Quatloos! > Tax Scams > Tax Shelters > Intercompany Financing

The Treasury Department and the Internal Revenue Service today issued guidance on certain kinds of abusive tax avoidance transactions in which corporations use partnerships to obtain inappropriate deductions for interest payments to related entities. These transactions are now “listed transactions.” Participants in these transactions must disclose them to the IRS. In addition, promoters of listed transactions must keep lists of investors and, in certain cases, register those transactions with the IRS.

“This is another step in our ongoing efforts to prevent taxpayers, both individual and corporate, from engaging in abusive tax avoidance transactions,” said Acting Assistant Secretary for Tax Policy Gregory F. Jenner. “In the transaction described in the Notice, related corporations provide financing through a partnership in an attempt to achieve a more favorable tax result than if they had done the financing directly. Congress did not intend that partnerships be used to implement tax reduction strategies instead of for legitimate business purposes.”

The transactions described in Notice 2004-31 are structured to avoid rules limiting the deduction of interest on certain debt issued to related persons that are exempt from tax, such as foreign corporations. In these transactions, a foreign corporation invests in the preferred stock of a domestic subsidiary through a partnership. The other partner in the partnership is another domestic subsidiary of the foreign corporation. The second domestic subsidiary argues that it is able to deduct most of the foreign corporation’s return on its investment because the foreign corporation's return is structured as a guaranteed payment by the partnership.

Notice 2004-31 is attached.