tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
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SPECIAL REPORTS<br />
The <strong>tax</strong>payer asserts that SPV’s two business activities<br />
were factoring accounts receivable and lending<br />
money. The simultaneous lending and alleged purchase<br />
activities essentially operated with monies contributed<br />
by the parent to SPV as a circular cash flow, because<br />
those funds were immediately retransferred to the parent’s<br />
group as loan proceeds and/or purchase monies.<br />
The simultaneous lending and alleged purchase activities<br />
also operated with respect to monies contributed<br />
by the bank to SPV as loan proceeds (some amount <strong>of</strong><br />
which was purchase money to buy the parent’s accounts<br />
receivable). SPV (the purported factor) had<br />
hired the parent’s group to service and collect on the<br />
accounts receivable that the parent’s group allegedly<br />
sold to SPV.<br />
The CCA concludes that SPV did not in effect or in<br />
substance factor the parent’s accounts receivable. SPV<br />
never owned the accounts receivable. At no time did<br />
SPV ever physically possess the accounts receivables<br />
files or any <strong>of</strong> the funds collected on the accounts receivable.<br />
The funds essentially stayed with the parent<br />
group, and SPV appears to have received only a security<br />
interest in the accounts receivable and the collections<br />
thereon. SPV was not given a present possessory<br />
interest on either the accounts receivable or the funds<br />
collected on those accounts receivable.<br />
The steps involved in the transactions, when taken<br />
together, the CCA states, closely resemble, and have<br />
many <strong>of</strong> the same characteristics as a revolving line <strong>of</strong><br />
credit from the bank to the parent, with the parent’s<br />
accounts receivable being used as collateral for the<br />
loan. The parent and its subsidiaries maintained lockboxes<br />
in their own names into which they put the<br />
monies collected in servicing the accounts receivable<br />
they allegedly sold to SPV. SPV would acquire dominion<br />
and control over the contents <strong>of</strong> those boxes only<br />
on the occurrence <strong>of</strong> a termination event.<br />
The purported factoring transactions permitted the<br />
parent to deduct on its consolidated federal income <strong>tax</strong><br />
returns both the losses in the aggregate amount <strong>of</strong> the<br />
discounts arising from the sale <strong>of</strong> the accounts receivable<br />
and the interest payment by the parent’s group<br />
made on the loans received from SPV. No U.S. income<br />
<strong>tax</strong> was paid on the interest or discount income earned<br />
by SPV. SPV did not treat its discount and interest income<br />
as attributable to a U.S. permanent establishment,<br />
nor did the parent withhold 30 percent U.S. <strong>tax</strong><br />
on the interest and discount paid to SPV. Further, the<br />
parent did not treat SPV as a controlled foreign corporation.<br />
The Service held that when viewed in substance, the<br />
series <strong>of</strong> transactions constituted solely lending activities,<br />
that is, monies loaned by the bank to SPV for the<br />
purpose <strong>of</strong> having SPV relend those same funds to the<br />
parent. SPV’s main role in the series <strong>of</strong> transactions<br />
was merely that <strong>of</strong> a lender <strong>of</strong> monies to the parent, or<br />
a conduit through which the bank passed the loan proceeds<br />
to the parent. The Service may alternatively ar-<br />
gue that either the loans were between SPV and the<br />
parent or that they were between the bank and the parent,<br />
with SPV acting merely as a conduit through<br />
which the loan proceeds passed. Either way, the parent<br />
is not entitled to deduct the purported losses arising<br />
from the factoring transactions, but should be allowed<br />
additional interest deductions resulting from the new<br />
recharacterization <strong>of</strong> these items.<br />
As an alternative position to recasting the transaction<br />
as a direct loan from the bank to SPV, the CCA<br />
recommends that the Service assert that the bank’s interest<br />
in SPV is strictly a debt interest with an equity<br />
kicker, rather than a stock interest in SPV. In that case,<br />
the parent would be the sole shareholder <strong>of</strong> SPV,<br />
which would be a CFC. The CCA states that recharacterizing<br />
the Class A securities as debt instruments<br />
would effectively deny the parent’s deduction for the<br />
factoring discount through the use <strong>of</strong> section 267.<br />
The CCA states that recasting the transaction as<br />
merely a loan between the bank and the parent with<br />
SPV’s role as that <strong>of</strong> a conduit provides the correct<br />
and most satisfactory resolution <strong>of</strong> the matter. Recharacterizing<br />
the transaction in this manner more accurately<br />
captures the true substance <strong>of</strong> the transaction. It<br />
also would serve to eliminate any section 267 issue,<br />
because under this recast, no sale <strong>of</strong> accounts receivable<br />
between the parent and SPV would be considered<br />
to have taken place, and, therefore, the parent would<br />
not have realized any loss on a purported sale <strong>of</strong> the<br />
receivables.<br />
Publicly Traded Partnerships<br />
LTR 200852005 described X, which was originally<br />
organized as a foreign entity that constitutes a per se<br />
corporation for U.S. <strong>tax</strong> purposes. (For LTR<br />
200852005, see Doc 2008-27159 or 2008 WTD 251-17.)<br />
A acquired all <strong>of</strong> the outstanding ordinary shares <strong>of</strong><br />
X. X then reregistered as an eligible entity under the<br />
laws <strong>of</strong> that foreign country and filed a check-the-box<br />
election to be treated as a partnership for U.S. <strong>tax</strong> purposes.<br />
In addition to its ordinary shares, X has outstanding<br />
B shares that are nonvoting, noncumulative preference<br />
shares that are widely held. The B shares previously<br />
were listed and traded on a stock exchange, although<br />
they since have been delisted. Holders <strong>of</strong> B shares have<br />
the right to sell their shares to X on a certain date each<br />
year. Also, X implemented an <strong>of</strong>f-market repurchase<br />
program under which the owners <strong>of</strong> the B shares may<br />
sell their shares to X twice per month. X has the right<br />
to repurchase all outstanding B shares without the consent<br />
<strong>of</strong> the B shareholders at a certain time for a specified<br />
price. X intends to exercise its right to redeem all<br />
<strong>of</strong> the B shares at that time.<br />
The <strong>tax</strong>payer sought and obtained a ruling that X is<br />
not a publicly traded partnership under section 7704(b).<br />
Section 7704(b) provides that the term ‘‘publicly traded<br />
partnership’’ means any partnership if: (1) interests in<br />
472 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL<br />
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.