Hewlett-Packard Co. v. CIR, No. 14-73047 (9th Cir. 2017)
Annotate this CaseThe Ninth Circuit affirmed the tax court's decision on a petition for redetermination of federal income tax deficiencies that turned on whether an investment by HP could be treated as equity for which HP could claim foreign tax credits. In this case, HP wanted its investment in a foreign entity to be treated as equity, so that HP would be entitled to the foreign tax credits that the entity—a so-called "FTC generator"—produces. FTC generators are entities that churn out foreign credits for U.S. multinationals, which companies typically desire if they pay foreign taxes at a lower average rate than domestic taxes. The panel held that its test was "primarily directed" at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like, and the tax court did not err in finding that HP's investment was best characterized as a debt. The panel also held that the tax court did not err in considering HP's put, purchased from ABN, as part of the "overall transaction" in characterizing HP's interest in the entity as debt or equity. Finally, the tax court's judgment—that HP's purported capital loss was really a fee paid for a tax shelter—was certainly based on a permissible view of the evidence.
Court Description: Tax. The panel affirmed the Tax Court’s decision on a petition for redetermination of federal income tax deficiencies that turned on whether an investment by taxpayer Hewlett- Packard (HP) could be treated as equity for which HP could claim foreign tax credits. HP bought preferred stock in Foppingadreef Investments (FOP), a Dutch company. FOP bought contingent interest notes, from which FOP’s preferred stock received dividends that HP claimed as foreign tax credits. HP claimed millions in foreign tax credits between 1997 and 2003, then exercised its option to sell its preferred shares for a capital loss of more than $16 million. The Tax Court characterized the transaction as debt, thus upholding the deficiency for the credits. Acknowledging a circuit split over whether the debt/equity question is one of law, fact or a mix of the two, the panel explained that the best way to read circuit precedent HEWLETT-PACKARD V. CIR 3 is that the test is “primarily directed” at determining whether the parties subjectively intended to craft an instrument that is more debt-like or equity-like, taking into account eleven factors set forth in A.R. Lantz Co. v. United States, 424 F.2d 1330, 1333 (9th Cir. 1970). The panel concluded that the Tax Court didn’t err in finding that HP’s investment is best characterized as a debt. The panel also upheld the Tax Court’s determination that HP’s purported capital loss, which can be deducted, was really a fee paid for a tax shelter, which cannot be deducted.
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