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Financial Products and Securities

Global Banks Being Audited

All global banks currently being audited by the IRS, which have engaged in cross-border withholding planning for clients, should take careful notice of AM 2012-009.

This GLAM explains to IRS LB&I how to assess foreign affiliates of domestic banks that did not withhold tax on foreign stock borrowing and back-to-back swaps, in reliance on Notice 97-66. The basic advice is to assert the economic substance doctrine. Fortunately, the advice applies only to transactions prior to the partial codification of the doctrine in 2010, which happened to coincide with legislation fixing the Notice 97-66 problem.

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Closing a Prepaid Forward with a Short Sale

TAM 201214021 appears to reconsider an issue addressed in CCA 201104031, issued about a year earlier. Both involved versions of a combination of a type of forward contract with the settling of the contract by physical delivery of borrowed shares—that is, a short sale. Both conclude that the value of the forward at the time of delivery of the borrowed shares should be the amount of gain recognized by the forward seller. The TAM is better reasoned than the CCA, but still just announces a conclusion without any on point authority.

The CCA’s facts were like the simplified Example 1, below. The CCA is discussed in Cummings, “Variable Prepaid Forward or Short Against the Box or Both?” 38 DTR J-1 (2/25/2011).

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Section 305(b)(2) Warrants

LTR 201213011 rules that a domestic corporation can generate a section 301 distribution to its shareholder(s), possibly for the purpose of creating capital gain, possibly to allow use of an expiring capital loss of the shareholder. Sec. 1212(a). The ruling is unusual both for its brevity and for dealing with section 305, which does not attract many letter rulings.

Facts. Taxpayer had outstanding common stock and at least two and possibly three classes of preferred stock: (1) cumulative preferred stock with dividends in arrears, (2) preferred stock convertible into common, and (3) other preferred stock. Taxpayer capitalized the dividends in arrears into some form of stock, which Reg. secs. 1.368-2(e)(5) and 1.305-7(c)(1)(ii) treat under section 305(c) as a deemed distribution to which sections 305(b)(4) and 301 apply. Then taxpayer issued common in exchange for some of the convertible preferred and also for other preferred that evidently was not convertible. Then taxpayer issued warrants to buy more common stock to all of its common shareholders as of the record date.

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Anschutz Company

Just before New Year’s Eve 2011 the Tenth Circuit affirmed the Tax Court’s ruling against the taxpayer Anschutz Company in a case involving a variable prepaid forward contract. Anschutz Co. v. CIR (10th Cir. 2011). The ruling required the taxpayer to recognize immediately the gain on the stock to be sold under the prepaid forward, rather than postponing gain recognition to the future closing of the sale. The court’s reasoning reflected an unfortunate tendency of courts to default to a “benefits and burdens” analysis of ownership of property rather than grappling with the details of the transactions and the code sections at issue.

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LB&I Directive Softens Economic Substance Doctrine

The new LB&I Directive on the economic subject doctrine (ESD) (dated July 15, 2011) probably could not be much better for taxpayers.

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Chevron Deference and the Salman Ranch

Salman Ranch LLC (partnership) won a refund action for the 1999 year on a Son of Boss transaction in which an allegedly overstated basis facilitated a huge loss. Salman Ranch II, 573 F. 3d 1362 (Fed. Cir. 2009).

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