Corporate, Business & Transactional Tax

Clear and contemporaneous documentation is crucial as it relates to U.S. tax matters, more so than in many other jurisdictions. It is important to know the consequences of what you do before you do it, not when the year-end accounting is done or tax returns are being prepared the following year. Even "vanilla" organizing documents can present traps for the unwary. Shifting judge-made doctrines of "substance over form" and the like 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 important from the really 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 two, five, or ten years later. Caplin & Drysdale can both participate in the nuts and bolts of drafting and provide a "second pair of eyes" when needed.

• Entity governing documents
• Purchase and sale transactions
• Financing transactions

Representative Engagements

1. A multinational is concerned that financing transactions contemplated by European affiliates could unnecessarily create "subpart F" income.
   
   Result: Caplin & Drysdale works with foreign advisors on a restructuring that results in the participants becoming a single taxpayer for U.S. tax purposes, eliminating the potential concern.
   
   
2. A corporation is concerned about protecting its rights to pending and contingent tax claims in a contemplated sale of a business.
   
   Result: Caplin & Drysdale assists in negotiating a satisfactory tax indemnity clause.

Representative Engagements

1. A managing partner of several domestic real estate partnerships is faced with a dispute over partnership accounting and tax issues with a major investor which escalates to threats of litigation and fraud claims.
   
   Result: Caplin & Drysdale reviews the partnership accounting and tax returns for the past several years and assists in negotiating a settlement of the disgruntled partner's claims.
   
   
2. A U.S. branch of a foreign company becomes enmeshed in a payroll tax dispute involving employee loans and whether particular persons no longer with the firm had been employees or independent contractors.
   
   Result: Caplin & Drysdale works with the client's human resources and tax staff and employees' representatives to achieve a satisfactory resolution.
   
   
3. Managers of a privately held group of companies with substantial assets decamp, leaving records in chaos. 
   
   Result: Caplin & Drysdale retains and works with accountants to substantiate several million dollars in deductible expenses that had not previously been claimed, and assists litigation counsel in obtaining a recovery from the former managers.

Caplin & Drysdale advises claimants, defendants, and their attorneys on the tax implications of damages and settlement payments, addressing the tax characterization of payments, allocations of damages, and withholding and reporting issues.  We have extensive experience working with qualified settlement funds established in mass tort and employment discrimination cases, including seeking rulings from the IRS National Office on fund qualification and operational questions and advising fund trustees on federal and state tax issues.

Representative Engagements

1. The parties negotiating a settlement in an age discrimination class action were bogged down over tax issues.
   
   Result: Caplin & Drysdale developed a method for allocating damages among wages, interest, and non-wage compensatory damages and for determining 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.
   
   
2. A business wants to settle pending litigation in a tax-efficient manner.
   
   Result: Caplin & Drysdale assists in crafting a settlement under which most of the proceeds should be deductible, rather than capital, and counsels on reporting and compliance issues concerning the proceeds.
   
   
3. A mass tort settlement fund that pays claimants a pro rata share of their agreed damages is unclear how to treat certain "delay damages" for federal income tax purposes.
   
   Result: Caplin & Drysdale secures a ruling from the IRS that all damages paid to a claimant are excluded from income as personal injury damages as long as the total amounts paid to the claimant do not exceed the agreed excluded damages.

Tax compliance planning is an ongoing process.  As transactions are completed or events take place, decisions must be made: How should particular transactions or events be reported? How confident should we be in the merits of our position, and should there be a disclosure? How should the item factor into the estimated tax calculations? How can we draft refund claims to preserve maximum flexibility in making arguments while being sufficiently specific to make out a claim? 

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. Publicly held companies have a host of reporting judgments to make every quarter.   New rules requiring reporting of foreign financial accounts over which US persons have signatory authority make "FBAR" reporting now a concern for businesses with run-of-the-mill foreign operations.

• Tax Returns and Opinion Letters
• Opinion Letters
• Refund Claims
• Withholding and information reporting
• FBAR reporting

Representative Engagements

1. A foreign corporate investor in the United States wants to come into compliance with past U.S. and state tax obligations. 
   
   Result: Caplin & Drysdale coordinates tax filings for back withholding taxes with the US payors in which the foreign investor holds minority interests; engages accountants to file back tax returns; assists in creating a financing structure that avoids unnecessary taxable distributions, and a restructuring of ownership interests to reduce both state taxes and compliance costs.

Caplin & Drysdale provides clients with a full range of assistance in dealing with examinations and allied administrative proceedings with both the IRS and state agencies.  Apart from direct representation before the IRS, 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.  How can we settle a tax case while preserving existing refund claims, or the right to file others in the future?  How do we avoid being rushed into filing suit before all our issues are ready?  How to deal with overlapping statutes of limitations that apply to the same taxable year, or different taxable years involving the same issue?  How can we raise computational and/or interest claims after the main case is done?  Caplin & Drysdale lawyers are constantly providing advice on these kinds of "nuts and bolts" tactical issues and drafting and negotiating the related documents.

There are also many different "voluntary" ruling processes in the IRS: private letter rulings on contemplated transactions; technical advice on issues that arise during audit; requests to allow correction of various kinds of footfaults.  The matters can often be high stakes, and it is equally important to craft a convincing written product and to "know your audience."   

• Audits and Technical Advice
• Private Letter Rulings
• Changes of Accounting Method
• Reasonable Cause Relief

Representative Engagement

1. 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 agent 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. 
   
   Result: Caplin & Drysdale oversaw the reconstruction of twenty years of Federal and state tax returns and identifies grounds for claiming additional losses.  Ultimately, a favorable resolution is reached with both the state auditors and Federal appeals.
   
   
2. Months after signing a multiple-year Federal Appeals settlement, a corporate taxpayer is surprised by IRS-calculated interest assessments that exceeded projected liabilities by over $100 million. 
   
   Result: Caplin & Drysdale coordinates filing three sets of refund claims raising over twenty computational issues; worked with the Appeals computations specialists to redo the interim tax calculations on which the restricted interest calculation was based; 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.

Positions taken on particular issues may have financial accounting implications which, in an environment of increased transparency of balance sheet tax provisions, can feed back into the process of audit and information exchange. Disclosures of advice to achieve one goal may potentially compromise an evidentiary privilege. A dispute with the IRS might have to be conducted with one eye on preserving a possible malpractice claim.  An "eggshell audit" may have potential criminal implications for the taxpayer or others. Multistate and multinational tax disputes – and the multiple professional advisers that frequently go along with them -- may require delicate coordination to avoid inconsistent positions, or actions taken in one jurisdiction having unintended effects in another. Potential transactions may require quick judgments about tax exposures based on limited information uncovered in a "due diligence" process. Caplin & Drysdale can offer ready access to pool of professional advisers who can bring their combined expertise to bear in picking through the minefield.

• Financial Accounting Tax Provisions
• Due Diligence
• Multijurisdictional Tax Disputes
• Tax Disputes with Malpractice Implications
• "Eggshell" audits

 Representative Engagements

1. A publicly held corporation wants to discuss issues embedded in its tax provision to identify potential exposures and weigh its disclosure obligations and whether to seek formal tax advice from other sources. 
   
   Result: Various Caplin & Drysdale attorneys provide an efficient and responsive sounding board on both the substantive tax issues and the likely course of potential controversies.
   
   
2. A foreign institution is evaluating the acquisition of a publicly traded U.S. taxpayer with a history of troubled management. 
   
   Result: As deal counsel conduct their due diligence review, Caplin & Drysdale evaluates the target's current and past tax audits in different jurisdictions and associated contingent liabilities.

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

1. Represent U.S. life insurance company during IRS examination on whether reserves of a foreign branch are recognized for U.S. tax purposes.
   
   Result: Favorable settlement with IRS Appeals Office.
   
   
2. Represent a U.S. life insurance company during an IRS examination on the allowance of losses from reinsurance transactions.
   
   Result: Favorable settlement with IRS Appeals Office.
   
   
3. Advise property and casualty insurance company with substantial investment activities on whether it qualifies as an insurance company for tax purposes.
   
   Result: Issuance of Caplin & Drysdale opinion.
   
   
4. Advise U.S. life insurance company on whether contracts issued to nonresident aliens affect its status as a life insurance company for U.S. tax purposes.
   
   Result: Issuance of Caplin & Drysdale opinion.
   
   
5. Advise U.S. life insurance company on whether fees assessed against annuity contracts constitute taxable distributions to policyholders.
   
   Result: Issuance of Caplin & Drysdale opinion.