Lawsuit States Repatriation Tax is Unconstitutional

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A Washington state couple sued the government arguing a tax on repatriated assets, created in the 2017 tax  law, violates the U.S. Constitution.  The 2017 tax law imposed a one-time tax on earnings held offshore in cash and other assets offshore since 1986—15.5% on cash and 8% on non-cash or illiquid assets. Before the change, assets could be held offshore without incurring tax.

The tax violates two provisions of the Constitution, Charles and Kathleen Moore told the U.S. District Court forthe Western District of Washington in a Sept. 26 filing.

“If it’s unconstitutional with respect to an individual, it’s going to be unconstitutional with respect to acorporation, and that will completely undermine the 2017 tax law,” said Victor Jaramillo, a member at Caplin &Drysdale Chartered who works on international tax.

The provision meant the couple faced unexpected taxes on a 13% stake in KisanKraft Ltd., an Indian company that provides small-scale farmers in India with affordable equipment, the couple said. The tax was on earnings they never received—earnings retained and reinvested by the company, they said. “Simply for owning a stake in their friend’s overseas business, they were on the hook for thousands of dollars in taxes,” according to the complaint.

The $132,512 income required to be included on a tax return under tax code Section 965 isn’t taxable, thecouple said. They requested a $14,729 refund, plus interest. “965 was meant to tax your Google, Apple, Amazon, Microsoft, Facebook, all the multinationals that had a lotof cash in Ireland,” Jaramillo said. “What Congress failed to realize is a lot of individual people directly owned shares in foreign corporations.”

In making their legal case, the Moores argued the tax is actually a direct tax, not an income tax, because it’s based on “the fiction” that taxpayers received income without an actual gain. This, they said, means it violates the Constitution’s apportionment clause because it isn’t apportioned among U.S. states, as direct taxes must be.

They also said it violates the Fifth Amendment’s due process clause by unconstitutionally imposing retroactive tax liability for earnings that go back over three decades. “The details of the tax may be complicated, but the constitutional violations are clear,” Andrew M. Grossman, a partner at Baker Hostetler and lead counsel in the case, said in a statement.