Florida Tax Attorney Blog

The Treasury Regulations tell us when to value stock issued in a reorganization for purposes of evaluating continuity. Curiously, however, these same regulations are silent as to how to value such stock.

With respect to the valuation date, stock will be valued at the agreement date if: (1) there is a binding merger agreement; and (2) the number of shares to be issued and the non-stock consideration are fixed. Otherwise, stock must be valued at the date on which the transaction closes. But once the valuation date is determined to be either the signing date or the closing date, how do you value the stock? On a typical trading day, a stock will trade within a range of prices, so which price is the relevant price for valuation purposes? The high? The low? The closing price? The weighted average? Curiously, the regulations provide not guidance on this subject.

The most conservative approach would be to use the lowest trading value for the relevant valuation date. So long as continuity requirements are satisfied based on the lowest trading value, you can rest assured that the requisite continuity of interest exists. However, the correct answer is probably less conservative. In the estate tax context, publicly traded securities are valued on the basis of the mean between the highest and lowest quoted selling prices on the valuation date. See Treas. Reg. § 20.2031-2(b). With that being said, there appears to be no reason in law or logic to believe that the same principles would not apply to stock valuation in the reorganization context.

If you need assistance in properly structuring a business reorganization under Section 368 of the Internal Revenue Code, please contact me.

Under the continuity of proprietary interest doctrine, a substantial part of the proprietary interest in the target corporation must be preserved in the reorganization. As to what constitutes a "substantial part," the treasury regulations indicate that 40% is sufficient. See Treas. Reg. § 1.368-1T(e)(2)(v), Example (1). That is, the requisite level of continuity is preserved if at least 40% of the value received for the target stock is in the form of stock in the acquiring company. While there are cases out there finding the requisite level of continuity where stock of the acquiring company constitutes less than 40% of the total merger consideration, taxpayers are well-advised to structure the transaction to satisfy the 40% threshold.

But even then, the transaction may be subject to fluctuations in value. Historically, where the merger consideration consisted of a fixed number of shares, the risk was that the stock would decline in value between the signing of the merger agreement and the closing date and, thereby, cause the merger consideration to consist of less than 40% of the total merger consideration. These types of valuation issues have been largely mitigated by the signing date rule under which valuation occurs at the close of the day before the signing of the merger agreement in cases where it applies. However, valuation concerns have not been eliminated, especially in the private company environment.

Unlike public company stock for which an active market exists, there is no established market for stock of privately held companies. As a result, valuation of the shares is a subjective determination to which the IRS is not bound. Thus, even in cases where the signing date rule applies, the actual value of the shares on the day before signing is susceptible to challenge by the IRS. Consequently, valuation risks continue to persist in the private restructuring environment.

Although valuation risks cannot be eliminated in the private restructuring environment, restructuring transactions can be proactively structured so that a successful valuation challenge by the IRS doesn't turn into a double-level tax disaster. In this respect, the reverse forward merger structure is one of the soundest forms of protection. Here's how it works:

Step 1: acquiring company sets up two subsidiaries, Sub1 and Sub2.

Step 2: reverse merger of Sub1 into target company.

Step 3: forward merger of target company with and into Sub2.

Under this structure, if the share valuations are respected, the separate steps would, more likely than not, be integrated, and the steps would, collectively, qualify as a tax-free reorganization. Obviously, this is the desired result. However, if the share valuations are successfully challenged, the reverse merger would constitute a qualified stock purchase of the target shares, while the forward merger would constitute a good (A) reorganization. The result? A single layer of tax at the shareholder level. Thus, while the transaction is not tax-free in its entirety, the reverse forward structure avoids the double layer of taxation (i.e. at both the shareholder and corporate levels) that would otherwise be triggered by a successful valuation challenge.

In general, a shareholder purpose does not satisfy the business purpose requirement imposed in the corporate reorganization context, at least not in the 355 context. Treas. Reg. § 1.355-2(b)(2). However, in some cases, a shareholder purpose may be "so nearly coextensive" with a corporate business purpose as to preclude any distinction between them. In this spirit, enhancement of shareholder value is often a valid business purpose insofar as the corporation benefits by reason of the enhanced shareholder value. Namely, enhanced shareholder value provides a more valuable currency to the corporation for purposes of post-spin acquisitions and equity compensation programs. Increased share value means that less shares are needed to fund equity compensation programs and potential future acquisitions.

Significantly, all of this and more was acknowledged by the IRS in Revenue Ruling 2004-23. Spin-offs more often than not result in enhanced share value because the market for the shares becomes much larger when a controlling corporate shareholder is eliminated. Thus, this ruling opens the flood gates for satisfying the corporate business purpose requirement with a shareholder purpose. Thus, after Revenue Ruling 2004-23, the business purpose requirement can almost always be satisfied.

One word of caution: while Revenue Ruling 2004-23 provides substantial leeway in the business purpose department, it is not carte blanche. For instance, the logic and theory of the revenue ruling is really only relevant in the public company context. Private companies typically do not diversify equity ownership or provide equity-based employee compensation. As a result, citing a more valuable currency for use in equity compensation programs and future acquisitions would probably be an impermissible shareholder purpose. Even in the public company context, a company with no substantial equity compensation program and/or no history of acquisitions and no legitimate plans of acquisition would probably be a poor candidate for a 2004-23 type business purpose.

Corporate officers and directors are denominated under the law as fiduciaries. As a result, they must always place the company's interests before their own. To this end, the law imposes two specific duties upon corporate officers and directors: (1) a duty of care; and (2) a duty of loyalty.

The duty of care generally requires that corporate officers and directors act on an informed basis in good faith and in honest belief that their action is in the best interests of the company. Brane v. Roth, 590 N.E. 2d 587 (In. Ct. App. 1993). The duty of loyalty requires that corporate officers and directors place the best interests of the corporation before his or her own interests. E.g., State Ex Rel. Hayes Oyster Co. v. Keypoint Oyster Co., 64 Wash. 2d 375 (Wa. 1964).

Notwithstanding these duties, a fundamental tension exists in the sense that a corporate officer or director may arguably act unlawfully without breaching the duties of care and loyalty. That is, a corporate officer or director may act with due care and in the best (economic) interests of the company, but in a manner which contravenes the law.

As a result of the foregoing, criminality in the corporate context has, in essence, become a business decision. In this respect, the decision-making criteria can be summarized in three words: does crime pay? For instance, in some cases, the fine associated with violation may be less costly than compliance. This is often true in the environmental context where it is often cheaper to pay the fine than to comply with environmental regulations. This may also be true with respect to corporate operations abroad. In many nations, official bribery is an accepted part of doing business. In this respect, the U.S. consequences of engaging in this bribery may be less costly than the loss of revenue from foreign operations that would result in the absence of the bribe.

Thus, the current state of the law appears to be this: if crime pays, then the criminal act is committed, and the corporate actors have complied with their duties of care and loyalty insofar as they have acted on an informed basis and in the best economic interests of the company. On this basis, U.S. companies are increasingly electing to knowingly violate the law. This is confirmed by a recent survey conducted by Deloitte which reveals that one in five executives fear management override of compliance systems. According to the survey, it appears that this increasing trend of corporate criminality can be largely attributed to unrealistic revenue goals and a lack of defined roles and accountability.

Pursuant to the treasury regulations under I.R.C. § 355, a spin-off must be undertaken for a purpose that is "germane" to the business of either the distributing corporation, the controlled corporation, or the affiliated group of which the distributing corporation and the controlled corporation are a part. In this respect, the IRS has long taken the position that a shareholder purpose is not a valid business purpose. But is this correct? Arguably, no.

Significantly, this issue has not been addressed by a court. That is, this position does not necessarily have any basis in the law (or in logic for that matter). My personal opinion is that a court would, more likely than not, squarely disagree with the IRS on this issue because I believe this general disallowance of shareholder purpose as a valid business purpose to be inconsistent with fundamental principles of corporate governance. The most basic theory of corporate governance is that a corporation exists for its shareholders. E.g., Dodge v. Ford Motor Co., 170 N.W. 668 (N.J. 1919). Indeed, a corporation is organized and carried on primarily for the profit of its shareholders. Id. Thus, any purpose which enhances shareholder value is consistent with the corporation's existence for its shareholders. Why, then, is a shareholder purpose insufficient by itself to support a 355 transaction?

To be clear, I would never recommend supporting a 355 transaction solely with a shareholder purpose. The IRS has clearly stated its position with respect to this issue, and the stakes are simply too high in this type of transaction to challenge the IRS. However, I do think that this is an issue to watch. Eventually, this issue will make its way into the court system, and when it does, I predict that the IRS' position will be invalidated.

Often, a divisive D reorganization precedes a Section 355 spin-off for the reason that the corporation must first segregate the assets and liabilities of the business to be spun off in a separate entity before it can spin off the business. Thus, the spin-off is actually comprised of two steps. Step 1: the parent corporation ("P") transfers the assets representing the business to be spun off to a subsidiary corporation ("S") in exchange for consideration including stock of the subsidiary. Step 2: P spins off the business by distributing the S stock received in the exchange to its shareholders so that after the transaction, the P shareholders own stock in two corporations: P and S.

The corporate level exchange that occurs in step 1 is governed by I.R.C. § 361. In this respect, P recognizes no gain or loss if it receives back solely corporate stock or securities. I.R.C. § 361(a). But often, the consideration consists of cash or "boot" in addition to stock or securities of S. One way to avoid gain recognition despite the receipt of boot is for P to distribute the boot received to its shareholders or creditors under I.R.C. § 361(b). With respect to the latter, an interesting question arises in the context of defeasance.

Defeasance

Defeasance is a financial accounting concept whereby a company can eliminate indebtedness from its financial statements without actually paying it off. At the most basic level, the company establishes an independent trust which is funded with high-grade government securities (AAA). Upon maturity, those securities will be sufficient to satisfy the entire amount of the debt. In essence, then, the company is collateralizing its debt with government securities rather than satisfying them. In any event, if properly structured, the company may treat the collateralized indebtedness as satisfied for financial accounting purposes. Such treatment allows the company to remove the liability represented by the collateralized indebtedness from its financial statements (with a corresponding reduction in assets, of course) which, in turn, favorably impacts financial ratios. That's the financial accounting treatment. But financial accounting and tax consequences often vary.

Is Defeasance a Distribution to a Creditor Under I.R.C. § 361(b)?

In the spinoff context, the question ultimately becomes whether use of the cash boot to collateralize a debt as described above constitutes a distribution to a creditor under I.R.C. § 361(b) which purges the transaction of the boot taint and preserves non-recognition treatment. It depends.

More specifically, it depends on the type of defeasance involved. As a matter of law, there are two types of defeasance: (1) legal defeasance; and (2) covenant (aka in substance) defeasance. In the case of a legal defeasance, the creditor no longer has a claim against the debtor corporation once the securities have been deposited into the trust. That is, the debtor corporation is released from liability, and the creditor must look solely to the trust for repayment. In the case of a covenant defeasance, on the other hand, the corporate debtor remains technically liable for the debt. That is, while the debt will be repaid from the trust, privity remains between the debtor corporation and the creditor such that the debtor corporation remains liable on the debt despite the collateralization.

Because a legal defeasance results in extinguishment of the creditor's rights against the debtor corporation, the tax law treats a legal defeasance as if the corporate debtor used the assets which were used to fund the trust as currency to satisfy the debt. By contrast, because a covenant defeasance does not result in extinguishment of the debtor corporation's liability or the creditor's rights against the corporation, the tax law treats a covenant defeasance as not in repayment of the debt.

Conclusion

A legal defeasance is treated as a distribution to a creditor, but a covenant defeasance is not. Thus, P's use of the boot received to effect a legal defeasance is sufficient to purge the transaction of the boot taint and preserve non-recognition treatment. By contrast, P's use of the boot received to effect a covenant defeasance is not sufficient to purge the transaction of the boot taint, and P would be subject to gain recognition despite the defeasance.

Two new questions appear on the corporate tax return (Form 1120) for the 2011 tax year:

(1) Did the corporation make any payments in current year that would require it to file Form(s) 1099?

(2) If "Yes," did the corporation or will the corporation file all required Form(s) 1099?

These questions are found on Schedule K as items 15a and 15b, respectively.

So what's this all about?

In 2010, Congress expanded 1099 reporting requirements and increased penalties for failure to file required 1099s when it enacted The Small Business Jobs Act (PL 111-240) and the Patient Protection and Affordable Care Act (PL 111-148). The specific 1099 reporting expansions which each Act effectuated are not important because both expansions were repealed in 2011 when the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (more commonly known as the "1099 Act") was signed into law.

As a result of the repeal, the 1099 reporting rules remain largely unchanged for the 2011 tax year. Pursuant to I.R.C. § 6041(a), "[a]ll persons engaged in a trade or business and making payment in the course of such trade or business to another person" of $600 or more must report the amount and the name and address of the recipient to the IRS and to the recipient. The Code applies this requirement to payments of "rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income," and the Treasury regulations add, "commissions, fees, and other forms of compensation for services rendered aggregating $600 or more" as well as interest (including original issue discount), royalties and pensions. Treas. Reg. § 1.6041-1(a)(1)(i).

Note, however, that the 1099 Act did not operate to repeal the increased penalties for failure to file a required 1099. Under the Small Business Jobs Act, the first-tier penalty under I.R.C. § 6721 for failure to timely file an information return was increased from $15 to $30, and the calendar-year maximum was increased from $75,000 to $250,000. The second-tier penalty was increased from $30 to $60, and the calendar-year maximum was increased from $150,000 to $500,000. The third-tier penalty was increased from $50 to $100, and the calendar-year maximum was increased from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increased from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard of the reporting requirement was increased from $100 to $250.

The retention of the enhanced penalties, together with Schedule K's explicit inquiry regarding 1099 reporting obligations tends to suggest an intent on the part of the Treasury to crack down on the enforcement of the1099 reporting requirements. Thus, items 15a and 15 b on Schedule K appear to be an unsubtle reminder to businesses of their 1099 reporting obligations.

Key Takeaway: The IRS has indiciated an intent to crack down on enforcement of 1099 reporting requirements. So make sure your business complies with all relevant 1099 reporting requirements for the 2011 tax year.

The issuance of additional stock by an acquiring corporation is often (though not always) a necessary precondition to qualify a merger or acquisition transaction as a tax-free "reorganization" under Section 368 of the Internal Revenue Code. However, the issuance of additional shares could have a dilutive effect in the simple sense that more shares outstanding means lower earnings per share ("EPS"). For privately held companies, this potentially dilutive effect is not much of a concern. But for public companies, this is a big deal. Indeed, EPS is highly correlated with market rate, and the stock of many public companies trades on that basis.

One option is for the acquiring company to go out into the market and buy back the number of shares issued in connection with the reorganization. Keep in mind, however, that continuity of interest is generally a prerequisite to a valid tax-free reorganization. The tax-free treatment of the reorganization transactions described in Section 368 of the Internal Revenue Code are predicated on the theory that the investment in the target corporation has not changed but rather continues in a different form. Stated more simply, the shareholders of the target corporation have not cashed out their investments insofar as they continue to hold stock in the acquiring corporation. Consequently, there has been no realization event which would trigger tax.

Now, if the acquiring corporation goes out into the market where it repurchases the number of shares that it issued in the reorganization it is conceivable that it could acquire shares that were issued to target shareholders in the reorganization.

The question, therefore, becomes whether this destroys the requisite continuity of interest and, thereby, exposes the merger transaction to tax.

According to the IRS, a market repurchase of shares by an acquiring corporation following reorganization does not destroy continuity. To be sure, it is conceivable (and probably likely) that the acquiring corporation will repurchase shares issued to the target corporation shareholders in the reorganization. However, there is no privity between the buyer and seller in a market transaction. Consequently, a purchase of stock issued to a target shareholder in the reorganization would be purely coincidental.

Note, however, that the holding in Revenue Ruling 99-58 is subject to one mathematical caveat: the acquiring corporation cannot buy back more shares than were outstanding before the reorganization. If you think about it, this makes sense. If the acquiring corporation bought more shares than were outstanding before the reorganization, it would necessarily be purchasing shares issued to target shareholders in the reorganization. And that would destroy continuity.

Structuring a tax-free reorganization is difficult. If you need assistance in this area, please contact me.

In Telebright Corp. v. Director, Division of Taxation, the New Jersey Division of Taxation effectively used a single employee's act of telecommuting as the jurisdictional hook to tax the income of a Delaware corporation. Significantly, the corporation maintained no offices in the State of New Jersey. Rather, the corporation's only contact with the State of New Jersey was in the form of an employee who telecommuted to work from her home in New Jersey.

This employee received her work assignments in New Jersey and completed such assignments from New Jersey using a company-provided laptop. Based on these indirect contacts through its employee, the corporation was held to be "doing business" in New Jersey. As a result, its income was subject to taxation in New Jersey under New Jersey law.

More significantly, the court held that such taxation was consistent with the Due Process and Commerce Clauses of the U.S. Constitution. First, the court held that the corporation's tax liability did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. In this respect, the court emphasized that the corporation had "fair warning" that its employment relationship with a New Jersey resident could subject it to New Jersey's jurisdiction. Second, the court held that the employee's presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey's labor markets.

Key Takeaway: In this modern age of technology, corporations must be mindful of their telecommuting policies. Indeed, having a single employee telecommute from a state with otherwise insufficient minimum contacts to justify income taxation could subject that corporation to taxation in that state.

An allowance for costs of corporate equity financing has been proposed in the United Kingdom as a means of eliminating the distortions created by the debt-equity distinction in the corporate tax context. See Institute for Fiscal Studies, Tax By Design: The Mirrlees Review.This proposal comes after a comprehensive review of the British tax system (the "Mirrlees Review") by a prominent group of international tax experts. The study identified traits of a desirable modern tax system and assessed the U.K.'s tax system to determine the extent to which it conforms to these principles. Belgium enacted a similar allowance in 2005 which has substantially enhanced the efficiency of its corporate tax system.

Like the British tax system, the U.S. tax system encourages debt financing by permitting tax deductions for interest paid but not for dividends paid. A tax deduction for costs of equity financing would deincentivize extensive corporate leveraging and neutralize debt-to-equity ratios. In essence, tax considerations would be eliminated (as they should be) from the decision of whether to employ debt or equity financing. As a result, corporations would become more efficiently structured from a capital perspective and resources which are currently being allocated to tax planning could be reallocated to more value-added activities.

For instance, under current U.S. tax law, the determination of whether an instrument should be treated as debt or equity involves a balancing test, which is quite costly in terms of both time and money, to determine whether the instrument is more like debt or equity. See I.R.C. § 385(b). Under this balancing test, the following factors are considered:

• Whether there is a written unconditional promise to pay, on demand or on a fixed date, a sum certain in money in return for an adequate consideration, and to pay a fixed rate of interest;

• Whether there is subordination to or preference over any corporate indebtedness;

• The ratio of debt to equity;

• Whether there is convertibility into common stock; and

• The relationship between the holdings of stock in the corp and the holdings of the interest in question

A U.S. deduction for costs of equity financing would largely eliminate the need for corporations to engage in this type of fact-intensive analysis at the tax planning stage to create instruments that possess traditional indicia of debt. Moreover, it would cut down on the constant tension between corporate taxpayers and the IRS in the debt-equity context. Finally, it would substantially reduce litigation in this area and consequently relieve the overburdened federal court dockets to some degree.

In a recent article, Wall Street Journal reporter John Steele Gordon called the Internal Revenue Code's imposition of separate income taxes at the corporate and individual levels "hopelessly arbitrary and unfair." According to Mr. Gordon, the corporate tax was intended only as a "stopgap measure" to tax the wealthy after the U.S. Supreme Court declared the individual income tax unconstitutional under Article I of the Constitution. See Pollock v. Farmer's Loan & Trust Co. In this spirit, Mr. Gordon suggests that the corporate income tax was erroneously left in force following the 16th Amendment's explicit approval of the income tax.

"One original sin was the separation of the corporate and personal tax, giving lawyers, accountants and the wealthy a chance to game the system."

But the corporate income tax provides much more than an opportunity to "game the system."

Beyond its revenue-generating capacity, the corporate income tax functions as a necessary limit on the power of corporate management. Given their position at the top of the corporate hierarchy and the extent of the financial resources over which they exercise control, corporate managers occupy a unique position of power and influence. Ironically, this vast corporate power and influence makes it very difficult to regulate corporate management without contravening basic principles of democracy. The only way to directly regulate corporate governance in a constitutionally consistent manner is through corporate taxation. Otherwise, the result would be a socialistic regulatory regime with extensive government regulation of every aspect of the business environment.

Continue reading "THE CASE FOR THE CORPORATE TAX" »

Under Subchapter S of the Internal Revenue Code, qualifying corporations can elect S corporation status, which allows the corporation to be treated as a flow-through entity for income tax purposes. This means that the income, deductions, and other tax attributes of the corporation flow through to the shareholders, who report corporate earnings on their individual tax returns. While this may seem insignificant, self-employed individuals can realize huge tax savings by operating as an S corporation.

Here's how it works:

The earnings of an S corporation can be allocated to shareholders in one of two ways: (1) as salary; or (2) as a distribution of profit.
Significantly, any amounts in excess of salary (i.e. distributions of profit) are not subject to FICA (Social Security) or Medicare taxes.

Therefore, self-employed individuals can partially opt out of the 12.4% FICA (Social Security) tax (on first $106,800 of salary) and the 2.9% Medicare tax to the extent that earnings are classified as a distribution of profit (rather than as salary).

As an example, consider a personal trainer who opens a personal training studio. Let's say that after paying all expenses, our trainer earns $100,000 during 2011. If the entire $100,000 is paid out as salary, the trainer will pay $15,300 in payroll taxes. ($12,400 FICA (Social Security) tax; $2,900 Medicare tax).

If, instead, $53,323, which is the average salary for a certified personal trainer according to the American Council of Exercise, is classified as salary and the remaining $46,677 is classified as a distribution of profit, the trainer will pay $8,158 in payroll taxes ($6612 FICA (Social Security); $1,546 Medicare). This amounts to payroll tax savings of $7,142, or 46.6%!

This loophole is popularly referred to as the "Edwards gambit," named after American attorney and politician, John Edwards, who notoriously avoided more than $500,000 in Medicare tax by employing the Subchapter S corporate structure for his law firm. In the four years before becoming a U.S. Senator, Edwards earned some $27 million as a personal injury lawyer. Of this $27 million, he classified about $1.5 million as salary and the remaining $25.5 million or so as a distribution of profit. In this way, he avoided paying Medicare tax on more than $25.5 million of earnings and saved $591,112.

To be sure, Edwards' tax avoidance tactic was widely criticized by political adversaries as evasive and deceptive. But the fact is that this tax avoidance strategy, when employed in a reasonable and non-abusive manner, remains permissible under the current tax law. So, don't hate the player, hate the game.

Continue reading "S CORPORATION COULD MEAN HUGE TAX SAVINGS FOR SELF-EMPLOYED INDIVIDUALS" »

One of the IRS's most commonly invoked arguments in the corporate context is the economic substance doctrine. Under this doctrine, tax benefits are denied if the transactions giving rise to the claimed tax benefits lack "economic substance" apart from tax considerations.

Of course, this begs the question: when does a transaction with favorable tax consequences have "economic substance" apart from the tax benefits?

As every good tax attorney knows, the answer is always a resounding, "it depends."

Over the years, different courts have formulated varying approaches for evaluating the economic substance (or lack thereof) of a transaction. Some courts have adopted a two-prong test requiring corporate taxpayers to establish: (1) economic substance; and (2) a business purpose. See e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th Cir. 1993). Other courts have adopted a disjunctive approach requiring corporate taxpayers to establish either: (1) economic substance; or (2) a business purpose. See e.g., Black & Decker Corp. v. U.S., 436 F.3d 431 (4th Cir. 2006). Still, other courts have considered all relevant factors in evaluating questionable transactions, with economic substance and business purpose constituting non-determinative factors to be considered. See e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d. Cir. 1998); Sacks v. Commissioner, 69 F.3d. 982, 985 (9th Cir. 1995).

In an effort to clarify the law on this point, Congress added Section 7701(o) to the Internal Revenue Code last year. Pursuant to Section 7701(o)(1), a transaction has "economic substance" if: (1) it changes the taxpayer's economic position in a meaningful way (apart from Federal income tax effects); and (2) the taxpayer has a substantial non-tax purpose for entering into the transaction.

Still, this begs the question: what types of non-tax benefits must a corporate taxpayer establish to demonstrate a "meaningful" non-tax change in economic position and what type of purpose must a corporate taxpayer have to establish a "substantial" non-tax purpose?

Continue reading "TECHINCAL COMPLIANCE WITH THE TAX CODE MAY BE INSUFFICIENT IN THE CORPORATE CONTEXT" »