Moore May Be Less (for the Government): Could It Be More?

If you are a tax practitioner or keep up with significant business news, you’ve likely heard of the quickly turning infamous “Moore Case.” What is the Moore Case, and why does it matter?

First, More History

In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). The bill was signed on December 22, 2017, a day that will “live in infamy” for many of us. The “us” here refers to international tax practitioners primarily, but it affected almost all tax practitioners in some way. Among the most impactful provisions of the law, Section 965 was enacted, commonly referred to as Transition Tax or Mandatory Repatriation Tax (MRT), the name used in the Moore case.

The basic premise of the MRT was to, on a one-time basis, deem all previously untaxed offshore earnings to be included currently, whether repatriated or not, in the income of U.S. shareholders of a foreign corporation in which such U.S. shareholders held greater than 50% of such foreign corporation’s stock (i.e., a controlled foreign corporation, or CFC). Put more succinctly, all CFC’s untaxed earnings were included via a deemed dividend, regardless of any actual dividend.

Meet the Moores

In 2005, Charles and Kathleen Moore paid $40,000 for an 11% interest in KisanKraft, Ltd., an Indian company classified as a CFC for U.S. tax purposes. In the ensuing years (2006-2017), the company earned income but repatriated none of the funds. Accordingly, the Moores were never taxed on these earnings. The Moores ultimately remitted MRT tax of $15,130. Subsequently, they filed a suit to recover this tax.

The premise of their case was that the MRT violated the Apportionment Clause of Article I, Section 9 of the U.S. Constitution in that it imposed an “unapportioned direct tax, rather than an income tax.” The taxpayers also argued that the tax was a retroactive application of a new tax and thus violated the Fifth Amendment’s Due Process Clause. Citing numerous cases, the District Court rejected the plaintiff’s argument that the tax was not on income and thus did not violate the apportionment clause.

Regarding the Due Process clause, the Court, rather forcefully, rejected the Government’s argument that the MRT was not a retroactive tax (indeed, the Court said “by its very nature, the MRT is a retroactive tax”). Nonetheless, citing United States v. Carlton, the Court ruled in favor of the Government on due process. The rationale was that a retroactive tax is permissible if it “(1) is supported by a legitimate legislative purpose and (2) is furthered by rational means.”

The taxpayers appealed to the Ninth Circuit Court and did not prevail. They subsequently appealed to the U.S. Supreme Court and were granted certiorari. The Court heard opening arguments on December 5, 2023. They will likely rule on this case sometime in the summer of 2024.

Moore Reality

While this case has many potential outcomes, the Tax Foundation provides an excellent summary of three possibilities:

“In one scenario, the Court strikes down all or part of the deemed repatriation in isolation. A broader ruling could call into question various taxes that apply to foreign earnings, including global intangible low-taxed income (GILTI), Subpart F, and the new book minimum tax (or corporate alternative minimum tax). In an extreme scenario, the Court could strike down all business income taxes (corporate and pass-through) that apply to undistributed (retained) earnings.”

Let’s consider an additional potential outcome to these three. There’s a possibility the Court rules that minority shareholders, who cannot initiate a distribution, would not be subject to the deemed repatriation rules since they cannot independently access the CFC’s earnings.

Moore to Come

Based on the comments and questions from the opening arguments, it seems very unlikely the Court will rule in a broad manner. Instead, it seems the “mood” of the Court is to tread lightly in this area and to move forward with great caution. Justice Sonia Sotomayor expressed this when she stated, “You’re asking us to announce what realization is out of context, and for the last hundred years, we’ve been studiously avoiding doing that….because we recognize that it’s dangerous to do that.”

Contact our Global Business Services team for questions on the Moore case or any other international tax issue.