This is the fourth article in a series examining significant considerations in Moore v. United States, No. 22-800. The first article reviewed the history of the realization requirement (Tax Notes Int’l, Sept. 11, 2023, p. 1387). The second article examined how Congress has historically taxed foreign earnings (Tax Notes Int’l, Sept. 18, 2023, p. 1517). The third questioned whether the Supreme Court should provide tax relief for taxpayers like the Moores who do not help themselves (Tax Notes Int’l, Sept. 25, 2023, p. 1671).
Judicial restraint is a fundamental tenet of conservativism, a key aspect of which is that courts refrain from weighing in on matters other than those raised by the facts of the litigants before the bench. Given that, it’s unclear how the Supreme Court should proceed when the facts that have been presented throughout a legal proceeding, including to the Court itself, are found to be inaccurate before the case is argued.
Moore v. United States may be testing questions that are otherwise mostly law school hypotheticals. The Moores have cast their refund claim for a tax liability incurred as a result of the application of section 965 as raising a constitutional question that is in turn being used as a vehicle for the Court’s consideration of the validity of a wealth tax. But the many inconsistencies among the statements made in their filings (with the U.S. District Court for the Western District of Washington, the Ninth Circuit, and the Supreme Court); Charles Moore’s 2020 declaration to the district court; and the publicly available Indian statutory corporate and audited financial filings of KisanKraft (the Indian company whose accumulated earnings are the basis for the inclusion required by section 965 for its shareholder Charles Moore), all raise questions about the legal basis for the Moores’ request for a refund.
Judicial Restraint and the Tax Claim
In Dobbs v. Jackson Women’s Health Organization, 142 S. Ct. 2228 (2022), Chief Justice John G. Roberts Jr. emphasized that the Court’s established practice was “not to ‘formulate a rule of constitutional law broader than is required by the precise facts to which it is to be applied’” (quoting Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 450 (2008), and citing United States v. Raines, 362 U.S. 17, 21 (1960)).
In Moore, the plaintiffs aren’t just asking the Court to weigh in on a hypothetical wealth tax irrelevant to the legal question at issue — namely, the constitutionality of the inclusion as subpart F income mandated by section 965 for U.S. shareholders (within the meaning of section 951(b)). They are also presenting the Court with facts that contradict the corporate documents and that raise questions about whether they properly applied the law in the first place.
Investment in KisanKraft
In their response and cross-motion for summary judgment in opposition to the government’s motion to dismiss, filed with the district court in 2020, the Moores said that they put up “$40,000 in exchange for approximately 11 percent of KisanKraft’s common shares” at the time Ravindra Kumar Agrawal (Ravi) founded KisanKraft. In his sworn declaration filed in support of that motion, Charles Moore stated that “Kathleen and I invested in KisanKraft at its inception in 2006. . . . Kathleen and I invested $40,000, which was approximately 11 percent of KisanKraft’s start-up capital.”
But when they filed their cert petition with the Supreme Court earlier this year, the numbers had changed. That filing said, “Moved by Ravi’s vision, the Moores put up $40,000 — for them, a significant sum — and received about 13 percent of KisanKraft’s common shares.” Assertions in the brief the Moores filed with the Supreme Court in August were consistent with that statement.
So how much of a stake did the Moores receive in 2006 when they contributed funds to KisanKraft? The KisanKraft corporate filings cast all of their statements into doubt.
As an initial matter, and contrary to the statements made to the courts, there is no indication that Kathleen Moore contributed any funds to KisanKraft or that she received any shares in exchange. The KisanKraft public filings list only Charles Goodwin Moore as a shareholder, and not Kathleen.
The KisanKraft financial statements also call into question the amounts the Moores said they contributed, the timing of those contributions, and the percentage ownership stake they received. KisanKraft’s fiscal 2013 financial statements include a schedule of details of shareholders owning more than 5 percent. According to that schedule, Charles Moore owned only 8.91 percent of the company at the end of fiscal 2012; by the end of fiscal 2013, he owned 12.95 percent.
There is no information in any of the court filings about how or why Moore’s supposed 11 percent initial stake was reduced to less than 9 percent, or how or why it increased in a later year. (Note that if Moore had retained just a 9 percent stake through 2017, there would be no section 965 inclusion required, making this case irrelevant.)
The court filings also include inconsistencies regarding the investment in KisanKraft made by Ravi, its founder. Although they suggest that Moore (or the Moores) owned KisanKraft together with Ravi and his wife, the latter couple directly owned only a small number of KisanKraft shares. Rather than holding his stake directly, Ravi established a wholly owned Washington state corporation, Washington Agrotech Ltd., to acquire a greater than 80 percent interest in KisanKraft. Why Ravi used a domestic company to acquire the KisanKraft shares but left Moore to own his stake directly is unclear.
Although not directly relevant to the mandatory section 965 inclusion, the Moores’ filings also fail to note that in 2019 Moore sold shares in three separate transactions to Ravi, Ravi’s wife, and other shareholders, sufficient to reduce Moore’s ownership stake below 10 percent. As a result, Moore is no longer a U.S. shareholder of KisanKraft (within the meaning of section 951(b)), and so isn’t required to include any amount as taxable income under section 951(a) or section 951A. The 2019 sales — presumably made to accommodate the Moores’ preference not to be taxed annually on the income of KisanKraft that would otherwise be includable as global intangible low-taxed income — conflict with the Moores’ statements that they were passive investors with no ability to influence KisanKraft’s activities. (Related coverage: p. 137.)
Board Seat
A key part of the Moores’ argument that section 965 is unconstitutional is based on their assertion that they lacked the power to access KisanKraft’s corporate earnings. Their response and cross-motion for summary judgment filed with the district court in 2020 said that “for minority shareholders like the Moores, [the section 965 inclusion] is money that they lack the power to force the corporation to distribute to them.”
Moreover, the Moores’ brief filed with the Ninth Circuit stated that they “have never participated in KisanKraft’s day-to-day operations or management.” It added that “Charles, however, visited India several times, partly for vacation and partly to see for himself the impact that KisanKraft is having.” That narrative of limited involvement was repeated in the Moores’ February petition for a writ of certiorari filed with the Supreme Court. The cert petition also said that “as minority shareholders without any role in KisanKraft’s management, [the Moores] had no ability to force the company to issue a dividend.”
The statements all are inconsistent with the fact that Charles Moore served as a director of KisanKraft between 2012 and 2017 — information that was not disclosed in any of the court filings. (Prior coverage: Tax Notes Int’l, Sept. 25, 2023, p. 1776.) The story the Moores told about Charles’s level of involvement with KisanKraft is directly at odds with the fiduciary responsibilities of an individual holding a board seat for an Indian company.
Fulfilling his duties as a KisanKraft director would have required Moore to participate in the company’s management to a degree inconsistent with the role of a passive investor. His responsibilities would have included involvement with all major decisions affecting the company, including recommending dividends and approving borrowings, approving significant contracts and agreements, setting strategy, establishing and liquidating subsidiaries, and overseeing risk management.
The evidence that Moore served on KisanKraft’s board of directors for five years also undermines the impression conveyed by the plaintiffs’ court filings that as a passive investor, he was unable to compel the company to pay a dividend — going directly to the Moores’ argument that they lacked control over KisanKraft. Especially in the subpart F context, the courts have long been willing to disregard taxpayers’ formal lack of control to find that a taxpayer had, as a substantive matter, the ability to control a corporation’s affairs. See, for example, Garlock v. Commissioner, 489 F.2d 197 (2d Cir. 1973) (noting that despite the taxpayers’ ostensible failure to meet section 957’s threshold of voting power, they had control in substance, where they had “sought out parties who understood both its motives and its situation” and “the terms of the arrangement worked out were such that the [other] shareholders would have no interest in disturbing the taxpayer’s continued control”).
In their August brief to the Supreme Court, the Moores acknowledge the validity of the Court’s position in an earlier case that “income that is subject to a man’s unfettered command and that he is free to enjoy at his own opinion may be taxed to him as his income, whether he sees fit to enjoy it or not” (Corliss v. Bowers, 281 U.S. 376, 378 (1930)). The decision in Corliss seems directly relevant to the Moores’ facts, once the full record is taken into account.
Payments From KisanKraft
Moore’s 2020 district court declaration states: “I have never received a distribution, dividend, or other payment from KisanKraft.” That was echoed in the August brief the taxpayers filed with the Supreme Court, which says that “the Moores never received any distributions, dividends, or other payments from KisanKraft.”
These statements conflict with KisanKraft’s corporate financial filings, which reveal that Charles Moore did receive payments of at least two different types from KisanKraft.
Related-Party Reimbursements
The KisanKraft financial statements note payments made in four separate years by the company to Charles Moore (referred to as a related party) as reimbursements for travel expenses (see table).
Fiscal 2014 | 2.06 |
3.31 | |
3.25 | |
0.55 | |
Total: | 9.17 |
Amounts in Indian lakhs, each equal to INR 100,000. At the INR-USD exchange rate of 0.015111 as of March 31, 2016, the total U.S. dollar value of the payments made by KisanKraft to Moore as travel reimbursements equaled about $14,000. | |
The payments to Moore for his travel expenses don’t merely contradict his statements that he never received any payment from KisanKraft. They also highlight the misleading nature of his descriptions of his trips to India. The couple’s 2020 response and cross-motion for summary judgment says that “Mr. Moore . . . visited India several times, partly for vacation and partly to see for himself the impact that KisanKraft is having in India.” Moore’s 2020 declaration says: “In total, I have visited India five times. My last trip was in 2016.” The brief filed with the Supreme Court says that “Charles visited India several times.”
Omitted from any reference to those trips was the fact that Moore was regularly reimbursed by KisanKraft for them, meaning that he was presumably traveling to India to undertake company business there.
The inconsistency is relevant to the Moores’ legal claims because it belies their argument that they lacked sufficient control over the company affairs to have access to corporate earnings.
Equity Infusion and Repayment
Reimbursements for his travel to India were not the only payments Moore received from the company. The financial records from 2014-2015 document a transaction whereby in 2014, Moore and Ravi made contributions of cash to the company of over $200,000 each, as an advance of share capital (“share application money pending allotment”).
Under Indian corporate law, equity advances designated as share capital that are not allocated to share capital within 60 days must be repaid with interest at 12 percent. The contributions by Moore and Ravi were never allocated to KisanKraft shares, and so were repaid in 2015 to the two shareholders.
The legally required repayment of the equity advance with interest is not just inconsistent with Moore’s statement that he never received any payment from KisanKraft. The transaction also helps illuminate how closely involved Moore was in KisanKraft’s management. Moore’s $230,000 contribution was about five times his initial investment and would have greatly increased his proportionate equity stake in the company. The record offers no clues as to why those investments were made and then repaid, because the court filings suggest that Moore’s interest in KisanKraft never exceeded his initial $40,000 contribution.
The story of a significant share capital contribution — made on equal footing with KisanKraft’s majority shareholder — revealed by the corporate documents, but not mentioned in the Moores’ filings, also contradicts the Moores’ claims that they had no involvement in important company affairs over the relevant time period, and therefore lacked the control needed to persuade KisanKraft to declare a dividend.
The 965 Inclusion Year
The mechanics of the section 965 income inclusion are described in section 965(a). It says that for the last tax year of a deferred foreign income corporation that begins before January 1, 2018, the subpart F income of the foreign corporation (as otherwise determined for the tax year under section 952) is increased by the greater of the company’s accumulated earnings as of November 2 or December 31, 2017. (The reference to both dates addresses policymakers’ concerns that taxpayers would try to strip out companies’ earnings beginning November 2, when the terms of the bill became public.)
The mechanics for the section 965 inclusion are determined by section 951(a), under which every person who is a U.S. shareholder (as defined in section 951(b)) of a foreign corporation that is a controlled foreign corporation at any time during any tax year, and who owns (within the meaning of section 958(a)) stock in that corporation on the last day, in such year, on which the foreign corporation is a CFC, must include their pro rata share of the subpart F income earned by the CFC in their gross income, for the shareholder’s tax year in which or with which such tax year of the corporation ends.
Under Indian corporate law, Indian companies have a mandatory March 31 year-end, and KisanKraft’s financial documents confirm that it had a March 31 year-end.
Consequently, any section 965 inclusion mandated for U.S. shareholders of KisanKraft who are calendar-year taxpayers should be in their 2018 tax year. And yet the Moores filed their amended 2017 tax return reporting the section 965 inclusion from KisanKraft in 2017.
It’s technically possible that 2017 was the correct year for the Moores to report and pay their section 965 liability. Section 898(a) states that for purposes of title 26, the tax year of any specified foreign corporation is “the required year” determined under section 898(c). Under that provision, the required year is either the majority U.S. shareholder year, or, if there is no majority U.S. shareholder year, the tax year prescribed under regulations.
Washington Agrotech, as the greater than 80 percent shareholder of KisanKraft, is its majority shareholder. The court records are silent as to the tax year of Washington Agrotech. If Washington Agrotech is a calendar-year taxpayer (and didn’t choose a March 31 year-end), section 898(c) might suggest that KisanKraft had a tax year ending on December 31 for U.S. federal income tax purposes. But that conclusion rests on an assumption that KisanKraft had a “required” tax year.
Regulations proposed in 1993 (REG-208985-89) but never finalized confirm that the concept of a CFC having a required year is relevant only if the company had a U.S. tax nexus — that is, if a U.S. shareholder had a prior-year subpart F inclusion from the company. Under the proposed regulations — which state that they are effective for tax years of specified foreign corporations beginning after July 10, 1989 — KisanKraft would retain its March 31 year-end, unless it had subpart F income in a year before fiscal 2017-2018. The record does not indicate that KisanKraft had subpart F income in a prior year, and nothing in the KisanKraft financial statements suggests that it earned subpart F income, other than a de minimis amount of subpart F income that likely would qualify for the exception in section 954(b).
This means that any reasonably well-advised taxpayer in the Moores’ position would have reported its section 965 inclusion in its 2018 tax year, rather than its 2017 tax year.
Paths Forward
There’s no straightforward mechanism for addressing or correcting a defective factual record in a case that has made its way to the Supreme Court to resolve a question posed as presenting a constitutional matter. One possibility is for the solicitor general to move to vacate the Moore’s cert petition on the basis that it was improvidently granted — in particular because of the lack of a factual record as to whether the refund claim was filed in the correct year. The solicitor general could request that the case be returned to the Ninth Circuit with instructions for the appeals court to request the district court to undertake further factual review and revisit the record.
For the Court to decide a constitutional question posed with reference to an inaccurate set of facts in order to take the opportunity to express an opinion on a hypothetical tax risks undermining the Court’s legitimacy and creating the impression that its docket and its decisions are too easily manipulated by politically motivated interest groups.
Mindy Herzfeld is professor of tax practice at University of Florida Levin College of Law, counsel at Potomac Law Group, and a contributor to Tax Notes International.
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