Tax Court: HP’s Tax Credit Generator Denied on Debt/Equity Grounds

The Tax Court, in a memorandum opinion by Judge Goeke, characterized Hewlett-Packard’s investment in a foreign corporation as a loan rather than equity for federal income tax purposes, thereby denying HP the benefit of foreign tax credits generated by the foreign entity. Though the court found for the government, it declined to consider the government’s arguments that the economic substance doctrine or the step-transaction doctrine applied and rested its decision solely on a debt/equity analysis.

The court adopted the Ninth Circuit’s 11 factor debt/equity analysis to determine the merits of the debt according to the Golsen rule, which requires the Tax Court to follow the law of the federal circuit where an appeal would lie. The Ninth Circuit analysis is notable because Hewlett-Packard has a pending suit in a U.S. District Court in the Ninth Circuit seeking a refund of foreign tax credits generated in other tax years attributable to the same transaction in question in the Tax Court case.

To the best of our knowledge, this is the first court decision to address a Tax Credit Generator transaction.

Read the entire opinion here:
Hewlett-Packard Company v. Commissioner, T.C. Memo 2012-135

Tax Court: 6 Year Statute of Limitations Still Does Not Apply to Understated Basis Cases

The U.S. Tax Court in a reviewed opinion, accompanied by two concurrences, rejects the applicability of final Treas. Reg. Sec. 301.6229(c)(2)-1(b) and follows its opinions in Intermountain Insurance Service of Vail v. Commissioner and Bakersfield Energy Partners, LP v. Commissioner to hold that the 6 year statute of limitations does not apply to an understatement of income. The majority opinion, sua sponte, considered the final regulations in light of the U.S. Supreme Court’s opinion in Mayo Foundation v. United States.

Read the Tax Court’s opinion here:
Carpenter Family Investments, LLC v. Commissioner, 136 T.C. No. 17 (2011)

9th Circuit: Cost Basis Allowed in Intangible Regulatory Rights

The Ninth Circuit Court of Appeals reversed the District Court for the Western District of Washington and ruled for the taxpayers. The Court of Appeals held that banks who received regulatory rights when they took over failed saving and loans at the government’s direction where entitled to cost basis in the acquired intangible assets.

Read the opinion here:
Washington Mutual v. U.S., Docket 09-36109 (9th Cir. March 3, 2011)

Read the District Court’s opinion here:
Washington Mutual v. U.S., Docket CO6-1550-JCC (W.D. Wash 2008)

Read more from the team that litigated the case for the taxpayers at Tax Appellate Blog.

4th Circuit: 6 Year Statute of Limitation Does Not Apply to Overstatement of Basis

The Fourth Circuit Court of Appeals joins two other circuits holding that the 6 year statute of limitations does not apply to an overstatement of basis.

Read the opinion here:
Home Concrete & Supply v. United States, No. 09-2353 (4th Cir. February 7, 2011)