In Moore v. United States, the U.S. Ninth Circuit Court of Appeals recently rejected arguments that the mandatory repatriation tax imposed under section 965 of the Internal Revenue Code violated the Constitution’s Apportionment Clause and Fifth Amendment Due Process Clause.[1]
Background
The case involved a U.S. couple (“Taxpayers”) that invested in an Indian company that was a controlled foreign corporation (“CFC”) under subpart F of the Internal Revenue Code.[2] Under subpart F, a CFC is a foreign corporation more than 50% of which is owned (directly, indirectly, or constructively) by U.S. shareholders.[3] U.S. shareholders, in turn, are U.S. persons that own at least a 10% interest in a foreign corporation.[4]
Foreign corporations generally are not subject to federal income tax except on U.S. source income and income that is effectively connected to the conduct of a U.S. trade or business.[5] Thus, foreign income earned by a foreign corporation that is not effectively connected to the conduct of a U.S. trade or business generally is deferred from taxation in the United States unless or until the foreign corporation distributes earnings to a U.S. person or such person sells an interest in that foreign corporation.
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