Federal tax law is somewhat complex when it comes to the earnings of business entities.  Some business entities are considered “pass-through” with all earnings being treated as income of the members/shareholders with the entity paying no taxes.  “Traditional” corporations pay corporate income taxes, and the shareholders are only taxed on distributions.  Usually, the “retained” income of these corporations builds up the value of the company which is reflected in capital gains income when a shareholder sells her stock.

But these rules are the rules that apply to U.S. corporations.  Different rules apply to Americans who invest in foreign corporations.   Some income, mostly things that are characterized as passive income, is “passed through” to U.S. shareholders for the purposes of federal income tax (and many states tie their definitions of income to the federal definition).  However, traditionally, other income was not “passed through” with the U.S. shareholder only getting taxed when that income was distributed as dividends or through capital gains when the shareholder sold his stock.

During the Trump Administration, in part to hide the actual price of Trump’s tax cuts and in part due to Trump’s “America Only” philosophy, Congress changed the rules for stocks in foreign corporations and imposed a “one time only” repatriation tax which taxes American shareholders their interest in the corporate earnings which had been retained by these foreign corporations and not distributed to the shareholders as interest.  Some of these shareholders challenged the suit claiming that the tax was not authorized by the Sixteenth Amendment. Continue Reading...