As we approach the end of 2013, with the House scheduled to be in session for less than three more weeks this year, it appears highly unlikely that we will see any comprehensive U.S. tax reform in 2013. \u00a0This provides numerous opportunities for taxpayers, because many techniques for tax minimization are likely to remain available, in spite of proposed but not enacted U.S. international tax reform measures, including the staff discussion draft on international business tax reform, just released on November 19, 2013, by Senate Finance Committee Chairman Max Baucus (D-Mont.).<\/p>\n
There is nothing sinister about taxpayers arranging their affairs so as to keep taxes as low as possible. \u00a0As Judge Learned Hand famously stated, long ago: \u201cAnyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. \u00a0There is not even a patriotic duty to increase one\u2019s taxes.\u201d \u00a0Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934) (J. Hand), aff\u2019d, 293 U.S. 465 (1935). \u00a0That quote remains true as ever today, but tax practitioners keep in mind an important Tax Court Memorandum (non-precedential) decision, released on April 16, 2013, namely, Barnes Group, Inc. v. Comm\u2019r, T.C. Memo. 2013-109 (\u201cBarnes Group\u201d).<\/p>\n
Barnes Group involved a large sum of cash \u201ctrapped\u201d in a foreign subsidiary (generally, repatriation would involve taxation as a dividend), an aggressive \u201ctax-free\u201d repatriation plan (the \u201cRepatriation Scheme\u201d) championed by a Big Four accounting firm that provided a \u201cmore-likely-than-not\u201d tax opinion (with the business purpose for the transactions assumed in the opinion) and received a \u201csuccess fee\u201d equal to a percentage of the expected tax savings. \u00a0The two financing subsidiaries, formed for the transaction, had no employees, earnings or bona fide business purposes for their existence. \u00a0In addition, on a key intercompany loan, the obligor made no payments. \u00a0Further, this taxpayer attempted this same scheme twice, using the same entities. \u00a0\u00a0The Tax Court upheld a twenty percent (20%) accuracy-related penalty under Code section 6662(b)(2)(substantial understatement), even though the taxpayer relied on sophisticated tax advisors and a long-standing revenue ruling. \u00a0Rev. Rul. 74-503, 1974-2 C.B. 117 (the \u201dZero Basis Ruling\u201d) (since repealed). \u00a0The Zero Basis Ruling provided that when a corporate transferor transfers its own stock to a transferee corporation in exchange for transferee stock in a tax-free Code section 351 exchange, both the transferor and the transferee have a zero tax basis in the shares of the other they receive.<\/p>\n
If the Service had respected the form of the Repatriation Scheme, there would be no dividend income on the repatriation under the principles of the Zero Basis Ruling and Code Section 956(a). \u00a0Instead, the Court looked at the \u201centire transaction,\u201d and used substance-over-form principles and the step transaction doctrine to disregard two intragroup Code Section 351 transfers, and to find a taxable dividend to the U.S. parent. \u00a0It is easy to imagine a more favorable fact pattern, with stronger business purposes, than Barnes Group.<\/p>\n","protected":false},"excerpt":{"rendered":"
As we approach the end of 2013, with the House scheduled to be in session for less than three more weeks this year, it appears highly unlikely that we will see any comprehensive U.S. tax reform in 2013. \u00a0This provides numerous opportunities for taxpayers, because many techniques for tax minimization are likely to remain available,…<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,12],"tags":[],"class_list":["post-1360","post","type-post","status-publish","format-standard","hentry","category-international-business-community","category-irs-news"],"_links":{"self":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts\/1360","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/comments?post=1360"}],"version-history":[{"count":0,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts\/1360\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/media?parent=1360"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/categories?post=1360"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/tags?post=1360"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}