Moore, The 16th Amendment, And The Underpinnings Of The TCJA’s Deemed Repatriation Provision

Christopher H. Hanna (SMU), Moore, the Sixteenth Amendment, and the Underpinnings of the TCJA’s Deemed Repatriation Provision, 76 SMU L. Rev. Forum __ (2023):

In Moore v. United States, the Supreme Court will consider a rare Sixteenth Amendment case. On its face, the case deals with deemed repatriation, a discrete provision of the 2017 Tax Cuts and Jobs Act that included in income past accumulated earnings held abroad. This short Article seeks to contextualize the deemed repatriation provision in terms of why it was passed and how it comports with principles underlying the U.S. tax code. Drawing on firsthand experience researching and drafting the Tax Cuts and Jobs Act, the Article shows the analysis that went into enacting the tax, focusing on the traditional elements of tax reform and legislation: equity, efficiency and simplicity.

Conclusion
The deemed repatriation provision was viewed as a necessary component of the U.S. international tax regime enacted as part of the Tax Cuts and Jobs Act. Transitioning from a worldwide deferral tax system to a territorial type of tax system required addressing the accumulated deferred foreign income of foreign subsidiaries of U.S. shareholders. From both a fairness standpoint and a simplicity standpoint, the accumulated deferred foreign income should be taxed. Giving taxpayers with deferred foreign income a free pass would have been unfair in that some U.S. multinationals would receive a windfall as a reward for keeping their earnings outside the United States while other U.S. multinationals, prior to TCJA, repatriated their overseas earnings at a 35 percent corporate tax less foreign tax credits. Taxing it on a mandatory basis rather than an elective basis also eliminates the lock-out effect, which would still exist if pre-TCJA deferred foreign income still faced a U.S. residual tax when repatriated voluntarily -- an important goal of the new U.S. international tax regime. The rate(s) of tax was also important. Taxing at the full corporate tax rate would have resulted in a windfall to the government because corporations had previously assumed that they could defer repatriation indefinitely. So, some preferential rate(s) that factored in corporations’ lower expectations about the burden of their eventual tax liability were appropriate.

The deemed repatriation provision was viewed as an efficient tax proposal. It applied to past events and past earnings. Therefore, while it was estimated to raise a substantial amount of revenue, it would not distort investment or business decisions, and it would not raise the after-tax cost of capital thereby having minimal negative impact on economic growth under macroeconomic models.

Limiting the provision to post-1986 accumulated deferred foreign income was viewed as primarily a simplification measure. U.S. multinationals may have had difficulty determining pre-1987 accumulated deferred foreign income, and even if they could make the determination, it would, in almost all cases, be a relatively insignificant amount when compared to (or included in) the estimated $2.5 trillion or more of accumulated deferred foreign income in 2017.

Prior TaxProf Blog coverage:

• Christopher Cox (Former Rep. (1989-2005) & SEC Chair (2005-2009)) & Hank Adler (Chapman), The Ninth Circuit Upholds A Wealth Tax (Jan. 30, 2023)
• Reuven Avi-Yonah (Michigan), If Moore Is Reversed, 179 Tax Notes Fed. 2215 (June 26, 2023)
• John Brooks (Fordham) & David Gamage (Indiana), Moore v. United States and the Original Meaning of Income (June 27, 2023) (reviewed by Michelle Layser (San Diego) here) (presented at Columbia workshop)
• Daniel Hemel (NYU), The Low And High Stakes Of Moore, 180 Tax Notes Fed. 563 (July 24, 2023) (reviewed by Young Ran (Christine) Kim (Cardozo) here)
• Alex Zhang (Emory), Moore, Eisner v. Macomber, and the Future of Structural Tax Reform, 92 Geo. Wash. L. Rev. __ (2024) (Aug. 29, 2023)
• Thomas Lee (BYU), Lawrence Solum (Virginia), James Cleith Phillips (Chapman) & Jesse Egbert (Northern Arizona), Moore, Corpus Linguistics, And The Original Public Meaning Of The Sixteenth Amendment (Sept. 14, 2023)
• Reuven Avi-Yonah (Michigan), Moore Questions Than Answers, 180 Tax Notes Fed. 2256 (Sept. 25, 2023)