Constitutionality of the Section 965 “Toll Tax”

The U.S. Supreme Court has granted certiorari for the case of Moore v. United States, in which the petitioner seeks to challenge the constitutionality of the Section 965 transition tax, commonly referred to as the "Toll Tax." The petitioner argues that the Toll Tax, enacted as part of the Tax Cuts and Jobs Act of 2017, violates the 16th Amendment by being a direct tax on unrealized income. Despite previous rejections of their case in lower courts, the Supreme Court's decision to hear it has raised significant questions about the potential impact on tax law.

The Section 965 transition tax required U.S. shareholders to pay a one-time tax on certain untaxed foreign earnings of specified foreign corporations, with the option to pay it in eight yearly installments. If the Supreme Court rules in favor of the petitioner and invalidates this tax, taxpayers might be eligible for refunds, but only if they filed protective refund claims before their applicable refund statute of limitations expired.

For many taxpayers who paid the Section 965 tax in full, their statute of limitations may have already closed, making it administratively impossible to seek refunds. However, taxpayers who elected to pay over eight years, filed late returns, or have open years due to audits may want to consider protective refund claims to keep their statute of limitations open in case the Supreme Court's ruling favors the plaintiffs. Despite lower courts generally upholding the tax's constitutionality, the potential ramifications of a Supreme Court decision in the opposite direction make this a noteworthy issue for taxpayers with open statute of limitations.

Affected taxpayers should consult with their tax advisors regarding the pros and cons and understand the legal ramifications before making protective refund claims.

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