A blocker corporation is a type of C
Corporation in the United
States that has
been used by tax exempt individuals to protect their investments from taxation
when they participate in private
equity or with hedge
funds. In addition to tax exempt individuals, foreign investors have
also used blocker corporations.
Most private equity funds and
hedge funds are composed as limited partnerships, or as LLCs (Limited Liability Company) which
for tax purposes is considered a Limited Partnership, unless the fund formally
elects to be taxed as a corporation. This allows the fund itself to avoid
taxation, as each of the individual investors is taxed as a partner with
respect to the share of profits attributable to the partner's personal equity
interest. By comparison, a fund set up as a C Corporation would be subject to
tax for its earnings, and then the limited partners would be subject to tax
when they received their profit in the form of dividends distributed by the
corporation. Thus, the LLC or LP format allows a fund to avoid double taxation.
When there are tax exempt
investors in a fund, they are not subject to US income tax, but are still
required to declare and pay taxes on "Unrelated Business Taxable
Income" or "UBTI".[1] For tax exempt investors, dividends, royalties, rents, capital
gains and interest
income are not
considered UBTI, but any money earned from conduct unrelated to the entity's
tax exempt purpose is considered UBTI.
Foreign investors, similarly, are
not generally subject to U.S. income tax. However, if a foreign investor
conducts a trade or business within the United States, it is required to file a
U.S. tax return and pay taxes on the same terms as a U.S. individual or
corporation. In both cases, because partners are treated as earning their share
of the partnership's income oA blocker
corporation is a type of C
Corporation in the United
States that has
been used by tax exempt individuals to protect their investments from taxation
when they participate in private
equity or with hedge
funds. In addition to tax exempt individuals, foreign investors have
also used blocker corporations.
|
Internal Revenue
Bulletin: 2009-3
|
|
January 21,
2009
|
Transaction of Interest — Subpart F Income Partnership Blocker
Table of Contents
The Internal Revenue
Service (IRS) and the Treasury Department are aware of a type of transaction,
described more fully below, in which a U.S. taxpayer that owns controlled
foreign corporations (CFCs) that hold stock of a lower-tier CFC through a
domestic partnership takes the position that subpart F income of the lower-tier
CFC or an amount determined under section 956(a) of the Internal Revenue Code
(Code) related to holdings of United States property by the lower-tier CFC does
not result in income inclusions under section 951(a) for the U.S. taxpayer. The
IRS and Treasury Department believe this transaction (which includes taking the
position that the U.S. taxpayer has no income inclusion under section 951(a))
has the potential for tax avoidance or evasion, but lack enough information to
determine whether the transaction should be identified specifically as a tax
avoidance transaction. This notice identifies this transaction and
substantially similar transactions as transactions of interest for purposes of
§ 1.6011-4(b)(6) of the Income Tax Regulations and sections 6111 and 6112
of the Code. This notice also alerts persons involved in these transactions to
certain responsibilities that may arise from their involvement with these
transactions.
In a typical transaction, a U.S. taxpayer
(Taxpayer) wholly owns two CFCs, (CFC1 and CFC2). CFC1 and CFC2 are partners in
a domestic partnership (USPartnership). USPartnership owns 100 percent of the
stock of another CFC (CFC3). Some or all of the income of CFC3 is subpart F
income (as defined in section 952). As part of the transaction, Taxpayer takes
the position that the subpart F income of CFC3 is currently included in the
income of USPartnership (which is not subject to U.S. tax) and is not included
in the income of Taxpayer. The result of the claimed tax treatment is that
income that would otherwise be taxable currently to Taxpayer under subpart F of
the Code is not taxable to Taxpayer because of the interposition of a domestic partnership
in the CFC structure. Without the interposition of USPartnership, the section
951(a) inclusion resulting from the subpart F income of CFC3 would be taxable
currently to Taxpayer. In some variations of the transaction, there may be more
than one person that owns the stock of CFC1 and/or CFC2, USPartnership may own
less than all of the stock of CFC3, a domestic trust may be used instead of a
domestic partnership, or the section 951(a) inclusion amount may result from an
amount determined under section 956.
The IRS and Treasury Department are concerned
that taxpayers are taking the position that structures described in this notice
result in no income inclusion to Taxpayer under section 951. Therefore the IRS
and Treasury Department are identifying as transactions of interest such
structures with respect to which the Taxpayer takes the position that there is
no income inclusion to Taxpayer under section 951, as well as substantially
similar transactions. The IRS and Treasury Department believe that the position
there is no income inclusion to Taxpayer under section 951 is contrary to the
purpose and intent of the provisions of subpart F of the Code.
Transactions that are the same as, or
substantially similar to, the transactions described in this notice are
identified as transactions of interest for purposes of § 1.6011-4(b)(6)
and sections 6111 and 6112 effective December 29, 2008, the date this notice
was released to the public. Persons entering into these transactions on or
after November 2, 2006, must disclose the transaction as described in 1.6011-4.
Material advisors who make a tax statement on or after November 2, 2006, with
respect to transactions entered into on or after November 2, 2006, have
disclosure and list maintenance obligations under sections 6111 and 6112. See
§ 1.6011-4(h) and §§ 301.6111-3(i) and 301.6112-1(g) of the Procedure
and Administration Regulations.
Independent of their classification as
transactions of interest, transactions that are the same as, or substantially
similar to, the transaction described in this notice may already be subject to
the requirements of sections 6011, 6111, or 6112, or the regulations
thereunder. When the IRS and Treasury Department have gathered enough information
to make an informed decision as to whether these transactions are a tax
avoidance type of transaction, the IRS and Treasury Department may take one or
more administrative actions, including removing the transactions from the
transactions of interest category in published guidance, designating the
transactions as a listed transaction, or providing a new category of reportable
transactions. In the interim, in appropriate situations, the IRS may challenge
the taxpayer’s position taken as part of these transactions under subpart F,
subchapter K, or other provisions of the Code or under judicial doctrines such
as sham transaction, substance over form, and economic substance.
Under § 1.6011-4(c)(3)(i)(E), Taxpayer and
USPartnership are participants in this transaction for each year in which their
respective returns reflect tax consequences or a tax strategy described in this
notice.
See § 1.6011-4(e) and § 301.6111-3(e).
The threshold amounts are the same as those for
listed transactions. See § 301.6111-3(b)(3)(i)(B).
Persons required to disclose these transactions
under § 1.6011-4 who fail to do so may be subject to the penalty under
section 6707A. Persons required to disclose these transactions under section
6111 who fail to do so may be subject to the penalty under section 6707(a).
Persons required to maintain lists of advisees under section 6112 who fail to
do so (or who fail to provide such lists when requested by the Service) may be
subject to the penalty under section 6708(a). In addition, the Service may
impose other penalties on parties involved in these transactions or
substantially similar transactions, including the accuracy-related penalty
under section 6662 or section 6662A.
The principal author of this notice is John H.
Seibert of the Office of Associate Chief Counsel (International). For further
information regarding this notice, contact Mr. Seibert at (202) 622-3860 (not a
toll-free call).
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
No comments:
Post a Comment