Category Archives: Controversies – Federal

The Panama Papers: Taking a New Look at an Old Problem

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On April 3, 2016, the International Consortium of Investigative Journalists (“ICIJ”) published more than 11.5 million documents connected to Mossack Fonseca, a Panama law firm that helped establish offshore financial operations for some of the world’s wealthiest power players. The implicated offshore operations allegedly failed to adhere to transparency and beneficial ownership reporting requirements thereby permitting some corporations to operate behind a veil of secrecy and avoid taxing authorities around the world. The release of the Panama Papers has prompted a new firestorm of international [...]Read more

“Nobody Loses All The Time”: Remembering Negative Precedents

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The IRS can have a long memory when it comes to rulings and decisions against taxpayers. Even with the seemingly all-purpose economic substance doctrine in its utility belt, the IRS sometimes dusts off old precedents to attack transactions. Revenue Ruling 80-239, 1980-2 C.B. 103, and Basic, Inc. v. United States, 549 F.2d 740 (Ct. Cl. 1977) are two anti-taxpayer authorities that targeted perceived abuses that are now largely obsolete. Nevertheless, the IRS may still invoke these precedents for support in totally different situations. Taxpayers should be aware of how the IRS might use [...]Read more

Federal Tax ADVISORY: Supreme Court May Consider Economic Substance Doctrine

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This advisory discusses how several taxpayers have petitioned or are considering petitioning the Supreme Court of the United States to review their losses at the hands of lower court judges applying the economic substance doctrine.

This advisory is provided on the Alston & Bird website: www.alston.com/advisories/fed-tax-may-2014/

STARS Transaction Rejected

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On Feb. 11, 2013, a regular Tax Court opinion was issued in a case that the opinion said was of first impression, ruling against Bank of New York Mellon (BNY). 140 T.C. No. 2. BNY had engaged in a cross-border transaction called STARS that KPMG created around 2000 in cooperation with the foreign bank Barclays. Barclays desired to obtain UK tax credits and deductions that required making an investment in a UK trust in conjunction with investments by a U.S. bank. The benefit for the U.S. bank was to be receipt as a loan of Barclays’ investment of $1.5 billion in the trust, with a very reduced [...]Read more

Global Banks Being Audited

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All global banks currently being audited by the IRS, which have engaged in cross-border withholding planning for clients, should take careful notice of AM 2012-009. This GLAM explains to IRS LB&I how to assess foreign affiliates of domestic banks that did not withhold tax on foreign stock borrowing and back-to-back swaps, in reliance on Notice 97-66. The basic advice is to assert the economic substance doctrine. Fortunately, the advice applies only to transactions prior to the partial codification of the doctrine in 2010, which happened to coincide with legislation fixing the Notice 97-66 [...]Read more

Non-355 Ruling

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Sometimes, a corporation wants to distribute stock of a subsidiary to its shareholders in a taxable transaction and does not want Section 355 to apply to prevent income recognition to both the corporation and the shareholders. Perhaps the corporation has expiring losses it can use to offset any Section 311 gain, and perhaps the shareholders wanted to enjoy the waning moments of the 15 percent tax rate on dividends in 2012. Of course, Section 355 is not elective. Therefore, the corporation may have to do something to avoid the application of Section 355. One thing to do is to state that it is distributing [...]Read more

Rare Taxpayer Debt-Equity Win

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Pepsico, Inc., and Pepsico Puerto Rico, Inc. v. Commissioner, T.C. Memo 2012-269, ruled that the U.S. holder of an ambiguous security issued by its foreign affiliate did not have to treat the periodic payments received as interest, even though the affiliate was deducting interest paid under Dutch tax law. Keys to taxpayer victory. The keys to the taxpayer victory were the following: (1) the issuer was a corporation and not a partnership; taxpayers have lost all recent debt-equity disputes with the IRS in the partnership context; (2) the hybrid security was carefully crafted to have equity-like [...]Read more

Excess Loss Account Avoided

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LPCiminelli Interests Inc. v. United States (W.D.N.Y. Nov. 13, 2012) ruled for the taxpayer on an IRS assertion of excess loss account liability. The facts involve a common situation of delay in writing off a worthless consolidated subsidiary that might produce discharge of indebtedness liability and/or recognition of an excess loss account. Facts: The taxpayer owned a subsidiary that was formed to do construction in a particular area. The subsidiary ran up a lot of debts, ceased operations and in 2004, was reported on the consolidated return as abandoned and removed from the consolidated group. [...]Read more

CERT Regulation Proposed

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Twenty-three years after it was enacted in 1989, the Treasury issued proposed regulations interpreting section 172(h), the corporate equity reduction transaction (CERT) loss carryback disallowance rule dating from the heyday of the leveraged buyouts. Most of us have tried to remember this rule as one aimed at preventing carrying back a loss generated by large interest deductions, and obtaining a refund, when the loan causing the interest deductions was incurred to make a large equity purchase—hence a “corporate equity reduction.” If that were all section 172(h) was aimed at it [...]Read more

Beware of IRS Closing Agreements

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United States v. ConocoPhillips, 2012 WL 3646809 (WD Okla) provides a good illustration on how closing agreements with the IRS are like any other contracts, only moreso, because the IRS is likely to be a particularly unbending contract partner if interpretive issues arise. Facts. Owners of the Trans-Alaska Pipeline agreed with the IRS in a closing agreement that they could deduct $900 million—ratably, over 25 years—for remediation costs that would be paid at the end of the lifetime of the pipeline. The agreement allowed the deductions to the current owners and successors in interest [...]Read more