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Moore 2.0? Analyzing Altria Group Inc. v. United States

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Tax Notes contributing editor Robert Goulder discusses the downward attribution dispute in Altria Group Inc. v. United States and the case’s similarities to Moore.

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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner: Jordan Parrish
Audio Engineers: Jordan Parrish, Peyton Rhodes
Guest Relations: Alexis Hart

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: More after Moore.

We're back talking about Moore v. [United States], albeit indirectly this week. As we wait for the Supreme Court's decision in that case, another big case is waiting in the wings. Altria [Group Inc.] v. United States has been referred to as Moore 2.0 by some in the tax world since the issues at the center of this case bear striking resemblance to the Moores' arguments.

To tell us more about this, I'm joined by Tax Notes contributing editor Robert Goulder. Bob, welcome back to the podcast.

Robert Goulder: Hello, Dave. Thanks for having me.

David D. Stewart: Now, just to start off, the name Altria rings a bell. What does that company do?

Robert Goulder: Yes. Well, they maybe are not a household name, but they once were. It is the successor and interest to Philip Morris, the giant tobacco company. That business decided a number of years ago it needed to rebrand itself, so it adopted a new corporate slogan, "Moving Beyond Tobacco."

And they're also now more of a diversified multinational. Yeah, they still produce a lot of tobacco products, but they've added adult beverages to their offerings. And they did that by going out and acquiring a minority stake in a global beer conglomerate called InBev based in Belgium, and it's that 10 percent stake in InBev that is getting Altria in trouble with the IRS.

David D. Stewart: Well, that is a great segue into talking about this case. So could you tell us what is this all about?

Robert Goulder: Yeah, so the case, as you mentioned, it's Altria [Group Inc.] v. the United States. Currently, before the U.S. District Court for the Eastern District of Virginia, just down the road from where we are today. It raises issues that are so similar to Moore that the taxpayer brought a procedural motion to stay the proceedings pending the outcome of Moore, and the government didn't even bother challenging that motion. So they presumably were fine with staying the proceedings.

So the case is frozen. And what does it concern? Well, it has to do with our old friends, subpart F and the TCJA [Tax Cuts and Jobs Act]. As you know, in the tax code there's this section 318 that has all of these sort of attribution rules. And most of them are fine; they're not too controversial. A lot of them actually just involve what we refer to as upward contribution, where shares of stock held by a subsidiary are considered to be constructively held by the parent company.

So that's fine. The issue is in section 318 of the Internal Revenue Code. There's also this downward attribution rule which says that the shares of stock held by a parent company can be attributed down to one of its subsidiaries, and that's fine. I mean, if Congress wasn't fine with that, they wouldn't have enacted it, but there was one instance where Congress said, "We don't like how that works," and they don't like how it works in the subpart F context.

So it adopted this other provision, and it's been on the books for a long, long time. It's code section 958(b)(4), and it basically says we're not going to permit the downward attribution rule in the subpart F context where it would result in a foreign company's shareholdings in their foreign subsidiaries to be attributed to their U.S. subsidiary.

They don't like that because it creates a bunch of subpart F issues. It creates CFCs [controlled foreign corporations] where we think you shouldn't have CFCs. So everything was fine — the system was just chugging along. Everything was normal. And then TCJA comes along late in 2017 and it repeals the bar against downward attribution in the subpart F context, and that creates a big problem for companies. They wake up one morning and overnight they've got all these CFCs they didn't think they had, and Altria was one of those companies.

David D. Stewart: Now, while both cases seem to come out from the TCJA, they definitely are looking at different areas of tax. How does this case relate to Moore?

Robert Goulder: Yeah, so it relates to Moore because of the realization requirement. You recall in Moore — and we've had previous episodes of the podcast where we talked about it — the taxpayers there are challenging the one-time transition rule under section 965, the mandatory repatriation provision saying, "Hey, that's constitutionally infirm because it doesn't have realization, right?"

There's this realization concept. It's not really in the tax code or even in the Constitution or in the 16th Amendment, but there's this old case from the 1920s, Eisner v. Macomber, which basically has some language that arguably is dicta, but it says if you don't have the realization of income, you shouldn't have taxable income. That's going to be an unconstitutional tax. So that's being litigated in Moore, and we're going to get an answer at some point, presumably this spring, about what little sliver of Eisner v. Macomber still exists in the 21st century. Once we have that answer, we'll be able to go back and make better sense of Altria.

So Altria is not about that transition tax. As I mentioned, it's about the downward attribution rule, but their argument is this: The taxpayers' theory is that downward attribution in subpart F context, it violates the 16th Amendment because it ignores this realization requirement. That is, the foreign income in question was earned or realized by the foreign subs, and those would be the foreign subsidiaries of InBev, that Belgian conglomerate. It's not fair to take that income and attribute it to Altria, the U.S. shareholder. Really, what they're objecting to is the lack of a control element in the downward attribution rule.

It's basically saying the Constitution as interpreted by Macomber requires that the U.S. entity needs something more than just a minority 10 percent stake in the foreign entity for you to have that kind of attribution. There should be at least a controlling stake, at least a 50 percent interest. So both of these cases are about the realization requirement.

David D. Stewart: Now tell us a bit about subpart F. We've talked kind of around it a bit, but what does it do and how important is it to the U.S. tax system?

Robert Goulder: Oh, it's critical. It's a major way that we guard against erosion of the corporate tax space. I mean, if you think jurisdictionally about the right of Congress to impose an income tax on an entity that has some sort of a gain, what are the outer reaches of its jurisdiction? Right.

There's source and there's residents. And if you think about it, if you have a foreign entity that has foreign income, the U.S. really shouldn't be able to tax that unless the income is effectively connected to a U.S. traded business. Right. Because under that scenario I just described, you don't have U.S.-source income and you don't have a U.S.-resident taxpayer.

So what is the authority of Congress to tax that income? Well, that's where CFCs come in, and subpart F is the United States' incarnation of a CFC regime. It basically says you've got these two tests, the 50 percent test and the 10 percent test.

If the foreign entity is controlled by U.S. shareholders, meaning U.S. shareholders collectively own at least 50 percent of the foreign entity, then it's OK to attribute its earnings on a current basis to the U.S. shareholder. And there's this 10 percent test for what is the technical definition of a U.S. shareholder. So in Altria's case, Altria is a U.S. shareholder of the Belgian conglomerate InBev because it owns just over 10 percent. I think the briefs refer to a 10.2 percent stake in InBev, with the remaining 89-plus percent of the outfit being owned by foreign investors.

So the taxpayer, it is a U.S. shareholder for subpart F purposes, but the question really is, InBev itself is not a CFC because it's not more than 50 percent owned by U.S. shareholders. So that's the subpart F issue, and that's one of the reasons why subpart F is so important to the U.S. tax space. If you didn't have it, it would be really easy to avoid taxes. You just take your income-producing assets and dump them into foreign subsidiaries, and that would be that.

David D. Stewart: Now, did these sort of subpart F questions come up during the arguments in Moore?

Robert Goulder: Oh, yeah, it did because subpart F relies on attribution. You're taking the income of a foreign entity and attributing it to a U.S. shareholder. In Moore, it was an Indian agricultural firm, KisanKraft, I think was the name of it. And because it's more than 50 percent owned by U.S. shareholders, subpart F says, "OK, you can take that income and attribute it to the Moores." And they're like, "Well, you've got the realization problem there. And it's the same kind of attribution that you have here. You're attributing income from a foreign company to a U.S. shareholder, and that is sort of at the root of these cases." Conceptually, it's as though they're first cousins.

David D. Stewart: So you said this case is on hold. Does it make sense to wait on this case until after Moore?

Robert Goulder: Yeah, I think so. I think that's kind of a no-brainer, and that's probably why the government didn't object to the motion to stay. One way or another, Moore is going to illuminate our understanding of the realization requirement. Sooner or later, the Supreme Court is going to inform us how much of Macomber still survives, and whatever that outcome is, it'll prove very significant for our consideration of Altria.

Now, if the Supreme Court rejects realization altogether — right, let's say, hypothetically, the Supreme Court affirms the Ninth Circuit and just says there is no realization requirement. It's nothing more than a matter of administrative convenience. If that's the result, then I can't fathom how Altria could prevail in its refund suit.

And by the way, this is a refund suit. They paid the tax, about $105 million. Now they're suing for a refund. If the court says there is no realization requirement, I don't see how they could possibly win. In that case, you'd have a summary judgment motion brought by the government that would probably prevail.

If you get a different result in Moore, if the Supreme Court comes back and says, "Yeah, the Moores win. We're going to invalidate section 965," then Altria, they've got a very good chance here. I mean, it doesn't guarantee that they would win, but they'd have a much easier path forward because there'd be this new Supreme Court decision out there saying, "Yeah, you need a realization requirement," that it's something we all have to deal with.

David D. Stewart: Would this take a taxpayer win in Moore and extend it to include a lot more revenue that the government is counting on?

Robert Goulder: Yeah, I mean, I don't remember offhand what the revenue score was for the repeal of a downward attribution rule, and it's also worth noting that the Treasury Department is aware of this problem, that so many people were caught by surprise by the TCJA. In fact, there's a whole really sort of momentum of people in the corporate community that think the TCJA was poorly drafted.

It gave us this result, the repeal of the bar against downward attribution in subpart F, but they say, "That's not really what the law was supposed to do. That's not how it should have been written." They point to a Senate Finance Committee report that says, "This shouldn't be a problem." They also point to a colloquy, a floor debate between two lawmakers where they're saying things that are then entered into the congressional record saying, "No, no, no, we're not going to do this. You're not going to have all these new CFCs that pop up overnight."

And despite all of that, we still have the statute that we have, and Treasury to some extent has been trying to provide relief to taxpayers. There's only so much they can do with this adverse language that's right there in black and white in the Internal Revenue Code. So yeah — if Altria wins, there's going to be a lot of very happy multinational corporations out there. It means they can go back to the same cross-border planning structures they had in place before TCJA where they didn't have to worry about these foreign entities that they thought were not CFCs.

David D. Stewart: Now lastly, there was this notion of the excise power that came up during the Moore oral arguments. Could you tell us about that and what bearing it could have on Altria?

Robert Goulder: Oh, I'm so glad you asked that, Dave. So this is kind of a big deal. If you go back and you look at the oral arguments in Moore, which were just about a month ago, right, there was some discussion about this. Some of the justices quizzed both the taxpayer's lawyer and the solicitor general about whether the corporate tax is supported by the Article I power to impose excise taxes. It's this concept that the corporate tax itself functionally is an excise tax on the privilege of conducting business in the corporate form.

Well, that might seem like a fanciful idea, but there's actually a Supreme Court case out there that said exactly that. Now, it's a very old case. It goes back, I think, to 1909. It's called Flint v. Stone Tracy, and it predates the ratification of the 16th Amendment. Well, it was never overruled. It's still sitting there on the books. It's good law.

The problem is that in this day and age, nobody genuinely in their heart of hearts thinks of the corporate income tax as being an excise tax. So it's a legalistic argument that doesn't really jive with our gut instincts. Now, the government raised it in Moore, but they did so sort of at the eleventh hour. They didn't argue it before the district court or before the Ninth Circuit.

They waited until it got before the Supreme Court and then mentioned it in their briefs, and that's problematic because there were at least two of the nine justices saying that the issue, because it hadn't been raised earlier, that it was waived, it was forfeited. You can't now come before the Supreme Court and argue that the corporate tax can be justified as an excise tax. That's not before the Court.

And some other justices said, "No, no, no. It can be before the Court if we want it to be before the Court. It's in the Constitution. It's always germane." So it's a very peculiar strategy on the part of the government that they didn't raise it early on in Moore, and they haven't raised it in Altria here, back to the U.S. District Court for the Eastern District of Virginia. They haven't raised it.

So what are they waiting for? If there's an appeal, it would go to the Fourth Circuit. Would they raise it then? If it gets appealed to the Supreme Court, if Altria gets a writ of certiorari, would they raise it then? It's just this bizarre situation. I mean, speaking as an unapologetic tax nerd, it would just be fascinating if you had one of the lower courts dodge the issue of the realization requirement, which is what we think these cases are about, right?

We think Moore is about the realization requirement. We think Altria is about the realization requirement. If the courts say, "Well, hold on, wait a minute: We don't even need to get to realization because if it's an excise tax, it only has to be a much lesser threshold. It only needs to be uniform across the states, which it is." That's a very low hurdle to clear. And that position, by the way, it's not an outrageous thing because there's a Supreme Court case saying, "Yeah, that's the law."

Presumably, all federal courts are still obliged to follow a Supreme Court decision like the one in Stone Tracy, even if it's over 100 years old. Despite its age and peculiarity, these lower courts could be obliged to follow it. So if they were to do that, you would then have this issue teed up for the Supreme Court, a reconsideration of the Stone Tracy case, and there's a real sense of worry in the tax community that the Supreme Court would jump at the first chance to reverse Stone Tracy if presented with the opportunity, and Altria could be that springboard.

David D. Stewart: Well, it's always great to keep an eye on the nerdy and arcane areas of tax. And Bob, thank you so much for bringing that part to us as well as the entire discussion of this case. We'll definitely have to keep an eye on it.

Robert Goulder: My pleasure, Dave. Anytime.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what do you have for us?

Jasper B. Smith: Thanks, Dave. In Tax Notes Federal, six KPMG practitioners examine the mechanics of implementing SEC clawbacks. Mark Ascher and Jay Soled propose a straightforward reform of subchapter E to update, improve, and simplify the grantor trust rules.

In Tax Notes State, four Bass, Berry & Sims practitioners examine AI and how it might help understand the challenges of applying traditional tax concepts to new technologies. Ray Stevens and Rick Reames examine why tax agencies overwhelmingly choose litigation instead of rulemaking.

In Tax Notes International, five tax practitioners explain changes to the taxation of foreign source income in Hong Kong, Malaysia, and Singapore. Mindy Herzfeld examines the legal status of pillar 2 administrative guidance around the world.

And finally, in featured analysis, Marie Sapirie examines the IRS's new registration portal for transferring energy tax credits and receiving elective payments.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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