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 problem.
Any readers who know about the Notice 97-66 problem are well aware of the concerns, but for this one point: they may not recognize what the chief counsel may actually be doing in issuing this GLAM. It may be building an administrative record to spring on the taxpayer in litigation as evidence of “the law” under the Chevron Doctrine.
The Chevron Doctrine is presumed to accord heightened deference to administrative interpretations of the law. The IRS has been known to assert not only that this applies to interpretations issued after the transaction at issue and after the litigation began, but also that the interpretation can occur in guidance as obscure as this GLAM.
To the affected banks in audit, any such IRS reliance on the GLAM could mean the difference between the IRS winning and losing in a court battle. But to taxpayers with post-2010 transactions subjected to the economic substance doctrine, IRS reliance on publications like the GLAM can mean a 40 percent, no-fault penalty.
For that reason, taxpayers should not miss any chance to rebut assertions of the economic substance doctrine. There are arguments against the GLAM. For further information, contact Alston & Bird.