9th Circuit ruling against Washington state couple could mean more federal wealth taxes

SAN FRANCISCO, Calif. – A recent ruling by the 9th Circuit Court of Appeals against a Washington state couple challenging the Mandatory Repatriation Tax could open the door to all manner of wealth taxes, a lawyer representing the couple said.

Charles and Kathleen Moore of Redmond, Wash., sued the government in 2019, arguing a tax on repatriated assets – created as part of major tax reform legislation passed by Congress in 2017 – violates the U.S. Constitution’s apportionment clause and the Fifth Amendment’s due process clause.

The Moores claim the Mandatory Repatriation Tax violates the Constitution’s requirement that direct federal taxes must be apportioned among the states. They also claim the tax is a breach of the Constitution’s prohibition on harsh retroactive taxes.

The case is the result of the Moores facing an unexpected tax bill on a 13% stake in KisanKraft Ltd., an Indian company that provides small-scale farmers in India with affordable equipment. This was unexpected because the tax bill – $15,000 – was on earnings never received by the couple, which were retained and reinvested by the company

“They’ve never gotten a payment from that,” the couple's attorney, Sam Kazman, said, noting this is not a defense from ignorance.

“No one in their right mind would expect this,” Kazman said of what he described as essentially a new tax. “They had no reason to expect it."

The trio of 9th Circuit Court judges disagreed

In its Tuesday ruling, the court observed that courts have consistently upheld the constitutionality of taxes similar to the mandatory repatriation tax in spite of any difficulty in defining income, noting that the realization of income does not determine the constitutionality of the tax.

Kazman characterized that portion of the ruling as essentially saying the realization of income is “just for administrative convenience."

"There is no blanket constitutional ban on Congress disregarding the corporate form to facilitate taxation of shareholders’ income,” the ruling said. “In other words, there is no constitutional prohibition against Congress attributing a corporation’s income pro-rata to its shareholders."

The court also held that the tax doesn’t violate the Fifth Amendment’s due process clause, because if there was no MRT on undistributed earnings, shareholders would have been able to avoid taxation indefinitely on pre-2018 earnings.