Friday, November 10, 2017

Hewlett-Packard v. CIR (9th Cir. - Nov. 9, 2017)

It's a (judicial) holiday today, so no opinions.  But lest you think that there's not a lot of money to be made by circumventing your tax obligations, read this one from yesterday:

"Despite the boundless ingenuity of financial engineering, tax law insists on pretending that an instrument is either debt or equity, then treating it accordingly—with sharply different consequences for the taxpayer. A corporation’s interest payments on debt are deductible, for example, while the dividends it pays to equity holders are not. This black-or-white tax treatment gives taxpayers an incentive to conjure up complex instruments that give them the perfect blend of economic and tax benefits. Taxpayer gamesmanship, in turn, puts courts in the ungainly position of casting about for bright lines along an exceedingly cloudy spectrum. . . .

Here, Hewlett-Packard (“HP”) wants its investment in a foreign entity to be treated as equity, so that HP will be entitled to the foreign tax credits that the entity—a so-called “FTC generator”—produces. The United States taxes the worldwide income of domestic corporations, but gives them a credit against their domestic taxes for foreign taxes they (or a subsidiary) pay. FTC generators are entities that churn out foreign credits for U.S. multinationals, which companies typically desire if they pay foreign taxes at a lower average rate than domestic taxes. . . . No small sum is on the line: The transaction here saved HP (and lost Treasury) millions of dollars. . . .

The tax borscht at issue was cooked up in the 1990s by AIG Financial Products. The arrangement took advantage of the fact that contingent interest—interest payments that depend on future developments, and may never be paid at all—was immediately taxable in the Netherlands but not in the United States. This allowed AIG to create a Dutch company—called Foppingadreef Investments, or “FOP”—that would (and could) do little else than purchase contingent interest notes."

Taxes for the "little people" are fairly straightforward, and you basically have to pay.  Taxes for people who can afford really good tax professionals; not so much.