A danger in complicated tax structures is that the IRS will invoke section 269 of the US tax code to deny benefits from the structure.

Invoked Section 269 is a danger in complicated tax structures | Norton Rose Fulbright

September 01, 1999 | By Keith Martin in Washington, DC

Section 269 gives the agency broad authority to deny tax benefits when a taxpayer acquires a corporation for the principal purpose of “evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit or other allowance which [the taxpayer] would not otherwise enjoy.”

A European company restructured its operations in the United States by placing them under new US holding company with predominantly foreign assets. The idea was to enable the European parent to receive dividends from its US subsidiaries without any US withholding taxes. Dividends are normally subject to 30% withholding tax at the US border. However, US law exempts dividends from withholding tax when they are paid by a US company that receives at least 80% of its income from sources outside the United States.

The IRS issued a “field service advice” this summer urging the agent in the case to invoke section 269 to deny the withholding tax exemption.

Keith Martin