New Appeals and Decisions on Two Cases: Alon Farhy and Charles Moore!


Photo by Michael Block:
It has been another exciting 1st half of a year where the tax community was awaiting with baited breath the Supreme Court's decision on not one but two important course cases! These were the Treasury's appeal on Farhy v. Commissioner and Moore v. United States.  

Quick recollections on the cases: 

The first one, Farhy v. Commissioner, Alon Farhy had businesses in Belize for which he had failed to file Forms 5471, Information Return of U.S Persons With Respect to Certain Foreign Corporations, for tax years 2003 through 2010. He had also admitted that these corporations he owned were part of an illegal scheme to reduce his U.S tax burden. He successfully argued with the Tax Court that the IRS could not enforce penalties under §6038 due to a lack of authority. 

This case was exciting because it would have had far-reaching consequences on the IRS' ability to assess penalties not only on the failure to file Form 5471, but also other international information forms 5472 and 3520. The consensus in the tax community was that the penalties had been designed to deter individuals & corporations from using other tax havens, it did also cast a wide net & innocent taxpayers genuinely unaware of filing these forms were caught in it. 

The D.C Circuit has not only reversed the Farhy decision by the Tax Court but has also remanded the TC for its decision in the above case. 

In its opinion, the D.C. Circuit held that §6038 had been amended by Congress in 1982 with an intention of making the penalties to be assessable. The fixed dollar amounts of the penalty mean they can be collected more consistently. 

The court has also stated that the IRS can make reasonable cause determinations to excuse penalties only if they can assess the penalties.  

In the second case, Moore v. United States, Charles & Kathleen Moore had invested in an American controlled foreign-corporation in India. Due to the enactment of the Mandatory Repatriation Tax {MRT} as part of the Tax Cuts and Jobs Act {TCJA} in 2017, the Moore's had to pay approximately $15,000 on their pro-rata share of income from this entity for years 2006-2017. Their argument was that this tax violated the Direct Tax Clause of the Constitution. 

The Supreme Court has held that the MRT attributes the realized and undistributed income of an American-controlled foreign corporation to the American shareholders, and then taxes the American shareholders' portion of this income, and this does not exceed the Congress' constitutional authority. 

What does this mean for you? 

If you are a U.S person who holds shares in a foreign corporation, one or both of these court rulings might apply to you. 

It is very important that you are aware of your tax and compliance obligations. The penalties of non-compliance are onerous and not to be taken lightly. Make sure you have a plan in place if you are going to start investing or are already investing in foreign businesses. 

If you have a long term plan to live abroad, it is a good idea to work with tax and financial advisors who are cross-border experts and can navigate you through the mine-field of changing tax laws, rules & regulations. 

These cases go to show you that your tax and reporting obligations as a U.S citizen/ green card holder living abroad will continue to be complex as the US government will continue to monitor your offshore holdings and financial status. 

Bibliography: TBAT Blog Post from September 9, 2023; Tax Notes 05/06/2024 News- Farhy; Tax Notes 06/20/2024 News- Moore; Moore v. United States; Farhy v. Commissioner IRS- Appeal

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