IRS: Barnes Group’s “Loan” Transaction Was Actually a Dividend to the Parent – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on June 10, 2014

At the US Court of Appeals for the Second Circuit, the Internal Revenue Service (IRS) is trying to make the case that the US Tax Court ruled correctly when it determined that loans from a subsidiary of Barnes Group Inc. to the parent company were, in fact, dividends from another subsidiary in Singapore. Therefore, the amount should have been included in Barnes’s income and, as it was not, Barnes should be subject to the 20% penalty for substantial understatement of tax under Section 6662(b)(2) and (d).

Barnes is a manufacturer of precision mechanical parts, industrial supplies, and aircraft components. In 1998, the company planned to expand through acquisition, leading to debts by the US parent in excess of 7%. At the same time, the company’s subsidiary in Singapore had excess cash earning approximately 3%.

Barnes then formed two new subsidiaries: one in Bermuda and one in Delaware. The parent company had the Singapore subsidiary transfer cash to the Bermuda subsidiary in exchange for stock, and then had the Bermuda subsidiary carry out the same transaction with the Delaware subsidiary. The Delaware subsidiary then provided this cash in the form of a loan to the parent company, Barnes, in two separate transactions during 2000-2001.

In its defense of the US Tax Court ruling, the IRS described these transactions as “a series of prearranged steps, including the creation of new foreign and domestic subsidiaries that served no business purpose of Barnes but, instead, were intended to disguise the true nature of the transaction, i.e. a repatriation by Barnes” of the Singapore subsidiary’s excess cash. The IRS justified this assertion by pointing out that Barnes failed to prove that it paid any of the interest on the loans, which amounted to $60 million by 2010.

Furthermore, the IRS argued that even if the transfers to Barnes constituted loans as opposed to dividends, the Singapore subsidiary would have been the true lender, not the Delaware subsidiary. In this case, the transfers would be taxable under Sections 951(a)(1)(B) and 956.

Although Barnes pointed to an opinion letter drafted by PricewaterhouseCoopers, which conceived of and promoted the transaction to Barnes, the IRS said relying on such materials was not reasonable.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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