Other Publications



Proposed Regulations on Nondevice & Active Business Requirements Under Code §355

Many jurisdictions have special provisions that apply when two businesses owned by a corporation or corporate group are divided and shares of group members are distributed to shareholders.  Sometimes referred to as a “demerger” in Europe and other times as a “butterfly” in Canada, in the U.S. these transactions are called Code §355 spin-offs, split-ups, and split-offs.  In the U.S., several hurdles must be overcome for the transaction to be free of tax at the level of the company making the distribution and the shareholder receiving the distribution.  The I.R.S. recently issued proposed regulations clarifying the application of two of these hurdles: the transaction must not be a “device” to distribute earnings, and companies conducting two or more active business must be involved.  The proposed regulations were motivated by a proposal by Yahoo! to distribute shares of Alibaba.  Rusudan Shervashidze and Andrew P. Mitchel analyze the proposed regulations and how they will apply to circumstances involving a spin-off of a corporation operating a small business but having a large investment asset.

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Required Taxable Inclusions from the Loss of §1248 Shareholder Status

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review the rules embodied in Code §1248, a provision that converts capital gain from the sale of shares in a C.F.C. into dividend income for certain shareholders.  Although for individuals, the tax rates for qualified dividends and gains are the same, the source of the income is changed in a way that may allow a benefit for unused foreign taxes.  If the dividend is not qualified, tax is imposed at a much greater rate.  For corporations that are shareholders, dividend income may bring along indirect foreign tax credits.  Code §1248 also defines the extent of a toll charge if a foreign corporation undergoes a tax-free reorganization that eliminates C.F.C. status.

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Inbound §332 Liquidations & Inbound Asset Reorganization

Rusudan Shervashidze and Andrew P. Mitchel continue their examination of U.S. tax rules applicable to cross-border reorganizations, formations, and liquidations.  This month, they review rules applicable to the liquidation of a wholly-owned domestic subsidiary corporation into its foreign parent corporation. Also discussed is the toll charge imposed on asset reorganizations that result in the domestication of a foreign subsidiary.

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Outbound Transfers of Stock in Code §351 “Tax-Free” Exchanges

The U.S. has extensive rules regarding tax-free reorganizations in a domestic context. When the transaction involves cross-border exchanges, these rules are supplemented by Code §367(a). Rusudan Shervashidze and Andrew P. Mitchel explain how the rules work when shares of a U.S. corporation are transferred to a foreign corporation in a §351 exchange.

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Tax 101: Corporate Reorganizations Part II – Types C, D, E, & F

Continuing their series on the basic rules that must be met for a transaction to be treated as tax-free reorganization under U.S. tax law, Rusudan Shervashidze and Andrew P. Mitchel discuss practical mergers, acquisitive D-reorganizations, recapitalizations, and changes to the identity, form, or place of organization of a single corporation.

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Tax 101: Corporate Reorganizations Part I – Types A & B

Tax 101 is back, this time addressing the basic concepts of tax-free A- and B-reorganizations. The first relates to statutory mergers and the latter relates to share-for-share exchanges. Rusudan Shervashidze and Andrew P. Mitchel explain the basic concepts for non-tax savvy readers.

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I.R.S. Argues Mylan's Contract is a License of Drug Rights – Not a Sale

The question of the proper treatment of a contract transferring exclusive rights to the use of a patent – as a sale or a license – is one that has been addressed many times in U.S. jurisprudence.  It has recently popped up again in a case before the U.S. Tax Court involving the generic pharmaceutical giant Mylan Inc., a company that has been the subject of much negative publicity arising from its inversion and subsequent re-immersion as a U.S. domestic company. In September, the I.R.S. filed a memorandum in support of a motion for summary judgment. We explain the basis for the I.R.S. position and comment on its merits.

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Albermarle: Refund Claims Relating to Foreign Tax Credits

We analyze a recent U.S. Court of Appeals case, Albemarle Corp. v. United States, that affirmed certain refund claims were barred by the statute of limitations. The case involved withholding taxes on payments of interest to Albemarle Corp. from its Belgian subsidiary during the years 1997 to 2001. The court held that the taxpayer’s claims for refunds, attributable to foreign tax credits, were time-barred in certain years.

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I.R.S. Proposed New Partnership Rules Under Code §956

The I.R.S. recently released temporary and proposed regulations to limit the use of foreign partnerships to avoid income inclusions under Code §956. The Temporary Regulations are more limited in their scope while the Proposed Regulations are quite broad. If finalized in the current form, the Proposed Regulations would cause most C.F.C. loans to partnerships with related U.S. partners to be investments in U.S. property.

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Insights Vol. 2 No. 7: Updates & Other Tidbits

As Democrats and Republicans attempt to revamp the U.S. tax system, there is renewed discussion of lowering the corporate tax rate. In other national news, U.S. expatriation numbers are down in Q2 of 2015, the I.R.S. Transfer Pricing Operations Unit is officially here to stay, and three more banks agree to disclose activities to D.O.J.

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I.R.S. Plan to Reject Foreign Taxpayers' Refunds Criticized by I.R.S. Advisory Committee

The I.R.S. proposal to deny refunds of excess withholding tax in cases were the withheld tax is stolen by the withholding agent was harshly criticized by the Information Reporting Program Advisory Committee. It seems the I.R.S. does not have the authority to pass the loss onto the party that suffered withholding. Elizabeth V. Zanet and Andrew P. Mitchel discuss the issue in detail.

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Artificial Loan Restructurings

The I.R.S. has discovered that related taxpayers have been renegotiating existing intercompany loans to allow operating companies within the group to pay a higher rate of interest to a related party benefitting from favorable tax attributes without violating Code §482 principles. Andrew P. Mitchel and Sheryl Shah explain how the I.R.S. is taking aim at this new approach to self-help.

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Proposed P.F.I.C. Exception Regulations Detrimental to Foreign Insurers

In April, the I.R.S. proposed regulations (REG-108214-15) that provide exceptions for P.F.I.C. treatment for offshore insurance companies, unless they are formed by hedge funds intending to defer or reduce tax. Andrew P. Mitchel and Christine Long look at comments of industry representatives. Many professionals deem these regulations too restrictive, needlessly subjecting legitimate insurance businesses to the harsh tax treatment of P.F.I.C.’s.

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Eaton Corp.'s Transfer Pricing Trial Begins August 24

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The U.S. Tax Court’s transfer pricing trial of Eaton Corp. v. Comm’r1 will begin on August 24, 2015, despite attempts by the I.R.S. to further delay the trial until 2016. The controversy between the parties began in 2011, when the I.R.S. used its discretionary power to cancel its advance pricing agreements2 with Eaton Corp. and issued a notice of deficiency. Eaton Corp. filed a petition in 2012 challenging the I.R.S. cancellations and claiming that the agreements should be upheld on the basis of contract principles. The outcome of the trial could have a substantial impact on the I.R.S. Advance Pricing Agreement Program and impact the finality of these agreements with other taxpayers.

The trial was originally scheduled to begin August 5, but the I.R.S. filed a motion to delay the trial for five months. In response to the motion, Judge Kathleen Kerrigan ordered a 19-day continuance. The I.R.S. filed another motion to reconsider the five-month delay, which Judge Kerrigan denied. The I.R.S. argued that Eaton Corp. has failed to cooperate during the discovery process and that it requires additional time to prepare for trial in light of new developments. Judge Kerrigan denied a further delay of the trial because she doubts that the hostile relationship between the parties will improve with additional time.

“Helen of Troy” Inversions Continue

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By Rusudan Shervashidze and Andrew P. Mitchel

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The Joint Committee Report discovers that a better tax result is obtained when foreign low-tax profits are removed from the U.S. tax stream, leaving more for shareholders and executives. Is it an inversion or merely self-help? Andrew P. Mitchel and Rusudan Shervashidze explain.  See more →

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Competitiveness of the U.S. Tax System

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By Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah

This month, our team delves into the Joint Committee Report addressing international tax reform in a series of articles. The report compares the U.S. tax system with the systems of other countries. Stanley C. Ruchelman, Andrew P. Mitchel, and Sheryl Shah explain what the J.C.T. staff believes. It is not pretty.  See more →

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Corporate Matters: Partnerships

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In previous issues, we discussed limited liability companies and the various benefits of using such entities, including pass-through taxation, asset protection, ease of formation and flexibility. There are partnerships that can be used to achieve the same results that may be of particular interest to individuals from jurisdictions where the limited liability company is not recognized to the same extent as it is in the United States. These are “Limited Partnerships,” “Limited Liability Partnerships” and “Limited Liability Limited Partnerships.” We thought it may be helpful to outline the differences between these three types of partnerships. Research should be conducted on a state-by-state basis depending on the jurisdiction one is interested in – the following discussion focusses on Delaware.


A Limited Partnership is a partnership where one or more of the owners are general partners and one or more of the owners are limited partners. The general partners have unlimited liability and are liable for all of the partnership’s debts and obligations. The limited partners have limited liability – limited to the amount of capital they have invested in the partnership. General partners control the partnership and are responsible for its operation. Limited partners have no say in the operation of the partnership and are subject to losing liability protection if they are found to be participating in the management of the partnership. The Delaware Revised Uniform Limited Partnership Act (“DRLPA”) provides that “a limited partner is not liable for the obligations of a limited partnership unless he or she is also a general partner or, in addition to the exercise of the rights and power of a limited partner, he or she participates in the control of the business.”


A Limited Liability Partnership is a general partnership for which an election has been made to obtain limited liability for all of the general partners. Unlike a Limited Partnership, in a Limited Liability Partnership there are no limited partners and all partners can participate in the management of the partnership. As a general rule, the partners of a Delaware general partnership are liable for all of the obligations of the partnership.

Major U.S. Drug Company Avoids Billions in Taxes on $1,000 Pill

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Gilead Sciences Inc. (“Gilead”) has developed one of the most expensive drugs available and is avoiding billions of dollars in U.S. taxes by holding its profits outside of the U.S.

The U.S. company has produced a hepatitis C treatment that costs $1,000 per pill. The treatment, which consists of a 12-week regime of its hit drug, Sovaldi, and another pill called Harvoni, costs $94,500 and has alleviated the hepatitis infection and successfully cured most patients of hepatitis C. Since receiving approval for Sovaldi from the Food and Drug Administration in 2013, the profits poured in for Gilead.

I.R.S. Defines Measure for Tax Rate Disparity Test

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In order to reduce its overall foreign tax rate, a company may attempt to separate its foreign manufacturing from its foreign sales operations. If a foreign manufacturing entity sells products at a low margin to a related foreign sales entity in a lowtax jurisdiction, less foreign taxes are paid than if the foreign manufacturing entity sold the products directly to customers. This type of transaction would generally trigger foreign base company sales income (“F.B.C.S.I.”) for the sales entity, while the manufacturing entity could rely on the exception whereby income produced by certain manufacturing activities is not included in F.B.C.S.I. (the “Manufacturing Exception”).

Nice Work If You Can Get It: A New Yorker's Guide to Change of Domicile

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New York State has been known to question individuals who leave the state, easily identifiable as prior New York residents who file Form IT-203, Nonresident and PartYear Resident Income Tax Returns. Often, the New York State Division of Taxation (the “Division of Tax”) will argue that the taxpayer has not established sufficient evidence to relinquish New York domicile. New York places a high standard on redomiciliation: “The taxpayer must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct,” and it is always challenging for the taxpayer to show subjective intent. Therefore, it was welcome news when Judge Herbert M. Friedman Jr., an Administrative Law Judge, in Albany, New York recently ruled in favor of the taxpayer Irenee D. May.


Mr. May moved to New York State and acquired a home in Harrison, New York (the “Harrison House”), where he resided with his wife and two children. He worked for JP Morgan in New York City for almost 20 years. Mr. May was terminated from his job effective January 2005. Shortly after, Mr. May obtained a position in London, working for the Royal Bank of Scotland. Mr. and Mrs. May made plans for the family to move to London with their children. They rented an apartment in London for the whole family, including their nanny. The lease was for one year; the eventual goal of the family was to sell Harrison House and purchase a home in London.

Subsequently, the children were not accepted to the desired London schools; therefore, Mrs. May returned with the children to Harrison allowing them to continue attending their previous school in Greenwich, C.T. Mr. May’s daughter briefly attended school in London but later returned to Harrison to live with her mother and brother.