Business, Investment & Transactional Tax

Both operating businesses and investment funds need to design their structure, operations and acquisitions and divestitures of assets with an eye to U.S. federal, state and local tax consequences. Whether these tax consequences are the principal focus of a transaction or an auxiliary concern, all parties need to appreciate them before proceeding.

Caplin & Drysdale advises clients on the most tax efficient means of achieving their goals taking into account the relevant operational, financial, accounting and regulatory priorities and constraints. When transactions or investors cross international borders, Caplin & Drysdale brings to bear its considerable experience with U.S. tax treaties and the U.S. taxation of foreign investors and investments and its extensive network of relationships with tax advisors throughout the world.

The choice of legal entity and the manner of its capitalization must be made with an eye to the tax status and future plans of its owners.  In cross-border situations, hybrid entities -- treated differently in different jurisdictions -- may be appropriate. Caplin & Drysdale has extensive experience with these issues in a variety of circumstances.

Our experience with tax-free corporate reorganizations, taxable acquisitions, like kind exchanges, installment sales, debt restructurings and the issuance and holding of various financial products is both broad and deep. We assist fund management companies in structuring their operations and help them address complexities that arise when these entities operate in multiple jurisdictions. We have extensive experience in assisting fund management companies when partners join and leave and in planning for generational shifts. We have structured hedge funds, private equity funds, venture capital funds and real estate funds and have helped them assess the tax consequences of buying, holding and selling their investments in financial instruments, portfolio companies and other assets. We have particular experience in the application of U.S. tax treaties to these situations.

More so than in many other jurisdictions, clear and contemporaneous documentation is crucial as it relates to U.S. tax matters. Clients must know the tax consequences from the outset, not discover them when the year-end accounting is done or tax returns prepared. Even standard organizational documents can present traps for the unwary. Amorphous doctrines such as "substance over form" and “economic substance,” as well as a variety of statutory and regulatory anti-abuse rules add further complications. Transactions and legal entities may be characterized differently for tax purposes than under non-tax law or in other jurisdictions. 

Negotiating with partners and counterparties is often a matter of separating the merely important from the critically important, and being able to look around corners to see what construction not only the other parties but the tax authorities might be inclined to put on the transaction in the future. Caplin & Drysdale can both participate in the drafting and negotiation of such documents and provide a second review when needed with respect to entity formation, investment, acquisition, sale and financing documents.

Representative Engagements

• When the founding partner of a fund management company with offices in several countries was ready to retire, Caplin & Drysdale attorneys represented the next generation of management in negotiating the recapitalization of the company.

• When a hedge fund executive with a complex, multi-jurisdictional tax profile started a new hedge fund and management company, Caplin & Drysdale attorneys served as the principal advisor to the project, coordinating the tax planning, legal structuring, transfer pricing and documentation efforts of legal and accounting professionals in multiple jurisdictions.

• When a family owned manufacturing company went through successive leveraged buyouts, Caplin & Drysdale lawyers structured the transactions and assisted the company in establishing its post-transactions tax accounting records in compliance with the partnership disguised sale rules.

• When a boutique investment banking partnership with worldwide operations admitted non-U.S. persons to the partnership, Caplin & Drysdale lawyers restructured the entities to create a tax efficient structure for the new partners.

• When a multinational company underwent a leveraged buyout, Caplin & Drysdale attorneys structured the financing to minimize the consequences of the controlled foreign corporation rules.

When a multinational corporation was concerned that financing transactions contemplated by its European affiliates could unnecessarily create "subpart F" income, Caplin & Drysdale worked with foreign advisors on a restructuring that resulted in the participants becoming a single taxpayer for U.S. tax purposes, eliminating the potential concern.

Caplin & Drysdale advises a wide range of businesses, however structured, on the taxation of their day-to-day operations.  We have extensive experience with a wide range of tax accounting, executive compensation and tax compliance issues that arise in the domestic and cross-border context, including withholding and reporting obligations for cross-border payments, the complex rules applicable to deferred compensation and the applicability of U.S. tax treaties.

Disputes and litigation with departing employees, partners, investors and deal counterparties are a fact of business life.  Many times these disputes involve or are informed by tax or partnership accounting issues.  Moreover, the tax consequences of damages and settlement payments need to be taken into account in resolving these disputes.  We have extensive experience in advising claimants, defendants and their attorneys on these issues.

Representative Engagements

• When the managing partner of several domestic real estate partnerships was faced with a dispute over partnership accounting and tax issues with a major investor which escalated to threats of litigation and fraud claims, Caplin & Drysdale reviewed the partnership accounting and tax returns for the past several years and assisted in negotiating a settlement of the disgruntled partner's claims.

• When an equity fund management company executive was forced out of her job, Caplin & Drysdale attorneys worked with her employment litigation team to interpret the management company’s partnership agreement in a manner that characterized the settlement in a tax favorable manner.

• When the U.S. branch of a foreign company became enmeshed in a payroll tax dispute involving employee loans and the issue of whether particular persons were employees or independent contractors, Caplin & Drysdale worked with the client's human resources and tax staff and the employees' representatives to achieve a satisfactory resolution.

• When the parties negotiating a settlement in an age discrimination class action were bogged down over tax issues, Caplin & Drysdale developed a method for allocating damages among wages, interest, and non-wage compensatory damages and determined an appropriate tax reserve, which allowed the settlement to proceed. We then determined the tax treatment of the fund that was established to pay damages to claimants and advised the fund trustees on federal and state withholding and reporting issues.

When the a business wanted to settle pending litigation in a tax-efficient manner, Caplin & Drysdale assisted in crafting a settlement under which most of the proceeds should be deductible, rather than capital expenditures, and counseled on reporting and compliance issues concerning the proceeds.

Caplin & Drysdale provides clients with a full range of assistance in dealing with examinations and allied administrative proceedings with both the IRS and state tax agencies.  Apart from direct representation before tax agencies, we often provide behind the scenes advice to assist in negotiating, preparing administrative protests of proposed deficiencies (and proposed disallowances of refund claims), requesting technical advice, and invoking the increasing array of alternative processes for resolving issues administratively.

Tax controversies often present taxpayers with a constant flow of tactical decisions such as how to settle a tax case while preserving existing refund claims or the right to file others in the future, how to avoid being rushed into filing suit before all issues are ready, how to deal with overlapping statutes of limitations and how to raise computational and/or interest claims after the main case is concluded Caplin & Drysdale lawyers are continually providing advice on these kinds of nuts and bolts tactical issues and drafting and negotiating the related documents.

There are also many different ruling processes in the IRS, including private letter rulings on contemplated transactions, technical advice on issues that arise during audit and requests to allow correction of various kinds of footfaults. These matters can often be high stakes, and it is equally important to craft a convincing written product and to anticipate how tax authorities will view the filing. Caplin & Drysdale has extensive experience with private letter rulings requests for changes in accounting method and requests for reasonable cause relief.

Representative Engagements

• The New York State Department of Finance asserted that a large investment fund was a mere "investor" rather than engaged in business as a trader, which would have had the effect of the partners losing hundreds of millions of dollars of investment expenses as deductions for New York State income tax purposes. Caplin & Drysdale attorneys painstakingly reviewed years of trading records and marshaled these facts along with case law to convince New York authorities that the fund was indeed a trader.


• A foreign taxpayer acquired a U.S. consolidated group that had used loss carryforwards to offset taxes on its profitable sales of unwanted assets before the transaction. On audit, an IRS proposed to disallow the losses on multiple grounds, asserting large current tax deficiencies. The situation was further complicated by state allocation and apportionment disputes involving current and past members of the group. Caplin & Drysdale oversaw the reconstruction of twenty years of federal and state tax returns and identified grounds for claiming additional losses.  Ultimately, a favorable resolution is reached with both the state auditors and federal appeals.


• Months after signing a multiple-year IRS Appeals settlement, a corporate taxpayer was surprised by IRS-calculated interest assessments that exceeded projected liabilities by over $100 million. Caplin & Drysdale coordinated filing three sets of refund claims raising over twenty computational issues, worked with the IRS Appeals computations specialists to revise the interim tax calculations on which the restricted interest calculation was based and then assisted the taxpayer in prevailing on virtually all of its interest claims, in the process achieving favorable resolutions of disputes about the scope of earlier settlements and the statute of limitations.

Caplin & Drysdale advises and represents life insurance companies and property and casualty insurance companies on a broad range of issues, including company-level tax issues under subchapter L of the Internal Revenue Code, subpart F issues for controlled foreign corporations that are insurance companies, and the U.S. taxation of U.S. and foreign policyholders of life insurance, annuity, and accident and health insurance contracts.

Representative Engagements

• When a property and casualty insurance company with substantial investment activities sought advice as to whether it qualified as an insurance company for U.S. tax purposes, Caplin & Drysdale issued an opinion.


• When a U.S. life insurance company sought advice as to whether contracts issued to nonresident aliens affected its status as a life insurance company for U.S. tax purposes, Caplin & Drysdale issued an opinion.


• When a U.S. life insurance company sought advice as to whether fees assessed against annuity contracts constituted taxable distributions to policyholders, Caplin & Drysdale issued an opinion.


• When a U.S. life insurance company was under examination by the IRS as to whether the reserves of its foreign branch were recognized for U.S. tax purposes, Caplin & Drysdale helped them reach a favorable settlement with the IRS Appeals Office.


• When a U.S. life insurance company was under examination by the IRS as to the allowance of its losses from reinsurance transactions, Caplin and Drysdale helped them reach a favorable settlement with the IRS Appeals Office.

Tax compliance planning is an ongoing process for all businesses.  As transactions are completed or events take place, decisions must be made as to how they should be reported, how confident should the client be as to the merits of its position and whether and to what extent it should disclose the transaction on its tax return.

Information reporting and withholding is increasingly complex, especially when dealing across borders.  Tax must be withheld, and certain information reports filed, in real time; decisions cannot be left until the end of the year. New rules requiring reporting of foreign financial accounts over which US persons have signatory authority now make FBAR reporting a concern for businesses with run-of-the-mill foreign operations.

Representative Engagements

• When a foreign corporate investor in the United States wanted to come into compliance with past U.S. and state tax obligations, Caplin & Drysdale coordinated tax filings for back withholding taxes with the US payors in which the foreign investor holds minority interests; engaged accountants to file back tax returns; assisted in creating a financing structure that avoided unnecessary taxable distributions, and a restructuring of ownership interests to reduce both state taxes and compliance costs.