In a case of first impression, the Tax Court ruled for the IRS in denying foreign tax credits to the Bank of New York (BNY) in an elaborate $1.5 billion financing transaction, resulting in income tax deficiencies over $200 million for the years at issue. The transaction, marketed by KPMG and Barclays to BNY, was… Continue Reading
Category Archives: Economic Substance
Subscribe to Economic Substance RSS FeedIRS Wins Con-Ed LILO Case On Appeal – No Substance to Lease or Debt
Posted in Debt vs. Equity, Economic Substance, Litigation/Controversy, Tax SheltersIn a reversal of the taxpayer-favorable lower court opinion, the Appeals Court for the federal Court of Claims concluded that Consolidated Edison’s Lease-In Lease-Out (LILO) transaction did not have economic substance and the purported lease was not a “true lease”. The IRS “listed” this particular transaction in Rev. Rul. 2002-69 and Congress further stopped these… Continue Reading
Third Circuit Concludes Historic Rehab Credit Investors Were Not Partners
Posted in Debt vs. Equity, Economic Substance, Partnership/LLC, Real Estate, Tax CreditsThe IRS has won a significant victory in the world of tax credit partnerships. Federal tax credits are typically monetized through syndicated credit-investment partnerships where the investor is required to be treated as a partner for tax purposes in order to receive an allocation of the credit. In a reversal of the Tax Court, the… Continue Reading
10th Circuit Affirms Taxability of Variable Prepaid Forward Contracts
Posted in Economic Substance, General, SecuritiesThe Tenth Circuit, in Anschutz v. Commissioner, affirmed a Tax Court decision taxing the disposition of appreciated stock through a Variable Prepaid Forward Contract (VPFC). The underlying issue was whether the complex financial arrangement created a taxable constructive sale. The transaction involved a series of contracts including (1) a “forward contract” to sell the appreciated… Continue Reading
First Circuit Applies 40% Valuation Penalty On Son of BOSS Transaction
Posted in Economic Substance, General, Partnership/LLC, Tax SheltersIn Fidelity International, the First Circuit upheld a 40% valuation penalty on a so-called “Son of BOSS” transaction described in Notice 2000-44. These transactions involved contributing offsetting long and short options into a partnership and claiming that the net effect of the options resulted in a very high tax basis in the partnership for purposes of… Continue Reading
IRS Has Three New Wins On Tax Shelter Cases
Posted in Economic Substance, General, International, Litigation/Controversy, Partnership/LLCThe Justice Department touted three significant wins on tax shelter cases involving importing foreign built-in tax losses, foreign tax credits, and generating tax losses from “underwater” commercial leases. In the first case, Southgate Master Fund LLC v. United States, the Fifth Circuit Court of Appeals, affirmed a lower court ruling that a purported “partnership” was… Continue Reading
Tax Court Slams “DAD” Loss Importation Shelter
Posted in Economic Substance, Partnership/LLC, Tax SheltersIn Superior Trading LLC v. Commissioner, the Tax Court denied losses and imposed penalties on the “Distressed Asset/Debt” tax shelter, otherwise known as the “DAD” shelter. The IRS previously described this transaction in a 2007 Coordinated Issue Paper. The DAD transaction involves a tax-indifferent party contributing built-in loss assets, in this case Brazilian consumer receivables,… Continue Reading
New IRS Guidance to Field on Applying Economic Substance Doctrine
Posted in Economic Substance, Tax SheltersThe IRS issued guidance to its field offices to instruct examiners when appropriate to seek approval to raise the economic substance doctrine. The guidance also sets forth a series of inquiries the examiner must develop and analyze in order to seek approval for the ultimate application of the doctrine in the examination. Substantive guidance includes… Continue Reading
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