A Washington State couple today 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.
The lawsuit was filed today in federal district court (W.D. WA) by the law firm of Baker & Hostetler LLP and the Competitive Enterprise Institute.
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.
Andrew M. Grossman of Baker Hostetler, lead counsel in the case, stated:
“The Mandatory Repatriation Tax is unconstitutional for the same reason that a wealth tax would be. The Constitution does not permit Congress to simply declare money that it wants to tax to be income and then demand its cut. And the courts have never permitted retroactive taxation reaching back anywhere near the 30 years, as the Mandatory Repatriation Tax does. The details of the tax may be complicated, but the constitutional violations are clear.”
Co-counsel Sam Kazman, General Counsel of the Competitive Enterprise Institute said:
“The power to tax is the power to destroy. For that reason, the Constitution’s limits on that power need to be vigorously defended. This new tax may well open the door to a federal property tax, or to the national wealth taxes that several presidential candidates have proposed.”
Plaintiff Charles Moore stated:
“We invested in this company and helped bring it into being because we believed in its mission. Now, even though we’ve never sold a share or received a dividend, we’re being told to pay taxes. But it’s not an income tax if there is no income.”
You can read the complaint here.
Case page for Charles and Kathleen Moore v. United States can be found here.