To the Editor:
The revelation that Charles Moore was a director in KisanKraft, the Indian controlled foreign corporation at the heart of the Moore case, throws significant doubt on the story told by the Moores in their court filings. (Related coverage: p. 1776; related analysis: p. 1671.) Their story is that Charles Moore met Ravi Agrawal when they were both working for Microsoft in 1991, that Ravi founded KisanKraft in 2006 with the Moores as minority (11 percent) shareholders, and that since then Ravi lived in India and ran KisanKraft while the Moores were hapless passive investors.
According to the declaration filed by the Moores:
Kathleen and I invested in KisanKraft at its inception in 2006. At first, there were only a handful of shareholders, and Ravi, Sarika Agrawal (Ravi’s wife), and Kathleen and I contributed 99.5 percent of the start-up capital. Kathleen and I invested $40,000, which was approximately 11 percent of KisanKraft’s start-up capital.1
Further, Moore states that:
To this day, Ravi regularly shares information with me about KisanKraft and its business. While Ravi shares information with me, he has served as the decision maker and CEO of KisanKraft since its inception. Since its inception, KisanKraft has not made any distributions of earnings to its shareholders. Instead, it has retained its earnings to grow its business and serve more customers. Accordingly, I have never received a distribution, dividend, or other payment from KisanKraft. Because KisanKraft reinvested its earnings, it does not have sufficient cash on hand to distribute its retained earnings from over the years to shareholders. As a minority shareholder, I do not have the power to compel KisanKraft to make distributions to shareholders.2
This story omits that Moore was a director of the company and that Ravi and Moore have been “friends” since 1991.3 This suggests that if Moore had asked his friend Ravi to distribute a dividend to him or repurchase some of his shares, Ravi would have been happy to do so. Moore was not a passive investor depending on a board controlled by strangers.
This is similar to the factual pattern in Garlock, in which the U.S. parent issued callable voting preferred stock with 50 percent of the vote in its tax haven subsidiary to a friendly investor to avoid CFC status. The Tax Court and the Second Circuit properly held that the foreign corporation was nevertheless a CFC, because:
It is significant here that the taxpayer sought out parties who understood both its motives and its situation. It is significant also that the terms of the arrangement worked out were such that the preferred shareholders would have no interest in disturbing the taxpayer’s continued control.4
This indicates that the formal division of voting power is not necessarily the same as the actual ability to influence decisions, including the decision whether to distribute a dividend.
Another fact that is omitted from the Moores’ declaration is that most of the shares in KisanKraft (just over 80 percent) were held not by Ravi directly, but by a Washington state holding corporation called Washington Agrotech Ltd.5 This was owned by Ravi and his wife.6
This fact raises two questions. First, is Ravi a U.S. citizen or green card holder? If not, then the whole structure makes no sense, because Ravi returned to India when KisanKraft was founded, so that it would only be a CFC because of the holding corporation. Making a non-CFC into a CFC unnecessarily would have been awful tax planning in 2006 (and after).
Second, assuming (plausibly, given his long stay in the United States) that Ravi is a U.S. citizen or green card holder and, therefore, KisanKraft would be a CFC if he held 80 percent of it directly, it is strange that Ravi invested through a holding company while his friend Charles Moore invested directly. It is clear from the declaration that Moore had limited knowledge of India (he visited it for the first time in 2011). Why did Ravi make his friend invest directly in an Indian corporation, which could expose him to various liabilities (for example, the case of Union Carbide’s 51 percent stake in its Indian affiliate, which exposed it to massive liability after the deadly cyanide gas leak in Bhopal in 1984)7? Instead, Ravi could have sold Moore 11 percent of the U.S. holding corporation. But in that case, Moore would only have been an 8.8 percent shareholder in KisanKraft and there would be no Moore case (because section 965, like all of subpart F and global intangible low-taxed income, only applies to 10 percent shareholders).
Moore, with its $40,000 investment and $14,000 tax liability, was tailor-made to be a vehicle for a constitutional challenge to section 965. Clearly, the Moores are more sympathetic plaintiffs than the mega corporations who make up most of the taxpayers affected by section 965. I would guess that the number of individual investors affected by that section was smaller than the number of multinationals, and that their total tax liability was a minute fraction of the $340 billion raised by the mandatory repatriation tax, which would have to be refunded if section 965 is held unconstitutional. It would be a pity if the Supreme Court focuses only on small individual investors like the Moores, and not on the actual, very large taxpayers targeted by the mandatory repatriation tax.
Reuven Avi-Yonah
Irwin I. Cohn Professor of Law
University of Michigan
Sept. 19, 2023
FOOTNOTES
1 Moore v. United States, No. 2:19-cv-01539 (W.D. Wash. Mar. 26, 2020) (“Declaration of Charles G. Moore”).
2 Id.
3 Id.
4 Garlock v. Commissioner, 489 F.2d 197 (2d Cir. 1973).
5 See KisanKraft Ltd., “Extract of Annual Return as on the Financial Year Ended on Mar. 31, 2018” (Form No. MGT-9) (Aug. 25, 2018).
6 Washington Secretary of State, “Annual Report Washington Agrotech Ltd” (2022); Washington Agrotech Ltd., “Application for Profit Corporation” (filed Nov. 7, 2005).
7 See Union Carbide Corp. v. Union of India, (1989) 1 SCC 674; In re Union Carbide Corp., 809 F.2d 195 (2d Cir. 1987).
END FOOTNOTES