Charles Godwin Moore appears to have been a director at KisanKraft Machine Tools, the company at the center of a Supreme Court dispute over the transition tax’s constitutionality, bringing the issue of control into question.
In its 2017 Form No. MGT-7, an annual return filed by Indian companies with India’s Ministry of Corporate Affairs, KisanKraft lists a Charles Godwin Moore as a director at the company until March 27, 2017. The filing does not state why he left that position. According to a 2012 directors’ report from the company, Charles Godwin Moore was appointed a director of the company in October 2012. Independent financial vendor websites also state that he was appointed a director of KisanKraft in 2012 though he is not serving in that capacity now.
U.S. residents Charles and Kathleen Moore have taken their dispute over the constitutionality of the section 965 transition tax all the way to the Supreme Court, where the case is now pending. The Moores are seeking a refund of $15,000 in taxes they paid, as minority shareholders, on undistributed earnings from KisanKraft, a company supplying Indian farmers with tools and equipment. They have challenged the transition tax imposed on a taxpayer’s post-1986 accumulated foreign earnings, arguing that it is a direct tax and not a tax on income and therefore is unconstitutional because it is not subject to the 16th Amendment’s exemption from apportionment. In June 2022 the Ninth Circuit affirmed a district court’s decision to reject the challenge. In its decision, the Ninth Circuit said courts have consistently held that taxes like the transition tax are constitutional and that whether income is realized is not determinative.
One of the Moores’ arguments in their case, including in their August brief to the Supreme Court, is that they lack the ability to make the company pay out its earnings.
“As minority shareholders without any role in KisanKraft’s management, they had no ability to force the company to issue a dividend,” the brief states. “For the Moores, it was payment enough that they were able to support KisanKraft’s ‘noble purpose . . . to improve the lives of small and marginal farmers in India’ and see the good that it was doing.”
The brief does not mention Moore being a prior director at KisanKraft. It does look to the legislative history of the 16th Amendment to note that a senator arguing for the amendment asserted that undistributed earnings cannot be income to a stockholder until a corporation’s directors agree to declare a dividend. And in challenging the provision’s constitutionality, the Moores noted the contrast between the transition tax and subpart F, the latter of which has been found constitutional by lower courts. The Moores argued that subpart F relates only to shareholders that have control of income-producing assets. In that instance, Congress found constructive realization of income by shareholders in control.
The transition tax "taxes shareholders . . . irrespective of whether they have the power to force the corporation to make a distribution,” the Moores' Supreme Court brief states.
In a filing made in response to an opposition to motion to dismiss and cross-motion for summary judgment in the U.S. District Court for the Western District of Washington in June 2020, Moore stated in a declaration that he and his wife had invested in KisanKraft since its inception in 2006 with only a small number of other shareholders. In total, they owned 12.9 percent of the company's outstanding shares in 2017. The declaration mentions that Moore spoke regularly to KisanKraft’s CEO about the company’s operations, received annual financial statements, and traveled to India multiple times to visit the business, with his last trip in 2016. It makes no mention of his directorship in the company but says that because he is a minority shareholder, Moore could not make KisanKraft distribute earnings to shareholders.
The transition tax was enacted as part of the Tax Cuts and Jobs Act at the end of 2017, after Moore surrendered his directorship.
The Moores’ attorneys did not respond to a request for comment.
According to Don Susswein of RSM US LLP, having the power as a controlling shareholder to require the board to declare a dividend does not mean that a dividend was paid, and it is that distinction that is decisive.
“Whether you are on the board doesn’t matter. The board actually has to meet and declare and pay a dividend,” Susswein said. He added that if there were a transfer of value to a major shareholder, such as the use of a corporate plane, that could be considered a dividend.
Susswein previously argued in a Tax Notes letter to the editor that under Eisner v. Macomber 252 U.S. 189 (1920) — a case on which the Moores rely in making their constitutional realization argument — domestic shareholders cannot be treated as partners. This would seemingly undercut a fallback argument from the government that would impute previously realized income from a corporation to shareholders, Susswein argued, although Macomber’s analysis might not apply to the transition tax or subpart F involving foreign-source income of a foreign corporation that is not subject to a U.S. entity-level tax.
In speaking with Tax Notes, Susswein pointed to language in Macomber that says that “short of liquidation," or until a dividend is declared, a stockholder "has no right to withdraw any part of either capital or profits from the common enterprise.”
“In your capacity as a shareholder, even if you are John D. Rockefeller or Bill Gates . . . you have to get the dividend,” Susswein said, countering arguments that income could be imputed to a person in control of all the board seats. “The flaw with that is if you did that, you would destroy the two-level tax. That was the point the Court [in Macomber] made. . . . Do you want to tax this thing as a passthrough entity or a corporation? You can’t have it both ways.”