Supreme Court Ruling Addresses Taxes on Offshore Earnings

 Posted on June 30, 2024 in Taxation Law

U.S. taxpayers who own foreign assets or earn income in other countries may need to address a variety of complex tax issues. The reporting requirements for foreign accounts and investments are not always easy to understand, and changes to tax laws may lead to new issues that can affect these taxpayers. A recent decision by the U.S. Supreme Court may affect taxpayers with offshore earnings. An experienced attorney can help determine how to address tax issues related to businesses in foreign countries while working to help taxpayers minimize their tax burdens.

Moore v. United States and Taxes on Foreign Assets

The case that the Supreme Court reviewed involved a couple who invested in a business in India. The Tax Cuts and Jobs Act of 2017 implemented a one-time tax on certain types of offshore earnings. These earnings had previously been tax-exempt until money was brought back to the United States. The new law created a Section 965 transition tax that requires U.S. shareholders of specified foreign corporations to treat offshore earnings as if they had been repatriated to the United States. Under this law, the couple was required to pay $15,000 in taxes.

The couple challenged their requirements under this law, claiming that while they had made an initial investment of $40,000 in 2006, and the value of their investment grew to be more than $500,000, they never received any money in return for the investment. The couple worked with the Competitive Enterprise Institute (CEI) to challenge the tax, claiming that in passing the law, Congress exceeded its authority by implementing a tax on unrealized income.

The Supreme Court ruled against the couple, but it did not settle the issue of whether Congress can implement taxes on unrealized gains. The decision stated that income generated from the couple’s investment in the company should be treated as realized income. This decision was based on long-standing policies in which business partners or shareholders may be taxed on their share of the income earned by a business, even if individual partners do not receive money from these earnings. Keeping these provisions in place will ensure that the IRS can continue to collect taxes on foreign assets and income.

Tax Obligations Under Section 965

The Section 965 transition tax applies to shareholders of controlled foreign corporations who had untaxed earnings in 2017. Applicable taxpayers may include individual shareholders, U.S. corporations, partnerships, trusts, and cooperatives. If a taxpayer held an interest in one or more applicable foreign corporations, they were required to report previously untaxed earnings or profits on their 2017 tax return. Taxes that applied to those earnings could be paid in a lump sum or in eight annual installments. Taxpayers who did not properly report foreign earnings on their 2017 tax returns may be required to pay the taxes owed, along with any applicable penalties and interest.

Contact Our San Jose, CA Offshore Tax Attorney

Tax issues related to foreign investments can be complicated, and some taxpayers may face penalties or owe taxes even though they were unaware of their reporting requirements. At John D. Teter Law Offices, our San Jose offshore tax lawyer can help address these concerns, and we can work with taxpayers to reduce or eliminate penalties while ensuring that they meet all applicable legal requirements. To learn how we can assist with issues related to taxes on offshore assets, contact us at 408-866-1810 and schedule a consultation.