Listed Transaction #29 (Abusive Foreign Tax Credit Transactions)
Abusive Foreign Tax Credit Transactions
IRS Notice 2004-20
In IRS Notice 2004-20, the IRS states that it believes that this transaction is intended to shift the foreign tax credits to MIDCO through the purported acquisition of assets that, when sold pursuant to a prearranged plan, triggers a foreign tax on built-in gain that is not subject to US tax. The IRS may challenge the purported tax results to MIDCO under the step transaction doctrine or the substance over form doctrine. Citing to IRS v. Court Holding Co., 324 U.S. 331 (1945), the IRS noted that "a sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title." Thus, the IRS believes that MIDCO would not be treated for US tax purposes as having purchased the stock of the Target foreign corporation. The IRS may also challenge the transaction under the provisions of Section 269 (applicable to acquisitions made with the principal purpose of evading or avoiding income tax, or by applying agency principles to disregard MICDO's ownership of Target corporation).
If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties' participation in any such "listed transaction" on IRS Form 8886. For more information about Federal law requirements, please contact us