GSS Holdings had claimed a loss of USD 22.54 million which the IRS disallowed. In disallowing the loss, the IRS claimed that the loss was not an ordinary business loss, but was incurred as part of a series of transactions that resulted in the sale of capital assets between related parties. The trial court upheld the IRS’s adjustment and GSS Holdings appealed to the Court of Federal Claims. The Court of Federal Claims applied a combination of substance over form and step transaction doctrines to combine two transactions and dismissed GSS Holdings’ claims on that basis. GSS Holdings then appealed to the US Court of Appeals. Opinion of the Court The Court of Appeals found that the Federal Claims Court had misapplied the step transaction doctrine and remanded the case for reconsideration under the correct legal standard. Excerpt “As part of this examination, the Claims Court must determine the outset of the series of transactions, keeping in mind that the series of transactions should be considered as a whole. Comm’r v. Clark, 489 U.S. 726, 738 (1989); see also True, 190 F.3d at 1177; Brown v. United States, 868 F.2d 859, 862 (6th Cir. 1989). The parties dispute the timeframe for the outset, with GSS advocating for the 2006 and 2007 timeframe when the Aaardvark LAPA and First Loss Note agreement were negotiated and entered, and the government advocating for the 2011 timeframe when the Aaardvark LAPA was renewed6 and exercised and when the First Loss Note Account payment was made to BNS. See Appellant’s Br. 33, 44–45; Appellee’s Br. 30–31. Once the outset’s timeframe has been assessed, the Claims Court must determine the intent from the outset, which is an- other disputed issue between the parties. See Falconwood, 422 F.3d at 1349; Appellant’s Br. 46–48; Appellee’s Br. 30–37. If the Claims Court does conclude that the separate transactions were “really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result,” then the step transaction doctrine applies. See Falconwood, 422 F.3d at 1349 (citation omitted). The Claims Court should conduct this analysis on remand. We are not suggesting any particular outcome; we are simply instructing the Claims Court to apply the correct legal standard. Even if the Claims Court applied an erroneous legal standard, the government contends that the intent was the same regardless of the timeframe, and that the Claims Court agreed. See Appellee’s Br. 37 (first citing Decision at 489 (“A payment from the First Loss Note [A]ccount was always anticipated to be at least a partial offset of losses resulting from the sale of a distressed asset.”); and then citing Decision at 489 n.22 (“The First Loss Note was always intended to absorb the first loss stemming out of a decline in Liberty[] [Street]’s investments.”)); see also Appellee’s Br. 30–34. In other words, the government con- tends that the same outcome would be reached under the correct legal standard. GSS disagrees, contending that the intent differed at various timeframes. See Appellant’s Br. 46–48; Appellant’s Reply Br. 11–15. Since the Claims Court applied an incorrect legal standard, the Claims Court “should make a new determination under the correct standard in the first instance.” Walther, 485 F.3d at 1152 (declining to reach the merits of a similar argument). To the extent any finding of the Claims Court “is derived from the application of an improper legal standard to the facts, it cannot be allowed to stand.” Id. (citations omitted). “In such a circumstance, this court must remand for new factual findings in light of the correct legal standard.” Id. GSS contends that under the correct legal standard, the step transaction doctrine would not operate to collapse the individual steps into a single integrated transaction for tax purposes. See Appellant’s Br. 44–52. In other words, GSS urges this court to reach a determination under the correct legal standard in the first instance. But just as we will not do so at the government’s request, we will not do so at GSS’s request.” Click here for translation ...

An intermediate Japanese holding company in the IBM group acquired from its US parent all of the shares of a Japanese operating company. The Japanese holdings company then sold a portions of shares in the operating company back to the issuing company for the purpose of repatriation of earned profits. These sales resulted in losses in an amount of JPY 400 billion which for tax purposes were offset against the operating company’s taxable income in FY 2002 – 2005. The Japanese tax authorities did not allow deduction of the losses resulted from the sales referring to article 132 of the Corporation Tax Act of Japan (general anti avoidance regulation). The tax authorities found that the reduction of corporation tax due to the tax losses should be disregarded because there were no legitimate reason or business purpose for the transactions. According to the authorities the transactions would not have taken place between independent parties and the primary purpose of the transactions had been tax avoidance. Decision of the Tokyo High Court The Court decided in favour of IBM and annulled the tax assessment. The Court held that the establishment of the intermediate holding company and the following share transfers should not be viewed as one integrated transaction but rather as separate transactions, and that each of these transactions could not be considered lacking economic reality. In 2016 the Supreme Court rejected the tax authorities’ petition for a final appeal. (The Corporation Tax Act of Japan was amended in 2010 and similar tax losses resulting from share repurchases between a Japanese parent and its wholly-owned subsidiary can no longer be claimed.) Click here for English Translation of the Tokyo High Court decision ...

The first rulings where the IRS proposed recharacterizing transactions that could be considered abusive through use of transfer pricing provisions. Judgement of the Supreme Court The court instead applied the general anti-abuse doctrine. “It is earnestly contended on behalf of the taxpayer that, since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected, and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made “in pursuance of a plan of reorganization” [§ 112(g)] of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves, and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” Click here for translation ...