normally, such profits are not considered income unless shareholders either receive dividends or sell the shares for a capital gain. The new law, however, attempts to tax these funds as income through a legal fiction, by simply declaring them to be taxable income.