A lawsuit alleging that the Section 965 transition tax is unconstitutional affords the opportunity to write Part 33 in my series of posts about the U.S. Transition Tax.
Part 22 of this series included a discussion of a paper by Sean P. McElroy which argued that the Section 965 repatriation tax was unconstitutional for the following reasons explained in the abstract:
Abstract
In late 2017, Congress passed the first major tax reform in over three decades. This Essay considers the constitutional concerns raised by Section 965 (the “Mandatory Repatriation Tax”), a central provision of the new tax law that imposes a one-time tax on U.S.-based multinationals’ accumulated foreign earnings.
First, this Essay argues that Congress lacks the power to directly tax wealth without apportionment among the states. Congress’s power to tax is expressly granted, and constrained, by the Constitution. While the passage of the Sixteenth Amendment mooted many constitutional questions by expressly allowing Congress to tax income from whatever source derived, this Essay argues the Mandatory Repatriation Tax is a wealth tax, rather than an income tax, and is therefore unconstitutional.
Second, even if the Mandatory Repatriation Tax is found to be an income tax (or, alternatively, an excise tax), the tax is nevertheless unconstitutionally retroactive. While the Supreme Court has generally upheld retroactive taxes at both the state and federal level over the past few decades, the unprecedented retroactivity of the Mandatory Repatriation Tax — and its potential for taxing earnings nearly three decades after the fact — raises unprecedented Fifth Amendment due process concerns.
It appears that the plaintiffs in this case are making precisely these two arguments.
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